It has been a very bumpy few years for shareholders in ITM Power (LSE: ITM). The ITM share price has risen 58% over the past five years. Over one year though, it has tumbled by 42%.
With upbeat news about revenues contained in the renewable energy firm’s preliminary results published today (15 August), could now be the time for me to start buying ITM shares for my portfolio?
Strong progress, but lots still to do
Revenue last year more than tripled to £16.5m. However, the company still managed to lose £27.1m for the year. That is not good in my view but is a significant step forward from the £101.2m loss in the prior year.
At the year end, ITM had net cash of around £230m. That is equivalent to roughly 65% of its current market capitalisation, so stripping out the cash, the market is assigning a value of around £120m to the business.
For this year, ITM emphasised a “sales pipeline that has grown very strongly” and forecasts revenue of £18m—£22m. It expects to end the year with net cash of £160m-£175m.
The business expects negative adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of £35m-£40m, higher than last year. I find EBITDA an unsatisfactory analytical measure as it ignores potential real-world costs. Still, between the negative EBITDA forecast and expected ongoing cash burn, the message is clear, ITM continues to be heavily lossmaking.
ITM has focused its activities more sharply over the past year and a half. It is now concentrated on growing volumes so it can spread its fixed costs thinner, potentially moving it closer to breaking even.
Risks remain substantial
Sales revenues are well above what they have been in the past and look set to remain that way, or grow. A more strategically focused business means that those sales could provide a pathway to profitability thanks to ITM focusing on its core strengths and managing costs better than in the past.
The cash pile provides a substantial cushion while the business tries to scale up and move beyond its long history of making losses.
I think the direction of travel is positive and the results highlight a number of grounds for optimism, from the financial potential of the current strategy to improved sales trends.
But ITM has had showed promise not just for years but decades. The challenge remains to turn that potential into financial reality.
Whether the current ITM share price is a bargain or still a value trap despite its slide over the past year, will ultimately depend on whether the company can deliver on its medium- and long-term plans.
Some of the signs are promising. But there remains substantial work to be done. I see no rush to invest.
I would not consider buying ITM shares yet in the absence of more concrete evidence that the business can be profitable on a sustained basis. By that point, the ITM share price may well be higher than today, but I would be much more comfortable with the risk profile.
