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Ceres Power Holdings plc: THE INVESTMENT CASE

Commercialisation milestones will provide near-term catalyst for fuel cell developer Ceres Power

Analysts at Berenberg said they believe Ceres Power’s core IP “is unique and scalable, using cheap, everyday materials, which could support mass adoption”
Fuel cell stack
INVESTMENT OVERVIEW: CWR The Big Picture
Berenberg started coverage on Ceres Power with a ‘buy’ rating and a price target of 1,500p, offering over 35% upside potential

Commercialisation milestones will provide the near-term catalyst for Ceres Power PLC (LON:CWR), according to Berenberg, with the German broker bullish on the steel fuel cells developer in an initiation note published today.

Starting coverage on the stock with a ‘buy’ rating and a price target of 1,500p - which offers over 35% upside potential on Ceres current share price of 1,100p - Berenberg’s analysts said they believe the group’s core IP “is unique and scalable, using cheap, everyday materials, which could support mass adoption”.

READ: Ceres Power says income will have ‘more than doubled’ as year-end nears

They added: “Ceres has established partnerships with blue-chip customers such as Honda, Nissan and Cummins, and we believe that reaching new commercialisation milestones should drive investor confidence in its ability to eventually monetise the technology.

“In the long run, we estimate that there is a market opportunity for Ceres to generate more than £1bn in revenues.”

The analysts pointed out that underlying trends support fuel cell adoption, with industry sources estimating that the market for fuel cells will grow at a compound average growth rate (CAGR) of circa 25% between 2016 and 2024.

They said that aside from their core benefits, fuel cells are increasingly relevant as a solution to the intermittency and capacity issues that the electricity grid will face in the coming years.

The analysts added that these are being driven by the growing proportion of renewables in the system as well as electrification driving vast energy requirements.

They said they believe that adoption is being driven by five key factors: 1) a global focus around air quality driving demand for alternative power; 2) growing proportion of renewables (solar and wind) increasing seasonal intermittency of electricity grids; 3) electricity grids facing capacity issues in the coming years driven by EVs; 4) the technology maturing after more than a decade of global investment; and 5) cost coming down to levels conducive to mass adoption.

The analysts added that, in their view, Ceres’ IP and existing commercial partnerships “leave it well positioned to benefit from this market growth.”

They noted that Ceres’ core SteelCell technology overcomes two problems traditionally associated with other solid oxide fuel cells, namely cost, and lack of robustness.

READ: Ceres Power to develop residential power systems in two-year deal

The analysts pointed out that SteelCell can use a variety of fuels - natural gas, hydrogen, biofuel - which can be manufactured from widely available materials, and is inherently the most cost-effective solution on the market.

They added: “This scalability is Ceres’ key competitive advantage, in our view.”

However, while the long-term opportunity for Ceres is potentially vast, the Berenberg analysts said they expect investors are looking for more near-term clarity given the early stage in commercial development.

They said: “We believe there are now two clear milestones which Ceres should meet soon: 1) winning a fifth commercialisation partner in 2017, and 2) completing two commercial launch programmes by end-2018.

“Both scenarios moderately help profitability in the short term, while drastically increasing the probability that SteelCell will be successfully monetised in the mid-term.”

The analysts said they have arrived at their 1,500p price target for Ceres by calculating the risk-adjusted net present value (NPV) of its future income from three markets - Japanese residential micro combined heat and power, US commercial and US data centres.

They noted that Ceres believes its strength lies in its core technology, as opposed to directly commercialising the end-product.

“As such, the business aims to make money by licensing its technology to larger OEMs and manufacturing partners who have the brand, development manpower, scale, balance sheets and distribution channels to successfully commercialise the product,” the analysts concluded.

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