In the past month, a UK share I follow has seen its price explode by around 60%. Despite that, it is still around 30% cheaper than a year ago. Could it keep booming – and ought I to buy in now?
Green energy share has soared
The company in question is Ceres Power (LSE: CWR). At first glance, the business performance of the fuel cell company looks mixed, at best. Last year, revenue was £22m – but the business reported a loss of £54m. It has been consistently lossmaking for years.
So why have the shares been on a tear of late?
Potential revenue boom
Ceres has signed a new fuel cell and electrolysis license with Taiwanese firm Delta Electronics that includes staged revenues of £43 million. Around half of that is expected to be recognised as revenue this year.
That revenue is expected to come through technology transfer and licensing. So in theory at least, it could be more or less pure profit from Ceres’ perspective, rewarding its years of ploughing money into research and development.
But the deal was announced in January, well before the UK share jumped in recent weeks. In fact, the past few weeks I have not seen any significant news that I think explains the sudden price movement.
Could the share be undervalued?
One explanation is that the City has been revisiting its valuation of Ceres.
The Delta deal looks set to bring in a lot of revenue on its own. It also underscores the attractiveness of the company’s technology. If Ceres can sell to more clients worldwide, revenues could grow rapidly.
That seems to be the plan, as the firm has been appointing commercial representatives in multiple markets worldwide.
Even after its share price surged in recent weeks, Ceres’ market capitalisation stands at £415m. It ended last year with £140m in cash and investments, so the current price implies an enterprise value of under £300m.
If the Delta deal works well there could be more revenues to come from the deal in future – and that might be the tip of the iceberg. The sort of hydrogen energy and fuel cell technology in which Ceres specialises is in hot demand globally.
While research costs remain high, licensing the technology may enable the business to grow revenues quickly without adding much cost.
That could transform the economics of the business – and potentially merit a far higher valuation for this UK share.
I’m not tempted to buy yet
Will it happen? Maybe. But maybe not. Ceres’ management has a track record of disappointing investors. Its long-mooted China joint venture may never materialised. The firm has burnt through large amounts of cash and continues to bleed red ink.
The tide may have turned. If the Delta deal paves the way for higher revenues and a move into the black, I think the current share price looks cheap. But there is a lot to prove – and we do not know whether that will happen in the end.
So for now at least, I will not be buying this UK share.
