ITM Power’s revenue collapses amid Covid disruption

As investors get increasingly excited about the prospects of hydrogen in the energy transition, ITM Power (ITM) has seen its shares explode over the past year – their value has risen more than fivefold. The company specialises in ‘proton exchange member’ (PEM) electrolysers that pass an electrical current through water and produce so-called ‘green’ hydrogen.

The shares initially retraced some of their gains following the release of ITM’s half-year results, dropping by as much as a fifth. This came as revenue for the six months to 31 October plunged by over 90 per cent year on year, to just £0.2m, as Covid restrictions delayed onsite work. The company only recognises revenue from projects once final installation has been completed and it estimates that without the pandemic disruption revenue would have been £3.1m higher.

The drop in sales translated to ITM’s operating loss widening by more than a fifth to £12m. This reflects higher engineering, procurement and construction (EPC) costs, increased spending on research and development and investment in headcount.

Manufacturing costs should come down moving forward as ITM consolidates from three sites to its new ‘Gigafactory’. Construction of this facility was completed in early January and production has already commenced. It is aiming to ramp up to 1 gigawatt (GW) of electrolyser capacity per year.

Investing in the Gigafactory and new inventory saw ITM burn through £14m of cash during the half and its net cash (excluding lease liabilities) declined by almost two-fifths from the April year-end position to £26m. Still, the company has no long- or short-term borrowings and net cash has since increased to £187m thanks to a £172m fundraise in November. This includes a £30m equity investment from Italian energy infrastructure group Snam (IT:SRG).

ITM has entered into a partnership with Snam through which it has ‘preferred supplier’ status for 100 megawatts (MW) of electrolyser projects. This represents £72m-worth of orders due for delivery by 2025 and discussions to finalise these contracts are said to be “progressing well”. They form part of a wider £124m order backlog, of which £36m is definitively contracted work and £16m is in the final stages of negotiation.

The company is also undertaking projects for other big names – including a 10MW electrolyser for a Royal Dutch Shell (RSDB) refinery in Germany that is due to start producing hydrogen this year – and it received an order from industrial gas giant Linde (DE:LIN) in January for the world’s largest PEM electrolyser at 24GW. A public-private partnership with the European Commission (EC) has also awarded €5m (£4.43m) of funding to a consortium that includes ITM and Ørsted (DK:ORSTED) to explore offshore green hydrogen production.

The EC’s ‘Hydrogen Strategy’ is targeting at least 40GW of green hydrogen electrolyser capacity by 2030 and is emblematic of the increasingly favourable policy environment. ITM says that the value of green hydrogen tender opportunities has risen by more than a third since the end of October to £434m, and excluding the share of its joint-venture partner Linde, the pipeline is worth £284m to ITM.

This should feed through to more orders and once the pandemic abates, more revenue as well. Still, those hoping to see a profit should note that analysts don’t currently foresee ITM swinging into the black until 2023. Hydrogen does have long-term potential, so ITM could be worth a speculative punt for investors who are comfortable with high-risk investments. Speculative buy.

Last IC View: Hold, 232p, 28 Oct 2020