Ilika Shares, IKA, Down 20% On Update – What’s Taking So Long?

Ilika (LON: IKA) shares are 20% down this morning on the back of their trading update. The specific results aren’t out of line with expectations, so that’s not the cause of the fall. We all know that they’re in development mode for their solid state batteries and that revenue is going to be entirely minimal while that process goes on.

What does matter though is the change in expectations for the future. Everything is just taking longer than previously expected. That of course significantly damages the net present value of that future.

There’s another macroeconomic effect we need to think about here too. As inflation and interest rates rise then capital growth companies like Ilika become less valuable compared to profitable and dividend paying now companies. That’s just the way it goes with such cashflows.

Ilika’s real problem though is that one application of their solid state battery technology isn’t quite working out as they thought it would. For the miniature sized applications they thought that the industrial sector would be their first market. It turns out that interest is much greater in the medical sector. That’s, in one way, a nice problem to have – margins tend to be higher in medical equipment than in many other business sectors. But that also comes with a problem. The whole licensing and being allowed to really sell stuff takes a lot longer in the medical field. So, the achievement of real revenue has now been pushed out to end 2023.

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The other side of their innovation process is in the solid state batteries for the automotive and transport field. This holds a lot of promise as of course the EV field is huge. It’s also true that everyone knows – OK, all those paying technological attention – that solid state batteries would ease many of the problems of the sector. They’d be much lighter for a given range and also much faster to charge. It’s the proving that the chemistry really, wholly and in the real world works that is the sticking point.

There Ilika is also saying that there are delays. The sentence used is “Ilika continues to explore opportunities for closer collaboration with strategic partners interested in aligning their product roadmaps with Goliath.” and what that actually means is that we’re talking to lots of people but no one has signed on the dotted line as yet. There’s a certain hesitancy to accept the claims about performance and or price perhaps.

None of these are killer problems that wipe out the value proposition. Getting solid state batteries into the market mainstream will, if it is achieved, be a major value creator. It’s just that those actual sales seem further away – and that adds to the uncertainty that they will happen too.

Ilika seems to have the cash resources to continue development – £23.4 million as against EBITDA loss of £7 million for the year – but as timescales and uncertainty have increased then the net present valuation is lower.

The real determinant of future value will be whether that solid state battery technology reaches the mainstream. Investigations into trading positions should concentrate, perhaps, on trying to divine that probability.