Morning Note: Market news and an update from Ceres Power.
Market News
US equities moved higher last night – S&P 500 (+0.4%); Nasdaq (+0.6%) – ahead of today’s release of the August core PCE deflator, the Fed’s key inflation measure. A rise of 0.2% is expected, the same as July and consistent with the Fed’s 2% target. However, unfavourable base effects may boost year-over-year core inflation to 2.7%, Bloomberg Economics said. The 10-year Treasury yields 3.79%, while gold is steady at $2,662 an ounce.
In Asia, equities finished a strong week on a positive note: Nikkei 225 (+2.3%); Hang Seng (+3.1%); Shanghai Composite (+2.9%). The China market is enjoying its biggest weekly advance since 2008. Turnover breached $100bn in the first hour in Shanghai, causing trading to be temporarily halted by glitches in processing orders. The yen jumped to 143 versus the dollar after former defence minister Shigeru Ishiba beat out BOJ easing advocate Sanae Takaichi in a run-off election for Japan’s PM.
The FTSE 100 is currently little changed at 8,291. Sterling remains well supported – $1.3373 and €1.2010 – with several investment banks predicting further gains on the back of a relatively slower rate of monetary easing by the Bank of England.
Oil extended a sharp two-day drop, putting prices on course for a substantial weekly decline. A deal between rival Libya factions may see more than 500,000 barrels a day of supply returning in the near term, StanChart said. Brent Crude is currently $71.50 a barrel.
Company News
Ceres Power has this morning released its H1 2024 results which came in at the top end of the guidance range and has reiterated its full-year revenue guidance. The company has seen an acceleration in orders this year, with new deals signed with a number of partners. Cash outflows have significantly reduced, and plans have been implemented to reduce the group’s cost expenditure by 15%. In response, the shares are up 15% early trading.
Ceres is a world-leading developer of clean energy technology: fuel cells for power generation, electrolysis for the creation of green hydrogen, and energy storage. The company designs and manufactures steel-based Solid Oxide Fuel Cells (SOFC) which, in very simplistic terms, produce electricity when fuel passes through the fuel cell, via the process of electrolysis. The key benefit of the Ceres steel-based version is that it is fuel agnostic and therefore does not require pure hydrogen, instead being able to use everything from biofuels to mains fed natural gas. Its power generation efficiency, which is around 60% and can even reach 85% with a heat recovery system, is significantly higher than the efficiency of centralised gas-fired power generation units, which are around 40%-50%. The steel-based structure also means they are more affordable, scalable, extremely robust, and able to operate at lower temperatures. The technology can be used in both stationary and transport applications.
The technology is also truly reversible, able to generate green hydrogen at high efficiencies and low cost – the solid oxide electrolyser cell (SOEC) technology produces hydrogen up to a third more efficiently than incumbent low temperature technologies particularly when thermally integrated with industrial processes such as chemicals and steel production.
Ongoing geopolitical events have highlighted the need for energy security around the world, with governments also under increasing pressure to decarbonise their societies. Hydrogen is expected to play a role in the move to net zero. We believe Ceres is well placed to benefit as the world’s energy mix moves to a lower carbon future and clean technologies play a strategic role in economic growth.
The group’s asset-lite business model is focused on multi-year development partnerships with global original equipment manufacturers (OEMs) to jointly develop products using the technology. Ceres receives a license fee for the initial use of the system technology, engineering fees during product development, and royalties upon commercialisation. This strategy allows for broader market reach and generates high margins.
The company currently has licensing agreements and joint development projects with some of the world’s largest engineering and technology companies, such as Weichai Power in China (also a 20% shareholder in Ceres), Bosch in Germany (an 18% shareholder), Miura in Japan, and Doosan in Korea. These cover multiple uses including residential boiler systems, range extenders, data centres, marine transport, and stationary power back-up. Both Bosch and Doosan continue to implement their initial volume manufacturing capabilities, with Doosan expected to start mass manufacturing to start in 2025. The group also has a partnership with Shell to utilise solid oxide electrolyser cell (SOEC) technology to deliver high-efficiency, low-cost green hydrogen.
Earlier this month, the group announced an SOEC systems licence with Thermax Limited, a leading provider of energy and environment solutions based in India. The non-exclusive global licence agreement included designs for electrolyser module systems that will be manufactured and sold by Thermax. The system will enable cost-effective green hydrogen production, targetting the hard-to-abate green ammonia, petrochemical, and steel industries. The agreement includes (as yet undisclosed) licence fees and product royalties to be received by Ceres.
Last month, the company confirmed a long-term licence agreement with Denso for the manufacture of Ceres’ proprietary SOEC for hydrogen applications. Denso is a Japanese-based global OEM with expertise in system control and thermal management. The global, non-exclusive deal secures another partner for Ceres with the scale, expertise, and resource to manufacture advanced equipment for the growing green hydrogen sectors. The agreement includes ‘significant’ (as yet undisclosed) revenue for Ceres over multiple years, with a similar profile to previous OEM licences, including licence fees, engineering services, and hardware. It also provides for royalty payments to Ceres on future commercial production and sale to end customers by Denso.
These deals comes on top of January’s announcement of a global long-term manufacturing collaboration and licence agreement with Delta Electronics for fuel cell stack production. The deal will generate revenue in 2024 and beyond. Initial production is expected by the end of 2026, with royalties expected to follow. In addition, in June, Ceres signed a contract with Shell to design a 10MW pressurised solid oxide SOEC module to produce green hydrogen.
Back to the today’s results. In the six months to 30 June, revenue rose from £11.7m to £28.5m, versus guidance of £27m-£29m. Revenue was split between licence fees (71%); engineering services (18%), and technology hardware (11%).
The group enjoyed a record order intake from signing new contracts of £46.9m in the first half, growing to £103.3m by 31 August. Going forward, the order book will continue to vary based on the timing of contracts won and revenue recognised from them.
The gross margin increased from 62% to 80%, versus guidance of 75%-80%, reflecting the impact of technology transfer to Delta. The group made an operating loss of £13.8m, significantly lower than £28.3m last year, demonstrating the operational leverage of the business.
Investment in the business fell from £3.1m to £2.8m as there was reduced requirement to invest in prototype manufacturing capacity and test stand infrastructure. The cash outflow reduced from £21.1m to £13.9m, to leave cash and short-term investments at a comfortable £126.1m as at 30 June.
The company has re-confirmed its full year revenue guidance of £50m-£60m, based on contracts secured to date. In addition, following successful milestone achievements in the group’s product development roadmap, and certain non-recurring investment programmes coming to an end, Ceres has disclosed there will be a natural reduction in investment requirements from historical peak levels. As a result, and following the implementation of a new organisational structure in September, the company will now rationalise its cost base, reducing overall expenditure by 15%.
The shares trade on the LSE Main Market. The stock has been very weak over the last three years due, in part, to the impact of rising bond yields on highly-rated unprofitable companies but also due to the failure to complete a 3-way joint venture agreement with Weichai and Bosch. However, recent announcements have had a positive impact on the group’s outlook and the share price.