ITMPF - ITM Power: No Rush To Invest

2023-04-10 02:06:42 ET

Summary

• ITM Power had a dismal first half.
• A new strategy should tackle some key problems, but there is a lot of work to be done.
• Until the business proves itself more, I continue to see the shares as a sell.

U.K. fuel cell developed ITM Power ( OTCPK:ITMPF ) has had a busy year so far and I expect that to continue. A new chief executive is reorienting its strategy in a way I see as positive for the business. However, I remain unconvinced for now that the business model is ultimately viable and will wait to see how it delivers in coming months and years. Accordingly I maintain a “sell” rating.

My last piece on ITM, in January, also carried a sell rating ( ITM Power: Yet More Bad News ).

Woeful Interim Results

In January the company released results for the first half of its financial year. It had flagged what to expect, but I still see the results as dreadful. Revenue fell over 50% to £2m. The operating loss was £56m and total loss was £57m.

Some project revenue was deferred but these are still not confidence-inspiring figures in my view. At the full-year level, the company guided to revenue of c.£2m, suggesting that it basically expects no revenue in the second half. It also guided to an adjusted EBITDA loss of £85-£95m and net cash at year-end is expected to be in the range of £245-£270m. At the halfway point it was £318m, suggesting the company expects cash burn in its second half of £48-73m.

It is easy to say that there may well be jam tomorrow: some deferred revenue ought to come in and the company is focussing on cleaning up its business model and strategy, which ought to pay results in future. But with cash burn running at the level it is and revenues still as small as they are, I think it is hard to see the first half results as anything other than woeful.

ITM’s Revised Strategy

Alongside those results, the company unveiled its 12-month strategy. The key components are:

• Concentrating the portfolio on a core product suite. As part of this it foresees “robust product validation” (implying, if I interpret correctly, that this may be somewhat different to previous practice) and preparing for manufacturing at scale. I think slimming down the portfolio to focus on what looks set to work best is a basic but appropriate move. Manufacturing at scale sounds sensible but I am not sure ITM is at that stage yet or that it would be my immediate management priority.
• What is described as “a rigorous approach to capital allocation and cost management”. This included 30% annual savings in personnel due to reducing the workforce size and tighter cost control. This makes perfect sense.
• ITM also foresees what we may call a sharpening of its processes by tightening areas such as “future testing capacity and incremental automation, improving cycle times, volume output and build quality”. Again I think that this makes sense and in the long term is essential. Its short-term impact on business results may be hard to discern, I expect.

The company is also assessing the future of its joint venture with Vitol, which is intended to save ITM Power around £28m it can reroute to its core business.

So overall the strategy helps tackle two key areas. One is reining in the company’s bloated costs, which I see as essential and urgent (in fact, long overdue). Another is putting validation, testing and production on a more consistently high-quality footing. I see that as positive in terms of helping to build the company’s reputation. It needs to be done at some point, and now is as good a time as any.

But what I am not sure the strategy tackles is how to drive sizeable revenue growth. Gearing up to manufacture at scale is one thing, but where will the orders come from? To cover even a sharply reduced cost base, the business will need to ramp up sales dramatically. A more disciplined approach to selling and profitability is undoubtedly the right move for the company, but in the short to medium term it could likely dampen already weak sales levels.

As the chief executive said when announcing the strategy,

“We need to transform ITM from an R&D culture company to a professional and credible delivery organisation ready for volume manufacturing - sustainably growing into a profitable business.”

That is true but risks replacing one problem (too much emphasis on R&D) with another (too much emphasis on volume manufacturing. I think revenue generation needs more attention too, and soon.

The company has made moves to implement the strategy. It has quadrupled the power capacity at its site to improve testing capacity. It has also leased additional factory and office space. Both moves are in line with its strategy, but the second one at least likely adds rather than cuts costs in the short term.

Lots to Prove

I think ITM’s current strategy does what it can to whip the firm into shape. That is positive for the investment case.

Amid my overall gloomy tone it is also worth remembering that the company’s technology is highly regarded. It has a large cash pile despite its ongoing cash burn and sophisticated customers like Linde.

However, I think there is a lot to prove here as to whether the sums of the part can ever add up to a compelling business. At the moment, despite falling 78% in the past year, the ITM market capitalisation is £484m. Even allowing for its large cash pile, that suggests an enterprise value of around £230m. I think that looks pricey for such an unproven business. ITM could yet soar from here, but I am in no hurry to invest and will wait to see how effectively the new strategy delivers.

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