Ballard Power Opts for Hibernation on Late Fuel Cell Adoption (NASDAQ:BLDP)

I’ve got you covered Ballard Power Systems Inc. (NASDAQ: BLDP) (TSX:BLDP:CA) previously, so investors should see this as an update of mine previous articles on the company.

Last week, leading Canadian fuel cell system developer Ballard Power Systems Inc. (“Ballard” or “Ballard Power”) announced a major corporate restructuring”to maintain balance sheet strength amid slowing hydrogen infrastructure development and delayed fuel cell adoption“.

(…) against a challenging macroeconomic and geopolitical outlook and amid prolonged policy uncertainty, we are witnessing a multi-year expansion in the availability of hydrogen and low-cost, low-carbon hydrogen fueling 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 pace to better align with delayed market adoption. (…)

The scope of abatement measures includes a reduction of workforce, a streamlining of product development programs, operational consolidation, reduction of capital expenditures and certain working capital improvement initiatives.

Management is targeting operating expense savings of more than 30%, which should translate to approximately $50 million on an annual basis.

Cash usage is expected to be further reduced through a reduction in capital expenditure and improved working capital management.

In total, I would expect up to $75 million in annual cash savings, as well as a one-time working capital release of up to $25 million.

In addition, the company is reviewing its planned large-scale investment in US manufacturing capacity and its existing joint venture in China:

Given the leveraged effect from the $94 million in government funding awards, we continue to carefully evaluate our proposed long-term manufacturing capacity expansion investment in Texas. We are reviewing financing options to extend our financing term and delay material cash outlays until we have adequate market adoption indicators. (…)

Given the continued challenges in the Chinese fuel cell market and the poor performance of the Weichai Ballard joint venture, we are also conducting a strategic review of our China strategy, including all options related to WBJV.”

In simple terms: The company will not proceed with its proposed $200 million investment (gross from anticipated US government funding) for a new fuel cell plant in Rockwall, Texas, just yet.

With respect to China: Ballard Power currently holds a 49% non-controlling interest in Weichai Ballard Hy-Energy Technologies Co., Ltd. (“Weichai Ballard JV”) in China with a book value of US$11.9 million :

The Weichai Ballard JV never lived up to expectations, and with just $1.3M in revenue in 1H/2024, I wouldn’t assign much or any value to the joint venture outside of its net cash balance.

At least in my view, the most likely outcome of the strategic review would be a sale to the company’s Chinese partner, Weichai Power Co. (OTCPK:WEICF), at a price around the book value of Ballard’s investment.

Following the recent decision to suspend a proposed $130 million investment in domestic manufacturing capacity in MEA, a sale would likely end the company’s decade-long push to become a leading player in China’s fuel cell market.

With a substantial portion of the annualized savings expected to be realized next year, I would expect cash usage in 2025 to be between $65 million and $75 million, with a further decline to $60 million dollars in 2026.

Assuming Ballard Power finishes 2024 with $600 million in cash and liquid investments, the company’s cash runway would stretch into the next decade.

However, given that the company’s operations are scaled back and considering weak backlog levels, analysts’ expectations for substantial near-term revenue growth remain illusive:

Given the discouraging comments from management and given the scale of the proposed restructuring efforts, I wouldn’t be surprised to see annual revenue down from last year’s $102.4 million number.

While Ballard Power isn’t giving up on mobility applications just yet, even the heavy-duty market will be dominated by battery electric vehicles (“BEVs”) in the future due to several key issues:

• lack of hydrogen infrastructure
• limited availability of green hydrogen
• hydrogen costs remain prohibitive
• total cost of ownership is expected to remain well above competing BEV solutions

In fact, the most effective use of green hydrogen would be to decarbonize hard-to-decrease sectors such as steel, cement, and the chemical industry, which account for most of the world’s industrial greenhouse gas emissions. However, these efforts would not require the company’s fuel cells.

At least in my opinion, management would do well to question the company’s strategic direction, but abandoning the core mobility applications business would leave Ballard Power with its fairly small backup power operations and very little revenue.

Given that a significant number of truck and bus manufacturers are still working on the FCEV, I would consider putting the company up for auction. While the valuation would likely be far from the 2020/2021 hype, a sale could provide shareholders with quick returns, unlike the expected play.

Ballard Power management apparently disagreed on the company’s way forward, because otherwise CFO Paul Dobson and COO Mark Biznek likely would have kept their high-paying jobs instead of being replaced by former underlings:

As part of the restructuring, Paul Dobson and Mark Biznek will step down as Chief Financial Officer and Chief Operating Officer, respectively. Paul will be succeeded by Kate Igbalode as our new CFO with immediate effect. 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 an obligation to record an unspecified restructuring charge in the following Q3/2024 results.

Conclusion

With market adoption of fuel cell mobility applications well behind previous expectations, Ballard Power is taking drastic measures to conserve capital and weather the storm.

In conclusion, the company’s restructuring efforts could extend its cash run 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 problems anytime soon.

However, the industry’s bleak outlook should keep investors on the sidelines, even as the company trades at a substantial discount to its cash position.

At least in my opinion, management should consider a full review of strategic alternatives, including selling the company as a whole or in pieces, to maximize short-term shareholder value.