Intelligent Energy (IEH) has announced that the deal to acquire the Energy Management Business of GTL will not now be consummated. The move leaves management free to concentrate on driving sales of commercially ready B2B products, which is a key element of its strategy. We adjust our FY17e revenue estimate while leaving our pre-exceptional losses and cash-flow forecasts unchanged.
IEH became involved in providing power management services in India with the intention of creating a captive market in the telecoms tower back-up power segment for its air-cooled cells. Since the transaction with GTL will not go ahead, IEH will not be able to dictate the rate at which diesel generators in the GTL tower portfolio are replaced with fuel cells. However, over the last year IEH has demonstrated that its fuel cells work well for both primary and back-up power deployment at telecoms tower sites in India, so the potential to sell fuel cells to tower operators in India and elsewhere, and for other diesel generator replacement applications remains.
Estimates adjustment confined to revenue line Our estimates had already assumed that IEH would either terminate the interim agreement with GTL at the end of December 2016 or move to a long-term arrangement in which the power management activity became a separate entity in which IEH held a minority stake. As the interim agreement was terminated at the end of November, we reduce our FY17e revenue estimate by £6.5m to £27.5m. Since the interim agreement was at minimal gross margin and we treated any share of profit from a potential power management JV as upside, the rest of our estimates are unaffected. Any costs associated with restructuring the power management activity will be treated as exceptionals.
Product sales to drive re-rating The valuation analysis described in our November note was based on revenues from sales of fuel cell-based products and funded development work on
The valuation analysis described in our November note was based on revenues from sales of fuel cell-based products and funded development work on air cooled technology, so is not affected by the termination of the power management activity. The analysis indicated that IEH was trading on a prospective EV/sales multiples that is towards the lower end of the range of its peers. We believe the successful execution of the revised strategy, resulting in meaningful product sales during FY17e, will be a key catalyst for future share price performance.