Byron Capital praises the new higher margin Ballard Power

This morning, Bhangui initiated coverage of Ballard Power with a BUY rating and one-year target price of $2.25.

Bhangui says that throughout its history there have been problems with Ballard’s business model. Its focus on developing fuel stack to automobile OEMs, he says, was simply unsustainable because of the protracted timeline to commercialization. Selling to systems integrators didn’t work because the margins were too low.

But the Byron Capital analyst says a recent shift in business model towards becoming a systems builder and solutions provider have moved Ballard up the fuel cell value chain. He says the effect on gross margins, which he believes are moving towards 30%, is dramatic considering the company’s gross margins just four years ago were close to 4%.

Bhangui says the Ballard of today is able to leverage “decades of IP and engineering expertise” to land lucrative services contracts. He points to the company’s work with Anglo American Platinum on fuel cell home generators and the success the company has had selling back up power solutions to emerging markets with unstable grids with its partner Nokia Solutions.

Ballard, says Bhangui, is set to exit fiscal 2013 with an order backlog of $43-million at margins greater than 30%. This, combined with the company’s reduced operating expenses, he says, means investors should remove their focus from Ballard’s history of losses and instead look with fresh eyes at a company is “about to begin ascending as it reaches EBITDA break-even in 2014.”

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