UBS has initiated coverage on a trio of hydrogen specialist companies, London-listed pair Ceres Power and ITM Power and Norway's Nel.
Ceres Power was started off with a 'buy' rating, praising its high-margin licensing business model within the solid oxide fuel cells (SOFC) and electrolysers (SOEC) sector.
The firm's credibility, which had been shaken by partnership delays in 2023, received a significant boost with Delta Electronics' £43 million licence acquisition on January 18, 2024, propelling shares up by 38%.
UBS is buoyant about Ceres' future, underpinned by management's confidence in securing more deals in 2024, and sees another fundraise as "unlikely".
The rating comes with a price target of 450p per share based on a sum-of-the-parts valuation, with UBS's base case being that another licence is added by the end of next year, "likely" to be Weichai Power in China, potentially increasing revenue by approximately 31% in 2025.
Global hydrogen subsidy schemes of around $36 billion could accelerate the addition of an SOEC partner by 2025, enhancing revenue forecasts and advancing EBITDA breakeven, the bank said.
"We think new partners will be attracted to an SO market estimated at $2.3 trillion by 2030, yet we only find two credible manufacturers (excluding Ceres partners)," UBS said, noting that solid oxide technology takes around 15-20 years to develop at an R&D cost of roughly £245-660 million.
This mean, UBS said, "new entrants risk missing scale-up in the hydrogen market to 2040 versus a ~£43 million licence from Ceres, and be selling a product in 2-3 years".
In a separate note, UBS started ITM Power PLC (AIM:ITM) with a 'neutral' rating and a 65p price target, acknowledging the company's ongoing turnaround efforts and the potential for upside upon order momentum resumption.
"There is upside potential to valuation when order momentum restarts after the turnaround. But consensus also has not seen the last downgrade in our view with elevated FY26 expectations," the bank said.
Despite operational improvements under new leadership, UBS remains cautious, projecting limited opportunities for 2025 consensus upgrades and noting the industry's preference for alkaline water electrolysis (AWE) over polymer electrolyte membrane (PEM) technology.
The firm's valuation is underpinned by a detailed DCF analysis, highlighting ITM's differentiated technology and its potential to lead in PEM efficiency and hydrogen production cost-effectiveness.
Norwegian hydrogen specialist Nel was also covered in another note, with a 'sell' rating issued, in part due to "evidence that its tech is behind the competition across both its first-generation AWE and PEM", alongside uncompetitive pricing.
Nel's ambitious market share targets appear "unlikely" due to a significant tech gap and higher costs compared to peers, compounded by large-scale order challenges and a reliance on intensive R&D to close these gaps.
With a projected market share adjustment and significant underperformance in revenue consensus for 2025, alongside the highest cash burn among its peers due to R&D and capex demands, Nel faces a challenging path ahead in scaling its operations and achieving market competitiveness, the Swiss bank reckons.