Westport Fuel Systems: Q4-2020 Review And Main Takeaways
Seeking Alpha Analyst Since 2017
- The company reported very positive results in Q4, thanks to the exceptional growth of the LNG truck sector in Europe.
- There is still room to grow in Europe and the Chinese launch seems very close.
- Management pre-announced a potential HPDI 2.0 launch in the US and applications in other Heavy Duty transport segment, which are not factored in by the market.
- This incoming growth needs to be financed, thus investors should look at the capital needs as a bullish signal for the stock.
I am happy to start this new article considering that actual Q4 results matched the estimates I made in February 2021. You can find the previous article at this link.
Please note that I have been covering the company for two years and readers can obtain further information about Westport on my October 2020's blog report and about the general market of NGV here on this other blog-article.
The company was able to beat both top and bottom-line estimates, thanks to the good performance of its HPDI 2.0 line in Europe with Volvo and to the increase in investment income of the US JV with Cummins ($CMI). Surprisingly, the Indian JV started to be profitable in Q4, with around $0.5 million of Net Income reported.
Results were pretty amazing for a company in the alternative fuel engine segment, but many long-term shareholders felt a bit disappointed by the earning call, and critics to the natural gas mobility sector rushed to take their revenge.
I will not dedicate time to the state of the arts of the LNG truck market in Europe or China, but I will focus on the main takeaways of the last earning call and the two press releases that came thereafter.
Shelf prospectus & manufacturing line expansion in Italy and China
Capital raise track record
One suggestion to my readers is to always double check on everything they read, that is why in my reports I try to post the direct links of my sources. This is even more important when you read authors and fellow users describing a shelf prospectus like a certain, incoming and quick dilution for existing shareholders. Be aware that these people might be misguiding you.
The SEC Form F-10 is a filing for a securities offering, while a SEC Form F-10/A is an amendment to the F-10. The form itself does not represent an actual offering, but just a potential raise of capital through new equity or debt securities. As long as an investment bank is not hired to proceed with the capital raise, the offering is not happening. You can read in the prospectus:
- This short form base shelf prospectus (the "Prospectus") relates to the offering for sale from time to time, during the 25-month period that this Prospectus, including any amendments, remains valid, of up to U.S.$ *specified amount* aggregate initial offering price of our common shares ("Common Shares"), preferred shares ("Preferred Shares"), subscription receipts ("Subscription Receipts"), warrants to purchase Common Shares ("Warrants"), senior or subordinated debt securities ("Debt Securities"), rights exercisable to acquire, or convertible into, Common Shares and/or other securities ("Rights"), and/or units comprised of one or more of the other securities described in this Prospectus in any combination, ("Units" and, together with the Common Shares, Preferred Shares, Subscription Receipts, Debt Securities, Warrants and Rights, the "Securities").
- “No underwriter has been involved in the preparation of, or has performed a review of, the contents of this Prospectus.”
In October 2020, Westport submitted a SEC Form F-10/A for a Shelf prospectus of $250 million, which you can find at this link. This amendment refers to a previous SEC Form F-10 submitted on the 26th of November 2018, for an amount of $250 million and valid for a period of 25 months. Here you can find the original prospectus. Therefore, the validity of the November 2018 prospectus expired someday in January 2021.
When was this shelf offering used? On the 9th of November 2020, Westport released a PR stating an exact amount, a type of security (common shares), a procedure for the sale of these securities (ATM offering), and specifics investment banks that will take care of the offering:
VANCOUVER, British Columbia, Nov. 09, 2020 (GLOBE NEWSWIRE) -- Westport Fuel Systems Inc. ("Westport" or "the Company") announced today that the Company has established an at-the-market equity offering program (the "ATM Program") that allows the Company to issue up to US$50 million (or the equivalent in Canadian dollars) of common shares ("Common Shares")[…] Sales of Common Shares through the ATM Program will be made pursuant to the terms of an Equity Distribution Agreement dated November 9, 2020 entered into among the Company, RBC Dominion Securities Inc., RBC Capital Markets, LLC, Oppenheimer & Co. Inc. and H.C. Wainwright & Co., LLC (the "Agents").
Therefore, the company happened to use just $27.6 million of the $50 million ATM offering. But it is worth to remember that the entire amount of the shelf offering was equal to $250 million, thus the company raised just 10% of the shelf prospectus amount.
On the 4th of March 2021, the company submitted a new shelf offering, as the previous one was terminated with the closing of the ATM offering and the expiration of the previous prospectus. This one is equal to $400 million and will finance the incoming expansion of the manufacturing line in Italy and China.
European venture considerations
As of today, the HPDI 2.0 kits are manufactured in Italy and sold to VOLVO, the European partner, and to Weichai, the Chinese partner, for the trial units for the Chinese market. As I said in my previous article, LNG trucks in Europe have a 3-4% market share, which is still a third of the market share they have in China.
EU LNG heavy-duty transport is expected to reach 280’000 units by 2030, that is an astonishing amount if compared with the 12’000 trucks currently on the road today. In January 2021, Europe had 350 LNG fueling stations and 3920 CNG fueling stations.Source: NGVA Europe
This means that if VOLVO-Westport keep a 25% market share, they should be able to sell around 7000 units per year. To give a rough reference, according to my estimates, VOLVO sold around 2100 units in 2020 and accounted for at least $55 million revenues for Westport (source: Q4 report). Therefore, Westport should be able to double revenues coming from Volvo in the near term and triple the amount in the medium term.
This growth trend will likely increase the pressure over the Italian factory, and management preannounced an expansion of the manufacturing lines.
Chinese Venture considerations
During the earning call I was not surprised that management was avoiding any reference to the Chinese market, which was indeed the elephant in the room. That is because the China vs Canada political feud is not yet solved. It is curious to note that we got not one but two updates on the Weichai deal exactly around the dates of the US-China government meeting in Alaska.
Weichai agreed on March 17th 2021 to modify the terms for the supply of HPDI systems, increasing the quantity to 25’000 units from the previous 18’000 and extending the deadline until 2024. Assuming that the start will be contained this year, we should assume at least 7500 units per year in the next three years. As I said in my previous reports, Weichai’s deal is different from the Volvo one because Westport will deploy components and not the entire kit.
On March 18th 2021, another PR came out, with Westport announcing the partnership with a Chinese manufacturer for the production of its HPDI injectors to satisfy demand coming from China and elsewhere around the world.
We received more details in 2021 about this new product line. As of today, HPDI-H2 is using the same hardware of the LNG version, but it is likely that some minor components need to be changed to better suit the specific characteristics of the hydrogen gas. The white paper released in February will be followed by more details in the Wien Symposium at the end of April.
Investors should remind themselves that Scania is already offering a spark ignition LNG truck in the European market, thus it is quite remarkable that it is looking to partner with a supplier that serves one of its main competitors.
The two Weichai updates and the earning beat were not welcome by the market as someone would have expected. Price action after the earning release was disappointing to say the least, and the reason could be multiple:
- “Show me the money” attitude: Chinese drama in September 2020 considerably affected long term investors, and it is likely that the upside for the share price will come when the management will be able to say that they are indeed selling large amounts of units to their partner. Any announcement will not move the needle considerably.
- Shelf offering misunderstanding: some retailers, and some malicious but experienced users, mixed the concept of survival dilution, which comes when the company has not any other option to stay alive, and growth dilution, which is actually healthy and should be welcome by the shareholders. As I pointed out in this article, there is not any sign that the dilution will be all in new equity and equal to the $400 million amount. The Chinese and European market are growing considerably, and if we pull into the equation a HPDI launch in the US and an expansion in other transport segments (shipping and rail operations), we should see a triple digit growth of HPDI in the next years.
- Market environment: small-cap growth companies experienced a huge correction from their ATH. Westport has been caught in the storm, but any existing and potential investor should remember that this company has very few things in common with the so called dream stocks of the alternative fuel sector, as it is traded at a cheaper valuation, but is showing tremendous growth and should be net income positive in 2021.
- Lack of coverage: for the ones who complained about the overperformance of the less appealing and US centered Clean Energy Fuel (CLNE), they should remember that the latter enjoyed the inclusion in many thematic and national ETFs (while Westport is only included in the Canadian Index) and the coverage of a major Investment Bank, Credit Suisse, with a price target of $17 per share. It is hard to imagine the success of Clean Energy Fuel in the US without the success of Westport, thus I expect more analysts to start the coverage of Westport in the months to come.
Analysts average Price Target increased from $11 to $14.7 and should be the price target to look at for the next months.
Market volatility may still affect the share price in the near term, but if vaccination pace worldwide accelerates and the Mr. Market starts to appreciate the meaningful differences between Westport and other expensive but loss-making and flat growth rate companies, the price performance should not disappoint.
Analyst's Disclosure: I am/we are long WPRT, CMI, CLNE.
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