ENVX - Enovix: Convertible Senior Note Offering And Fab-2 Scenario Analysis

2023-04-24 15:43:31 ET

Summary

• On April 17, Enovix announced its intention to offer $150 million in convertible senior notes due 2028 in a private placement.
• On April 18, Enovix priced the notes at a rate of 3% each year and the company expects $133.9 million in net proceeds from the offering.
• The use of proceeds from the sale of these notes and the $70 million non-dilutive financing will enable Enovix to build the four production lines in Fab-2 in Malaysia.
• Enovix's current $1.7 billion enterprise value today equates to 11x the EBIT produced from Fab-2 in the "Best" case scenario and 21x the EBIT produced from Fab-2 in the "Worst" case scenario.
• Enovix will be reporting first quarter 2023 results on April 26, which is next week, and I will be watching closely.

This article was first posted in Outperforming the Market on April 19, 2023.

Enovix ( ENVX ) will be reporting first quarter 2023 results on April 26, which is next week.

The article will be a brief one on the recent convertible senior notes private placement that was done this week. I think of greater interest will be the scenario analysis I have done based on the commentary that the CEO made about the 38 million to 75 million batteries expected to be produced annual from the four production lines being built at Fab-2.

Details of the convertible senior notes offering

On April 17, Enovix announced its intention to offer $150 million in convertible senior notes due 2028 in a private placement. These initial purchasers of the note is also expected to have the option to purchase an additional $22.5 million in notes for a 13-day period after the notes are first issued.

On April 18, Enovix priced the notes at a rate of 3% each year and the company expects $133.9 million in net proceeds from the offering. The notes will mature in May 2028 and it will be an unsecured obligation for Enovix. In addition, Enovix expects net proceeds of $9.7 million from affiliate notes. Affiliate notes are purchases by Affiliated Investors, which includes entities that are affiliated with Enovix's chairman, Thurman J. Rodgers. Also, an entity affiliated with John Doerr, Chairman of Kleiner Perkins, has agreed to purchase $10 million of notes from the offering. Both T.J. Rodgers and John Doerr have co-invested previously in companies like Enphase Energy ( ENPH )

If the initial purchasers decide to exercise their option to buy additional notes, the total net proceeds are expected to be $155.7 million.

Part of the net proceeds from the offering will be used to pay for capped call transactions. Enovix entered into capped call transactions with some of the initial purchasers and affiliates to reduce the potential dilution to Enovix’s stock after the notes are converted. The cap price that was set for the capped call transaction is at $21.17, which is at a 56% premium to its current stock price.

The rest of the net proceeds will be used to build Fab-2, Enovix's second battery cell manufacturing facility as well as the purchase of its Gen2 lines manufacturing equipment.

Under certain circumstances, the notes will be convertible at the option of its holders and the notes can be converted into cash, Enovix's shares or a mix of both, depending on the discretion of Enovix. The initial conversion rate is 64.08 shares of Enovix’s shares per $1,000 principal amount of notes. This equates to an initial conversion price of $15.61 per share, a 15% premium to Enovix's current stock price. The notes can only be redeemed by Enovix after May 2026 if it meets a liquidity condition and the stock price of Enovix reached more than 130% of its conversion price, which equates to $20.29 per share.

Use of proceeds to fund buildout of four lines in Fab-2

Enovix CEO Dr. Raj Talluri expects that the use of proceeds from the sale of these notes and the $70 million non-dilutive financing for Fab-2 in Malaysia will enable Enovix to have sufficient funding for building the four production lines, with just a dilution of about 7%.

With these four lines in expected to be built in Fab-2, management expects that it will be able to produce between 38 million to 75 million batteries in a year. The range will depend on the size of the battery to be manufactured. These batteries produced will be key to meeting its customer demand in its Internet of Things, Mobile and Computing segments.

In the scenario analysis below, I varied only the batteries produced from Fab-2. In the "worst" case scenario, I assumed 38 million batteries are produced while in the "best" case scenario I assumed 75 million batteries are produced. The average selling price for the batteries are known to be between $5 to $10, thus I took the average for that to be the average selling price of $7.50. In addition, management commented that they expected the long-term EBIT margin to be around 30% . Based on the analysis below, we can see that in the "Best" case scenario, only based on Fab-2 production alone, the stock's current $1.7 billion enterprise value today equates to 11x the EBIT produced from Fab-2 in the "Best" case scenario and 21x the EBIT produced from Fab-2 in the "Worst" case scenario.

I admit that the "Worst" case scenario is definitely not the worst case that could happen. However, in the analysis above, I only wanted to vary the batteries produced in a given year.

In the next analysis below, in the "Worst" case scenario, apart from the 38 million batteries produced each year, I assume that the average ASP to be at $5 per battery and the long-term EBIT margin to be at 25%. For the "Best" case scenario, I assumed that 75 million batteries will be produced each year and that they are sold at $10 average selling price and 30% EBIT margins. Based on the analysis below, we can see that in the "Best" case scenario, again only based on Fab-2 production alone, the stock's current $1.7 billion enterprise value today equates to 8x the EBIT produced from Fab-2 in the "Best" case scenario and 38x the EBIT produced from Fab-2 in the "Worst" case scenario.

1Q23

Enovix announced with its investor presentations for the offering of its convertible senior notes that it produced 12,500 battery cells from its Fab-1 production facility as of its first quarter.

This surpassed its initial forecast of 9,000 battery cells to be produced in the first quarter. As a result, the production numbers from 1Q22 beat its own forecast by almost 40%.

Enovix expects to produce 180,000 wearable size cells at Fab-1 for the full-year of 2023.

The company is also seeking $70 million of non-dilutive financing for its Gen2 line in Fab-2 facility in Malaysia.

Thoughts

As mentioned earlier, Enovix will be reporting first quarter 2023 results on April 26, which is next week.

It remains unclear what it means for Enovix to be offering the $150 million convertible senior note before its earnings next week.

The fact that its production numbers for Fab-1 beat its own forecasts suggests that the operational improvements are going well. Management also gave clear guidance that the funding for the four Gen2 production lines in Fab-2 is secured and guidance on the batteries produced for each year in Fab-2.

For further details see: