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Questor: shares in this hi-tech power firm have fallen flat. Time to admit we were wrong?

Hydrogen graphic
Hydrogen graphic

It wasn’t the happiest timing. When Questor tipped Ceres Power, the hydrogen energy company, in late January it coincided to the day with the shares’ peak, in recent years at least, of £15.88. Since then it has been downhill all the way to last night’s close of 969p – a fall of almost 40pc.

Must we hold up our hands and admit to a terrible mistake?

In these circumstances it’s easy for the heart to rule the head. But let’s remind ourselves of a basic investment principle: that once you have bought a stock on the basis of a clearly articulated investment case rooted in evidence, you do not sell it unless something changes in that investment case – either in the business itself or in the environment in which it operates – or unless its valuation rises above what you consider rational.

The latter consideration doesn’t arise here. Let’s see what has changed at the company, and in the world in which it operates, since our tip.

“Operationally, Ceres Power remains on track,” said Matt Evans, manager of Ninety One’s UK Sustainable Equity and UK Smaller Companies funds, whose significant holding in the company prompted our tip.

“Its partners, principally Bosch and Doosan, a Korean conglomerate, are building factories to make fuel cells to Ceres Power’s design, which will generate licence payments when various milestones are reached and then a royalty on every unit sold once production starts. Some smaller deals have also been signed. Commercially its position in fuel cells is stronger now than it was in January.”

But since our tip the company has added another string to its bow: it is developing an electrolysis product. Electrolysis is the use of electricity to break water down into hydrogen and oxygen. This is the precise reverse of what fuel cells, Ceres’s original product, do and an electrolysing cell is in essence the same as a fuel cell, although the design is modified in minor ways.

Electrolysis offers the chance to fill a critical gap in the power systems of the future: a convenient means to store energy. If, say, you generate too much power from solar cells on a summer’s day, assuming we ever see them again, you use it to electrolyse water and produce hydrogen, which is then stored until it is used in a fuel cell to generate electricity – at night, for example.

“As we transition to a modern, green energy system, many see hydrogen as a very good way to store it,” Evans said. “Ceres is now working with partners to see if its fuel cells can be adapted for this purpose. The use of hydrogen in other industries – in the decarbonisation of steel production, for example – could also reduce the firm’s dependence on energy.” He said the firm had not articulated this aspect of its strategy until March, so it was not part of our original investment case.

So much for what has changed at the company. What about the broader environment?

The urge to modernise energy systems is if anything stronger still, so again the company looks even better positioned. The one external development that is most definitely not in its favour is the emergence of inflation expectations and the related rotation from “growth” stocks to “value”.

Ceres, whose prospects for significant revenues and profits lie well into the future, is unequivocally a growth stock.

“This, and an increasing focus on the very fact that royalty revenues are three to four years away, prompted the severe share price fall in my view,” Evans said.

So what is the rational thing to do now? Seen simply as a business, Ceres is in a better position now than it was in January. When we look at it as an investment we have to consider the changed appetite for growth stocks.

“I remain comfortable that if it delivers on its targets its valuation in a few years’ time will look reasonable,” Evans said. “I don’t think the shares have priced in the full scale of the opportunity.” He added: “I am more confident about Ceres than I was in January.

“Its positioning in the market is allowing it to attract talent and it has made some good hires, while governance is evolving as it should in a small company.” Evans has backed his words with actions: he took part in a share sale by Ceres in March at £10.60.

As we were at pains to emphasise in January, this is a long-term investment, but it merits a place in a balanced portfolio.

Questor says: hold

Ticker: CWR

Share price at close: 969p

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.