BALLARD POWER SYSTEMS INC. (BLDP:NASDAQ)

Transcription

1 Research Update United States/Canada Industrial Electrical Equipment 22 April 2014 Michael Anderegg, CFA Senior Research Analyst BALLARD POWER SYSTEMS INC. (BLDP:NASDAQ) Leading Contender in the Nascent Fuel Cell Market Alternative Energy Solutions Critical for Future Economic Growth Reason for Report: Research Update RATING: SPECULATTIVE BUY Recent Price: $3.78 Summary and Investment Thesis Market Data Market Capitalization (mln) $416.1 Fully Diluted Shrs Outstnd (mln) Float (mln) Ave. Volume (3 month 000) 10,480 Institutional Ownership 15.1 Insider Ownership 7.22 Exchange NASDAQ Balance Sheet Data Shareholders Equity (000s) $71.6 Price / Book Value n.m. Net Cash (Debt mln) $30.3 Working Capital (000s) $34,283 Long-term Debt (000s) $10,772 Total Debt to Capital.15:1 Revenue Data (FYE 12/31) Revenue (000 s) $ $ $ Ballard is building a clean energy growth company that is already recognized as a leader in proton exchange membrane ( PEM ) fuel cell development and commercialization. BLDP s principal business is the design, development, manufacture, sale and service of fuel cell products for a variety of applications, focusing on motive power (material handling and buses) and stationary power (backup power and distributed generation) markets. The Company also provides engineering services for a variety of fuel cell applications. A fuel cell is an environmentally clean electrochemical device that combines hydrogen fuel with oxygen to produce electricity. The hydrogen fuel can be obtained from natural gas, kerosene, methanol or other hydrocarbon fuels, or from water through electrolysis. BLDP fuel cell products feature high fuel efficiency, low operating temperature, low noise and vibration, compact size, quick response to changes in electrical demand, modular design and are environmentally friendly. Embedded in each Ballard PEM fuel cell product lies a stack of unit cells designed with proprietary esencia technology. BLDP s business strategy is to establish a sharp focus on key growth opportunities with near-term commercial prospects in the core fuel cell markets, enhanced by an engineering services operating unit to leverage the Company s expertise in fuel cell design, prototyping, manufacturing and servicing. To support its business strategy and capability to execute on its clean energy growth priorities, Ballard has also focused its efforts on both product cost reduction and managing its operating expense base. Initiatives include overall expense reductions, the pursuit of government funding for research and product developments, and the redirection of engineering resources to revenue bearing engineering service projects. Please see analyst certification and required disclosures at the end of this report.

2 We are issuing an update on BLDP as an established competitor in the rapidly growing fuel cell market with a Speculative Buy Rating. This emerging technology has a chance to be an important element in next generation clean energy solutions that will power the world as society moves away from fossil fuels. Chart Technical Analysis Ballard Power Systems DAILY: BLDP has been correcting from a high volume price spike that had the stock extended. The stock has given back nearly 75% of the move up from the $1.44 level and is searching for a base of support. The stock has dipped just below the 50 day moving average which is still rising along with the 200 day moving average. Selling volume appears to be moderating and we are on alert for support to assert. Important support currently resides in the $ $3.27 area which lines up with a prior low and Fibonacci support. Technical resistance targets for traders to focus on are near $4.10 near term and then $4.91. Closes above $4.91 set up a retest of the $5.75 area. Ballard Power Systems, Inc. Daily (BLDP $3.78) MRA Research 2014 Page 2 of 10

3 Company Background Ballard was incorporated on November 12, 2008 under the Canada Business Corporations Act, under the name " Canada Inc.". Ballard changed its name to "Ballard Power Systems Inc." on December 31, Previously, Ballard Power Systems Inc. was a British Columbia company incorporated on May 30, The original predecessor to Ballard was founded in 1979 under the name Ballard Research Inc. to conduct research and development on high energy lithium batteries. In the course of investigating environmentally clean energy systems with commercial potential, the Company began to develop fuel cells and has been developing fuel cell products since All dollar amounts are in United States dollars unless otherwise indicated. BLDP has four principal subsidiaries and affiliates: Ballard Fuel Cell Systems Inc., an Oregon corporation that develops methanol-fueled clean energy backup power systems; Dantherm Power A/S ("Dantherm Power"), a Denmark-based corporation jointly owned with Dantherm A/S that develops hydrogen-fueled clean energy backup power systems; BDF IP Holdings Ltd. ("IP Holdings"), a Canadian corporation that holds intellectual property assets; and Ballard Material Products Inc., a Delaware corporation that formerly developed and manufactured carbon fiber products for BLDP in the automotive and fuel cell markets, and which now focuses on the development of fuel processing components and systems for use in fuel cell applications. The following chart shows these principal subsidiaries and affiliates, their respective jurisdictions of incorporation and BLDP s percentage of share ownership in each of them, all as of March 15, 2013(1): Notes (1) BLDP s 19.9% equity interest in AFCC was transferred to Ford on January 31, 2013, pursuant to a purchase agreement with Ford, Daimler and AFCC dated January 31, 2008 (the "Share Purchase Agreement"). As part of an agreement with a financial institution in December 2009 to monetize its rights under the Share Purchase Agreement, Ballard pledged its shares in AFCC and assigned its right to "put" or sell those shares to Ford. (2) Following the acquisition of the shares of Danfoss Ventures A/S in December 2012, the Corporation holds 57% of the shares of Dantherm Power A/S and Dantherm A/S hold 43%. (3) The Corporation holds all of the non-voting, participating shares of IP Holdings and 34% of the voting, nonparticipating Shares of IP Holdings, with each of Daimler AG and Ford Motor Company holding 33% of the voting, non-participating shares. Recent History Over the past three years, BLDP has been focused its core fuel cell business and on markets with near-term commercial prospects. In support of this strategy, BLDP has focused on bolstering its cash reserves to strengthen its capability to execute on growth priorities. On January 31, 2013, BLDP sold substantially all of the assets of Ballard Material Products Inc., a subsidiary, a non-core asset with the majority of its sales generated in industrial sectors unrelated to fuel cells. On August 1, 2012, Ballard acquired key assets from IdaTech LLC, a customer in the telecommunications backup power market. On January 18, 2010, BLDP acquired a controlling interest in Dantherm Power, a Denmark-based corporation, which develops clean energy backup power through utilization of hydrogen fuel cell technology. Engineering Services Contract with Volkswagen AG In March, 2013, BLDP signed an agreement with Volkswagen AG for an engineering services contract to advance development of fuel cells for use in powering demonstration cars in Volkswagen s fuel cell automotive research program. The contract term is for 4 years, with an option for a 2-year extension. The expected contract value is in the range of C$ million. Work will involve the design and manufacture of a next-generation fuel cell for use in Volkswagen HyMotion MRA Research 2014 Page 3 of 10

4 demonstration cars. Ballard engineers will lead critical areas of fuel cell product design, including the membrane electrode assembly (MEA), plate and stack components, along with testing and integration work. Volkswagen will own all intellectual property generated during the program while Ballard retains a royalty-free license to use it for all non-vehicular applications and for bus and motorcycle applications. Sale of Ballard Material Products Inc. Assets On January 31, 2013, BLDP completed an agreement to sell substantially all of the assets in its Lowell, Massachusetts based Material Products division for gross cash proceeds of $10.5 million and additional potential proceeds of up to $1.5 million. The additional proceeds of up to $1.5 million are payable in 2014 and 2015 (through a GDL product credit) if the former Material Products division attains certain financial results in Acquisition of Key Assets from IdaTech LLC On August 1, 2012 (announced on July 24, 2012), BLDP completed an agreement to acquire key assets and product lines from IdaTech LLC ( Idatech ), a customer of Ballard for the past several years. In exchange for $7.5 million of Ballard shares issued from treasury (7.1 million Ballard shares valued at $1.05 per share based on the share price as of the acquisition date), BLDP acquired Idatech s key assets including fuel cell systems inventory, prepaid rights to inventory, product lines for backup power applications, distributor and customer relationships, a license to intellectual property, the right to assume control of a manufacturing facility in Tijuana, Mexico, and certain property, plant and equipment. Acquired fuel cell systems inventory, prepaid rights to inventory, product lines and intellectual property consist of both direct hydrogen units as well as methanol fuelled units and are designed for deployment as emergency backup power in the networks of wireless telecom service providers. The methanol systems incorporate a fuel reformer to extract hydrogen from a mixture of methanol and water which is then used as feedstock for the fuel cells. The assets were transferred to Ballard Fuel Cell Systems Inc., a new company formed as a result of the transaction. As part of the transaction, Ballard exercised its right to assume IdaTech s manufacturing facilities in Tijuana, Mexico in January Dantherm Power Transaction On January 18, 2010, BLDP acquired a controlling interest in Denmark-based Dantherm Power, partnering with co-investors Danfoss Ventures A/S and Dantherm A/S. In exchange for an initial investment of DKK 30m (approximately $6m) funded in two tranches in January and August 2010, Ballard obtained a 52% interest in Dantherm Power. On December 20, 2012, Ballard and Dantherm A/S acquired the shares of Danfoss Ventures A/S, giving Ballard a 57% interest in Dantherm Power. Dantherm Power develops clean energy backup power systems utilizing Ballard's hydrogen fuel cell technology, for telecom equipment suppliers. BLDP is building a clean energy growth company. Management believes the Company is recognized as a world leader in proton exchange membrane ( PEM ) fuel cell development and commercialization. The Company s principal business is the design, development, manufacture, sale and service of fuel cell products for a variety of applications, focusing on motive power (material handling and buses) and stationary power (backup power and distributed generation) markets. BLDP also provides engineering services for a variety of fuel cell applications. A fuel cell is an environmentally clean electrochemical device that combines hydrogen fuel with oxygen (from the air) to produce electricity. The hydrogen fuel can be obtained from natural gas, kerosene, methanol or other hydrocarbon fuels, or from water through electrolysis. Ballard fuel cell products feature high fuel efficiency, low operating temperature, low noise and vibration, compact size, quick response to changes in electrical demand, modular design and environmental cleanliness. Embedded in each Ballard PEM fuel cell product lies a stack of unit cells designed with proprietary esencia technology which draws on intellectual property from BLDP s patent portfolio together with its extensive experience in key areas of fuel cell stack operation, system integration, and fuel processing. BLDP provides its customers with the positive economic and environmental benefits unique to fuel cell power. The intent is to build value for shareholders by developing, manufacturing, selling and servicing industry-leading fuel cell products to meet the needs of customers in select target markets. Management is focused on leveraging the inherent reliability and durability derived from its legacy automotive technology into nonautomotive markets where demand is near term and on core competencies of PEM fuel cell design, development, manufacture, sales and service. MRA Research 2014 Page 4 of 10

5 Market Opportunity BLDP estimates its total available market conservatively to be at least $4.5 billion. Source: The Fuel Cell Today Industry Review 2013 MRA Research 2014 Page 5 of 10

6 Recent Developments Ballard Reports Q4, Full Year 2013 Results & 2014 Outlook February 25, 2014 Q4: Improved GM and reduced Opex contribute to positive Adjusted EBITDA Full Year: 40% revenue growth and 63% Adjusted EBITDA improvement For Immediate Release VANCOUVER, CANADA Ballard Power Systems (NASDAQ: BLDP)(TSX: BLD) today announced consolidated financial results for the fourth quarter ended December 31, 2013 and full year All amounts are in U.S. dollars unless otherwise noted and have been prepared in accordance with International Financial Reporting Standards (IFRS). Summary of Q4 & Full Year 2013 Results Ballard posted strong operating results in Q4, on both the top line and bottom line. Q4 results, compared to the same quarter last year, were as follows: revenue was up 5%, to $17.3 million; gross margin was up 12 points, to 34%; and Adjusted EBITDA improved significantly from ($3.2) million to $0.2 million. These results continued the strong positive trend in Ballard's operating performance posted through the earlier quarters of 2013, as shown in the following quarterly results charts. John Sheridan, President and CEO said, Ballard s strong Q4 results capped off a great year for the Company, with full year revenue growth of 40%, gross margin improvement of 10 points to 27% and 63% improvement in Adjusted EBITDA. When viewing this 2013 performance in the context of the past two years, it is clear the Company is executing strongly, on the right strategy. Executing on our three-level business model over the past two years, with product sales, engineering services and IP licensing, Ballard has posted 62% revenue growth, a doubling of gross margin and a 70% improvement in Adjusted EBITDA. Q4 & Full Year 2013 Highlights Growth (all comparisons to Q and full year 2012 unless otherwise noted) Q4 revenue was up 5% to $17.3 million, resulting in full year revenue growth of 40%, to $61.3 million, consistent with the Company s guidance for revenue growth in excess of 30%. Fuel Cell Product Sales: (i) Telecom Backup Power Q4 revenue of $5.9 million and full year revenue of $20.5 million, an increase of 74%. ElectraGenTM system shipments of 177 in Q4 and full year system shipments of 796, an increase of 99%. The bulk of these shipments fulfilled sales in Ballard s priority markets of Japan, China, Southeast Asia, South MRA Research 2014 Page 6 of 10

7 Africa and the Caribbean. (ii) Material Handling Q4 revenue of $2.0 million and full year revenue of $6.5 million, an increase of 5%. While full year 2013 revenue was relatively flat year-over-year, Ballard s partner Plug Power has solidified its financing and recently reported a significant increase in its order book, including repeat orders from Walmart, Kroger, BMW and Mercedes-Benz. (iii) Bus 2013 bus revenue was generated from the shipment of 12 power modules to system integrators in Europe, the U.S. and China, as well as from IP licensing. Bus revenue is reported in development stage markets. In addition, in Q4 Ballard signed a Memorandum of Understanding with Van Hool to support the manufacture and further deployment of zero emission fuel cell buses in Europe. The Companies are planning to submit a joint bid in Q for additional funding of up to 25 European fuel cell buses. Engineering Services: Q4 revenue of $6.2 million and full year revenue of $21.1 million, an increase of 24%. Engineering services is anchored by a 4-year contract with Volkswagen, signed in March 2013, and has broadened to include other automotive and non-automotive contracts. Path to Profitability (all comparisons to Q and full year 2012 unless otherwise noted) Q4 gross margin improved 12 points, to 34% and full year improved 10 points, to 27%, due to revenue growth and the impact on product mix of engineering services and licensing. Q4 and full year gross margins benefited approximately 3-points and 1-point, respectively, from the net impact of Q4 inventory and warranty accrual adjustments. Q4 cash operating costs4 improved 12%, to $6.5 million and full year improved 7%, to $28.3 million. Q4 Adjusted EBITDA improved to $0.2 million and full year improved 63%, to ($8.2) million, consistent with the Company s guidance for Adjusted EBITDA improvement in excess of 50%. A net benefit of approximately $0.5 million was realized in Q4, due to the net impact of the aforementioned inventory and warranty accrual adjustments. Q4 net income was ($2.3) million or ($0.02) per share, improvements of 87% and 89%, respectively. Full year net income was ($20.0) million or ($0.20) per share, improvements of 53% and 59%, respectively. Q4 cash used by operating activities was ($0.9) million and for the full year was ($17.4) million, an improvement of 38%. Year-end cash reserves were $30.3 million, with a zero balance on the Company s bank operating line Business Outlook The Company expects the positive growth trends in 2012 and 2013 to continue in 2014 with a similar trajectory, as Ballard continues to pursue its growth strategy for fuel cell product sales, engineering services and IP licensing. As such, for the full year 2014 Ballard expects: Revenue growth of approximately 30%; and Approximately break-even Adjusted EBITDA. CEO Transition In a further development, John Sheridan, Ballard President and CEO, has informed the Board of Directors of his intention to retire by yearend Sheridan, 59, said, After being CEO now for eight years and, with Ballard s strengthened positioning and momentum, this is the right time for a transition in leadership. The Board of Directors has established a search committee and expects to have the new CEO in place and the transition process completed by Q4. MRA Research 2014 Page 7 of 10

8 For a more detailed discussion of Ballard Power Systems Q4 and full year 2013 results, please see the Company s financial statements and management s discussion & analysis, which are available at and RISK FACTORS The Company may not be able to achieve commercialization of its products on the timetable anticipated, or at all. Management believes cash reserves will be reduced due to future operating losses and working capital requirements, and cannot provide certainty as to how long its cash reserves will last or that they will be able to access additional capital when necessary. A mass market for the Company s products may never develop or may take longer to develop than anticipated. Management may not be able to successfully execute its business plan. In the material handling market, BLDP depends on a single customer for the majority of its revenues The Company has limited experience manufacturing fuel cell products on a commercial basis. Global economic conditions are beyond the Company s control and may have an adverse impact on the business or key suppliers and/or customers. Potential fluctuations in financial and business results make forecasting difficult and may restrict access to funding for the commercialization plan. MRA Research 2014 Page 8 of 10

9 SUMMARY/CONCLUSION Ballard is a well established and leading contender in the very promising emerging market for fuel cells. The Company was relatively early to enter the market which has provided certain advantages not available to later or future entrants. There are clearly a number of trends underway that should drive sustained rapid growth in alternative energy technologies over the next several years including fuel cells. We view BLDP as one of the best positioned contenders to benefit from market growth and rate the stock Speculative Buy based on previously mentioned factors. Positive elements in the story are somewhat counterbalanced by market risk, competitive risk and the Company s history of operating losses and likelihood that additional capital will be required to strengthen the balance sheet. Analyst Certification I, Michael Anderegg, hereby certify that the view expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the recommendations or views expressed in this research report. Disclaimer This report was prepared for informational purposes only. ALL INFORMATION IN THIS REPORT IS PROVIDED AS IS WITHOUT WARRANTIES, EXPRESSED OR IMPLIED, OR REPRESENTATIONS OF ANY KIND. TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAW, MRA RESEARCH WILL NOT BE LIABLE FOR THE QUALITY, ACCURACY, COMPLETENESS, RELIABILITY OR TIMELINESS OF THIS INFORMATION, OR FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES THAT MAY ARISE OUT OF THE USE OF THIS INFORMATION BY YOU OR ANYONE ELSE (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF OPPORTUNITIES, TRADING LOSSES, AND DAMAGES THAT MAY RESULT FROM ANY INACCURACY OR INCOMPLETENESS OF THIS INFORMATION). TO THE FULLEST EXTENT PERMITTED BY LAW, MRA RESEARCH WILL NOT BE LIABLE TO YOU OR ANYONE ELSE UNDER ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY OR OTHER THEORY WITH RESPECT TO THIS PRESENTATION OF INFORMATION. The information contained herein is not intended to be investment advice and does not constitute any form of invitation or inducement by Michael Andereg, CFA to engage in investment activity. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities, financial instruments, strategies, or commentary mentioned herein may not be suitable for all investors and this material is not intended for any specific investor and does not take into account an investor s particular investment objectives, financial situations or needs. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fluctuate, and an investor may, upon selling an investment lose a portion of, or the entire principal amount invested. Past performance is no guarantee of future results. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. This report may contain certain forward-looking statements and information, as defined within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and is subject to the Safe Harbor created by those sections. This material contains statements about expected future events and/or financial results that are forward-looking in nature and subject to risks and uncertainties. Such forward- looking statements by definition involve risks, uncertainties and other factors, which may cause the actual results, performance or achievements of mentioned company to be materially different from the statements made herein. COMPLIANCE PROCEDURE Content is researched, written and reviewed on a best-effort basis. This document, article or report is written and authored by Michael Andereg, CFA. An outsourced research services provider represented by Michael Andereg, CFA, provided Small Cap Specialists, LLC this article or report. However, we are only human and are prone to make mistakes. If you notice any errors or omissions, please notify us below. Small Cap Specialists, LLC and BrokerBank Securities, Inc. are not entitled to veto, interfere or alter the articles, documents or report once created and reviewed by the outsourced research provider represented by Michael Andereg, CFA. If you wish to have your company covered in more detail by our team, or wish to learn more about our services, please contact us at admin@smallcapir.com. For any urgent concerns or inquiries, please contact us at admin@smallcapir.com. MRA Research 2014 Page 9 of 10

10 NO WARRANTY OR LIABILITY ASSUMED BLDP has not compensated Small Cap Specialists, LLC, BrokerBank Securities, Inc., or Michael Andereg, CFA for the creation or dissemination of this report. Small Cap Specialists, LLC and BrokerBank Securities, Inc., is not responsible for any error which may be occasioned at the time of printing of this document or any error, mistake or shortcoming. Small Cap Specialists, LLC and BrokerBank Securities, Inc. do not hold any positions in BLDP. No liability is accepted by Small Cap Specialists, LLC and BrokerBank Securities, Inc. whatsoever for any direct, indirect or consequential loss arising from the use of this document. Small Cap Specialists, LLC and BrokerBank Securities, Inc. expressly disclaims any fiduciary responsibility or liability for any consequences, financial or otherwise arising from any reliance placed on the information in this document. Small Cap Specialists, LLC and BrokerBank Securities, Inc. do not (1) guarantee the accuracy, timeliness, completeness or correct sequencing of the information, or (2) warrant any results from use of the information. The included information is subject to change without notice. Small Cap Specialists, LLC is the party responsible for hosting the full analyst report. BrokerBank Securities in the party responsible for issuing the press release and Michael Andereg, CFA, is the author of research report. Small Cap Specialists, LLC has compensated Michael Andereg, CFA two hundred dollars dollars for the right to disseminate this report. BrokerBank Securities has been compensated one hundred dollars to issue press release by Small Cap Specialists, LLC. Information in this release is fact checked and produced on a best efforts basis by Michael Andereg, CFA. CFA and Chartered Financial Analyst are registered trademarks owned by CFA Institute. MRA Research 2014 Page 10 of 10