ITM Power - a buy on a long term investment basis considers Peter Brailey

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My interest in alternative energy companies on AIM has seen me conclude Simec Atlantis Energy (SAE) and Powerhouse Energy (PHE) are fundamentally un-investable to me. I like the sound of RedT Energy (RED) as noted here. ITM Power (ITM) has potential - I can see some good reasons to invest.

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ITM is a company engaged in the commercialisation of Hydrogen as fuel. It earns both real commercial revenue and obtains grant funding. We are guided (RNS 30^th May) that year end turnover to 30^th April 2019 will be some £17 million compared to 2018 turnover of £14.1 million year and £9.2 million in 2017. The pre-tax losses in each year have also increased, which is a little worrying. It is of course burning cash each year. So on a simplistic fundamental level it is obtaining new business, but it’s costing more each year to deliver – so that’s all bad! IFRS-15 ("Revenue from Contracts with Customers") would appear to be a further hit to the financials in due course as revenue cannot be recognised until contract completion rather than on a staged basis. So that all sounds hopeless on the finance front, particularly given the market cap of £126 million. But I like the technology stage, the partners, the projects and the key shareholders.

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I noted to the company's IR / PR adviser end of last week the absence of major shareholders declaration on the company website, as required under AIM Rule 26. Simon Hudson ITM’s IR/ PR representative at Tavistock was a gentleman as always (and I understand a ShareProphets subscriber so cannot be all bad!) and he promptly responded confirming JCB (12.6%) as the largest single shareholder.  Allianz (11.1%), Schroders (5.8%) and Herald (3.6%) add some credible institutional backing. To add spice Peter Hargreaves (8.8%) leads the high net worth individual investor list. I like this as a solid base of investors. I’m sure Simon will advise the company to make the company website AIM Rule 26 compliant PDQ. The key investor to me is JCB. I would suggest JCB is the UK’s leading vehicle maker, and one of the few world class manufacturing businesses we have left in the UK. To see them on the shareholder register speaks volumes to me about the potential of Hydrogen as a vehicle fuel and ITM’s potential to deliver alternatives to diesel on construction sites for example. ITM is working with Royal Dutch Shell (RDSB) on the rollout of UK vehicle hydrogen fuelling and elsewhere also in the industrial sector. ITM also works with Linde – the German based multinational specialist gases company with c.Euro17 billion turnover and owns the BOC UK specialist gasses business. Very few AIM companies can claim such prestigious influential and well financed partners.

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So what else does the company do? Several very interesting things. Fundamentally it turns water into hydrogen – water is of course H₂O (two hydrogen atoms bound to each oxygen atom). Splitting these atoms apart takes lots of energy and most of the time it makes no sense to do so, as the energy required exceeds the resultant potential energy of the parts. But sometimes it does make sense. I flagged previously how renewable energy has come to be very dominant at times in the UK and elsewhere to the extent that at times we should, in my view, be looking to use the excess renewable electricity for other uses than simple grid supply. This excess energy can be stored in batteries, such as provided with Redt Energy (REDT) solutions as noted previously – but it is early stage for the commercialisation of this technology. This excess renewable electrical power can also be used within ITM supplied process plant to generate hydrogen which is then directly injected into gas grids. With a high energy density, and ability to burn without creating carbon dioxide this is a very “green solution” to the excess “green energy” available. I would note ITM is part of the consortium that includes National Grid (NG.) implementing a demonstration project in the UK and with German regional government funding in Germany also. I can see this being an area that may well obtain further funding and interest to commercialise. ITM advised in July 2019 it has commenced development of a production facility in Sheffield that has the capacity to produce up to 1,000MW of electrolyser capacity per annum. That is significant capacity by any measure and I note the company states it has 170 employees. This is a serious business of scale.

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To return to my earlier comments about turnover and profit and cash. This company is revenue generating at a small scale, but consuming cash. I think it will continue to consume cash for a while yet which is a big red flag in my book, as equity raises will be required. The company raised £5.7 million by placing at a share price of 17p in Jan 2017, and again raised more substantially to the tune of £29.4 million in October 2017 at 40p, but I would note the company provided an open offer to existing shareholders as part of this fund raise. As at 31^st October 2018, ITM had some £15.6 million of cash and some £9.4 million of trade receivables over and above trade debtors. With a growing business one can only expect this working capital requirement to increase. The share price today, at 38p, is a discount to the last fund raise. I would expect further fund raises if this business does fulfil its potential but I like the open offer provided last time as at least recognising existing private investor shareholders do exist! I consider investment in this share to be speculative but it has clear potential and looks to me to be operating in areas of increasing interest, with good backing and partners. Despite the business being cash consuming, I call it a Buy on a long term investment basis.

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