For a company focussed on developing new sources of power, it has been far from an electric year at ITM Power (LSE: ITM). The ITM Power share price has fallen over 75% in that period.
What has gone wrong – and does it mean I have a potentially good value buying opportunity for my portfolio?
Still a lot to prove
The company announced last week that it has appointed a new chief executive, with effect from this week.
The new boss is joining from Linde, one of ITM’s customers. That is good in that he probably has a very good grasp of the technology, although I am watchful for any signs that such a hire could hurt the relationship with Linde. More optimistically, it could help accelerate the firms’ commercial partnership.
The company warned last month that manufacturing issues mean revenue for the current year “is likely to be towards the bottom of the current guidance range”. That is not great, in part because it raises the question of how ready ITM is to scale up its manufacturing and commercialisation efforts. In fairness, though, coming in towards the bottom end of the expected range is still delivering on the guidance previously provided.
Not only is this bad news for the projected delivery timings of existing orders, the company also pointed out that it could impact current sales negotiations. That could mean lower revenues in coming years than previously hoped, although the company has not said that explicitly.
Weak financial performance
ITM pointed out when announcing production delays that it has a lot of liquidity. That eases short- and medium-term risks.
Nonetheless, ITM remains a money pit. Pre-tax loss last year rose 69% to £46.7m. That compares to a more modest 30% increase in revenues. While a 30% increase in revenues might often sound strong, they still only came in at £5.6m.
In other words, ITM is growing sales but is massively loss-making — and those losses are growing faster than revenues. It had current cash of around £320m last month, which is reassuring. But if cash burn accelerates, at some point the company may need to dilute shareholders further.
The investment case
One way to look at the prospect of investing in a company that is still in its development phase like ITM Power is to look at the ultimate size of its addressable market and how attractive the firm’s technology is.
But I feel that is a big picture story, not an investment case. ITM Power cannot just expect to do well having a good product in a potentially lucrative market that is attracting competitors. It needs a commercial model that includes a clear pathway to profitability, so that it can manage its cash burn rather than risk diluting existing shareholders.
My move on the ITM Power share price
For now I remain unconvinced that ITM Power has a compelling business model. It remains loss-making in a big and growing way.
The latest delays are just one more reason for me to doubt the commercial capabilities of the company’s management team and only time will tell if a new leader is able to turn that around. I cannot assess the value of ITM Power shares in the absence of any proven business model. For now, I have no plans to invest.
