Items of Interest #2

Rivian IPO, McAfee take-private, Viasat/Inmarsat merger, Avon Protection Plc

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As I continue to work on some new ideas, for this week’s newsletter I thought I’d again highlight some news items of interest from the past week. As before, I believe delving into news items (usually combined with some creative thinking) is helpful for idea generation and can lead to some interesting ideas over time.

Rivian IPO - The Opposite of a Value Situation

Firstly, as most readers are probably aware I generally tend to avoid market headline and hot topic stocks such as Tesla, Amazon etc. Such names are usually well covered by analysts and the financial media, so its unlikely I can add any additional insight or value in discussing them further.

In this vein, Rivian (RIVN) is one such hyped name that I’d ordinarily ignore. It went public via a blockbuster IPO last Wednesday, raising ~$12 billion in what management and cornerstone investors such as Amazon, Blackstone, Coatue Management and T. Rowe Price among other high profile names must regard as an astounding success. The IPO priced at $78/share implying a PF market cap of ~$68bn on a fully diluted basis (~2.5x its last private funding round in January), and the stock surged on Day 1 of trading, and closed +29% at ~$101/share (~$87bn market cap), and ended the week breaking the $100bn market cap barrier at almost $130/share ($113bn market cap). Not a bad result for a company that reported zero revenue in FY20, and to date in FY21 has sold only 12 vehicles (in the quarter to September), mostly to its own employees (as disclosed in the S-1/A filing with the SEC).

I’ll admit that I knew next to nothing about RIVN until I read Jamie Powell’s FT Alphaville column last Wednesday. The article presented the financial statements of an unnamed company and invited readers to try and value it based on the financials provided. Noting zero revenue and negative FCF of almost ~$2bn for FY20, I guessed the company in question might be RIVN and cross-checked my guess against RIVN’s S-1/A SEC filing which confirmed my guess was correct.

While I still have no real interest in RIVN as an investment proposition, the Alphaville article provided the opportunity for a useful thought exercise. In a way, RIVN was a kind of value situation, or more accurately a mis-valued situation, which might lead to some interesting tangents. So how does RIVN’s valuation compare against established peers and what does it imply?

As RIVN is a US manufacturer of electric pick-up trucks, and its focus is on selling into the US pick-up and SUV markets, I started this exercise by comparing RIVN against the other top (established) pick-up/SUV manufacturers in the US, namely Ford, General Motors, Toyota and Honda:

Source: Koyfin; Value Situations analysis. Valuations based on market closing prices on 15 November 2021. Note: Stellantis is rebranded name for the merged Fiat Chrysler-Peugeot business.

Despite it having no revenue track record, RIVN is deemed to be worth more than all the major US auto manufacturers, and even 2x+ Honda on a market cap basis. Of course, the market is a discounting mechanism, and values businesses (in theory at least) on future performance and cash-flow expectations. So what should we expect from RIVN based on the facts?

The form S-1/A provides some basic facts or data points that allows us to make some assumptions and project future revenue levels. Firstly, RIVN disclosed that the 12 units sold up to 30 September this year generated ~$1m in revenue, so we can assume a price/vehicle of approximately $85,000. Secondly, with regard to annual sales volumes, we can project sales volumes under three scenarios as follows:

• NTM (current run-rate) - RIVN has an order book of 55,400 vehicles which it expects to deliver by the end of FY23, which equates to an annualised run-rate of ~25,600 units between now and 31 December 2023.

• Stabilised production (current fully ramped capacity) - the S-1/A filing states that the current installed capacity is for 150,000 vehicles per annum.

• Future (expanded capacity) - outside the S-1/A, it has been reported that the strategy is to eventually expand capacity to 300,000 vehicles per annum.

A possible range of future sales scenarios therefore may be as follows:

Source: Value Situations analysis.

This high level analysis implies the market is valuing RIVN at ~62x NTM sales and ~10.5x stabilised sales at current installed capacity. (I’m ignoring future profitability in this valuation exercise and instead relying on EV/S as my valuation methodology here given the very limited visibility on manufacturing costs and therefore to profitability, as well as RIVN’s unproven track record).

There’s nothing that surprising in the above, in that it would appear to confirm that RIVN is wildly overvalued with the market price reflecting hope rather than fundamentals.

It’s always useful to apply the Munger “Invert, always invert” lens to situations like this to reverse engineer what the market might by discounting into RIVN in terms of its future, fully stabilised and capacity and sales generation. If we divide a 1.3x EV/S multiple (derived from Ford and GM’s current multiples as the leading US pick-up manufacturers) into RIVN’s current EV, this implies that the market expects it to sell over 1.2m pick-ups and SUVs annually at some point in the future (assuming the $85,000 price holds). To put that into perspective, the Ford F-series has been the best-selling truck in the United States for the past 43 years and is the best selling vehicle overall in America, and sold 986,097 of these in 2019 pre-COVID. So the market believes RIVN will out-sell Ford on its strongest product in the future.

However this seems fairly unlikely in my opinion, given Ford’s brand, and the level of competition RIVN is facing, with all major manufacturers developing their own electric vehicles, and most notably with market leader Ford developing its own electric F-series truck.

So RIVN’s valuation is clearly not based on fundamentals. But what might it be worth based on fundamentals? I’ll attempt a very crude valuation analysis here to round out this exercise.

Given the lack of revenues, profits and cash-flows I believe RIVN can only be valued based on its balance sheet today with some assumptions for NTM sales and cash costs based on current capacity.

Taking the pre-IPO balance sheet first, RIVN has an equity value of roughly $6.5bn but this is mainly backed by cash of $3.7bn and PPE of $2.4bn:

Source: SEC S-1/A Registration filing

I’ll assume a simplified pre-IPO equity value of Cash + PPE - total liabilities = $5bn.

Next I factor in the IPO cash, which is to be used for working capital, investment and general corporate purposes.

RIVN raised $11.9bn which I assume nets to $11.8bn net of underwriter and other IPO expenses based on an implied ~1.3% fee cost as per the S-1/A filing.

Combining these numbers implies RIVN has a post-IPO equity value of $5bn + $11.8bn = $16.8bn, before any future sales and cost assumptions.

Finally, I need to factor in near-term production, sales and cash-burn and adjust my equity value accordingly. Given the lack of track record and limited visibility to future profitability, I’m only going to assume a NTM period for sales and costs, in which I assume RIVN will sell 25,600 units at $85,000 per vehicle (as above), generating ~$2.2bn in sales, offset by ~$3.4bn in negative FCF, based on annualising the H1 FY21 performance of -$850m in OCF plus $870m of capex.

The net result of this is an implied equity value of $14.3bn (vs. current market cap of ~$113bn), or $16.55/share, implying -90% downside to the current share price for RIVN:

Source: Value Situations analysis.

To reiterate, the above is a crude analysis intended simply to gauge just how far the disconnect is between price and fundamental value based on facts today. This leads me to conclude that RIVN is valued as it is for two reasons:

• Investors see it as the next Tesla-style 10-bagger, and don’t want to miss out.

• RIVN offers a way for public market investors to make a “in on the ground floor” VC-type investment at pre-revenue stage, a situation normally not available to the general public and limited to qualifying investors such as PE/VC/hedge funds.

Investors perhaps are also finding additional mental support for RIVN’s hope value in two further respects:

• The EV transition a secular growth story that is real and underway, and therefore the growth potential is enormous.

• If investors such as Amazon, Blackstone et al are in it, then it must be a smart investment.

To conclude, amid all the hype around the RIVN story, the most interesting aspect of this exercise to me was noting the substantial valuation gap between Stellantis (STLA), the merged Fiat-Chrysler /Peugeot business vs. its peers. As shown in the valuation comparison table up above, SLTA trades at just 0.3x LTM sales vs. 1.3x for Ford and GM, which ostensibly reflects two factors:

• A perception around its electric vehicle strategy is weak relative to peers

• Concerns around the successful integration of the two companies following the merger.

While these concerns are not to be dismissed, SLTA recently presented a very comprehensive EV/Electrification Strategy to investors at an Investor Day in July which suggests that the market’s judgement may be overly pessimistic. Furthermore, the previous merger of Fiat and Chrysler has become a case study itself in the successful integration of two very different businesses, which again suggests the market’s concern is perhaps excessive. It’s also worth noting that STLA also recently reported “blow-out” results and for the first half of this year and a strong outlook ahead.

All of this leads me to think that if one is interested in auto manufacturers and the EV transition, at a valuation of ~3x LTM EBITDA vs. ~13x for Ford and ~7x for GM (Koyfin data), STLA looks a lot more interesting on a risk-adjusted basis at this point than RIVN.

Next, moving on to two other news items of interest that make for interesting quick ideas. I’ve written before about how transformative mergers can lead to interesting opportunities, and I think two deals announced last week could point to interesting value situations.

McAfee Going Private; KAPE looks interesting

Firstly, cybersecurity software business McAfee Corporation (MCFE) announced last week that it was being acquired by a private equity consortium led by Advent International, Permira Advisers and others for $26/share, implying a total deal value of $14.7bn at a valuation of ~17.8x LTM EBITDA. The bid price represents a ~22% premium to McAfee’s share price before recent media reports about a possible buy-out.

McAfee is a consumer-focused cybersecurity company best known for its PC anti-virus software and its colourful, now deceased founder John McAfee. The company has an interesting recent ownership history, having been acquired by Intel in 2010 before Intel sold a 51% interest to PE firm TPG Capital in 2016 that valued the business at ~17.5x EBITDA at that time.

While investor focus has largely been on cloud-based, enterprise-security companies such as CrowdStrike, Zscaler and Palo Alto Networks given their higher expected growth and customer retention rates, the consumer segment of the market has continued to see investor interest recently, with the most notable transaction being Norton LifeLok’s (NLOK) deal to acquire UK-listed Avast Plc for ~$8.6bn / 16x. (NLOK was formerly known as Symantec, a long-time peer of MCFE).

The MCFE deal offers an interesting read-across for UK AIM-listed KAPE Technologies (KAPE), a name I’ve mentioned before as it has sat on my idea bench for some time. KAPE itself recently announced its own transformative deal to acquire privately held US peer ExpressVPN for $938m / ~12.5x LTM EBITDA, which will effectively double the company’s size in terms of software subscribers to ~6 million users, treble revenues from FY21 forecast revenues of ~$200m to $600m+, and more than double EBITDA from ~$80m to ~$170m. The deal is being funded by a combination of upfront cash funded via a new share placing (completed successfully), new ordinary shares to be issued to ExpressVPN shareholders, and deferred cash consideration payable in 12 and 24 months installments.

While there have been concerns around KAPE’s ownership/governance and accounting (which I won’t get into here for the sake of brevity), the deal transforms KAPE from a UK-listed small-cap to a much larger US and UK-focused business. KAPE is currently valued at ~19x FY21 forecast EBITDA, but this doesn’t reflect its future earnings power following the ExpressVPN merger.

If the combined KAPE/ExpressVPN business continues to grow at a similar rate as it has over the previous 3 years, I estimate on a back-of-the-envelope basis that the company will generate EBITDA of ~$250m by FY24 (vs. $150m combined in FY20). Applying the McAfee multiple of 17.8x (and noting McAfee is a much slower growth business) to KAPE’s PF EBITDA, and adjusting for share dilution and net debt post the acquisition, I could see KAPE shares re-rating to ~£9+ per share, or +100% upside vs the current share price by FY24, implying a ~30% IRR / 2x MOIC over ~3 years. Possibly catalysts here include a new US-listing (supported by 40%+ of ExpressVPN’s users being in the US) and/or index bump-up given its greater scale and growing market cap post the acquisition.

Furthermore, KAPE is conceivably a takeover target in time, which would fit with controlling shareholder Teddy Sagi’s modus operandi, as he will surely seek an exit at some point after pursuing an impressive turnaround and buy-and-build strategy with KAPE to date. Furthermore, the Avast and MCFE deals clearly demonstrate there is continued appetite for growing consumer cybersecurity assets.

This is admittedly a quick-and-dirty analysis but indicative of a potential value situation in my view. KAPE is a name I may return again to in due course.

Viasat/Inmarsat Merger

Another transformative merger deal that caught my attention last week was the news that US-listed satellite business Viasat (VSAT) is acquiring UK peer Inmarsat for $7.3bn, or 10x Inmarsat’s current year EBITDA pre-synergies. Inmarsat is being sold by a private equity consortium led by Warburg Pincus and Apax Partners, who acquired it in 2019 for $6.1bn / ~8x EBITDA at the time.

VSAT’s acquisition of Inmarsat creates the largest player in the satellite industry with an estimated combined ~21% market share and a fleet of 19 satellites that provide mission critical satellite services to governments, the aviation and maritime industries, the energy sector and fixed broadboand markets among other end-users.

The satellite industry remains fragmented but is expected to consolidate as the traditional players such as VSAT, Inmarsat, EchoStar and others who operate large, high orbit geostationary satellite networks face increasing competition from newer competitors such as Elon Musk’s Starlink and Amazon’s Project Kuiper which offer lower-cost, lower orbit satellite services.

I have not done the detailed work on the situation, but at a high level I (crudely) estimate that VSAT could be worth ~$130/share in three years time, assuming it holds it’s current 11x multiple and is able to continue to grow EBITDA at a 12% CAGR (below management’s mid-teens projected merger growth rate) to ~$2bn. After adjusting for net debt and share dilution arising under the transaction terms, this breaks back to an equity value of ~$16bn or $129/share vs. VSAT’s current share price of ~$55/share as at the time or writing, for upside of ~130%+. Of course, given industry dynamics, with new, lower-orbit competition as well as improvements in terrestrial telecoms networks impacting demand for the traditional players’ services, a rigourous downside risk assessment is required here.

As I’ve written about before, consolidation and structural change within an industry can offer some interesting investment opportunities and the VSAT/Inmarsat merger could well be one such opportunity. As such I believe it merits a spot on on my idea bench.

Avon Protection declines 50%+

Finally, military and protective equipment supplier Avon Protection Plc (AVON) is another name from my idea bench that was in the news last week. AVON’s stock plunged ~51% last Friday following an announcement that body armour plates ordered by the US military had failed customer approval tests, as well as there being further delays in obtaining approvals for a separate range of body armor plates (again with the US military). The result of these issues is revenues and earnings for AVON’s Body Armor business in “FY22 and beyond will be significantly reduced,” and management have now commenced a strategic review of the entire Body Armour business.

So the likelihood here is that the unit is impaired and earnings power going forward is significantly lower than previously expected. While this is clearly bad news and raises questions of management, I do wonder if the market has overreacted with the price decline (and I note AVON stock rallied ~20% Monday). After all, the Body Armour segment accounts for ~12% - 15% of revenues and if we assume a total mothball of the unit and its ~$40m in FY22 forecast revenues, I guesstimate this wipes ~$6m or so off LTM EBITDA, but still leaves core earnings power of $55m from AVON’s leading respiratory protection and helmet and armour business.

I need to do some further work on this to firm up my numbers, but at a high level AVON is trading at ~9x LTM EBITDA, net of the earnings shortfall in the Body Armour unit. This compares to AVON’s historic multiple range of ~11x -16x, and to peers current multiples of 14x and ~21x for US-listed Gentex Corporation and 21x for MSA Safety Incorporated (per Koyfin data). This also factors in zero future growth in the core business. More clarity is needed on what exactly went wrong here and how the core business remains unimpaired, but assuming this is the case AVON looks a lot more interesting at the current price, being still down ~40% from where it was before the bad news was announced.

That concludes this round of news items and possible idea leads. Hopefully this has been of interest to readers, and please get in touch if you've any thoughts on the themes or names mentioned above.