Back when renewable energy share ITM Power (LSE: ITM) was trading above £5 a couple of years ago, many investors were optimistic about the outlook for the business. But now that the ITM Power share price is in the pennies, the mood has clearly changed.
Could that much reduced price offer me a buying opportunity?
Turnaround aim
2023 is a pivotal year for the lossmaking company. A new boss came on board and announced a 12-month strategy aimed at fixing some of the immediate problems that have plagued ITM, as well as setting the groundwork for longer term success.
Last week the firm released a trading update summarising how it did in the 12 months to the end of April. There was some good news. Net cash at the end of April was expected to be £283m, ahead of forecast. That gives ITM a substantial liquidity cushion, at least for the next couple of years.
Revenue also came in ahead of the £2m guidance. Beating that estimate sounds good but I felt the guidance was low in any case, given that revenue in the prior year had been £5.6m.
Adjusted earnings before interest, tax, depreciation and amortisation were expected to show a £90m-££95m loss.
That last figure really alarms me. It was within prior guidance, albeit at the upper end. But it is massive. For a company with only a few million pounds in revenue to lose close to £100m even when excluding common business expenses like amortisation is a horrifying state of affairs.
Reduced cash burn
The chief executive emphasises the company’s current focus on reducing cash burn. That will need to be successful for ITM to have a viable long-term future, in my view.
But it is not enough. I think the business needs to ramp up revenues dramatically to justify its current valuation, let alone a higher one. Even as the ITM Power share price sits in pennies, the market capitalisation stands at £438m.
That looks too high to me for a massively lossmaking company with just a few million pounds in annual revenues.
Possible bargain?
The good news is that the company has started to ship its newest battery stack platform.
It has also been taking organisational steps to improve efficiency and engineering processes. It is using a more disciplined approach to portfolio management and selling, hopefully allowing it to build scale in its most financially promising activities.
But most of this is about fixing problems in the way the business has been run to date. That is necessary, but in itself it will probably not propel the company to the sort of growth needed to justify the current valuation.
For ITM shares to get back to where they were a few years ago, the company needs to deliver on its potential. Not only does cash burn need to be cut dramatically, I think revenues need to ramp up exponentially and the company must prove that it can grow sales profitably.
All of that feels a long way off, if it happens at all. I do not expect the ITM Power share price to hit £5 again in the next couple of years. For now, the risk of the shares losing even more value mean I have no plans to invest.
