EU Renewable Hydrogen Demand Will Spur Electrolyzer Capacity Expansion

Key Takeaways

• EU hydrogen strategy could boost ITM's revenues due to increased demand for their technology as electrolyzer capacity expands.
  
• Operational improvements and strategic initiatives enhance margins, revenue growth, and competitiveness while preserving cash flow.
  
• Political and regulatory uncertainties, cost underabsorption, and reliance on limited partners may hinder ITM Power's revenue growth and profitability despite increasing revenues.

Catalysts

Designs and manufactures proton exchange membrane (PEM) electrolysers in the United Kingdom, Germany, Australia, rest of Europe, and the United States.

• The European Union's ambitious strategy to produce 10 million tonnes of renewable hydrogen by 2030, requiring significant expansion in electrolyzer capacity, could significantly increase ITM's revenues as the demand for their technology grows.
  
• ITM's operational improvements, such as a 98% factory acceptance test first-time pass rate, have reduced costs and increased margins, potentially leading to improved net margins as production becomes more efficient.
  
• The strong sales pipeline, including high-value projects like Shell REFHYNE II, signifies potential future revenue growth and could enhance earnings as ITM converts its backlog into recognized revenue.
  
• Further reductions in the use of iridium and other operational advancements are likely to keep ITM competitive, potentially increasing profitability through cost savings and improved economies of scale.
  
• ITM's strategic initiatives to grow its worldwide footprint and enhance regional operations without overcommitting capital can preserve cash flow, sustain operational flexibility, and potentially contribute to better earnings management.

ITM Power Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ITM Power's revenue will grow by 69.9% annually over the next 3 years.
• Analysts are not forecasting that ITM Power will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate ITM Power's profit margin will increase from -175.9% to the average GB Electrical industry of 5.0% in 3 years.
• If ITM Power's profit margin were to converge on the industry average, you could expect earnings to reach £5.6 million (and earnings per share of £0.01) by about April 2028, up from £-40.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 116.2x on those 2028 earnings, up from -4.2x today. This future PE is greater than the current PE for the GB Electrical industry at 13.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.28%, as per the Simply Wall St company report.

ITM Power Future Earnings Per Share Growth

Risks

• Political and regulatory uncertainties, particularly in the United States with changes to the Hydrogen Production Tax Credit and paused disbursement of funding, could result in delayed investments and revenue growth in this critical market. These can directly impact revenue and cash flow projections.
  
• Despite a strong market presence in Europe, the overall pace of final investment decisions (FIDs) by customers is still slower than industry participants would like, leading to increased competitive pressure and potential impacts on future revenue generation and net margins as companies vie for fewer projects.
  
• The presence of a substantial gross loss, even as revenues increase, indicates ongoing cost underabsorption issues. If these are not addressed, they could continue to affect earnings and hinder progress towards profitability.
  
• Dependence on a limited number of partners and regions, despite reducing reliance on Linde, means that ITM's financial performance is susceptible to fluctuations in demand and project decisions within these channels, potentially affecting revenue and earnings stability.
  
• Currency volatility and geopolitical shifts in major markets like the EU, UK, and US could impact net margins and profitability, especially as ITM scales its global operations and expands its regional footprint.

Valuation

• The analysts have a consensus price target of £0.838 for ITM Power based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £3.1, and the most bearish reporting a price target of just £0.24.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £113.5 million, earnings will come to £5.6 million, and it would be trading on a PE ratio of 116.2x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of £0.28, the analyst price target of £0.84 is 67.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.