LILM - Lilium Didn't Raise Enough Capital To Take Off

2023-03-09 04:55:34 ET

Summary

• I think this idea of battery-powered flight is really cool. But that doesn't mean that it's going to work financially.
• It's also possible to look at the specific finances of Lilium and claim - as I do claim - that they're not going to work.
• They've simply not got enough cash to cover the runway they require.

Lilium has two distinct problems

We should all grasp Toltoy's comment about families - each is unhappy in its own way. We should also apply this to corporations and investment opportunities. They can all go wrong in their own way.

But more than that, there are so many things that need to go right for an investment - especially the development of an entirely new product - to go right. Finding just the one way in which that isn't going to work - is unhappy - is enough for us. Finding two, well, at that point we can go look at something else.

That's my contention for Lilium (LILM). There are two major things wrong. Therefore, within this current corporate shell at least, Lilium isn't going to work.

As I said before

I had a look a Lilium a year back . My major contention was simply that they'd made the wrong design choice. Which, coming from someone who knows nothing about aircraft design is pretty brave (well, OK, I used to supply Airbus with alloys for them to experiment on for new aircraft designs but that's not knowing about designs, that's knowing about alloys).

The point is a basic economic one - always optimise for the scarce resource. If labour's cheap and capital expensive (the same statement) then put the guy on the ordering counter at the bigger joint. If capital's cheap and labour expensive (the same statement) then put up an ordering screen and don't employ the guy at the counter. Optimise for the scarce - which to econ types means expensive - resource.

Electric aircraft, well, OK, nice idea, certainly. When talking about Rolls Royce I pointed out that I think we're going to solve climate change and flying a different way. Synthfuels rather than electric or hydrogen planes. OK, but the short haul - 100 mile - market could be very different. As the helicopter market is different from the jet engine one.

So I'm not ruling out electric VTOL or anything. As an econ type entirely happy for folk to try and what succeeds will be that which meets enough peoples' desires to actually sell.

Optimising for the scarce resource

This still needs to be done though. And what is it that's the scarce resource with battery powered planes? Range. Or, to walk it back a step, power. Batteries weigh a lot for the power they contain. We've not got any ideas in chemistry that are going to change that. And what's the grand limitation for any flying machine? Weight in the air. So, batteries are the weight which provide the limitation on the performance of a battery powered plane.

Now, it might well be possible to build a battery powered plane which meets the needs of some set of consumers. Say, 100 mile hops. And that is what most of the electric plane manufacturers are targeting. Fine, that market may or may not exist but that's not my point (I think that if flying became cheap enough then that market would exist but that's again outside my point here).

But we've that weight/performance trade off all the same. And performance is really being determined here by range. OK.

Lilium claims to have a better battery technology which is nice. They've also got a pretty cool - and markedly different - design for their plane. That's also nice. But the important thing we need to know about their plane is that for all its coolness - and it does have some real merits too - it is energy hungry.

Our scarce resource in aircraft design is energy, doubly so in electric aircraft. They've a design which does not optimise for the scarce resource. Bad idea.

So, as I was saying

That's what the original point I made was a year back. Since then, Lilium stock is down 73% and the S&P 10%. So, bully for basic economic analysis then.

But financial analysis

Obviously there have been developments over the year. For Lilium has a couple of operational problems as well. One is that it looks like they're going to miss their own target for type approval. That was going to be next year - 2024. It would be really very surprising if they managed that.

And here's the thing, type approval for an aircraft manufacturer is like FDA (or other) approval to a pharma company. It's all or bust to that point. There'll be pretty much no debt finance up to that point of approval or not. Because there's nothing there to provide security for the debt of course. It's all got to be capital funded to that point. Which is fine, as long as we all know that it's all capital eating to that coinflip decision of yes or no.

Well, not coinflip, because we can have views on whether the permission will be granted of course. But the most important part of this observation is that the company must have what is called the runway (the connection between this and aircraft is just that it's a useful analogy, not actually a pun, or play on words). Have they got enough money to get to that permission or no permission decision point?

For Lilium the answer was not. So, they had a capital raise . This was predicted, that they would need one. Also, that it would be dilutive when they did. They did have one and it was. OK, but that's in the past and as with all investments it's the future that matters.

And here's the problem. As far as anyone can see that capital raise doesn't give enough runway.

From Lilium itself :

• Total cash spend at €69 million in Q3 (Q2 2022: €63 million) mainly driven by the ramp-up in one-time supplier payments; in line with target budget of €250 million in 2022.

OK:

Liquidity as of the end of Q3 - and prior to the recently completed investment round - stood at €160 million (end of Q2: €229 million)

OK .

announced the successful closing of a $119 million capital raise

So, being realistic we've €260 million, which is four quarters of runway. But that's not enough.

OK, it's not enough if we think they're slipping on their approval process. And while they say that their European work is 80% done that's more it's 80% done in filing the paperwork. The very fact that they're not saying the same about American approval is all the evidence we need to think that they're not that advanced there.

But they've got customers!

Well, yes, they do .

Lilium expands into UK market with eVolare, signs binding contract including pre-delivery payment for up to 20 aircraft

Except, well, there's binding and there's binding.

eVolare to pay pre-delivery payment to Lilium to secure aircraft delivery slots

This is normal enough in aircraft work. Production line queues often last for years. So, it's possible, normal even, for a would be buyer to offer up some money in order to gain one of those slots. Aircraft 17 off the line costs this much to reserve, aircraft 117 some other amount for delivery some time later.

Which is what is being talked about here. But of course all such contracts are dependent. Dependent, most obviously, on type approval for the aircraft. This isn't, it really isn't, a contract in the sense that planes have been sold absent approval. There's an option payment to book space on the production line dependent upon approval.

Which means that approval becomes the important question again. Has Lilium enough money, now, to get the plane approved. I think not.

Much the same is true of the other announcement .

My view

I remain with my original point, that Lilium has optimised the design the wrong way around. It's running an energy hungry design when energy is - because batteries - the scarce resource, the limitation, on the basic technology. I simply do not think that's going to work.

Looking more closely at financial information I do not think they've got the capital to get to type approval. That either means another - and hugely dilutive at current prices - capital raise or bust. Simply because the finances here work as with pharma companies. Before approval it's an interesting idea to be funded by eating capital. After approval it's hugely more valuable and can possibly be funded by debt.

I just don't think it's going to work.

Why I'm wrong

If they can gain approval then yes, everything changes. It might still be the wrong initial design decision but if the market disagrees with me then, well, I', wrong, right? But approval is necessary for that proof. So, if they've sufficient funds to actually get to approval then yes, that proves me wrong.

The investor view

The twin questions for any investor in Lilium are really very simple. Do they have enough money to get to aircraft approval? If they do, is an energy hungry design likely to win in the market for aircraft?

The second clearly depends upon the first. I've made my views clear. I think the original decision is wrong and also that they've not got the capital to get to where that matters.

Others may well differ of course.

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