Ballard Power Systems Inc

Ballard Power Systems Inc (TSX: BLDP) is an alternative energy company based out of Canada. It is engaged in the business of designing, developing, manufacturing, selling, and servicing of PEM (Proton Exchange Membrane) fuel cell for multiple uses including Technology Solutions, Portable Power, Backup Power, Material Handling and Heavy-Duty Motive.

Key Highlights:

• On September 20, 2020, China’s government has announced a new official policy regarding Fuel Cell Electric Vehicles and the company is expected to take advantage from its Weichai Power Co. joint venture, as it will supply fuel cell stack and module platform.
• On September 14, the group  announced the launch of its FCgen^®-HPS product, a high-performance, zero-emission, proton exchange membrane (PEM) fuel cell stack, which will provide propulsion for a range of Light-, Medium- and Heavy-Duty vehicles in an industry-leading volumetric high-power density of 4.3 kilowatts per litre.

Q2FY20 Financial Highlights: BLDP announced its quarterly results, wherein the company reported a higher top-line of USD 25.818 million, as compared to USD 23.651 million in the previous corresponding period (pcp). The growth was driven by an increase from Heavy-Duty Motive and Backup Power segment, while declines in Technology Solutions and Material Handling revenues remained a drag. Gross margin fell slightly to USD 5.357 million, from USD 5.550 million in pcp, due to a higher cost of product and services. Total operating expenses stood at USD 14.017 million, significantly higher from USD 10.149 in pcp. The group reported a higher loss from operating activities at USD 8.660 million, against a loss of USD 4.599 million in pcp. Net loss for period widened to USD 11.432 million from a net loss of USD 6.971 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The market conditions in which the company operates is full of challenges and might impact the operational performance and reduce financial performance as well. Any change in regulations and government policies could affect the overall business of the company. Further, higher operating costs would likely to hinder profitability.

Valuation Methodology: EV to Sales Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of BLDP appreciated ~201% in the last one year. The company reported an impressive top-line; however, the company failed to retain the momentum in the bottom-line, which is a key challenge. The company has reported a significant increase in the operating costs, which has resulted in a poor bottom-line and dampened the margin as well. However, the current collaboration with Weichai is expected to improve the company overall business prospect, as the Govt. of China has confirmed the policy regarding Fuel Cell Electric Vehicles, which is a key positive. However, we remain skeptical about the operating performance of the company and would keep an eye on the variable costs structure for the coming quarters. The Group needs to manage its operating expenses unless it results in further deterioration in financial performance in the coming years. We have valued the stock using EV to Sales based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like Algoma Central Corp, Ceres Power Holdings PLC, Bloom Energy Corp. Hence, we recommend an ‘Watch’ rating on the stock at the closing market price of CAD 21.71 on September 21, 2020.

BLDP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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