Ceres Power Holdings Progressing towards commercialisation Interims Alternative energy During FY15 Ceres Power made good progress towards commercialising its Steel Cell technology, which offers a route to economically viable fuel cell-based systems for mass deployment. As FY15 results were in line with our estimates, we leave our FY16 and FY17 forecasts broadly unchanged. Year end Revenue ( m) EBITDA* ( m) PBT* ( m) EPS* (p) 06/14 1.2 (6.7) (7.7) (1.2) 0.0 N/A 06/15 0.3 (9.7) (10.5) (1.2) 0.0 N/A 06/16e 1.0 (11.2) (12.4) (1.4) 0.0 N/A 06/17e 2.0 (10.8) (12.0) (1.4) 0.0 N/A Note: *EBITDA, PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. Progressing the technology Adoption of fuel cells remains limited because although the basic technology is proven, it is not yet cost-competitive. Ceres s patented Steel Cell technology is an innovative solution to this cost problem, predicated on using non-exotic materials that can be processed in volumes using conventional manufacturing equipment and techniques. During FY15, Ceres made significant advances in energy conversion efficiency, power density and production techniques. It also completed extensive validation tests proving a product lifetime of at least seven years. Collectively, these enhancements improve the cost-effectiveness of the technology and its attractiveness to end-users. Securing routes to market DPS (p) Ceres s business model is to focus on developing highly efficient, robust and costeffective fuel cell stacks that will be deployed by partners in power generation systems. During FY15 Ceres worked with partners in Japan, Korea, the US and the UK on a variety of joint development and technology evaluation programmes. Management expects evaluation work to intensify during our forecast period, underpinning the revenue growth shown in our estimates. During the year, Ceres began to develop multi-kw systems for potential customers interested in products for light commercial systems. This complements ongoing work on lower-power systems for combined heat power (CHP) residential systems. Net cash at end FY15 benefited from the placing in July, which raised 19.6m (net) at 8.5p/share. This provides the balance sheet strength to engage with commercial partners for the next stages of joint development and commercialisation. Management expects the July 2014 placing to provide funding well into FY16. Valuation: Long-term value from royalties The long-term value for Ceres lies in potential royalty streams created when energy generation systems incorporating Steel Cell technology are commercialised. For illustration, we estimate that if commercialisation is successful, a 40% share of the Japanese CHP market and deployment in 20% of all boilers sold in Korea could generate c 130m annual royalty revenues. A 5% share in the EU or US boiler markets could add c 60m or c 80m royalty revenues respectively. P/E (x) 7 October 2015 Price 8.63p Market cap 67m Net cash ( m) end June 2015 including short-term investments 18.2 Shares in issue 772.5m Free float 51.5% Code Primary exchange Secondary exchange Share price performance CWR AIM N/A % 1m 3m 12m Abs (0.3) (9.9) (16.9) Rel (local) (4.2) (7.2) (16.1) 52-week high/low 10.1p 6.7p Business description Ceres Power is a developer of low-cost, nextgeneration fuel cell technology for use in decentralised energy products that reduce operating costs, lower CO2 emissions, increase efficiency and improve energy security. Next event AGM 2 December 2015 Analysts Anne Margaret Crow +44 (0)20 3077 5700 Roger Johnston +44 (0)20 3077 5722 industrials@edisongroup.com Edison profile page Ceres Power Holdings is a research client of Edison Investment Research Limited
Progress on execution of strategy Ceres s investment proposition is based on achieving its aim of developing a solid oxide fuel cell technology that is competitive with other types of electrical generation. This means the technology must be efficient at converting chemical energy into electrical energy, can be manufactured using materials and processes that make the technology cost-competitive and is sufficiently robust to give an adequate payback period for consumers installing products based on the technology. In addition, since Ceres has decided to focus on developing fuel cell technology rather than complete power generation systems, it needs to secure long-term relationships with partners capable of taking complete systems to market in different geographies. At this stage of evolution, progress towards achieving these goals is more significant that the financial results themselves. Technology developments Efficiency The technology team increased electrical conversion efficiency to 47%, which is equivalent to the best systems currently available commercially in Japan. The team aims to exceed 50% efficiency during FY16. High electrical efficiency is critical for adoption in the Japanese micro-chp sector, where the spark-gap between gas and electricity prices is small. Higher electrical efficiencies are also important for entering the commercial and light industrial business sectors where fuel cells are beginning to be used for power-only and back-up power applications. The team also demonstrated power density improvements of 40% during the year. It hopes to incorporate these power density improvements in future releases of the technology from FY16 onwards. Manufacturing Significant progress was made on production scale-up projects intended to provide demonstration and validation of a production process suitable for high-volume fuel cell manufacture at market cost points. Innovations include changing the way in which the electrolyte layer inside individual cells is laid down. Previously this was done by spraying, but is now done by a less time-intensive screen printing technique, which also gives a better-quality deposition layer. A high-speed print line has been acquired, which is expected to reduce print cycle time from 30 seconds to three, substantially improving throughput. As these innovations are validated, they will be incorporated in successive product releases from v4, scheduled for CY H116, onwards. Robustness Ceres released its v3 technology during the year. V3 has undergone extensive internal testing and validation proving durability, as well as lifetime, accelerated and steady-state testing. Validation included multiple stack testing over 10,000 hours, during which the technology showed degradation rates equivalent to a product lifetime of more than seven years, which is comparable to fuel cell competitors in Japan. Stack test on earlier generations of the technology also passed 20,000 hours of testing. Higher power output Ceres has begun to develop multi-kw systems for potential customers who are interested in products for light commercial systems, such as the commercial market of 5-10kW power-only products. Ceres Power Holdings 7 October 2015 2
Demonstration system Following the adoption of a new business model in 2013, Ceres is focused on developing the fuel cells and stacks for partners to integrate into their own power generation systems. However, to demonstrate what is possible to potential customers, Ceres is developing a further version of a complete prototype system, the Steel Gen, for release during FY16. This is fully compliant with all emission standards. Management believes it is the most compact solid oxide fuel cell system design available, which is key for penetrating the market or installations in high-rise apartments in Asia where space is at a premium. Developing routes to market Japan Ceres continues to work with the Japanese power system company announced in October 2014. The relationship is strengthening as it continues into its third year. Following discussions with other Japanese companies engaged in residential and light commercial applications, management expects to deploy further systems for joint development to Japan in the coming months. Korea All the testing undertaken in KD Navien s facility under the Technology Assessment Agreement completed successfully, including aggressive accelerated testing for cycleability and steady-state running. At the partner s request, Ceres has provided KD Navien with an additional system on which it can carry out extended validation. The US Discussions with Cummins regarding an evaluation programme are ongoing. The EU Ceres has completed system testing by IE CHP, which is a JV between Intelligent Energy and SSE in a simulated typical UK home environment. Management expects other follow-on evaluations to take place during FY16. Valuation Ceres has yet to generate commercial revenues, so its value resides in the potential royalty streams generated once distributed power systems incorporating Steel Cell technology are eventually commercialised. In our Initiation note published in June 2015, we presented a scenario analysis showing potential profits attributable to key markets: Japan, Korea, the US and the EU. This analysis shows that, if commercialisation is successful, a 40% share of the Japanese CHP market and deployment in 20% of all boilers sold in Korea could generate c 130m annual royalty revenues. A 5% share of the EU boiler market or the larger US market could generate a further c 60m or 80m of annual royalty revenues respectively. Since it is not possible at this point to determine the potential dilutive impact of any financing activity, we are not attempting to derive an indicative share price from this analysis. The analysis assumes that technological advances enable Ceres and its partners to achieve the target selling prices required to be cost-competitive. Ceres Power Holdings 7 October 2015 3
Financials: Progressing to commercialisation Earnings After stripping out deferred income of 0.7m relating to the ending of a legacy product and supply agreement with Bord Gáis Éireann, which flattered FY14, FY15 underlying revenues, which exclude 0.6m of government grants, fell year-on-year from 0.5m to 0.3m, in line with our estimates. Operating costs rose by 2.3m to 12.5m, reflecting the increased number of employees engaged in R&D and initiatives to improve the company s test and manufacturing capability. Operating losses widened by 3.1m to 11.7m, also in line with our estimates. Exhibit 1: Revision to estimates Revenue ( m) EBITDA ( m) PBT ( m) EPS (p) Unchanged Old New % change Unchanged Old New % change FY15 0.3 (9.7) (10.5) (1.24) (1.19) N/M FY16e 1.0 (11.219) (11.248) 0.3 (12.4) (1.42) (1.40) (1.4) FY17e 2.0 (10.762) (10.791) 0.3 (12.0) (1.37) (1.35) (1.5) Source: Edison Investment Research We leave our FY16 and FY17 estimates broadly unchanged. We reduce depreciation slightly, reflecting lower FY15 capex than expected, which increases EBITDA losses slightly. We model a slightly higher level of tax credits to reflect higher than expected levels in FY15. This improves EPS losses slightly. Our model assumes that engagement with existing partners will intensify during FY16 and that discussions with potential partners will mature into evaluations and development programmes, as discussed in our Initiation note, resulting in a strong ramp-up in revenues through the forecast period. We assume that annual revenues from technology evaluations could be 100-200k per partner, which we estimate could scale up to 500-1,000k for a joint development agreement. Delays in progressing individual customer engagements will have a significant impact on revenue development. At this early stage, we exclude any potential licence and royalty fees from our financial model, giving scope for substantial upside. We estimate that a single licence fee could be worth tens of millions of pounds. Cash flow and balance sheet FY15 cash consumption, excluding financing, totalled 9.1m. This included 1.2m invested in test facilities and the prototype printing line. Net cash (including short-term investments) at end FY15 benefited from the placing in July, which raised 19.6m (net) at 8.5p/share, increasing from 7.7m at end June 2014 to 18.2m. This provides the balance sheet strength to engage with commercial partners for the next stages of joint development and commercialisation of the Steel Cell technology. The placing attracted both new and existing institutional investors and was oversubscribed, demonstrating investor confidence in the proposition. We do not capitalise any of this R&D expenditure. Management expects the July 2014 placing to provide funding well into 2016. In the absence of any one-off licence payments, which we treat as upside, our estimates show a 4.1m funding gap in FY17, which we model as satisfied through debt. Ceres Power Holdings 7 October 2015 4
Exhibit 2: Financial summary '000 2013 2014 2015 2016e 2017e Year end 30 June IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 523 1,224 324 1,000 2,000 EBITDA (7,937) (6,663) (9,716) (11,248) (10,791) Operating Profit (pre amort. of acq intangibles & SBP) (9,259) (7,732) (10,642) (12,448) (11,991) Amortisation of acquired intangibles 0 0 0 0 0 Share-based payments (414) (856) (1,080) (800) (800) Exceptionals (3,068) 0 0 0 0 Operating Profit (12,741) (8,588) (11,722) (13,248) (12,791) Net Interest 55 73 110 70 0 Profit Before Tax (norm) (9,204) (7,659) (10,532) (12,378) (11,991) Profit Before Tax (FRS 3) (12,686) (8,515) (11,612) (13,178) (12,791) Tax 1,311 1,122 1,571 1,571 1,571 Profit After Tax (norm) (7,893) (6,537) (8,961) (10,807) (10,420) Profit After Tax (FRS 3) (11,375) (7,393) (10,041) (11,607) (11,220) Average Number of Shares Outstanding (m) 292.8 536.8 753.2 772.5 772.5 EPS - normalised (p) (2.70) (1.22) (1.19) (1.40) (1.35) EPS - normalised fully diluted (p) (2.70) (1.22) (1.19) (1.40) (1.35) EPS - FRS 3 (p) (3.88) (1.38) (1.33) (1.50) (1.45) Dividend per share (p) 0.00 0.00 0.00 0.00 0.00 EBITDA Margin (%) N/A N/A N/A N/A N/A Operating Margin (before GW and except.) (%) N/A N/A N/A N/A N/A BALANCE SHEET Fixed Assets 2,234 1,715 2,080 2,380 2,680 Intangible Assets 0 0 0 0 0 Tangible Assets 2,234 1,715 2,080 2,380 2,680 Current Assets 16,935 10,084 20,685 9,000 3,062 Stocks 0 0 0 0 0 Debtors 1,498 2,385 2,501 2,423 2,615 Cash (including short-term investments) 15,437 7,699 18,184 6,577 448 Current Liabilities (1,350) (1,385) (2,013) (1,435) (1,717) Creditors including tax, social security and provisions (1,350) (1,385) (2,013) (1,435) (1,717) Short term borrowings 0 0 0 0 0 Long Term Liabilities (3,211) (2,341) (2,071) (2,071) (6,571) Long term borrowings 0 0 0 0 (4,500) Other long term liabilities (3,211) (2,341) (2,071) (2,071) (2,071) Net Assets 14,608 8,073 18,681 7,874 (2,546) CASH FLOW Operating Cash Flow (10,016) (8,252) (9,182) (11,748) (10,700) Net Interest 57 75 110 70 0 Tax 2,667 1,000 1,218 1,571 1,571 Capital expenditure (42) (520) (1,243) (1,500) (1,500) Capitalised product development 0 0 0 0 0 Acquisitions/disposals 0 0 0 0 0 Financing 12,593 (41) 19,569 0 0 Dividends 0 0 0 0 0 Net Cash Flow 5,259 (7,738) 10,472 (11,607) (10,629) Opening net debt/(cash) (10,178) (15,437) (7,699) (18,184) (6,577) HP finance leases initiated 0 0 0 0 0 Forex 0 0 13 0 0 Closing net debt/(cash) (15,437) (7,699) (18,184) (6,577) 4,052 Source: Company accounts, Edison Investment Research Ceres Power Holdings 7 October 2015 5
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Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE s express written consent. Frankfurt +49 (0)69 78 8076 960 Ceres Schumannstrasse Power 34b Holdings 7280 October High Holborn 2015 245 Park Avenue, 39th Floor Level 25, Aurora Place Level 15, 171 Featherston St 6 60325 Frankfurt Germany London +44 (0)20 3077 5700 London, WC1V 7EE United Kingdom New York +1 646 653 7026 10167, New York US Sydney +61 (0)2 9258 1161 88 Phillip St, Sydney NSW 2000, Australia Wellington +64 (0)48 948 555 Wellington 6011 New Zealand