EVTL - Vertical Aerospace: Not Ready For Takeoff

Summary

• Vertical Aerospace has a promising pre-order book for eVTOLs, but the market appears to have big questions regarding these orders.
• The company just announced a pre-delivery payment from Marubeni in Japan, but the press release didn't provide any financial details.
• The stock isn't investable until the company solves the cash issue with a year-ending balance of ~£125 million and 2 years to go before the VX4 enters service.

The stock of Vertical Aerospace (EVTL) has come back to earth after excitement over pre-orders in mid-2022 collapsed. The electric vertical takeoff and landing (eVTOL) manufacturer has lots of promising orders, but the company doesn't have a lot of cash. My investment thesis is Neutral on the stock trading at $2 with a lot of questions about dilution from the need to raise cash via selling stock.

Pre-Orders Hope

A lot of promising stocks that went public via SPAC are running into a stock market highly questioning order books despite all the promises in the world from eVTOLs to disrupt regional travel. From July to October last year, Vertical Aerospace soared from similar levels to now over $10. During this period, the eVTOL company announced major pre-orders, including a commitment for a pre-delivery payment from American Airlines ( AAL ).

In total, Vertical Aerospace lists over 1,400 aircraft pre-orders from leading airlines, such as American Airlines and Virgin Atlantic, and aircraft lessors. The pre-orders from American Airlines, Virgin Atlantic and Iberojet combine for 600 conditional orders and production for years.

The massive 500 pre-order for the VX4 aircraft from Avolon was originally part of the excitement with Vertical Aerospace. The global aircraft leasing company has a collection of promising contracts with the likes of Japan Airlines and Air Asia to lease these eVTOLs in the future, leading to the Avolon CEO being named the Chairman of the Board.

Cash Problems

So far, all of these pre-orders don't appear to have led to any cash payments to Vertical Aerospace. The pre-orders appear conditional and non-binding, leaving shareholders with a lot of potential orders and no cash.

The company ended Q3 with cash totaling £145 million . Vertical Aerospace forecasted burning another £20 and £25 million in cash from operations in Q4'22, leading to an end of year cash balance of ~£125 million.

The eVTOL manufacturer has limited cash burn compared to competitors due to the focus on using parts from partners. A big question in the sector will be the different models of building proprietary parts at high costs versus borrowing parts from helicopters and other aircraft, where possible, but leaving the company without proprietary technology or patents.

Vertical Aerospace has the potential to sell another £91 million worth of shares after selling 1.1 million shares during Q3 at a purchase price of nearly £9 million. Unfortunately, the company failed to sell a bunch of shares when the stock price soared to $10 last year.

A big part of the SPAC issue were the warrants issued with an exercise price lined up at $11.50 with the corporations expecting further dilution and cash flow when the stock jumped. Instead, these former SPACs that didn't raise enough cash are stuck selling stock at $2, as is the case of Vertical Aerospace.

These big pre-orders quickly become viewed as real demand with a lot of pre-delivery payments. The promising news from last week was a pre-delivery payment from Marubeni for 25 VX4 aircraft out of an original pre-order of 200 aircraft.

Though, the company didn't provide any details on the timing and size of the pre-delivery payment. Despite a similar announcement with American Airlines back in July leading to a lot of the excitement in the major stock surge, Vertical Aerospace shows no signs the pre-delivery agreement actually resulted in cash for the company.

The original statement from Vertical Aerospace was as follows:

Vertical Aerospace (Vertical) [NYSE: EVTL], a global aerospace and technology company that is pioneering zero-emissions aviation, today announces that it has confirmed delivery slots and the commitment of associated pre-delivery payments with American Airlines (NASDAQ: AAL).

Similar to the Marubeni announcement, American Airlines has a pre-order of 250 aircraft, along with an option for another 100 aircraft. Vertical Aerospace saw the cash balance dip from £158 million at the end of Q2'22, suggesting the company didn't see any material payments from the large U.S. airline.

The deal with Marubeni clearly states Vertical Aerospace has secured a pre-delivery payment for the reservation of aircraft delivery slots. The press release leaves out the "commitment" for a pre-delivery payment included in the American Airlines announcement, but the devil will be in the details.

Vertical Aerospace doesn't expect production aircraft until 2025, leaving a 2+ year gap here from reserving delivery slots to production. The company started 2023 with limited cash on the balance sheet putting pressure on the aerospace company to raise more cash during the year and the only shareholder friendly option is a large amount of pre-delivery payments.

Unfortunately, Vertical hasn't announced any pre-delivery details. Archer Aviation ( ACHR ) did announced a pre-delivery payment of $10 million from United Airlines ( UAL ) for 100 aircraft. The deal would amount to $100K per aircraft suggesting similar deals with Vertical would net $5 million from American Airlines and only $2.5 million from Marubeni.

Takeaway

The key investor takeaway is that Vertical Aerospace has a promising pre-order book, but the company has collected limited, if any, pre-delivery payments. With the stock at $2, shareholders are left in a precarious position with the company needing to raise additional cash and the order book providing no relieve or guarantees to prevent dilution.

Investors should stay on the sidelines for now until more details emerge on actual order demand, or the industry gets closer to approval.

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