I can now buy two shares in Ceres Power (LSE: CWR) for the same cost as a single one a year ago. Over a 12-month period, the Ceres Power share price has plummeted 50%.
Looking at the share price chart since October, however, it seems as if the shares may have passed the worst. Could they now be a bargain for my portfolio?
Long-term business outlook
As a long-term investor, I like to buy into great companies when their shares are selling at an attractive price.
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Ceres Power has an attractive technology platform and could benefit from rising demand for renewable energy sources. However, so far the company has been consistently loss-making. Last year it notched up £21.4m of losses after tax.
Revenues in the first half of this financial year were sharply lower than for the same period in the prior year. The company expects second-half revenues to be broadly in line with the first half. That means that at the full-year level, revenues will likely fall — for the second year in a row. For a growth business, that is not impressive.
The revenue fall expected this year is due to the finalisation of a key license agreement for a Chinese plant being later than hoped. The license revenue could be substantial. Such a deal — if completed — would improve the Ceres Power investment case, in my view. However, the fact that revenues are affected so much by a single development makes me feel the Ceres business model remains fragile.
At this point, I do not see it as the sort of great company in which I would like to invest.
Assessing the Ceres Power share price
Given that I do not see it as a great company on current evidence, the price at which Ceres Power shares trade is of little relevance to me, as I will not be investing.
Nonetheless, its market capitalisation of £743m looks high to me for a consistently loss-making company with an uncertain outlook for sales growth.
At the end of June, the company was sitting on net cash of £222m. That removes any short-term liquidity worries in my view. But as a loss-making company with a history of shareholder dilution, I see a risk that any future fundraising could lead to further dilution.
Valuation concerns
Relative to its sales, the company looks pricy to me even allowing for the cash pile.
The lack of profits means that a price-to-earnings ratio cannot be calculated. I think the shares look expensive for what they are. So, based on what we currently know, I definitely do not see it as a bargain.
That might change. For example, the company reckons the prospective Chinese joint venture could be worth ”£30 million to Ceres in near term license fees plus future royalties”. That may yet be transformative for the company. For now, though, I think the Ceres business as it stands does not merit its current valuation.
