Less that a year ago, shares in ITM Power (LSE: ITM) changed hands for more than £5 each. Now they sell for pennies. The ITM Power share price has collapsed 82% in the past 12 months.
So, could now be the time for me to add the hydrogen energy equipment manufacturer to my portfolio?
Value not price
Just because a company’s shares have fallen sharply in price does not in itself make them a bargain.
While the share price has tumbled, its market capitalisation is still over half a billion pounds. So the question I need to ask myself as an investor is: do I think its valuation is attractive given its future profit prospects?
Strong balance sheet
A market capitalisation on its own does not always tell the full story when it comes to enterprise valuation. ITM is an example of this. It finished its last financial year, at the end of April, with a whopping £366m in net cash on its balance sheet.
That provides a substantial liquidity cushion for the company. It also means the valuation is not quite what it seems when looking solely at market cap. Investors are actually valuing ITM Power at a couple of hundred million pounds, when allowing for the net cash it has.
Still, even that strikes me as a high valuation for a company that last year recorded less than £6m of revenues – and £47m in pre-tax losses.
Could the ITM Power be a bargain?
Although revenues are small and losses large, might that change in future?
After all, the business is still in its development phase. If it gains critical mass, the economics of development, manufacturing and sales could be transformed. Last year the firm raised a quarter of a billion pounds in new funding, primarily to expand its production capacity. That suggests it is optimistic about future demand for its products.
Since then though, the company has shelved plans to open a second UK factory. It expects product revenue of £23m-£28m this year. That would be a big jump from the prior 12 months. That suggests customers like ITM’s products, which could form the foundation of future business success as demand for hydrogen energy grows.
But the firm also forecast an adjusted loss before interest, tax, depreciation and amortisation of £45m-£50m. Even more alarmingly, in my view, cash burn is expected to be at least £100m and perhaps as much as £135m.
For the ITM Power share price to be a bargain, I think the company needs to show that it has a viable commercial plan to turn its large losses into profits in coming years.
Wait and see
For now, I am not persuaded that it can do that. It does have a growing sales pipeline, but it is also losing money hand over fist. If that continues, it may need to raise more money in future, with shareholders facing the risk of dilution.
For now, the share price does not tempt me. I see the company’s business model as unproven. I will watch developments to see if that appears to be changing — but I will not be investing at the moment.
