HYLN - Hyliion Holdings: Sell On Decision To Give Up On Core Electric Powertrain Business

2023-10-10 22:20:06 ET

Summary

• Market participants have been caught flat-footed by the company's decision to pursue strategic alternatives to its core electric powertrain business and refocus on its recently acquired KARNO stationary power generator solution.
• With KARNO still in the design phase, management's timeline for early field deployments in H2/2024 looks aggressive.
• In addition, stationary power is a crowded field already, with KARNO likely to face stiff competition from leading fuel cell players.
• Assuming a sale or wind-down of the electric powertrain business, the move has the potential to extend Hyliion's cash runway quite meaningfully.
• However, with the KARNO stationary power solution still in the design phase, I would expect most analysts to throw in the towel on the stock regardless of the company's substantial cash balance. Consequently, I am downgrading the stock from "Hold" to "Sell" and would advise investors to consider selling existing positions and moving on.

Note:

I have discussed Hyliion Holdings Corp. ( HYLN ) previously, so investors should view this as an update to my earlier coverage of the company.

After the close of Tuesday's session, Hyliion Holdings Corp. or "Hyliion" surprised market participants with the decision to pursue strategic alternatives for the company's core electric powertrain business and refocus on its recently acquired KARNO power generator solution (emphasis added by author):

Hyliion Holdings Corp. (...) today announced that it has engaged strategic expert advisors to explore a range of options for its powertrain business .

The commercial vehicle electrification industry is evolving, with fleets committed to ultimately reducing their environmental footprint through practical solutions. Hyliion, like others, has experienced slower-than-anticipated market adoption as fleets undertake a gradual transition to electric trucks. Hyliion’s ongoing participation in commercial vehicle electrification will require continued investment, while addressing escalating component and production costs, meeting ongoing regulatory requirements, and aligning with a new CARB mandate for fleet adoption of electric trucks.

While Hyliion’s capital position is currently strong, its proprietary technology is transformative, and commercialization is progressing on track, additional future capital will ultimately need to be raised against the backdrop of uncertain market conditions if we continue on our current trajectory (...) We therefore believe now is the right time to consider a host of strategic options for our electric powertrain business to ensure that we deploy capital most effectively and maximize value for our shareholders.

(...)

Hyliion will continue commercialization of the fuel-agnostic KARNO generator , which the company expects to compete effectively in the stationary generator market due to its superior operating characteristics. Given the rising strain on electrical infrastructure, notably from electric vehicles, the KARNO generator is positioned well to address these challenges. The insights and learnings from the powertrain segment further strengthen endeavors with the KARNO generator.

The company intends to complete the assembly of initial production trucks and continue showcasing the solution in extended fleet trials as it pursues this strategic review process. However, certain efforts will be paused, including securing orders for Hypertruck ERX-equipped trucks and new powertrain development work.

At least in my view, investors will find it hard to believe that the company is giving up on a business that was originally projected to generate more than $1 billion in highly profitable revenue this year:

But with the company no longer pursuing customer orders for its Hypertruck ERX-equipped trucks, even the paltry $10 million in annual revenue projected by management on the most recent conference call won't be achieved.

Going forward, Hyliion will refocus on the KARNO stationary power generator solution which the company acquired from a unit of General Electric ( GE ) last year for $37 million in cash and stock:

Please note that Hyliion's original plan was to " leverage the KARNO as the next generation generator onboard the Hypertruck " but with the company withdrawing from on-road applications, the KARNO generator will remain a stationary power solution with early field deployments expected in the second half of next year:

But stationary power is a crowded field already with KARNO likely to face stiff competition from leading fuel cell players Bloom Energy ( BE ), Plug Power ( PLUG ), and Ballard Power ( BLDP ), just to name a few and while Hyliion expects KARNO " to achieve a 20%+ efficiency improvement over today’s conventional generators ", the company has remained vague regarding potential advantages over existing fuel cell solutions (" could be more efficient than most available fuel cells ").

With the KARNO solution still in the design phase, the timeline for early field deployments in H2/2024 looks aggressive.

For my part, I do not expect the new core business to generate meaningful revenues before 2026, not to speak of potential profits.

Under a worst-case scenario, commercialization might fail entirely, very similar to the company's electric powertrain technology.

So, what about the near-term impact of Tuesday's announcement?

Given the company's stated intent " to complete the assembly of initial production trucks and continue showcasing the solution in extended fleet trials as it pursues this strategic review process" , any near-term cash savings are likely to be limited and might be more than offset by the costs of the strategic review.

However, assuming a sale or wind-down of the electric powertrain business, the move has the potential to extend Hyliion's cash runway quite meaningfully.

Based on management's most recent projections, the company is expected to finish the year with approximately $275 million in cash and no debt. Full-year cash consumption is expected to reach $150 million.

With Hyliion refocusing on KARNO, I would estimate annual cash consumption being at least cut in half.

Under this scenario, the company would end 2024 with approximately $200 million in cash which more or less equals the company's current market capitalization.

Moreover, Hyliion's remaining cash balance should be more than sufficient to fund commercialization of the KARNO generator technology, even when assuming a delay of up to two years from current projections.

However, I do not expect the abrupt change in strategic direction to be well-received by market participants as the company essentially admits to failure and basically starts from scratch with an unproven stationary power solution that is likely to face stiff competition in the market.

Bottom Line

Just two months after I voiced my concerns regarding the commercial viability of the company's product offerings, Hyliion announced the decision to pursue a range of strategic alternatives for the core electric powertrain operations and refocus on its recently acquired KARNO stationary power solution.

For my part, I do not expect substantial sales proceeds and wouldn't be surprised to see a near-term wind-down of the electric powertrain segment.

With the original business plan being null and void and the KARNO stationary power solution still in the design phase, I would expect most analysts to throw in the towel on the stock regardless of the company's substantial cash balance.

Moreover, following the electric powertrain disaster, market participants are likely to scrutinize management's ability to successfully commercialize the next early-stage technology.

Given the issues discussed above, I am downgrading Hyliion's stock from " Hold " to " Sell " and would advise investors to consider selling existing positions and moving on.

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