Shares hydrogen energy group ITM Power (LSE: ITM) have slumped following this morning’s half-year results. The fall comes on top of a sharp drop yesterday. At the time of writing, ITM’s share price is down by 20% in two days.
I’ve been taking a look at today’s report to see what might have triggered this sharp fall.
Covid-19 delays hit revenue
ITM’s total income rose by 16% to £4.4m for six months ending 31 October. However, 95% of this cash came from grant income. The company’s own revenue from its commercial activities fell to just £0.2m, compared to £2.4m during the same period last year.
Management said this revenue slump is due to project delays caused by Covid-19. These have prevented final installation work on some projects. Without completing this work, ITM can’t recognise the revenue relating to these projects.
This revenue shortfall contributed to an increased operating loss of £12m, compared to £9.8m during the same period one year earlier.
Order backlog is rising fast
ITM may be suffering from short-term delays, but the company’s order backlog rose to £124m during the six months to 31 October. That’s an increase from £119m at the end of April and £42m in October 2019.
More than £70m of the order growth seen over the last year has come from ITM’s latest industrial partnership with Italian gas pipeline group Snam. ITM’s share price has risen by around 125% since the energy infrastructure group invested £120m in ITM in October.
This money came as part of a deal that makes ITM the preferred supplier for a total of 100MW of Polymer Electrolyte Membrane (PEM) electrolysis projects. In plain English, these will be hydrogen-fuelled power plants that generate up to 100MW of electricity.
ITM’s modular PEM electrolyser technology means these installations can be manufactured to a standardised design and gradually expanded. The Snam project will be delivered in stages between 2021 and 2025.
Snam is ITM’s third heavyweight industrial partnership. The group also has deals with oil and gas group Royal Dutch Shell and chemicals giant Linde — ITM recently agreed to sell Linde a 24MW PEM electrolyser, said to be the world’s largest.
Why is the ITM share price falling?
ITM Power is very much a growth stock. The latest broker forecasts suggest the group’s revenue will rise to £10.4m in 2021, £31.4m in 2022, and £75m in 2023. Analysts expect the business to remain loss-making for at least one more year.
In my view, these forecast revenue numbers are quite low compared to ITM’s market-cap, which has now reached £3.2bn. This means the shares are priced at 102 times forecast sales for the 2021/22 financial year.
This lofty valuation is the result of rapid share price gains — ITM’s share price has risen by 450% over the last year.