I recently completed an industry review entitled "small EV companies" I collected data on EV companies with a market cap of less than $500 million (March 12th). The review considered twelve companies and looked for a diamond in the rough (or perhaps a Tesla in the bunker). It identified three companies as lead candidates for further research, and here I present the case for investing in one of them, GreenPower Motor Company (NASDAQ:GP).
For the reader's interest, here is a part of the review and may publish the full review at some time.
GreenPower, founded in 2010 and based in Canada, manufactures battery-electric trucks and buses. They launched their first product, a 40-ft electric bus, in 2014. Innovation and product development have continued since then. The range now includes the EV star range of electric trucks and vans, two electric buses, and the BEAST, a purpose-built battery-electric school bus for the North American market.
GreenPower has a US assembly facility in Potterville, CA, where it can produce 200 "buy America compliant" units a month. Its vehicles are CARB and FTA Altoona test certified, ensuring that its products can access all available government financial incentives.
GreenPower released its Q3 results. They showed $10.7 million of finished goods inventory and $17.9 million work in progress. They recorded a gross profit of $1.5 million on revenue of $5.3 million (up 120% year on year), giving them an operational 21% margin.
The $29 million of inventory comprises approximately 100 EV star trucks and vans plus 30 BEAST school busses, all of which are due for delivery in the near term. (they have a collaboration with Workhorse for 1,500 EV Star Cab and Chassis version)
Available liquidity was $4 million at the end of the quarter but they had only $0.2 million in cash. With Q3 expenses coming in at $3 million, they will have to monetize their inventory next quarter or raise additional liquidity. The current debt level is relatively low, $4.4 million but has ticked up recently with solid sales revenue, they should be able to borrow at a favorable rate should they choose to do so. Still, investors should consider a dilutive stock sale as likely.
They do need to develop a 12-month cash runway. GreenPower expects to receive $2 million cash in Q1 for products booked as revenue in Q3. (6 BEAST units to Thermalito) Implying the cash position is a little better than reported but not great.
In 2021 GreenPower announced an additional manufacturing site in West Virginia dedicated to producing the BEAST school bus. They have a proven history of bringing these facilities online quickly; the Porterville site went from zero to a finished product in 100 days. GreenPower has signed a good deal with the state of Virginia, they are getting 12 months rent-free, and future rent payments will go to the purchase of the building. $3.5 million of incentives has been made available for job creation, and they have a $15 million order for BEAST school buses for West Virginia schools. Buses are expected to start leaving the Virginia facility in fall 2022.
The BEAST (Battery Electric Automotive School Transport) has a significant competitive advantage and, in my view, will drive GreenPower revenue for many years and makes the company a potential multi-bagger. It is the only School bus available with a monocoque truss chassis, developed in Formula 1 motor racing, making it the safest School bus currently available. It is 40-ft long and 102 inches wide (that is unusually wide), can seat up to 90 people, and has a range of 150 miles. It has better storage than competitors and air suspension for a more comfortable journey.
The Virginia manufacturing facility has a maximum capacity of 1,000 buses a month, but that would mean running multiple shifts seven days a week. GreenPower is targeting 30 busses a month by the end of 2022, and with each bus carrying an end-user price tag in the region of $385,000, we can expect $11.5 million per month from the BEAST this year.
Near term, GreenPower is guiding to a doubling of BEAST sales quarter over quarter. They delivered two in Q2 and eight in Q3. In the conference call, Fraser Atkinson (CEO) said they expect to provide 10 to orders received, and they have at least six in the pending box, implying at least 16 in Q4. They expect the Virginia deliveries to begin in Q2 (September 2022) and complete all the deliveries by December.
The BEAST ticks the necessary boxes; its range of 150 miles is ample for most school runs, and its advanced safety features make it an excellent package. More than 50 potential customers are currently looking at the BEAST (source conference call Ryne Shetterly VP sales) and interest is growing as sales and deliveries confirm the range and reliability of the product. As long as authorities continue to subsidize this zero-carbon product, sales will likely increase.
EV Star orders are outpacing BEAST orders; at the end of 2021, they had more than 60 approved orders for EV stars (approval relates to California clean bus and truck incentive scheme). The EV Star is a flexible product; it comes in at least six versions (rather like the transit van from Ford); it can be a small bus, a cargo van, a box van, and many things in between. The Cab and chassis version allow others to integrate many different uses (this is the version going to Workhorse). Near-term GreenPower is guiding to 100 unit sales (all currently being built). The EV star Cargo is presently the only available EV with a high range and cargo capacity (150 miles and 546 cubic feet of payload). It is a new product with 20 vehicles being built to satisfy a growing backlog, and the CEO says they have sufficient orders to start building this number again as soon as the current 20 leave the factory.
GreenPower has seen its share price drop by 72% in the last 12 months; it has a current market cap of US$147 million. The balance sheet looks quite strong.
Revenue has been increasing, and it looks like it will continue to do so. GreenPower has some great products and excellent user engagement. Operating expenses are rising in line with revenue, leading to a more than 20% positive margin. GreenPower is guiding to a margin closer to 30% when they achieve scale.
The chart shows the elephant in the room; it is cash generation. Cash from operations and free cash flow is heading south at an alarming rate. Fortunately, the actual figures involved are not large. In Q3 (Dec 2021), GreenPower reported:
Gross profit $1.5 million; S&A costs -$3.8 million; R&D costs -$0.3 million; money costs -$0.2 million (interest and exchange rate).
Summing these gives a loss of $2.8 million in the quarter.
Cash outflow for the 12 months Jan to December 2021 was $29 million against earnings for the same period of -$10 million. The cash outflow has eaten up GreenPower's cash at hand, increasing inventory of $23 million over the period accounts for most of it.
Analysts raised this issue in the recent earnings call. Barry Sine of Spartan Capital Securities pressed the point. Firstly Barry asked if the impediment for getting finished inventory to clients was regulatory after a non-committal answer he followed up with this more pointed question.
"...why can't you deliver it almost immediately from the time it is finished?"
Brendan Riley (President) said that there were three issues.
GreenPower has a $4 million line of credit available to them to help with cash, but it is a pressing issue that they must address. It is hard to imagine that they will be able to speed up getting finished goods to customers enough to alleviate this problem. The cash outflow to inventory is likely to increase as they begin to scale production. $4 million probably won't be enough and relying on payments from customers seems a little dangerous.
Assuming GreenPower solves the cash issue without diluting shareholders and that they meet the outlined sales forecasts, then a DCF valuation looks like this. (it is in Canadian Dollars)
Wall Street analysts have an average price target of US$16.6 per share and current value is US$6.54 (source Seeking Alpha), Wall Street is forecasting annual earnings growth of 73% with revenue growth of 51%, making 2023 the first profitable year.
Great products, good execution, poor cash position.
GreenPower is a small EV player generating a positive gross profit from an excellent sales funnel. I have used the following quote in a couple of articles.
"if they have sales, then everything else can be fixed. If their making a profit, then it probably isn't broken" (3i group consultant in conversation)
The cash position can be fixed, GreenPower has sales and they generate gross profit. I am buying GreenPower targeting a 100% return in the next 1-2 years.
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Disclosure: I/we have a beneficial long position in the shares of GP either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.