For years, some investors were highly excited about the prospects for Ceres Power (LSE: CWR) – and for years the share price went in the wrong direction.
Those days increasingly seem like a distant memory. The Ceres Power share price has soared an incredible 665% over the past year. That gives the fuel cell specialist a market capitalisation of £1.3bn, earning it a place in the FTSE 250.
Ceres Power has taken advantage of its buoyant share price to raise around £100m of new capital this month by issuing new shares. This dilutes existing shareholders.
So far I have stayed on the sidelines, but could this growth story still have legs – and ought I to invest?
A revamped business model has helped Ceres
Part of the reason for the surge in the Ceres Power share price dates back several years. It had spend a lot of time preparing for a deal in China, sucking up a lot of management effort ultimately to no avail, at least in the short term.
Ceres revised its approach to the Chinese market and also built business with customers in other markets, such as Taiwan. It also started to ramp up the number of customers it had worldwide.
Part of the attraction of the current approach is that by licensing technology to some customers, Ceres can earn royalties – a less capital-intensive business model than doing everything itself. That saw Ceres’ first royalties flow last year.
Here’s my problem with the share price
Over time, that shift could turn out to be decisive. Ceres’ technology has long been admired, but the challenge has been how best to commercialise it at scale. The company’s business performance in recent years suggests it is now nearer than ever to achieving that.
However, while the surging share price suggests investor optimism has boomed, I still have some doubts.
Ceres remains heavily lossmaking. It is also burning cash. Last year, revenue actually shrunk rather than grew, but at £33m, was still substantial. Ceres is not just an idea in a lab like some rivals, but a functioning medium-sized business.
But the firm’s operating loss, at £48m, was even bigger than its revenues. Operating activities burned through £20m net cash, leaving the company with £83m of net cash and investments at the end of last year. That helps explain this month’s capital raise.
I think the technology has strong potential and I appreciate the moves Ceres is making towards long-term commercial growth and a more attractive business model. But this still feels like a punt. Ceres Power has been spilling red ink for years and continues to do so. It is still burning cash at a rate that alarms me given the size of its business.
So I will continue to watch the business but have no plans to buy this UK growth share.
Should you invest £5,000 in Ceres Power Plc right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
