It has been a disappointing 12 months for shareholders in Ceres Power (LSE: CWR). The share price has tanked 62% in that period.
Yet there are promising signs of business development at the company.
In its annual results announced today (15 April), it said that revenues grew last year – and Ceres Power expects them to double this year. That is just from existing partnerships, so new customers might add even more sales growth on top of that.
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Given the upbeat outlook for sales, what is going on with the share price?
Ongoing losses
The sales surge expected this year has already been factored into the share price as the deal was announced earlier this year.
Meanwhile, although revenues grew last year compared to the restated prior year figure, so did losses. The operating loss was £59m, on sales of £22m. Those are not attractive economics for any business. The total loss for the year grew to £54m from £48m the prior year.
Unsurprisingly given that, the green energy company continues to burn cash.
It ended the year with net cash and investments of £140m. That is significantly lower than the £182m it had at the end of the prior year.
It is still a sizeable cash cushion (especially for a company with a market capitalisation of £267m). But if the company keeps burning cash then there is a risk that at some future point it may dilute existing shareholders to raise more funds.
Sales outlook seems good
What about the expected surge in sales revenues, though?
I see that as positive. Usually it is easier to make the economics of a business work when sales are large rather than small. Fixed costs can be spread more widely and bigger sales can help cash flows (though that is not always the case in practice).
On top of that, the big deal with Taiwanese company Delta is a sizeable vote of confidence in Ceres’ technology.
Not only could that mean we see further revenue from that customer in future, it may also help the firm persuade other potential clients to start buying its products.
Lots still to prove
But the deal brings risks too. It makes Ceres Power heavily reliant on a single customer for its revenues.
That sort of concentration can be problematic, as if anything goes wrong with that one customer relationship then it can have an outsized impact on the business overall.
Big contracts sound good but they can be a mixed blessing. Scaling up production and servicing capabilities to deliver them can be costly.
Not only that, but the firm has been bleeding red ink partly because its commercial model remains unproven. One deal, even a chunky one, does not necessarily change that.
I think the current Ceres Energy share price could yet turn out to be a huge bargain. It has impressive technology, an existing sales base and revenues look set to soar.
Whether it in fact turns out to be a bargain, depends in part on how well it commercialises its products. That remains to be seen and for now, I will not be investing.
