nomura code cfcl report, page-9

thanks vernonhardapple(can I call you V or Vernon)

Lots of good stuff for the true believers in the report.

This snippet re the opposition

Ceres Power
Delays highlighting the current challenges
In its FY09 results presentation, Ceres Power confirmed that it is 6-9 months behind
schedule in its beta development as it now expects commercial field trials to begin in
1Q10, versus the original expectation 3Q09. In addition, the data presented showed the
alpha unit achieved >0.8kW and not the 1kW go to market specification. We believe
these two key points highlight the challenges in progressing a promising electrochemical
cell technology into a commercial product that meets the key criteria of electrical
efficiency, longevity and cost. Furthermore, it highlights the risks that are involved in
trying to accelerate the development process by performing the balance of plant
development and optimisation, field trials, CHP boiler product development and
manufacturing scale-up in parallel. Despite the challenges facing Ceres Power in its
product development becoming more evident, we retain our Neutral recommendation as
we continue to believe in the long term potential of the Ceres Power SOFC technology.
How much more development? Despite the independent validation of alpha performance and
the next milestone payment from Centrica of 2m, the data released showed the alpha unit did
not meet the 1kW go to market specification achieving only >0.8kW. Questions also remain as
to where the unit is in terms of electrical efficiency, as the 87% overall efficiency recorded does
nothing to clarify this large unknown, and the company has yet to provide any data point as to
where it is in terms of degradation and longevity.
Field trials delayed by 6-9 months. Original expectations were for field trials to start this
summer but these are now expected in 1Q10, although the management expects at least one
unit to be installed in a home before the end of the calendar year. Modelling data from Ceres
also shows the unit is expected to operate at just ~40% of its capacity. With this load profile, we
continue to believe field trial data will be required over the period of a whole year to confirm the
units expected operating profile and potential value creation. The focus on the UK market and
Centrica as the main partner also makes Ceres dependant on their timings.
Accelerated development process highlight further risks. With the development of the beta
unit delayed by 6-9 months, the accelerated development process for the complete m-CHP
product and the mass manufacturing strategy seem at risk of running into further issues,
including rising costs. We highlight that the appliance manufacturing partner Daalderop has, to
our knowledge, not yet received a unit to test.
We now forecast profitability in FY15 after pushing back our expectations by 9 months. With
23m cash, cash burn increasing to 11.5m and 4.5m capex expected in FY10, we expect
Ceres Power to require further funding in FY11, FY12 and FY13. But with commitments from
Centrica and Calor gas, this should not prove too much of an issue. We continue to believe in
the technology and retain our Neutral recommendation but highlight that the downside risks are
becoming more apparent and reduce our fair value to 170p.
Neutral
(Unchanged)
2009A 2010E 2011E 2012E