ITM Power - Full Year Results

For some time now I have been thinking that hydrogen could play an increasing part in the transition from fossil fuels to clean energy. Here's an article from the start of the year suggesting green hydrogen could transform the global economy. It's the most commonly occurring element in nature and is set to play a defining role in the 'green' industrial revolution as it replaces fossil fuels. It can be stored and used to power long-distant transport such as cars, lorries, trains and ships. It can be used to generate electricity. It is a clean source of energy and when used the only emissions are water and heat.

So, last year, I decided to add a few companies to my green portfolio which I hoped would be able to take advantage of this revolution. One of these additions was ITM Power - a small AIM-listed clean energy company added to my portfolio in August 2019 at the price of 37p. I have added to my initial holding over the months and now hold in both SIPP and ISA.

Results

ITM has this week announced results for the full year to end April 2020 (link via Investegate).

This has been a difficult year with Brexit looming, a move to new accounting rules IFRS 15 and business hit by Covid-19. As a result sales revenues fell by 28% to £3.3m and grant income fell away sharply to just 2.1m compared to £12.9m the previous year.

Adjusted loss for the year was £18.1m (2019 £7.3m) however cash reserves increased to £39.9m compared to £5.2m last year. The value of assets increased to £67.5m compared to £38.3m in 2019.

On the positive side, the company announced a partnership with a leading global energy infrastructure operators, Snam who will make a £30m equity investment and 100MW preferred supplier to 2024. They are also raising an additional £135m to accelerate development of various projects and also an open offer to existing shareholders at 235p for an additional £7m.

"Our agreement and preferred supplier status with Snam more than doubles our contract backlog, a signpost of future revenue measuring amounts under contract and in the latter stages of negotiations, to £118 million while our tender opportunity pipeline, where we have provided written quotations over the last 12 months, now stands at some £325 million.  Raising additional funds allows us to accelerate our response to the growing worldwide demand for green hydrogen as a key tool in meeting net zero targets.  I am delighted to add Snam to our roster of partners.  Snam is one of the world's leading energy infrastructure operators and is committed to supporting our industry, showcased by our preferred supplier status for 100MW of PEM electrolysis equipment." CEO, Graham Cooley.

Their new Gigafactory at Bessemer Park, Sheffield is nearing completion and will have the capacity for 1,000MW by the end of 2023.

Commenting on the results, Cooley said , " 2020 has been a transformational year for ITM Power.  We attracted a strategic investor and joint-venture partner in Linde, the world's largest speciality gases company, we strengthened our balance sheet so that we can take full advantage of the rapidly expanding green hydrogen market and we put the finishing touches to the world's largest electrolyser factory in Sheffield.  I believe we have the right products at the right time and the capacity to produce them at scale."

The company has seen an increase in qualified tender opportunities to £325m - 37 projects and a corresponding record backlog of £118.7m.

Despite the setbacks from Covid this year, the company maintains a positive outlook. Global energy markets are increasingly recognising the need for the use of green hydrogen for energy storage, transport and heating. The UK Committee on Climate suggest we will need between 6 and 17GW of electrolysis to reach net zero emissions by 2050. ITM with its partner Linde are well positioned to benefit from these opportunities.

The EUs new hydrogen strategy announced in July sets out a plan to increase green hydrogen capacity from just 140MW in 2018 to 4,000MW by 2024 and then 40GW by 2030...this will be hugely ambitious and also challenging but is a strong indicator of the direction of travel for the energy sector.

However, the company is still not profit-making as it invests to scale-up its operations. Cash burn this year was £23.3m which includes expenses in connection with the new factory.

Linde Joint Venture

Global industrial engineering group Linde acquired a 20% stake in ITM for the £38m. The 50:50 joint venture will target an increasing number of companies and governments that are looking to green hydrogen as a solution to tackling climate change. These include the storage of renewable energy and grid balancing as well as the essential task of reducing CO2 emissions from sectors such as transport and heavy industry. ITM will focus on hydrogen production from its electrolysers whilst Linde will look after the engineering and construction side of the projects. The benefits from this collaboration will likely become more apparent in future years.

 

ITM One Year Share Price

The results are again disappointing but the markets seem fairly relaxed and the share price is up 5% today at 270p  - quite a jump from my purchase price of 37p last August. Hopefully the company can make some progress to profitability over the coming year or two with their new partners.

We are still in the early stages of the hydrogen revolution and whilst I thing there will be some big returns for investors in this sub-sector, there's are no guarantees that all the current players will reap the rewards. I am hoping ITM will make it with the help from Linde and will be looking to see what progress can be made over the coming 12 months. But for the time being, this can return to the bottom drawer.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation... investing in individual companies, especially those listed on AIM can be rewarding but is higher risk compared to collective investments - always DYOR!

Looking Back on Some Portfolio Disposals

For several years, from moving to early retirement in 2008 to state pension in 2018, I was dependent on income generated from my investments to pay the bills. I certainly could not have made ends meet just from the interest on cash savings. Therefore some of the UK Growth and Income investment trusts were an important part of my investment mix during this period. The three trusts which formed the backbone of my income strategy were City of London (CTY), Aberforth Smaller Companies (ASL) and Temple Bar (TMPL).

By 2018, however I started to receive the state pension of £8,500 and so became much less in need of this income. It was around this time that I was starting to compare the performance (total return) of my UK-based investments and also think about climate change and how this might impact my investments, especially the big oil companies who were coming under increasing pressure on greenhouse gas emissions. I was paying more attention to the weighting of the fossil fuel companies in my collective portfolio holdings and wondering about the long term sustainability of returns from these sectors. 

I actually remember emailing Job Curtis at CTY and the managers of Aberforth and requesting they pay more attention to climate risk and suggesting they reduce/dispose of their fossil fuel holdings (a long shot I know). To be fair, both responded but politely declined my suggestion!

Disposals

And so I had a decision - compromise my values and continue with my investments and hope they come around to reducing the oil company holdings over time; or sell my investment trusts and replace them with something more ethical and in line with my values. Of course, I chose the latter.

Temple Bar was the first to be sold at the price of £12.10 in October 2018 and replaced with Baillie Gifford Positive Change @ 160p.

The following February I sold CTY held in both my SIPP and ISA @ 400p and also Aberforth in my SIPP @ £11.25 and added to my Positive Change fund as well as the initial purchase of iShares Clean EnergyETF @ 433p and also added Orsted @ DKK 500.

Making such big dramatic moves to a long-standing strategy which had served me well for many years is a leap of faith but luckily, this has turned out to be a good move in hindsight (so far). The climate-friendly green investments have all done well - Orsted currently more than doubled to DKK 1,035, iShares Clean Energy more than doubled to 908p and Positive Change up 90% at 304p. The disposals have been hit badly by the Covid pandemic and drop in the oil price - CTY down 19% at 325p, TMPL down 42% at 695p and Aberforth down 22% at 880p.

2 Yr Chart for CTY, ASL & TMPL
(click to enlarge)

Just looking at the final results for City to end June 2020, both Shell and BP were still top 10 holdings but much reduced in weight 5.4% compared to 10.8% in 2018 and now don't feature at all.

Conclusion

I can't help but conclude that these (and others) fund mangers have been blind to the consequences of the huge global shift in the tectonic plates of the transition from fossil fuels to renewable energy. As a result they have been caught out chasing the higher income offered by the oil & gas sector in recent years and are now paying the price of their short-sighted approach. It came as no surprise to see the likes of Shell and BP slash their dividend payments by 50% earlier this year.

I hope the events of recent months will serve as a wake-up call to these fund managers to take climate change more seriously and avoid those companies which fail or stubbornly refuse to align their business with a world of 1.5C. I just cannot see the point in continuing to back companies whose business models are completely at odds with a sustainable long-term future for the planet.

Over to you...do you think your fund managers take climate issues seriously? Do they still continue to hold fossil fuel companies in their portfolio? How have they performed so far this year? Feel free to leave a comment below.

Ocado - Portfolio Addition

Established in 2000 and floated on the market in 2010, Ocado has grown very rapidly to become a member of the FTSE 100 with a current market cap. of £18bn. They are transforming the world of grocery shopping in the UK and are now looking at expanding their technical know-how into a global market and into other wider sectors. Unlike the traditional supermarkets like Tesco or Sainsbury, Ocado has no physical stores but operates only online and does all home deliveries from a small number of customer fulfilment centres.

The business has grown rapidly in recent years as we move to more online shopping and of course the Covid-19 pandemic with periods of lockdown has boosted demand for even more online services. As a result, it  is looking like 2020 will be a breakthrough year when the company delivers its first annual profits. In a recent trading statement, the company announced an increase in revenues of 52% for the 3rd quarter to end August and expects full year profits of  at least £40m.

In 2019 Ocado stuck a deal with M&S to set up a joint retail operation which provides M&S with its first home delivery service. M&S have bought a 50% share of Ocado's retail business for £750m. Ocado customers can now access over 4,000 M&S lines as well as Ocado continuing with their own-label products. The deal with Waitrose has now ended. Ocado also has a deal with Morrison supermarket providing the technology for its online home deliveries. It will be interesting to see if Ocado customers who used the service mainly for Waitrose products are prepared to go along with this new offering...the switch took place this September so early days.

Technology

Whilst its main area of focus is retail, in essence, Ocado is a cutting edge tech company. Ocado Technology designs most of the in-house operation. The whole operation is highly automated - warehouse, app, deliveries, routing and customer service - everything is based on sophisticated algorithms and smart optimisation.

The Ocado Smart Platform is the world's most advanced filfilment and logistics platform. This technology has been developed in-house over many years and is protected from competition by over 200 worldwide patents. This should provide barriers to entry by potential competitors - the proverbial moat.

The warehouses feature thousands of robots swarming like bees across a huge grid. They can pick a 50-item order in minutes whizzing around thousands of bins at speeds of up to 20mph!

Expansion

This smart platform can be licensed to other operators around the globe which means these automated efficient warehouses can be set up in every country. Some other applications include baggage handling, parcel sorting, vertical farming, container ports etc. UK grocery retail is just the start of the journey.

The company is now rolling out International Solutions which secured fees of £73.7m in the first half of this year, an increase of 58%. In addition to the tie-up with M&S and Morrisons in the UK, Ocado is now working closely with Casino of France and Sobeys in Canada. Also Bon Preu in Spain, Coles of Australia, Aeon in Japan and Kroger in the US.  

It will be interesting to see where expansion and development goes from here.

Isuzus EV Delivery Van

On the environment, the company say greenhouse gas emissions are an area they are looking to improve along with food waste and plastic recycling. They are currently looking at the switch to EVs for deliveries which account for around 70% of the company's carbon emissions. Trials of the EV delivery vans started last year and this year the company are committed to move their North London fleet of vans to fully electric. I will be interested to hear more on this in the full-year results.

Now Close to Overtaking Tesco

The shares have had an excellent run this year moving from £12.50 at the start of 2020 and reaching a high point of £29 at the end of September before falling back over the past week or so. The shares were recently added to my ISA at the price of £23.65 and I will be looking to add on any significant pull-back from here. There may well be some share price volatility over the coming weeks and months as Covid-19 plays out. The share price has doubled this year to-date and I think the longer term prospects look very promising and I would not be surprised to see the shares hit £50 and beyond over the next year or two. There has been speculation they may become a target for a takeover by Amazon...

The next Q4 trading statement will be in December and the full year results are in February.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation... investing in individual companies can be rewarding but is higher risk compared to collective investments - always DYOR!

Fossil-Free Portfolio - Update

It's now just two years since I started to move my portfolio towards more climate-friendly investments and exactly one year on since I managed to wean myself off the final fossil-fuel investment in my global index funds. Last September I sold Vanguard Lifestrategy 40 and HSBC Global Strategy funds - both held in my Halifax ISA.

Over the past year I have been gradually building my green portfolio. Additions include Vestas Wind, Gresham House Energy Storage Trust, Octopus Renewables Trust at launch, a top up to ITM Power, Ceres Power, additions to UK Wind, TRIG and Bluefield Solar during the Covid downturn, likewise new holdings in Google and Microsoft in April, McPhy Energy, NIBE and more recently the addition of Tesla and Allianz Technology Trust.

The Big Themes

As we transition to a new world order from an economy based on oil and coal to clean renewables, I think it is now clear that the organisations that can embrace the new order and align their business models with a commitment to zero carbon emissions will benefit.

Just last week, China unexpectedly announced it was aiming to hit peak carbon emissions before 2030 and to become carbon neutral by 2060. This policy announcement and the implementation will have a big impact on how other countries respond to the fight against climate change. It will be interesting to see how the US responds!

Orsted Current Share Price 950 DKK

A company that is ahead of the climate curve is Orsted which has transformed its business from one focussed on oil and gas just a decade back to now being a global leader in offshore wind and one of the worlds most sustainable businesses.

There are many companies both large and small now working in clean energy and related industries. These include those focussed on the growing hydrogen economy which is set to become a large part of the transition to net zero and is increasingly recognised by governments as needing support over the coming years.

The global hydrogen economy is estimated to be worth $12 trillion by 2050 according to a report by Goldman Sachs and create many millions of jobs. The EU, Japan, Australia, South Korea, and China are already investing billions to support their hydrogen plans for the future and the UK government will shortly announce its hydrogen strategy.

Of course, not all the companies currently involved in this area will become successful..but some will become the next equivalent of Exxon or Shell.

Technology

The other big play, in my humble opinion, is and will increasingly be the tech sector. The Covid crisis has highlighted just how much we all depend on technology. Trends that have been gradually become more and more integrated as a part of our everyday lives have accelerated during the lockdown. These are structural changes to our global society and will remain long after the pandemic recedes. People will continue to work from home rather than commute into the cities.

Tech companies account for around 25% of the S&P 500 and this percentage is likely to increase over the coming decade. It is no surprise that funds and trusts such as Allianz Technology and Polar Cap. Technology have provided some the best returns for investors over the past 10 years with annualised returns of 23% and 20.6% respectively for these investment trusts.

Conclusion

So, I am aligning my portfolio in accordance with my values and lifestyle. In recent years I had become increasingly uncomfortable investing in the big oil companies and the banks which support their operations so I decided to do something positive. I suspect lots of people are starting to question where their pensions and ISAs are invested and what sort of companies they are unwittingly supporting.

Obviously I am somewhat lucky to have ditched the fossil fuel sector before it crashed - Exxon, Shell and BP are down 50% for the year-to-date and this has been a big drag on the index funds which all hold these large fossil fuel companies. I last updated my portfolio to the end of August and one month on my returns for the first 9 months are 21.5% as a whole and 28% for my green holdings which currently make up around 80% of the portfolio. The Vanguard Lifestrategy 80 fund is down 0.18% over the same period and VLS 60 up 1.56%. The FTSE 100 is down -19.6% on a total return basis...dire.

The better performers have been the smaller companies with a focus on hydrogen such as ITM Power 300%, McPhy 310%, Ballard Power 62% and Ceres 58%. My global clean energy ETF 65% and the large wind energy companies Orsted and Vestas 47% and 65% respectively.

It's still early days but after two years of significant outperformance compared to the global index funds, I am becoming increasingly confident that green investing for a more sustainable world is both the right thing to be doing as well as the most rewarding.

The world is changing very quickly to tackle the immediate threat posed by Covid-19 but also the much larger threats posed by our climate emergency. I am wondering if we will look back in a few years and see 2020 as the year when the world started to take climate change seriously.

Anyway, over to you...what do you make of climate change and have you made any changes to your portfolio over the past year or two? Leave a comment below.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation... investing in smaller companies can be rewarding but is higher risk - always DYOR!