To say that the stock market was not impressed with the latest trading statement from battery producer Ilika (LSE: IKA) is an understatement. Its share price dropped almost 40% yesterday and hit a 12-month low.
It recovered slightly in early trading on Friday morning, as I write, but is still 78% lower than it was a year ago. What is behind this drop – and what should I do about it?
Lower revenue forecasts
The Ilika trading statement contained bad news. Ramping up commercial production of its flagship Stereax product line is now expected to take longer than planned. Accordingly, revenue in 2024 and 2025 will be “materially lower” than previously forecast.
That is troubling news. Cutting revenue forecasts this far ahead suggests the ultimate timescale for Stereax commercialisation could be far longer than previously thought. As Ilika continues to burn cash, that increases the risk that liquidity shrinks and the company will try to boost funds by diluting shareholders.
The business also said it expects revenue for the first half of its financial year to come in at the same level as last year: £0.2m.
But while revenues are flat, losses are growing. The loss before interest, tax, depreciation and amortisation is expected to come in at £4.5 million for the first half and the same again in the second half.
That full-year total of £9m is above last year’s £6.4m which, in turn, was a big jump from the £2.3m seen in 2021. As Ilika ramps up Stereax manufacturing capacity and further develops its Goliath range of large format solid-state batteries, losses are growing.
There is a lot of work still be done on both programmes to reach full-scale commercial production. So I see a risk of even higher losses in coming years. The firm expects to end this year with cash and cash equivalents of around £14m.
Some good news
Ilika did not only share bad news however. The energy density of the prototype Goliath cells have improved by around 80% since the start of the financial year. Ilika now expects to reach parity with lithium-ion energy density this year. Although that is behind schedule, I still see it as a positive development. I think it can help boost the commercial proposition of these cells for customers such as electric vehicle manufacturers.
The Ilika share price doesn’t tempt me
I see promise in Ilika’s technology. It is making progress in bringing products to market, even if that is slower than previously hoped.
If things go well, the current share price could turn out to be a bargain. But I am not tempted to add the company to my portfolio. The concern I have is not about potential rewards, but concerns the risks involve. As the latest trading statement shows, Ilika is burning through cash while lowering expectations about commercialisation. That does not match my risk appetite.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.