ITM Power Stock: more down than up (OTCMKTS: ITMPF)

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ITM Power (OTCPK:ITMPF) recently reported another negative surprise with its FY22 results – while total revenue of £5.7m was in line with the previous trading update, its adj. EBITDA widened further to -£39.8m for the full year. While the long term The hydrogen electrolyzer theme is attractive, especially given the current global energy crisis, constant quarterly failures and downward revisions are concerning. With a new lower-than-expected revenue forecast for FY23 accompanied by the departure of CEO Graham Cooley (no replacement announced yet), consensus forecasts could come under even more pressure in the coming quarters. The long-term outlook is far from compelling either – product has lagged in efficiency and supply and demand dynamics appear unfavorably skewed in an impending influx of capacity. In terms of valuation, the high valuation of ~44x EV/Sales also implies an overly optimistic view of ITM price, which keeps risk/reward unfavorable at these levels.

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A disappointing FY22 report

Since ITM’s FY22 results were pre-reported prior to official release, the downgrade to its adj. EBITDA was a bad surprise. To recap, Adjusted EBITDA widened to £39.8m from the initial loss of £36.5m (vs. £21.2m last year), despite revenue figures broadly in line at £5.6m (vs. £4.3m last year). . The order book of 755 MW was also in line with its last commercial update. However, the full year revenue still incorporates the 24MW delivery deferral from Leuna, so around £11m of revenue recognition rolls over to FY23. Like the EBITDA figures, the cash flows ITM’s cash flow are also of concern – overall cash burn for the year reached £53.3m, bringing the overall net cash balance to £365.9m (after capital increase). Perhaps the biggest negative surprise was the announced departure of CEO Graham Cooley, who cited ITM’s journey to becoming a “global manufacturing powerhouse” and the need for “more experience in this area” as contributing factors. motivation. Worryingly, no replacement has been announced, which increases uncertainty around ITM’s medium-to-long-term strategy.

Bridge EBITDA FY22

ITM Power

No more downward revisions to guidelines

ITM has also updated its guidance for FY23, with product revenue expected to reach £23-28m and smelter shipments set at 48-65MW based on a conversion of 60 80% of approximately 77 MW of contracted work. The latter is of particular concern for a high-growth name, given low single-digit % growth from ~75MW in April 2022. Similarly, the 755MW backlog remained worrisome during the same period, although management will increase the current contract backlog as more projects reach the “final investment decision” stage in the coming months.

Under the income line, adj. The EBITDA loss is expected to widen to £45-50m, with investments at £30-40m and working capital at £40-60m. Given that ITM’s increased capital expenditure intensity coincides with soaring cost inflation, the recent revision to the EBITDA loss estimate may be the first of its kind. a long series to come. In the meantime, the company’s capital raise of around £250m last year (for the expansion of its manufacturing capacity) buys it time. Still, the updated cash burn forecast of £110-135m implies a narrowing of the runway and therefore further capital raises may be needed sooner rather than later.

Cash Bridge for FY22

ITM Power

Heightened competitive pressures weigh on the medium-term outlook

The momentum behind hydrogen has gained momentum over the past year amid stronger political support following the Russian-Ukrainian fallout. Measures such as REPowerEU (i.e. a plan to reduce Russia’s dependence on fossil fuels and accelerate the “green” energy transition) and the American law on reducing inflation, for example, foresee significant hydrogen subsidies. While incumbents like ITM should benefit from demand-side support, the supply-side implications are far less rosy given the impending wave of electrolyser manufacturing capacity expansion entering the industry. . Of most concern is that much of the additional capacity is expected to come from large-scale industrial and engineering conglomerates such as thyssenkrupp (OTCPK:TYEKF) through its hydrogen unit Nucera, Cummins (CMI) and Plug Power (PLUG ). The latter has already unveiled a firm order book of >1.5 GW this year – a worrying sign for incumbents. Additionally, a significant portion of manufacturing capacity in China is undisclosed, which has an advantage over the IEA’s electrolyzer manufacturing capacity estimates.

In short, manufacturers of pure-play chlorinators could face an increasingly competitive environment in the years to come. ITM has already responded to the pressure with its decision to scale back its expansion – Bessemer is now expected to grow to 700MW over the next six months (from 1GW previously), with 1.5GW now pushed back to the next two years (that’s i.e., FY24 or greater). Things could get worse as industry-wide supply grows, so the company’s strategy of growing solely on usage rates makes strategic sense, in my view. That said, slower growth will have important implications for future market share assumptions and pending a significant reset in mid-term guidance, I would be cautious about buying ITM’s growth story.

Bessemer Ability Update

ITM Power

More disadvantages than advantages

ITM may offer investors exposure to an exciting growth theme in clean hydrogen, but there are probably better ways to play the adoption curve at this point. On the one hand, the industry looks poised to see a major influx of capacity in the coming years, increasing ITM’s risk profile as the competitive landscape evolves. So far, its high-growth strategy has faced setbacks, ranging from supply chain-related execution delays (e.g. the delay of the Leuna project) to weak orders (leading to reductions in plans of expansion), as well as the recent departure of the CEO (without replacement). Coupled with continued earnings losses and downward revisions to guidance numbers, it’s hard not to see more negative adjustments for the business in the coming quarters. Finally, the stock has underperformed since the start of the year, but remains bullish at its current multiple of around 44x EV/Sales. All things considered, I would stay on the sidelines at these levels.

Sallie R. Loera