ITM Power (LSE:ITM) shares rose by a whopping 333% this year. That’s a lot, given the energy market’s overall weakness. The question now is, are they still worth buying?
ITM Power shares
ITM Power specialises in making electrolysers, equipment used in generating hydrogen energy. It’s an important part of the renewable energy sector. These days there is a lot of hype about being environmentally friendly or ‘green’.
During the coronavirus crisis this might sound odd, given that there are so many cheap energy sources. For example, oil and gas prices are extremely low right now. So, it might look like clean energy sources make no economic sense in the current situation. But investors and governments seem to disagree. As I mentioned above, this year ITM Power shares rose dramatically. This investor interest is broadly in line with many governments’ initiatives. Germany, Portugal, and the Netherlands have all set up ambitious electrolyser targets for 2030. So, as we see, the equipment the company specialises in is clearly part of several renewable energy agendas.
In fact, ITM Power shares also rose because of a record increase in the company’s backlog. On 8 June the company reported a 24% backlog rise since 27 January. It now stands at £52.4m. The market capitalisation, however, rose by more than 300% over the period.
Are the shares still worth buying?
At the same time, the 2019 sales rose to £2.4m, 100% up from £1.2m reported in 2018. It looks quite impressive. But how about the company’s market capitalisation? It is about £1.5bn. So, the price-to-sales (P/S) ratio is an astonishing 625. Let’s also look at another valuation metric, the price-to-book (P/B) ratio. For the company to be reasonably valued according to its book value, the P/B should total 1 to 3 at most. But in the case of this mid-cap company, it’s about 22. And how about the company’s profitability? Well, ITM Power is a loss-making business. In 2019 its EBITDA loss rose to (£8.3m) from (£4.5m), an increase of 84%. Ouch…
The company’s management also reported an even greater loss for the year ended 30 April 2020. It totaled £17.5m. But ITM Power’s management explains these results almost as ‘one-offs’. Brexit uncertainty, Covid-19 disruptions, and legacy projects are the management’s excuses this year. But CEO Dr Graham Cooley remains optimistic, seeing “great opportunities” ahead.
Although I generally agree that renewable energy might have a brilliant long-term future, I don’t think investors should share management’s optimism. In fact, I think ITM Power is a typical overhyped mid-cap company with bad fundamentals. The market seems to be ignoring this now. If you look at the graph above, you’ll see that the ITM Power’s shares held up extremely well during the end of March sell-off.
In my view, the company’s shares are not worth buying for a risk-averse value investor. If you’d like to get exposure to the renewable energy sector, I’d recommend having a look at SSE. My colleague Kirsteen Mackay wrote an excellent article on this company. Clearly, it seems to be better value for money than ITM Power.
Anna Sokolidou has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.