Lake Street Capital Markets analyst Robert D. Brown takes a close look at Ballard Power Systems Inc. (NASDAQ:BLDP) and after reading the tea leaves, lowers its rating to Hold.

Ballard Power Systems
Ballard Power Systems Inc. (BLDP)

We are lowering our rating to HOLD from BUY as we believe shares fully reflect the significant improvement in business fundamentals and the growth potential from the core forklift and back-up power markets, as well as give substantial value for long-term development markets including transit buses, automotive, continuous power generation, and aerospace.

At the current price for Ballard Power Systems Inc. (BLDP), we believe shares are implying roughly $4 per share in value for new development programs (based on discounting at least $80M in additional annual EBITDA) on top of the core business, which we value at $2.50 per share. Many of these potential programs have yet to be identified, have very limited visibility on future outcomes, and likely will not contribute meaningful revenue for at least 4 years.

HIGHLIGHTS

Reducing rating to Hold on Ballard Power Systems Inc. (BLDP)

While we like Ballard Power Systems Inc. (NASDAQ:BLDP)’s core business trends and management has done a fantastic job improving the business over the past few years, we think shares have downside risk if new programs do not develop and only limited upside potential from here if they do. Thus, we are reducing our rating to HOLD from BUY.

Ballard Power Systems Inc. (BLDP) Stock Expecting Substantial Progress In Development Programs

We estimate the core business is worth roughly $2.50 per share, which assumes the current operating businesses (forklift, telecom back-up, engineering services) can reach $200M in revenue and roughly $30M in EBITDA in 2018 and applying a 12x EV/EBITDA and discounting back to today at 8%. Therefore, we think the current price implies roughly $4 per share ($497M in market value) for the multiple embedded call options that Ballard has assembled. These call options include: (1) licensing revenue from new automotive programs; (2) recurring component sales from VW and other automotive programs (if launched); and (3) fuel cell systems for bus programs in China and Europe. While we expect additional traction on these efforts, meaningful revenue and profit contribution would likely be a longer-term (4-5+ years) event. We estimate a $4 per share valuation implies these segments would need to collectively generate $80M in EBITDA in 2018 (at a 12x EV/EBITDA multiple and discounting it back to today at a 25% discount rate, which we believe is appropriate given the risk and uncertainty inherent in this segment). We note that reaching $80M in EBITDA is a highly uncertain scenario because it implies large volume shipments and relatively high market penetrations in the China transit bus and continuous power segments, both of which have yet to be proven.

Adjusting Price Target To $4

We are adjusting our price target to $4 from $3.60 to reflect a new valuation methodology based on a 2018 EV/EBITDA multiple discounted back to today. Our $4 price target is based on $2.50 per share for the core business as modeled (a 12x EV/EBITDA multiple on the $28M in EBITDA we estimate this business can generate in 2018, discounted back to today at 8%) plus $1.54 per share for the development stage business (based on a 12x EV/EBITDA multiple on the $30M in EBITDA that business could generate in 2018, discounted back to today at 25%). While we don’t include it in our model, the $30M in additional EBITDA from the development stage business implies the company produces roughly 1,500 units annually for the China bus market and roughly 2,000 units annually in the stationary power market. Reaching these levels is not an easy task and we think significant development work and market traction will be required.