I have covered Ballard Power Systems Inc. (NASDAQ:BLDP) (TSX:BLDP:CA) previously, so investors should view this as an update to my earlier articles on the company.
Last week, leading Canadian fuel cell systems developer Ballard Power Systems Inc. (“Ballard” or “Ballard Power”) announced a major corporate restructuring “in order to maintain balance sheet strength amid a slowdown in hydrogen infrastructure development and delayed fuel cell adoption“.
(…) in the context of a challenging macroeconomic and geopolitical outlook and amid protracted policy uncertainty, we see a multi-year push-out of the availability of low-cost, low carbon hydrogen and hydrogen refueling infrastructure. As this delay represents a significant headwind to our corporate growth plan, we are implementing a cost restructuring to moderate our investment intensity and pacing to better align with delayed market adoption. (…)
The scope of reduction measures include a reduction in workforce, a rationalization in product development programs, operational consolidation, reduction in capital expenditures, and certain working capital improvement initiatives.
Management targets operating expense savings in excess of 30% which should translate into approximately $50 million on an annual basis.
Cash usage is expected to be lowered further by a reduction of capital expenditures and improved working capital management.
In aggregate, I would expect up to $75 million in annual cash savings as well as an up to $25 million one-time working capital release.
In addition, the company is reviewing its planned large-scale investment in U.S. manufacturing capacity and its existing joint venture in China:
Given the leverage from the $94 million in US government funding awards, we continue to carefully assess our proposed investment for long-term manufacturing capacity expansion in Texas. We are reviewing financing optionality to extend our funding timeline, and delay material cash outlays, until we have appropriate market adoption indicators. (…)
With continued challenges in the China fuel cell market and underperformance of the Weichai Ballard joint venture, we are also conducting a strategic review of our China strategy, including all options relating to the WBJV.”
In layman’s terms: The company won’t proceed with its proposed $200 million investment (gross of anticipated U.S. government funding) for a new fuel cell gigafactory in Rockwall, Texas for the time being.
Regarding China: Ballard Power currently owns a non-controlling 49% interest in Weichai Ballard Hy-Energy Technologies Co., Ltd. (“the Weichai Ballard JV”) in China with a carrying value of $11.9 million:
Regulatory Filings
The Weichai Ballard JV has never lived up to expectations and with revenues of just $1.3 million in H1/2024, I wouldn’t assign much if any value to the joint venture beyond its net cash balance.
At least in my opinion, the most likely outcome of the strategic review would be a sale to the company’s Chinese joint venture partner Weichai Power Co. (OTCPK:WEICF) at a price around the carrying value of Ballard’s investment.
Following the recent decision to suspend a proposed $130 million investment in domestic MEA manufacturing capacity, a sale would likely put an end to the company’s decade-long efforts to become a leading player in the Chinese fuel cell market.
With a substantial part of the annualized savings projected to be realized next year, I would expect 2025 cash usage of between $65 million and $75 million with a further decline to $60 million in 2026.
Assuming Ballard Power to finish 2024 with $600 million in cash and liquid investments, the company’s cash runway would extend well into the next decade.
However, with the company’s operations being scaled down and considering weak backlog levels, analyst expectations for substantial near-term revenue growth remain illusive:
Yahoo Finance
Given management’s disheartening comments and considering the magnitude of the proposed restructuring efforts, I would not be surprised to see annual revenue coming down from last year’s $102.4 million number.
While Ballard Power is not yet giving up on mobility applications, even the heavy duty market is likely to be dominated by battery-electric vehicles (“BEV”) going forward due to a number of key issues:
- lack of hydrogen infrastructure
- limited availability of green hydrogen
- costs of hydrogen remain prohibitive
- total cost of ownership expected to remain way above competing BEV solutions
ICCT
In fact, the most efficient use of green hydrogen would be the decarbonization of hard-to-abate sectors like steel, cement and the chemical industry which account for the majority of global industry greenhouse gas emissions. However, these efforts would not require the company’s fuel cells.
At least in my opinion, management would be well-served to question the strategic direction of the company but abandoning the core mobility applications business would leave Ballard Power with its rather small backup power operations and very little revenue.
With a meaningful number of truck and bus OEMs still working on FCEVs, I would consider putting the company on the auction block. While valuation would likely be far cry of the 2020/2021 hype, a sale could provide shareholders with quick returns in contrast to playing the waiting game.
Apparently, Ballard Power’s management wasn’t in agreement regarding the company’s path going forward as otherwise CFO Paul Dobson and COO Mark Biznek would have likely kept their well-paid jobs rather than being replaced by former subalterns:
As part of the restructuring, Paul Dobson and Mark Biznek will be departing as our Chief Financial Officer and Chief Operating Officer, respectively. Paul will be succeeded by Kate Igbalode as our new CFO effective immediately. Mark will be succeeded by Lee Sweetland as our new COO effective at the end of 2024. (…)
Please note that the measures announced last week will result in the requirement to book an unspecified restructuring charge in the upcoming Q3/2024 results.
Bottom Line
With market adoption of fuel cell mobility applications way behind previous expectations, Ballard Power is taking drastic measures to conserve capital and weather the storm.
In sum, the company’s restructuring efforts could extend its cash runway into the middle of the next decade. Unlike cash-strapped peers Plug Power (PLUG) and Nikola Corporation (NKLA), Ballard Power won’t have to worry about liquidity issues anytime soon.
However, bleak industry prospects should keep investors sidelined, even with the company trading at a substantial discount to its cash position.
At least in my opinion, management should consider a full review of strategic alternatives including a sale of the company as a whole or piecemeal in order to maximize short-term value for shareholders.
