ITM Power PLC

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.

Investment Rationale for Valuation – SELL at GBX 465.00

• Weak Shareholders’ Returns: The Return on Equity remained in negative territory during FY21, while the respective industry median remained positive.
• Widening of Operating Loss: The operating loss got widened by 12% during Q1 FY22 when compared with an equivalent period of the prior year.
• Crude Oil Price Growth: The recent surge in Brent crude oil price due to the tightened supply caused a significant growth in the stock price, providing a good opportunity to book profit at the current levels.
• Unfavourable Technical Indicators: From a technical standpoint, ITM is hovering around the upper Bollinger band, indicating a correction in the stock price.

Key Risks

• Rise in Interest Rates: Any rise in interest rates would make it difficult for the ITM to raise debt funding for the exploration activities.
• 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.
  

Q1 FY22 Trading Update (for three months ended 31 July 2021, as of 14 October 2021)

(Source: LSE Website)

• The Surge in Revenue: The top-line revenue surged by around 357% to £1.2 million during Q1 FY22.
• Increase in Cash Balance: ITM had reported an increase in the cash balance from £33.8 million as of 31 July 2020 to £170.8 million as of 31 July 2021.
• Reduction in Cash Burn: The cash burn got reduced by around 34% to £5.3 million during Q1 FY22.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

The stock price recently rallied, driven by the energy crunch situation happening worldwide. More recently, China's coal futures shrunk significantly after the Chinese government decided to act and bring down the record high prices of the fuel back down to normal levels. Moreover, it may put pressure on crude oil prices, and the stock price may decline very soon. Considering the consistent loss-making nature of the Company, it would be advisable to liquidate the position on this stock and book profit at the current levels. The stock made a 52-week low and high of GBX 220.50 and GBX 724.00, respectively.

Based on the weak profitability, the recent intervention of the Chinese government, and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on ITM Power PLC at the current market price of GBX 465.00 (as on 20 October 2021 at 08:21 AM GMT+1), while we will suggest fresh buying after analysing more corporate announcements.

*All forecasted figures and Industry Information have been taken from REFINITIV.

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

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