DLAKF - Lilium Stock Explodes On Lufthansa Deal

2023-12-08 09:00:00 ET

Summary

• Lilium's stock has gained 19% since the last coverage, outperforming the broader markets.
• The challenges for eVTOL companies include unproven technology and certification standards, as well as unrealistic certification timelines.
• Lilium's funding and liquidity may not be sufficient to support its ambitious timeline and production ramp-up.

I previously covered Lilium and issued a Hold rating for the stock. Since then, the stock has gained 19% compared to 10% for the broader markets. Following a deal with Deutsche Lufthansa ( DLAKF ), the stock gained as much as 24% and ended the day 19% higher. In this report, I will be discussing Lilium’s prospects once again and whether I like it any better now.

The Challenges For eVTOLs and Urban Air Mobility

Covering eVTOL (electric Vertical Take-Off and Landing) companies is challenging and the reason is quite simple, the products and technology, while disruptive in nature, are not proven nor are the certification standards which cast doubt on timelines and funding needs. You can sprinkle on that a very vocal fanbase who choose to ignore some basic development principles and typical cash requirements and equally vocal base of critics. Somewhere in between, analysts have to do their job. I am such an analyst, but what helps me is that I have a background in aerospace engineering which puts me in a somewhat more suitable position to assess designs from an engineering perspective, but also from a financial perspective. What is quite often ignored is the fact that part of crafting a product even if you work on preliminary designs is the financial feasibility study and aligning timelines, so having a background in aerospace engineering does not confine one to the design but also requires skills and knowledge on timeline, risk and cost estimation.

The major risks I see for eVTOL manufacturing companies is a very optimistic scenario on certification timelines. Amended type certificates for single aisle jets such as the Boeing 737 and Airbus A320neo took roughly 13-14 months from the date of first flight and somehow disruptive technology providers such as eVTOLs have largely been aiming for 12-month campaigns although we do see some rationalization in that regard recently and that is important as it allows manufacturers to recalibrate timelines and funding requirements.

Besides that, disruptive technology is all too often equated with outsized shareholder returns which in the case of urban air mobility solutions might not be the case at all.

How Is Lilium Doing On Their eVTOL Schedule?

In May 2023, I discussed Lilium’s funding and what I did point out is that dilution is the most probable path forward. The company expects to have a flying model by late 2024 and certification by late 2025 or roughly a 12-month period whereas the most optimistic number is around 13-14 months if we look at established certification processes. So, Lilium is assuming more or less a perfect trajectory from first flight to certification.

Does Lilium Have Sufficient Liquidity?

When looking at the timelines to see whether they are somewhat realistic or not, the next thing to look at is whether the funding matches the timeline. The most disturbing thing about eVTOL manufacturers is that they are touting big numbers, but nowhere are they discussing in detail CapEx requirements to increase production or learning curves as it is an industry reality that initial production units for aerospace products are significantly loss making. So, we are not given any projections on cash requirements while those same companies are able to promise blue skies.

The most recent shareholder letter details $386 million in cash and equivalents and adjusted cash burn of $185 million for H2 2023. What does it mean? Very simple, if this is the rate at which things continue, by mid-2024 we would be seeing additional dilutive action.

A big deal is being made about deposits and PDP (pre-delivery payments). The 50 limited edition jets would provide along the line of $270 million in PDPs. Some readers have interpreted that as cash that is still to come, but this is factually incorrect. By Q2 2023, 21 limited edition jets had been sold for which a PDP was made leaving 29 jets on the table for which a PDP could be secured. The company had initially expected to sell all jets by the end of the 2023, but at current standing, there would be 31 on firm order after 10 units ordered at the Dubai Airshow and 10 options. So there is a significant gap. I am not saying that the remaining jets won’t be agreed on by the end of the year, but it does show that selling the jets has not been as easy as presumed and from what currently has been agreed on, we can only add another $54 million. Every dollar raised in a non-dilutive way is one that saves the shareholder, but it also goes to show that in comparison to the cash burn the pre-delivery payments for the limited-edition jet are small. $270 million funds around three quarters which is nice but also under the assumption that the $185 million cash burn expected for H2 does not include any cash flow from PDPs received while technically if assuming that all 50 jets would be sold, the associated PDPs should also be in that projection provided by Lilium as advances typically are part of operating cash flow.

So, stacking the PDPs is tricky as some cash is already received and some might not be received if the orders are not agreed on or whether they are already agreed on or not, they might be embedded in the cash flow projections. I am assuming they are not already embedded and that would put Lilium’s year-end balance at around $255 million with 19 Pioneer Edition jets remaining to be sold. $255 million gives Lilium liquidity for another three quarters in 2024 and almost four quarters in case the Pioneer jets will be sold meaning that until late 2025 Lilium should be covered if it keeps cash burn at current levels and its service entry does not slip and that is under the assumption that the quoted price is the price paid and no discounts apply while it is clear that actual sales prices may significantly vary (though for the limited edition product, discounting does not make sense):

We currently estimate that the first-generation Lilium Jet will have a list price of approximately €10 million in the case of private sales and approximately €7 million in the case of OEM and fleet sales. “List price” is not indicative of sales price, and actual sales prices are based on future economic, competitive, regulatory and other considerations, many of which are beyond the control of the Company.

So, in a perfect world Lilium has sufficient liquidity but its ramp up trajectory for commercial users for the regular €7 million jet for which PDPs will be more streamlined is key here. If those jets will also enter by 2026, then we should see around $2.8 million for an undiscounted jet flow in over a 2-year period starting in 2024. However, initially the expected actual sales price was $2.5 million which even corrected for inflation would mark a >60% discount to catalog. Given that typical discounts of commercial jets are in the range of 50 to 57.5 percent, the PDPs are likely to be more moderate as they function with actual sales price rather than with the list price as is the case with conventional fixed wing airplanes.

What does this mean? The PDP ramp up that we will see in 2024 more prominently or should see more prominently is going to depend on the two-year period to delivery (as PDPs start two years prior to delivery) and they are going to be more volume-oriented meaning that in order to rake in more PDPs and higher production efficiency a very fast ramp up is required. The actual PDP profile will most likely be closer to $1 million than to the $2.8 million I initially anticipated.

So, while the math closes in an ideal scenario there is little room for error and we have yet to see any word from Lilium on production planning and capacity. I would not at all be surprised if we would see the company looking for additional funding on current levels because having to look for funding in more dire times is more difficult and has an even bigger dilutive impact.

What Is The Deal With Lufthansa Worth?

I have a Hold rating on Lilium stock, and you might say that because the stock has gained 19% and outperformed the market, that call is wrong. I think that is not at all the case because the risk with Lilium is real, so for the investment to be worth it, the return should also be outsized and likely bigger than the outperformance seen so far. Moreover, the stock was trading at $1.11 when I published my first Lilium report and is now trading at $1.32 up $0.21 per share following the news about an eVTOL cooperation with Lufthansa. Absent of that announcement, the stock would have been flat.

The news about a strategic partnership between Lilium and Lufthansa is good news of course, but it is a Memorandum of Understanding to explore a strategic partnership. It is not a tentative or firm order for Lilium jets in any way:

FRANKFURT, Germany and MUNICH, Germany, Dec. 07, 2023 (GLOBE NEWSWIRE) -- The Lufthansa Group and Lilium (LILM) signed a Memorandum of Understanding ((MOU)) to explore a strategic partnership on electric Vertical Take-Off and Landing (eVTOL) aircraft operation in Europe. The companies want to explore innovation opportunities in aviation, discussing areas such as ground and flight operations, future aircraft maintenance, as well as crewing and flight training. In a possible strategic partnership, both companies also want to analyze the opportunities for collaboration with third parties like airports and regional partners, for instance, on the advancement of infrastructure such as vertiports, airspace integration and the definition of required operation processes.

Most certainly this could lead to orders in the future from Lufthansa and I certainly do see a market for the Lilium jets in Germany with improved range capability promised by 2030, but a network in Germany has always been part of the plan. So, I don’t see this announcement as groundbreaking. Lilium has a sales pipeline of 745 Lilium jets. Let’s say these are around 700 regular Lilium jets the value would be around $2 billion. The Lufthansa MoU is not adding anything to that or anything that could not have been expected before, so I don’t quite see any proper reason for the stock jump on the news.

The real news for the stock to jump would be any insights that the company should at some point start to produce information for its investors regarding production planning as it provides a more credible and supported base for the long-awaited PDPs to materialize.

Conclusion: Nice News From LILM But Unjustified Stock Price Lift

Partnering with established players such as Lufthansa is of course big for companies such as Lilium, but I find the stock price reaction to be quite overdone because at this point the investor focus should be on the production planning ramp up, and timeline and CapEx requirements if anything. In some ways I am somewhat disturbed that eVTOL manufacturers make it a sport to come up with attention grabbing press releases, but are not producing required insights on production planning, ramp up and the inflection from production losses to production profits.

So, while Lilium most definitely could provide a sustainable transport mode solution in Europe and other parts of the world, I do not see any reason to adjust my rating and therefore I am maintaining my Hold rating.

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