ITM Power PLC (LON: ITM)

ITM Power Plc is an FTSE AIM UK 50 Index listed company that designs and manufactures products that generate hydrogen gas based on Proton Exchange Membrane (PEM) technology. This technology only uses electricity (renewable) and tap water to generate hydrogen gas on-site and has a product offering capable of being scaled to 100MW+ in size.

Industry Trends

As per the International Agency report, in order to achieve the “Net Zero target” by 2025, the world needs 322 million tonnes of electrolytic hydrogen and a global electrolyser capacity of 3,585GW. 

National electrolyser targets increased from 40GW to 144GW in the year, and the EU announced its new net-zero law. China also declared net-zero by 2060.

As the drive to achieve net-zero targets continue, the market for large scale electrolysis equipment to produce green hydrogen might increase, which could drive the growth of the company going forward.

Growth Prospects

• Market Leadership: The company manufactures world-leading and PEM electrolysers with a proven record. It has the largest PEM electrolyser factory in the world. As the market continues to grow at a better-than-expected rate along with high regulations by the government on electrolyser targets and policy, the company sees this as an opportunity to cash its market leadership and capture market share going forward.
• High GW Demand: The Company continues to meet up with the global demand. The project scale continues to increase 10x every two years, and the management remains proactive towards securing first-mover advantage by automating core elements of product and planning production capacity increase.
• Cost Reduction: The Company is targeting 50% electrolyser cost reduction within five years through technology, product standardisation & modularisation. The Company is also leveraging partners (Linde) to reduce system cost.

Key Risks 

• Rising Cases of Covid-19: The rising cases could cause the cessation of normal company function and forces staff into lock-down. This could impact the ability to progress contracts, generate revenues, creating a higher potential for losses.
• High Cash Requirement: The business continues to be in a cash consumption phase, as it seeks to accelerate and build capacity ahead of anticipated demand and the inability to generate cash or finance the project could impact the outlook.
• Technological Threat: If alternative technologies are adopted in preference to the Group’s technology, the Group could struggle to gain market share or may find itself operating in a smaller market than is currently anticipated.
  

Now we will analyse some key fundamental and shareholders statistics of ITM Power PLC

Financial and Operational Highlights (for the 12 months ended 30 April 2021 as of 13 September 2021)

(Source: LSE Website)

• The total Revenue & Project Grant Funding was down by 6% to £5.1 million, mainly due to a 63% decline in grant fundings. However, the revenue for the year was up by 30% on a YoY basis.
• The tender pipeline value to ITM Power of £378 million, up 94% YoY amid high demand for the products.
• The Company was successfully able to reduce its losses by 9%.
• The Company increased its available cash balance to £176.1 million in FY21 from £39.9 million at the end of FY20.
• The Company expects core stack module production to be in excess of 55MW and the completed product volume to be in the range of 33-50 MW.
• The recently completed electrolyser Gigafactory is expected to reach an annual production capacity of 1,000 MW per annum by FY23.

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 14 September 2021, at 11:27 AM GMT, ITM’s shares were trading at GBX 385.64, down by 6.81% against the previous day closing price. Stock 52-week High and Low were GBX 724.00 and GBX 220.50, respectively.

On a daily chart, ITM's price is sustaining around the lower Bollinger band. Hence, there could be an uptick in the stock price in the near term. Moreover, the 14-days RSI of ~32.80 is inching towards the oversold zone, indicating an upside potential in the stock price.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative) 

Business Outlook

ITM reported a decent performance in FY21, with core revenue rising 30% YoY. The company was successfully able to reduce its losses by 9% while maintaining a solid cash position of £176.1 million. The Company completed the installation of the 10MW REFHYNE I project, with expansion by 100MW planned for REFHYNE II at Shell's Rhineland Refinery. The company maintains solid guidance for FY22, with Core stack module production to be more than 55MW and production volume to be between 22-50MW.

Considering the Company’s market leadership, its increased production volume, its continued investments, and support from the valuation as done using the above method, we have given a “Speculative Buy recommendation on ITM Power Plc at the current price of GBX 385.64 (as on 14 September 2021 at 11:27 AM GMT), with lower-double digit upside potential based on 99.82x EV/NTM Sales (approx.) on FY22E sales (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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