EVEX - Vertical Aerospace: Disastrous Delay (Rating Downgrade)

2023-05-30 17:25:11 ET

Summary

• Vertical Aerospace Ltd. has delayed eVTOL aircraft certification until at least the end of 2026.
• The company only has a cash balance for the next year and has committed to raising additional cash.
• Vertical Aerospace Ltd. stock should be sold until Vertical obtains funding to reach aircraft production and the certification becomes more visible, considering the massive delays.

A big key to the success of most SPACs was raising enough money to reach profits, or at least start production in the case of a new aircraft manufacturer. Vertical Aerospace Ltd. ( EVTL ) finds the company in the position of needing to raise substantial amounts of additional capital while the company has announced substantial delays in just obtaining aircraft certification. My investment thesis is now very Bearish on the stock until the funding situation is resolved, and production start gets far closer.

Big Delay

The eVTOL - electric vertical takeoff and landing aircraft - concept is set to revolutionize short-distance air travel. The aircraft are safer and operate with substantially reduced noise compared to helicopters, vastly increasing the urban areas where trips can be made.

While first-mover advantage will offer an eVTOL manufacturer and operator a huge step-up on the market, ultimate success will depend on which company makes the best aircraft and can profitably scale production. For now, though, shareholder success depends on reaching production without major dilution, considering public market valuations have plunged.

The recent news from Vertical Aerospace has been a potential disaster for the business and a complete disaster for shareholders. Last year, the company was looking at 2024 for certification, while the latest news has the process lasting until the end of 2026 .

In essence, Vertical Aerospace is targeting 2027 before the company starts production of the VX4 aircraft in a massive hit to the timeline considering we're still in mid-2023. While the company continues to suggest a first mover in the eVTOL market, most aircraft manufacturers are still targeting dates in the 2024/25 timeline.

Even TD Cowen listed Eve Holding, Inc. ( EVEX ) as being late to the game with a goal of launching their urban air mobility service in 2026. The company has the advantage of an owner in Embraer S.A. ( ERJ ) that should provide a significant boost to reach scale production.

Cash Crunch

A big reason that Vertical Aerospace trades below $2, while Eve trades above $8, is the cash position of these companies. Vertical Aerospace ended Q1 with a cash balance of a measly £104m.

The company had an operating loss ~£23 million during the March quarter alone. Even the relatively low spending in the quarter due to using manufacturing partners to supply key components of the VX4 aircraft isn't enough to prevent Vertical Aerospace from needing a highly dilutive capital raise this year. The management team has already committed to raising additional capital this year, and the delay of up to 2 additional years is brutal for shareholders, with the market cap falling down to $400 million prior to raising cash.

The company has listed over 1,400 pre-orders, but one has to wonder how long these orders stick around. Not to mention, some of these pre-orders were from companies listed as potential insiders. Other high quality airlines such as American Airlines Group Inc. ( AAL ) and Japan Airlines via the large Avolon order might move on to another eVTOL manufacturer looking for production prior to 2027, at the earliest. Remember, Vertical Aerospace hasn't provided any updates on production scale plans once aircraft certification is achieved, though Kakao Mobility just agreed to pre-order 50 aircraft for the South Korean market.

Unfortunately, the aircraft certification slip likely pushes out any pre-delivery payments agreed to by Marubeni and American Airlines. Neither airline provided payments during Q1, and Vertical Aerospace needs the cash now, not sometime in 2026 to 2027 when the aircraft is certified and production starts taking place.

Takeaway

The key investor takeaway is that Vertical Aerospace Ltd. shareholders are left in a very precarious position. Vertical Aerospace Ltd. doesn't offer shareholders much hope with the constant delays in expected aircraft certification while the cash balance continues to dwindle. An investor now has up to 3.5 years to worry about the company actually achieving certification on time, which is near eternity in the stock market for a cash-burning company like Vertical Aerospace Ltd.

Investors should sell Vertical Aerospace Ltd. stock and look for a better option in other beaten-down small cap stocks.

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