| FUNDAMENTALS: CFU is focused on the stationary power market through its SOFC technology. Although we believe that CFU’s choice of fuel cell technology (SOFC) is likely among the most competitive solutions for stationary power generation due to its 60% efficiency, we believe that its target market (the residential market) is unlikely to be competitive vs. tradition grid pricing for several more years. Given low revenue run-rate and high cash burn, we advise investors await better entry opportunity. We would likely become more excited about prospects for shares if strategic focus was geared towards becoming a component/materials supplier to an existing SOFC fuel cell company. Maintaining partnerships that span many geographies (UK, Germany, France, Japan and most recently Switzerland) from its Australian headquarters seems to be an expensive proposition with many hurdles ahead. VALUATION ANALYSIS: Trading at approximately one-third of its CY04 IPO valuation is not a catalyst in itself as CFU has had a tougher time scaling sales over the past five years than anticipated. Relative to itself, CFU is trading in-line with average levels, but relative to peer group it is among the most expensive name. We view current valuation with enterprise value of ~$200Mn as rich relative to peers with similar valuations and significantly larger market penetrations (i.e. BLDP and FCEL). Balance sheet is a threat with only ~$20M in cash and a burn rate that suggests capital will be needed in 2H10 to sustain operations. SENTIMENT: CFU has significant insider ownership at 23% but dismal institutional ownership ~18%, with most institutional ownership European. In 4Q09, sold-out positions out number new positions 3 to 0, but we note recent recovery in share price might signal incremental interest after placement with Cosvegas in Switzerland. OUR EXPECTATIONS VS. STREET: The current Street expectations (per model) discounts a view that management will be able to execute plan to reach breakeven by CY12. The biggest swing factor in model is clearly revenue given the current Reuters estimate discount growth from <$2M in FY09 (June), which was almost entirely driven by field trial sales to ~$64M in FY12. Similarly, we see risk to Street gross margin assumptions, as subsidation will unlikely continue once product gains momentum. Strategic Initiatives: CFCL will be the supplier of choice for reliable and high electrically efficient solid oxide fuel cell products, which manufacturers can easily integrate into micro generation appliances for the European market. To implement this strategy, CFCL has: § Successfully developed and tested its fuel cells, as single cells and integrated stacks; § Designed and built the Balance of Plant systems; § Integrated its fuel cell stacks with its Balance of Plant into complete CHP demonstration units; § Delivered CHP demonstration units to customers for field trials; § Designed and built a prototype ‘fuel cell micro-generator’ unit – called ‘Net~Gen™’; § Established a plant in the UK to produce high quality ceramic powders, which are a key component of solid oxide fuel cells, using the Company’s patented technology; § Established a fuel cell stack manufacturing plant in Germany to enable large scale manufacturing of the Company’s fuel cells. To successfully commercialize its technology, the Company intends to: § Conclude arrangements with appliance manufacturers to incorporate CFCL’s fuel cells into their end-user products; § Continue to improve its fuel cells - in particular, power output and stack life – and make it easier for appliance manufacturers to integrate CFCL’s fuel cells and Balance of Plant systems into a range of end user products. § CFCL will focus on implementing this strategy, whilst keeping an eye on other opportunities – from within or outside the fuel cell world - that can generate revenue or otherwise add to shareholder value. Industry Collaborations: Ceramic Fuel Cells has entered into agreements with various companies for the supply of fuel cells over the next few years. Some of the key agreements are mentioned below. § Partners in France: In December 2006 the Company signed a product development agreement with Gaz de France and De Dietrich Thermique. § Partners in Germany: In March 2007 CFCL signed a product development agreement with EWE and Bruns Heiztechnik GmbH (Bruns), a specialist German boiler manufacturer. § Partners in the United Kingdom: In July 2007 the Company signed an agreement with E.ON UK Ltd, the company that runs Powergen, to develop a unit for the UK market. § Partner in Japan: Under the agreement, CFCL and Paloma will work together to evaluate and develop a commercial m-CHP product by integrating CFCL's advanced fuel cell module with a Paloma home heating appliance. |
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