- With pandemic time restrictions gone, the operations are back to normal.
- The company is restructuring in order to scale the business of EV conversions.
- VVPR remains a highly risky stock with much uncertainty clouding its future.
Electric vehicle conversion is a relatively new by-product of alternative fuel vehicles. At this point, the market is run mostly by small firms and startups that cater to a niche group of customers. But the potential for automotive applications, in the world that is set on decarbonizing, is huge. It is this opportunity that VivoPower International ( VVPR ) is attempting to capitalize on, by infusing subsidiary Tembo e-LV with significant economies of scale to perfect the technology and broaden the distribution.
vivopower.com
VivoPower has been offering solar and critical power technology solutions since inception in 2014, and more recently electrification services for off-road vehicles, primarily in Australia, but also Europe, North America and the Middle East. Critical Power has been the cash cow: it supplied 95% of group revenue in the first half of FY2022; Electric Vehicles is the long-term growth focus.
1-Year Price Return to 1 July 2022
Seeking Alpha
In the past year to July 1, VVPR came down 80%, falling much more than the S&P SmallCap 600 ( SP600 ) which dropped 18%, its Energy Sector sub-index (SP600-1010) which fell -7%, as well as the Energy Equipment & Services sub-index (SP600-101010) that suffered a -6% decline. It is less than impressive but the outlook is not entirely glum.
Value-adding deals
Theoretically, VivoPower’s decarbonization solutions have near endless potential in today’s world that realizes the need for an eventual phase-out of fossil fuels. A couple of developments over the last quarter have started to actualize that potential in earnest.
In May, the company entered into an agreement with Toyota Motor Corporation Australia to model a fully electrified LandCruiser 70 for the mining sector in Australia, following a binding Letter of Intent signed a year ago. Executing this project is VivoPower’s Dutch subsidiary, Tembo e-LV (wholly owned since February 2021).
Then in June, VivoPower was awarded its largest-ever solar contract for electrical works, worth A$11.7m ($8m), at the 204 MWDC Edenvale Solar Farm in Queensland. Delivering this project will be the solar division of the company’s Australian subsidiary J.A. Martin Electrical that has grown 62% compounded annually since financial year 2019.
Promising but risky
While recent contracts are positive signs, VivoPower has a long way to go before it reaches financial soundness. COVID-19 was a big setback, delaying schedules and increasing costs, primarily relating to Tembo, in both Australia and the Netherlands. This caused group loss to widen to $10m for H1 FY2022 from $0.4m a year earlier.
The borders are now open, but challenges remain. Aside from freshly added war-induced externalities (supply chains, inflation, energy), VivoPower has been struggling to fund itself. Its net debt-to-equity ratio last stood at 65%, a level that is typical of capital intensive energy companies. More concerning are modest cash reserves — $3.3m in December 2021 and $4.6m in March 2022 — which leaves it with less than a year of cash runway.
Acquiring headline unit Tembo has been the heaviest item so far: $4.7m was paid for 51% in 2020, $2.2m and 15,793 VVPR shares for the remaining 49% in 2021, plus additional $10.9m as an earnout. With limited cash, debt and equity financing have been used unsparingly. Debt started at $8m from the time of the IPO in 2016 and peaked to $25m in mid-2020. Meanwhile, the dilution trendline is a high 34% per annum.
VVPR: Shares Outstanding as of 31 December 2021
GuruFocus
Yet all of that fundraising has been taking place in the context of growth. The acquisition of Tembo, for one, brought a distribution deal with GB Auto Group for Tembo’s electric Toyota Land Cruiser and Hilux as well as conversion kits. The partnership is expected to generate up to $250m in revenues, combined with the value of the converted vehicles, over the first four years.
Setting up new regional offices and staffing them is producing high opex but should help expand the company’s reach. Generous R&D allowances are already bearing fruits, first and foremost in the way of a 300% performance upgrade for Tembo’s current 28 kWh battery kit.
Moving forward, VivoPower is committing to non-dilutive expansion, maximizing cash flows from Critical Power unit Aevitas and prioritizing working capital financing facilities coupled with government grants in jurisdictions with climate-friendly policies such as the UK (e.g., Net Zero Strategy ) and the EU (e.g., European Innovation Council ).
At the same time, the management has introduced measures to boost cost savings and efficiencies which have helped bump up the latest quarterly results : cash levels increased 39% to $4.6m and revenue 15% to $10.2m compared to the previous quarter.
Focused growth
VivoPower does seem to realize that expansion has to be laser-focused given scarce resources. The management has just announced the sale of two non-core units, J.A. Martin Electrical — excluding the solar unit — and NDT Services, for an upfront consideration and an earnout that could add up to A$10m ($6.8m). This money will be channeled to the fast-growing businesses delivering electric vehicles and renewable energy solutions.
Also soon to go might be Caret Solar, a portfolio of 38 solar projects in the US with combined generation capacity of 1.8 GWDC. Part of it is newly formed Caret Decimal, a renewable powered digital asset mining business, whose planned initial contribution of 206.5 MWDC is valued at $20m. The management expects to make a good profit on the deal given a healthy interest from crypto firms in green mining.
Integrated sustainability
VivoPower is a B Corp , a voluntary status earned by companies that meet high environmental, social and governance standards. While the relevance of this certification for the company is obvious (as it relates to decarbonization), it is not a common feature of businesses of this kind and size due to the complexity of qualifying for the status and maintaining it afterwards. In the renewable energy installation space (other than solar panels), there are 37 B Corps in total, and VivoPower is the only US listed entity.
It may be worth it, though, because being a B Corp means having a preferred status with industry partners, impact investors and B2B customers. This competitive advantage could result in wider market recognition and exponentially more contracts for VivoPower as (and if) it achieves greater traction.
Risks
VivoPower will continue turning to credit markets to drive growth. But in the rising interest rate environment that is gaining ground around the world, it will become more expensive to carry debt. As of end-2021, the company had liabilities of $13.4m due within a year and $23m after that. And if alternative sources, such as government funds, prove to be inadequate, the chances of VivoPower going back to equity issuances — which means stock dilution for shareholders — will increase.
Valuation
As far as traditional metrics go, VivoPower is priced quite low. Trailing twelve-month P/S is 0.73x which compares positively to the Utilities sector median of 2.28x; it is also below its own 5-year average of 1.09x. Seeking Alpha grades it as A. Graded A+ is the forward P/S ratio of 0.84x, based on one-year forecasted revenue growth rate of 15%.
Conclusion
VVPR is the smallest stock in its sector, so high volatility is a given. But that is not a major issue in itself. What matters more is whether, and how fast, the company will become more financially sustainable. Against a challenging macro backdrop, I see two things working for VivoPower. The first is capable management led by Kevin Chin who is no stranger to scaling and business turnarounds. The second is the strategic bet on Tembo that is receiving all of the group’s free cash flow and proceeds from restructuring. But will that bet pay off? It sounds plausible to me, but the timeline is uncertain.
For further details see:
VivoPower Shows Positive Signs Of Change