ITM Powers down

Shares for ITM Power (ITM) took a 26 per cent swan dive on the back of its full-year results as investors took fright at an objectively disappointing update that was as bad as these sometimes can be. The hydrogen power company was hit by contract delays, widening inventories and a sense that capital is flowing out of the door faster than the company had expected. It is also now looking for a new chief executive after Graham Cooley stepped down after 13 years in the role.

The major issue is a delay in revenue recognition at the Leuna project run by ITM backer Linde (US:LIN), which means sales here will now be pushed back into next year. The project has been plagued by supply chain delays, plan changes and manufacturing and testing delays. In fact, contract backlogs rose exponentially during the period, up by 79 per cent, as customers seemed to put off capital spending decisions and procurement.

This had a cascade effect through the balance sheet which showed rising provisions for contract losses, which tripled to over £12mn, and more capital tied up in higher levels of inventory to support the build on new projects. Inventory levels leapt from £3.9mn to £24mn during the year, all of which contributed to the far higher cash burn of £53mn. The operational impact of this is that ITM has now cancelled plans to open a second production site at Aviation Park in the UK and will concentrate instead on getting its Bessemer Park facility up and running. The company expects to spend up to £15mn to increase capacity here.    

Overall, the results leave little scope to keep our mis-timed buy tip in play and this has now been booked on a trip to Zurich. ITM must also find new management and direction. There may eventually be some value left in the company, alternative sources of energy are increasingly important, after all, and it has plenty of cash to tide it over after raising £250mn in November last year. But we will have to wait and see if its contract delays are simply operational problems, or a sign of customers getting cold feet at the high upfront costs of capital projects. In the end, ITM has over-promised and under-delivered which is the main reason for the rout. Hold.

Last IC View: Buy, 325p, 28 Apr 2022