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Fuel cell technology developer and all round eco-green nonsense penny dreadful Ceres Power (LSE:CWR) is not going bust. It has found a saviour. As such my target price of 0p is (pro tem ) looking a bit optimistic. For now. But are the shares really worth 3.01p? I very much doubt it. As I shall explain below.
My recommendation to sell at 2.5p can be found here.
To those who are 20% out of the money so far I apologise. I see that Spreadbet Magazine says this was a very “duff call.” So far it looks that way. This is of course the same magazine that in September made Ceres a “conviction buy” at 5.2p and which in the summer said the shares were a strong buy at 12p and heading for 20p. Aaaah the powers of Technical Analysis. I suppose if my minus 20% advice is a duff call that buy at 12p advice ( minus 75%) can only be described as a “quadruple duff call” .
I will not honour Spreadbet with a link in case you find any other conviction buys which might lure you into TA inspired penury.
Anyhow, where now? The company is currently raising £3.3 million via a placing and open offer at 1p. As per my previous analysis, as at the end of October net cash minus trade payables was virtually nothing. The company has admitted as much when it warned that an orderly wind-down of its business would be unlikely to secure anything for shareholders.
So assuming the open offer is fully taken up my guess is that if you knock off a bit for broker fees, documentation plus the November cashburn net cash (minus trade payables) will be c£2.5 million at most.
The business plan is now changing. Ceres says:
“Under this alternative business model, Ceres will offer its technology (through components including cells, stacks and FCMs) to customers to be incorporated into their own products for multiple mass market applications, including m-CHP. Ceres would expect to earn revenues from a combination of development licenses, on-going fees for services and royalties on partners’ mass market product sales. The core fuel cell and FCM technology is considered by the Board to be suitable for m-CHP in territories including Europe, South Korea, Japan and North America, and may also be used as the basis of products such as vehicle auxiliary power, telecoms base station power and larger scale distributed generation. To implement the revised business model, the Group is refocusing the size and scope of the business to maintain the necessary core technology, system integration and pilot-scale cell manufacturing capability, but it will no longer maintain the capability to design, develop and sell complete m-CHP products.”
Okay but as the company admits, the product is not yet being snapped up across the board it wants to be “focusing the Group’s resources on the development and commercialisation of the Ceres core fuel cell.”
In other words , do not expect immediate sales and costs will not exactly fall to zero on day 1 of the new regime.
Ceres was until recently burning £1.4 million in cash per month. Most of that was on staff. Now assuming that most are on three or six month notice periods, losing those staff will not exactly be cheap and cannot be done overnight. The well paid old board has fallen on swords and that will save quite a bit but if one assumes that cashburn is ( somehow) cut by two thirds that still only gives this company until Easter to either start generating material revenues or to raise money yet again.
I will bet the monkeys at Spreadbet magazine 5 Albanian Lekke that this company will raise cash again, at least one more time before next summer.
Meanwhile the valuation on a proforma basis is £12.5 million. In effect you are paying £10 million for technology which is commercially unproven owned by a company that could well be out of cash again by Easter. The shares remain a strong sell. The target price is clearly not 0p yet as there is now cash in the bank but I cannot see why this stock should trade at a mammoth premium to net cash until we get a handle on its true net cash & trade payables position, ongoing monthly cashburn rate and any sense that revenues are on the way. As such I’d say about 1p a share was fair value pro tem.
Libertarian investment writer Tom Winnifrith writes extensively for a number of US and UK financial websites. All of that material appears on his own blog, which also carries his extensive original non financial material, at TomWinnifrith.com – for alerts on all Tom’s writings follow him on twitter at @tomwinnifrith
Still think you’ve called this right Tom?