EVEX - Eve Holding In Mid-2023: Flying Higher In A Brighter Sky

2023-08-09 13:32:27 ET

Summary

• Since late-May, when I first covered Eve, the stock has risen by ~45%. With recent updates post-May bolstering my thesis, I've revised my Dec-23 price target to $12 (up from $8).
• Eve's potential orders for eVTOL units have continued to rise, now 2.9k, translating to ~$8.6B in potential sales; putting them ahead with the largest market share amongst peers of ~22%.
• With a unique approach in courting ANAC over FAA or EASA and ~90% backing from Embraer, Eve has an edge over the crowd, and I reiterate my buy rating.

Since my March 2023 article on Eve Holding (EVEX) , the stock's trajectory has resembled a promising eVTOL ascent, shooting up by roughly 45%. My previous forecast tagged EVEX with an $8.0 target for Dec-2023. But as we investors know, the business world is ever-evolving. So, fresh off the heels of EVEX's 1H 2023 results and the swirl of news post-May, I've recalibrated my lenses, but my investment thesis largely remains the same:

1. Eve's potential orders zoom in at approximately 2.9k units, translating to a hefty $8.6 billion. Among its peers, it reigns supreme, capturing a sky-high market share of about 22%
2. With Embraer (ERJ)-a titan in its own right-owning close to 90% of Eve and offering its services, Eve is poised to keep its operational costs grounded in its nascent stages, setting it apart from the flock
3. Eve is also differentiated with its plan to certify its eVTOL with the ANAC, which will provide undivided attention from the regulator, while Joby (JOBY), Archer (ACHR), and Lilium (LILM) are competing for FAA and EASA attention.
4. The eVTOL realm forecasts an exhilarating $1 trillion by 2040 for passenger demand alone. Toss cargo and military into the mix, and we're talking a potential $3 trillion

However, as I cruise through my analysis, I'm always ready to adjust my altitude. The eVTOL sector, while brimming with potential, still navigates the turbulent skies of certification and market adoption. These factors can cast shadows on market forecasts and, by extension, my recommendation.

Diving deeper into valuation, my revised Dec-2023 target for EVEX is $12, derived from a blend of my DCF, sales, profitability multiples, and market share projections. Using metrics aligned with the industry-including a 3x EV/Sales 29e and 20x EV/EBITDA 29e-I envision Eve seizing a 30% slice of a $58 billion market pie with a dialed-down 25% discount rate, in tune with the eVTOL industry's certification and testing benchmarks.

Eve's Developments and Announcements (Mid-to-Late June 2023)

Paris Air Show Highlights (link here ):

• Key Supplier Partnerships :
  • Nidec Aerospace : Entrusted with electric propulsion systems. Worth noting, this partnership extends to Embraer, which has formed a joint venture with Nidec
  • BAE Systems : Tasked with devising advanced energy storage systems, this partnership not only focuses on efficient, zero-emission operations but also on maintaining a low noise profile
  • DUC Helice Propellers : A pivotal player from France with a significant U.S. presence and over 25 years in aviation, they will supply the rotors for Eve's eVTOL's 8 lift motors along with the cruise propeller
• Extended Collaboration with Blade : Eve's alliance with Blade is growing stronger, focusing on embedding Eve's eVTOL within Blade's expansive European network, particularly initiating in France. This development follows previous collaborations that included an agreement for up to 200 eVTOLs in India and a Letter of Intent for U.S. operations, targeting markets in the West Coast, New York, and Florida
• New eVTOL Orders : Following the Paris Air Show, Eve announced fresh orders of 80 eVTOLs. Nordic Aviation Capital ((NAC)) confirmed a 15 firm order plus 15 options, while Widerøe Zero expressed intent for 50 eVTOLs, with the first aircraft aiming for revenue service by 2027. Eve also highlighted Voar Aviation's prior order of 50 eVTOLs

Backlog Details as of June 26th, 2023

Eve's order cache stands impressive at 2,850 units, translating to a monetary value hovering around $8.6bn. In terms of geography, North America is the major player holding 46%, trailed by South America's 18% and Europe's 16%, with the rest sprinkled globally. However, a quick caveat-this backlog is anchored in non-binding letters of intent, so there's wiggle room for adjustments. Diving into the specifics: airlines are front runners with 940 units (33% of the total pie), chased closely by helicopter operators (705 units or 25%) and ride platforms (525 units or 18%). Market share paints a rosy picture too, with Eve clutching 22% of the industry's potential for the 13.3k eVTOLs up for grabs. See below for three figures on Eve's backlog as of June 26th, 2023:

Figure 1 - eVTOL Industry Backlog Market Share (% of eVTOL backlog)

Figure 2 - EVEX Backlog Breakdown by Client Type (% of eVTOL backlog)

Figure 3 - EVEX Backlog Breakdown by Client Share (% of eVTOL backlog)

EVE's Q2 2023 Developments

1.0 Financial Highlights

• 2Q23 Performance : Eve reported its 2Q23 results, showcasing a net loss of $31mn, slightly larger than the 1Q23 loss of $26mn
• R&D and SG&A : Eve had R&D expenses of $22mn (in line with $21.5mn of 1Q) and SG&A at $6.6mn, slightly higher than the $6.2mn in 1Q
• Cash Consumption and Position : Eve witnessed a cash burn of $28mn, and its net cash position was reported at $269mn. If one includes the BNDES credit line, the available cash is increased to $371mn. The cash consumption for the entire year is anticipated to range between $130-150mn

2.0 Earnings Call and Presentation Highlights

• Aircraft System Architecture : The company has defined its aircraft system with a Lift+Cruise model, intending to accommodate four passengers along with a pilot
• New Production Facility: Their choice of Taubate, Brazil, is intriguing. Being close to Embraer's HQ and Eve's core teams might simplify logistics and operations
• CEO Transition : Johann Bordais will assume the role from September 1. Current co-CEOs will transition to other pivotal roles within Eve, ensuring continuity and leveraging their expertise

3.0 Notable Upcoming Milestones

• Prototype Development : The manufacturing of the first prototype is anticipated to commence in 4Q23, subsequent to defining propulsion and energy-storage systems
• Testing Phase : Early 2024 will see the test campaign, designed with a flexible approach for system tests, enabling refinements in design
• Urban ATM Software : Throughout 2023, Eve aims to conclude testing of trial software dedicated to Urban Air Traffic Management (Urban ATM)
• Financial Allocation : Eve has earmarked $130-150mn for the 2023 development program and SG&A expenses. This contrasts with $59.9mn used in 2022 and $47.8mn in 1H23. Access to the standby long-term finance lines worth $102mn is expected in 2H23

4.0 Expanding Backlog

• Nordic Aviation : A LOI for 30 aircraft was announced during the quarter
• Wideroe Zero Partnership : This extension includes a promising 50 eVTOLs combined with a service and operation solutions package
• Voar Aviation Agreement : The quarter also revealed an LOI with Voar Aviation for 70 eVTOLs. This includes a prospective partnership pertaining to Eve's UAM service and operations solutions. Notably, this order was previously undisclosed and was incorporated in the 1Q23 backlog
• Currently, 28 eVTOL customers from 14 countries contribute to their backlog, valued at $8.6bn and covering 2.85k eVTOLs. Their strategy is to emphasize prototype testing and milestones before accelerating LOI to firm order conversions

Eve's Updated Valuation Breakdown

• Current Trading Metrics : Right now, Eve is positioned at a 4.3x EV/EBITDA for 2029 estimates. To give a bit of perspective, let's consider Joby. With its hefty market cap of $5.6bn, it's trading at 7.9x
• Industry Standards & Discounts : A critical point I always bear in mind is that these are forward-looking figures. They need a bit of refining for the present scenario. Usually, in this industry, we lean on a 2-4x Sales multiple and a 15-20x EBITDA multiple when anchoring consensus estimates. From my observations, these numbers should be brought to their present values with a discount in the ballpark of 20-30%

My Valuation Process :

• Sales & EBITDA Approach : Plugging in the numbers, I've applied a 3x Sales multiple and a 20x EBITDA multiple to Eve's projected sales and EBITDA figures for 2029. With a 25% discount, which brings down my discount factor to 0.27 for 2029, my calculations point towards a $9.2 valuation
• Market Share Strategy : Zooming out, I looked at the anticipated $58bn revenue pool by 2029. If we anticipate Eve capturing about 30% of this market, and again applying the same 25% WACC (resulting in a 0.072 discount factor for 2035), the numbers tell an interesting story. Using slightly adjusted EV/Sales and EV/EBITDA multiples, I'm seeing a Dec-2023 price target of $11.66 and $17.49, respectively

All in mind, I arrive at a Dec-23 price tag of $12 a share, using a blended average of 4 valuations.

Potential Bumps in Eve's Flight Path

1.0 Eve is navigating through early-stage turbulence, given its budding status in the market. While they're designing a nifty eVTOL aircraft, they also have to wait for the rest of the eVTOL world to catch up. Think of it as waiting for everyone else to get ready when you're all set to hit the party:

• Air traffic control, vertiports, supply chains, certification processes... Eve's relying on all these pieces falling into place
• Hold-ups anywhere? It could mean a market slowdown or even a size reduction
• Plus, let's not forget the big questions: Will folks feel safe using it? Will they even want to hop on board

2.0 Eve's aiming for a thumbs-up from ANAC (that's the Brazilian Aviation Agency for the uninitiated). But certifications can be tricky:

• Delays might mean keeping potential customers waiting, and pushing back that all-important cash flow
• Getting the nod from Brazil is one thing. Winning over US and European watchdogs? That's another hurdle

3.0 It's a bit hazy predicting Eve's financial runway. They're on an innovative journey, and sometimes that needs more fuel (or in this case, cash) than expected:

• There might be pit stops to raise more capital, either through equity or borrowing. Shareholders might not be thrilled if that dilutes their slice of the pie
• Good news? They've got a cool $300mn in their pocket. I reckon that should last till 2025, assuming they don't pile on more debt

4.0 Eve's not alone in this airspace. Over 15 companies, like Joby, Archer, and Lilium, are all prepping their own flying marvels:

• With the skies getting crowded, Eve might have to work harder to carve out their market space and returns

For further details see: