ITM Power PLC – Overstretched despite widening EBITDA loss.

ITM Power PLC (LON: ITM) is a FTSE AIM UK 50 Index listed Company, which designs and manufactures integrated hydrogen energy systems for energy storage and clean fuel production.

Investment Rationale – Expensive at GBX 344.80

• From a trading multiple perspective, EV/Sales is quite overvalued against the Renewable Energy industry.
• From a technical perspective, 14-day RSI (81.22) is in the overbought zone, and hence, stock price correction is expected in the short term.
• In FY20, revenue and project grant plunged 69%, and adjusted EBITDA loss widened by 148%.
• Over the past four years, ITM’s operating and net margins are in the negative zone, while the industry median for the same ratios is positive.
• Covid-19 pandemic can impact its ability to perform over existing contracts.

Risk Assessment

• The operational and financial challenges presented by Covid-19 pandemic, Brexit, and the adoption of IFRS 15 can significantly affect the Company’s performance.
• The Company reported losses from operations in FY20, and thus, can face liquidity pressure amid uncertain demand outlook.

Recent News

23 October 2020: ITM placed 57,446,808 new ordinary shares of 5 pence at a price of 235 pence per Placing Share, to raise approximately £135 million. The funds will be used to boost manufacturing capacity and invest in operational capabilities.

Preliminary results for the year ended 30 April 2020 (as on 22 October 2020)

• ITM’s revenue and EBITDA were adversely affected by Covid-19 pandemic and Brexit.
• The total revenue & Project Grant Funding were 69% down year-on-year, while the loss from operations stood at £29.4 million (FY19: £9.3 million).
• The adjusted EBITDA loss widened by 148% to £18.1 million (2019: loss £7.3 million).
• At the end of FY20, cash balance stood at £39.9 million.
• The Company also announced a commercial agreement with Snam S.p.A. with initial supplier indicative commitment of 100MW.
• It had also proposed an equity fundraise of £150 million to accelerate the Company’s development.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

FY20 was a transformation year for ITM Power as it attracted a strategic investor and joint-venture partner in Linde and strengthened the balance sheet. However, Covid-19 pandemic had a material impact on the financial performance and normal operations of the Company. Moreover, the stock is trading close to a 52-week high despite significant adjusted EBITDA loss and unfavourable technical indicator (14-day RSI), which raises doubts over the upside potential. Stock 52 week High and Low were GBX 366.81 and GBX 57.57, respectively.

Given the heightened level of uncertainties, we recommend a “Expensive” stance on ITM Power PLC at the current price of GBX 344.80 (as on 20 November 2020, before the market close at 1.55 PM GMT), while we look forward to reviewing the support from upcoming catalysts to reinvest. 

Ceres Power Holdings PLC – Covid-19 pandemic continued to create risk future manufacturing output.

Ceres Power Holdings Limited (LON: CWR) is a FTSE AIM UK 50 Index listed Company, which develops low-cost, next-generation fuel cell technology primarily in the United Kingdom.

Investment Rationale – Expensive at GBX 857.27

• The EV/Sales multiple is currently undervalued compared to corresponding multiples of the Renewable Energy industry.
• From a technical standpoint, 50-Day SMA (77.01), supporting the upside potential.
• Over the past four years, CWR’s operating and net margins are in the negative zone, while the industry median for the same ratios is positive.
• Operating losses widened in H1 FY20 while the Gross margin was reduced as compared to H1 FY19.
• Covid-19 pandemic continued to disrupt the supply chain and can defer the revenue generation.

Risk Assessment

• The unavailability of substantial cash reserves after operating losses can create liquidity risk.
• Revenue streams can be deferred for a new facility at Redhill with Covid-19 disruption.
• Brexit can also disrupt the supply chain and shipments.

Recent News 

19 October 2020: Announced a strategic collaboration and licence agreements with Doosan Corporation in South Africa. The contract value will be £30 million for over 3 years. 

Interim Results for 12 months ended 30 June 2020 (as on 28 September 2020)

 (Source: Company Website)

• During FY20, revenue surged by 21% and other operating income increased to £19.9 million (FY9: £16.4 million).
• The gross margin increased to £13.8 million, with a sector-leading gross margin of 73% (FY19: 75%).
• Due to further investment in the growth area of electrolysis for hydrogen, adjusted EBITDA loss widened to £6.5 million.
• As of 30 June 2020, the order book stood at £14 million while the pipeline was robust at £54 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Covid-19 pandemic continued to create operational challenges while Brexit uncertainty remained over the supply chain disruption. Notwithstanding, the urgency of climate change can drive the global demand for clean and flexible sources of energy in the future.

However, CWR has reported an operating loss and adjusted EBITDA loss was widened as compared to H1 FY19. Moreover, the stock is trading close to 52-week high while the technical indicator is not supporting the upside potential. Therefore, the stock appears to be overvalued and overbought at the moment.

Given the heightened level of uncertainties, we recommend a “Expensive” stance on Ceres Power Holdings PLC at the current price of GBX 857.27 (as on 20 November 2020, before the market close at 1.30 PM GMT), while we look forward to reviewing the support from upcoming catalysts to reinvest.  

*All forecasted figures and Industry information have been taken from Refinitiv, Thomson Reuters.

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