Some renewable energy shares have had a strong start to the year – and Ceres Power (LSE: CWR) is among them. The Ceres Power share price is up 23% this month. But it is still 27% lower than a year ago – and more than 70% below its February 2021 highs.
So, could the latest surge be the start of a bigger recovery – and should I buy now to avoid missing out?
Revenue fall
The company announced last week that it still expects 2021 revenues to come in at around £21m, with a gross profit margin of 60%.
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That revenue would be a sizeable fall compared to the previous couple of years, when annual revenue topped £30m. The company also said that it significantly expanded its commercial team last year. That could be good as it tries to ramp up the commercialisation of its technology, although it will add costs.
For now, at least, a lot still hangs on some Chinese joint ventures that have taken longer to be agreed than the company originally expected. Ceres has previously said that those JVs should be “worth £30m to Ceres in near-term license fees plus future royalties”, which is a sizeable sum if it comes to pass.
Sizeable cash burn
I think the recent increase in the share price probably partly reflects growing investor optimism about these joint ventures.
However, the fact that the company’s results can be so affected by the timing of such a deal shows how fragile the current commercial model remains. Meanwhile, cash burn remains high – the firm used £20.6m in net cash in operating activities in the first half of last year.
Uncertain pathway to profitability
That cash burn alarms me.
Ceres has plenty of liquidity for now, having ended last year with cash and short-term investments of £182m. But the company’s growth is expensive. Its 2021 loss was £21m. It lost even more than that in the first half of last year alone. I see a risk that the company will dilute shareholders further to raise cash if it keeps burning money at the current rate.
I also remain unconvinced about the long-term attractiveness of Ceres’ commercial model. While it already has big revenues, those have effectively stalled then declined in the past couple of years. As a potential investor I would like to understand more clearly where future revenue growth will come from – and crucially how it can translate into profits.
Price and performance
Ceres has an £850m market capitalisation. It looks priced for long-term commercial prospects I see as far from certain, based on its performance to date.
The technology is promising. I think the China joint ventures could yet turn out to step-change revenues at the firm. For now though, I think the business still has a lot to prove. If there are signs that good things are happening – like the China deal being finalised – I think the share price could climb strongly from where it sits today. But I am wary of its large cash burn and consistent losses.
For now, I will not be investing.
