Lightning Analysis - CFU - Ceramic Fuel Cells

(Source: http://ozstock.blogspot.com)


Ceramic Fuel Cells develops electric generator power units based on Fuel Cells technology. Fuel cell itself is a relatively new technology which is supposed to be low emission and highly efficient compared to conventional generators. Scientifically, a fuel cell converts chemical reaction energy into electricity. This is similar in principle to batteries but fuel cell requires an external source of fuel. The fuel can be hydrogen or in CFU's case, they natural gas. Previously fuel cells are not economical to use en masse hence they are only found in special applications, including space flights. But CFU is suppose to develop economical industrial fuels cell generators that can be used for homes and buildings.

Reading about the CFU company gives the impression that it not only has a breakthrough technology which is addresses climate change and global warming, it is also on he verge of mass producing the fuel cells and has large international client orders from Germany and the UK in addition to Australia. Its manufacturing plant is located in Germany, which is from where production units will roll off.

CFU has a respectable relation with European countries like Germany and UK, which are serious in tackling the climate change problem. CFU has received research grants and financial incentives from Germany and received benefits from UK government feed in tariffs. The German plant opened in Oct 2009, is ramping up production in preparing for large volume sales in 2010 onwards.

The CFU story looks very rosy indeed, but trying to analyse its financials is a totally different story. Firstly CFU booked a massive loss of over $42m (2009) compared to $24m (2008). The 2008 loss was large enough but in 2009, CFU booked an extra $27 impairment loss from investments. No further details are given in the annual report but from news media a few months back, some may recall the boss of CFU talking about suing an investment company that invested a large amount of CFU's money into Sub-Prime investments.

In this blog, there are two strategy to analyse companies in the fundamental sense.
i) For established industrial companies, we look at a few financial ratios, eg debt level; the Warren Buffet formula and Lincoln indicators.
http://ozstock.blogspot.com/2009/07/warren-buffets-1981-formula-for-quick.html
http://ozstock.blogspot.com/2008/11/fundamental-analysis-ratios-formula.html
http://ozstock.blogspot.com/2008/07/9-golden-rules-according-to-lincoln.html

ii) For Biotech companies, ozstock has developed a set of biotech metrics to sift out potential winners.
http://ozstock.blogspot.com/2007/01/biotech-valuation-indices.html

CFU however, is still a startup, ie. massive losses, hence cannot be evaluated using method i). Although CFU is a startup, it does not have the biotech metrics such as clinical trials to judge the effectiveness and milestones of the product. Because of this CFU is purely a speculative play.

A few other things to note about CFU financially:
1) The massive $23m extra impairment loss stands out like a sore thumb. On the bright side, it is only for the one year, we hope. On the darker side, CFU is involved in a law suit concerning this loss. My opinion is that they cannot win the law suit, and need to pay the legal cost.
2) Recent cash flow is actually not that bad at $1.4m operational outflow with remaining $24m cash. The last 2 quarters had a loss of $4.88m combined. However, annual cash flow over the last two years were a massive $17 and $20m, with slight improvement in the last year.
3) Last two years, CFU was able to raise $32m and $15m, showing an ability to raise cash, especially when it seems like its technology is very well regarded in Europe.
4) On the balance sheet, it appears to have no debt. Majority of assets are cash($25m) and Plant and Equipment($20m) with very little intangible assets. This seems like a strong position.

From a technical analysis standpoint:
i) The Relative Strength (RSI 14) looks like its bordering on the oversold side, so could turn up.
ii) The Stochastic Oscillator is at almost 0, and may signal a buy when it moves strongly into positive territory.
iii) MACD is way under zero and thus indicates an oversold condition. For this to signal a buy, the MACD must have moved strongly across the signal line.
iV) The price itself seem to have found temporary support at 16c after falling from a tight range at 25c.

Summary
Fundamentally it is worth a punt, not only because of promising technology but also a strong balance sheet. Its past financial history however suggest extreme caution.
Technically it  has been oversold recently. The wait is for it to confirm the support or break through to lower levels.