Ballard Power Systems - Q4/2019 Takeaways - Strong Top Line Beat But Margins Disappoint

Summary

• Strong top-line beat but gross margins disappoint as 60% of revenues were derived from sales to the company's Chinese joint ventures. Backlog down sequentially.
• Broad-Ocean likely to discontinue strategic relationship potentially resulting in some overhang on the shares as the company owns an almost 10% stake in Ballard Power Systems.
• Company projects FY2020 revenues of $130 million, roughly in line with current analyst consensus.
• Announced intention to sell up to $75 million of new shares into the open market.
• After the most recent rally, valuation appears entirely off the charts at almost 20x projected FY2020 revenues. A short sale might yield decent results should the current hype abate.

Note:

I have covered Ballard Power Systems (NASDAQ:BLDP) previously, so investors should view this as an update to my earlier articles on the company.

On Wednesday, leading Canadian fuel cell systems developer Ballard Power reported Q4/2019 results and provided its initial FY2020 outlook.

The company's shares have performed admirably over the past couple of months, more than doubling from the slight dip experienced after the Q3 report in late October 2019.

The hype correlates almost perfectly with the ongoing squeeze in Tesla's (TSLA) heavily shorted shares so I would assume market participants have increasingly been picking up fuel cell- and other alternative energy stocks as sideplays here.

At a $2.5 billion market capitalization and a FY2020 revenue multiple of close to 20, the company is, by far, the most expensive U.S. exchange-listed fuel cell stock:

Source: Yahoo Finance, Author's own work

Clearly, investors are betting big time on the company's endeavours in China despite uncertainties around the extension of national FCEV subsidies beyond this year and the recent corona virus outbreak.

Without much further ado, let's now take a look at the company's Q4 numbers and initial FY2020 guidance:

Reported revenues of $41.9 million came in substantially above expectations, outperforming analyst consensus by almost 35% mostly due to a massive surge in sales to the company's joint ventures in China.

Sales under the recently amended MEA supply agreement with the company's legacy joint venture in China, Guangdong Synergy Ballard Hydrogen Power Co. ("the Synergy JV"), came in at $6.5 million, an almost 500% sequential increase while revenues derived from its new, all-important joint venture, Weichai Ballard Hy-Energy Technologies Co. ("the Weichai JV") surged by almost 150% quarter-over-quarter to $18.8 million.

In aggregate, sales to its Chinese joint ventures represented more than 60% of Ballard Power's Q4 revenues.

Unfortunately, margins associated with these sales appear to be quite low as consolidated gross margin was down by 400 basis points sequentially, coming in at just 21%, a far cry from margins enjoyed at the time of the ramp-up of the Synergy JV back in 2017.

Clearly, the recently amended MEA supply agreement with the legacy joint venture now carries much lower margins quite similar to the product revenues with the new Weichai JV.

Cash was down by $5.6 million sequentially to $147.8 million as $8.0 million in favorable working capital movements were not sufficient to offset losses from operations and a $6.4 million cash contribution to the Weichai JV. In aggregate, the company's cash position declined by $44.4 million over the course of FY2019.

For this year, Ballard Power expects to contribute another $20 million in cash to the new joint venture which is now expected to be commissioned and operating by mid-year 2020.

Investors likely need to prepare for further, substantial cash outflows this year as Ballard Power continues to invest into the Weichai JV and the related expansion of its MEA production capacities at its Vancouver facility.

To take advantage of the elevated share price and bolster liquidity, the company announced its intention to sell up to $75 million in new shares into the open market as stated in management's Q4 and full year 2019 discussion and analysis ("MD&A"):

We intend to establish an at-the-market equity program (“ATM Program”) and to issue up to $75 million of common shares from treasury to the public from time to time at the Company’s discretion, subject to favorable market conditions. The ATM Program will be conducted under our existing $150 million Base Shelf Prospectus and will be used to fund growth and strategic opportunities.

Both the company's 12-month and total backlog were down by approximately 11% sequentially to $110 million and $179 million respectively which shouldn't be viewed as a surprise given the strong Q4 revenue performance.

In the MD&A, Ballard Power also announced that the company's legacy partner in China and second largest shareholder, Zhongshan Broad-Ocean Motor Co., Ltd. ("Broad-Ocean") will likely discontinue its fuel cell engine manufacturing activities based on the company's prior generation FCvelocity®-9SSL stacks.

Given that the company has not generated material revenues from this relationship in 2019 and negotiations with Broad-Ocean regarding the potential sale of a 10% stake in the new Weichai JV recently failed, the news isn't exactly a surprise. Nevertheless, it could create an overhang on the shares as Broad-Ocean might very well decide to dispose of its almost 10% stake in the company going forward, particularly after the outsized move in the stock price as of late. At current prices, Broad-Ocean would realize an almost 400% gain on its investment in Ballard Power.

Lastly, the management provided initial FY2020 revenue expectations of approximately $130 million, roughly in line with current consensus estimates:

Consistent with the Company’s practice, and in view of the early stage of hydrogen fuel cell market development and adoption, we are not providing specific financial performance guidance for 2020. However, directionally we expect total revenue of approximately $130 million in fiscal 2020, compared to total revenue of $106.3 million in fiscal 2019, as commercial activities increase in our target geographic territories. This growth is expected to primarily result from commercial progress in the Heavy Duty Motive market, underpinned by increasing demand for FCEVs in China and Europe. Our 12-month Order Book of approximately $110 million at the end of 2019, together with a robust sales pipeline, establishes a strong foundation for projected growth in full year 2020 revenue.

Keep in mind that the outlook does not reflect any impact of the recent corona virus outbreak:

Our 2020 Business Outlook does not reflect any impact of the corona virus (COVID-19). It is currently too early to accurately project any impact, since the duration and scope of the outbreak is not yet known with any certainty. If the outbreak continues for an extended period of time, Ballard and Weichai Ballard JV may experience supply chain disruptions, a decline in sales activities, and reductions in operations and workforce.

Bottom Line:

The company closed FY2019 on a high note with Q4 revenues outperforming consensus expectations by almost 35% mostly due to increased sales to its Chinese joint ventures. On the flipside, gross margin performance was disappointing at just 21%, raising concerns about the margin profile of its Chinese business, particularly with regards to the recently amended MEA supply agreement with the legacy Synergy JV. In FY2020, the company will transition to more or less regular MEA shipments to the new Weichai JV with the impact on margins yet to be seen.

FY2020 revenue guidance of $130 million came in roughly in line with expectations, representing about 22% year-over-year growth after 2019 top line performance came in materially better than expectations. That said, the company warned investors of potential disruptions in case the corona virus outbreak continues for an extended period of time.

Investors will likely have to prepare for another year of material cash usage as the company continues to invest into the Weichai JV and the expansion of its MEA production capacities in Canada.

In addition, both the company's intent to sell up to $75 million of new shares into the open market as well as the anticipated end of the Broad-Ocean strategic relationship could provide a meaningful overhang on the stock for quite some time as both the company and Broad-Ocean might be looking to take advantage of the elevated share price.

In sum, it is difficult to envision Ballard Power's Q4/2019 results and initial FY2020 outlook igniting a further rally in the company's shares. In fact, the disappointing margin performance and the perceived overhang from the announced at-the-market offering and Broad-Ocean's potential disposal of some or all of its stake in the company could cause some pressure on the stock price going forward.

From a fundamental perspective, after the most recent rally, the company's valuation appears to be entirely off the charts but with the hype feeding the hype, market participants couldn't care less about fundamental considerations as long as the trend remains intact and the stock keeps running on strong volume.

The company will hold its conference call later today, I will update investors in case of any new, material developments.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.