What determines the value of an EV manufacturer?

In today’s Exponential Investor:

  • How to 10x your money without lifting a finger
  • A secret opportunity for global auto makers 
  • Could EV Arbitrage be the trade of the century? 

I’ve had an idea. It goes something like this.

You’re a big investor with a pile of cash on the sidelines.

You’ve seen Tesla going parabolic, and you want a piece of the action.

You think about doing it yourself, starting from zero, buying engineers, manufacturers, robots, designers, marketers, and accountants (actually nah, don’t bother with them).

But you think this through, and to be honest, you’d rather not work for a living. Why bother?

When you could make much more money, much quicker, and without nearly as much hassle.

I call it “EV Arbitrage”, and here’s how to do it.

A public EV maker is worth 7x what a private one is (just look at Nikola Motor).

And a pure-play EV maker is worth roughly 10,000x what a diversified auto manufacturer is.

So you go to Peugeot, Toyota or BMW and you say, “Look here, Bonjour, Guten Morgen, Ohayo Gozaimasu – I’d like to buy the lot.”

The lot? They ask…

And we’re in Europe here, so they understand that you mean the whole thing, not just the car park.

Anyway, let’s take Peugeot as an example, or PSA Group as it actually is (made up of the Peugeot, Citroën, Opel, Vauxhall and DS brands).  

The whole company is worth €13.3 billion, and it trades on a price-to-earnings ratio of 4.5x.

Ignore the fact that it’s grown revenues by 37% to €74 billion in the last three years and almost doubled net income in the same period (€1.7 billion to €3.2 billion), on a healthy margin improvement from 3.1% to 4.3%.

That’s during a very difficult period for the auto market as unit sales have declined worldwide.

PSA Group is actually already a big player in the EV market, and is set to grow even bigger.

The electric vehicle division will have released 23 separate models across its brands by 2025.

Fifteen of those will come in 2021 and 2022 alone.

This is part of a much wider trend among major auto makers, where we are on the cusp of the major arrival of EVs. We are looking at a doubling of available models in just the next five years.

Source: Transport & Environment EV Report

And more broadly, EVs still made up only 2.6% of global auto sales last year (2019), though this was up from 0.6% in 2015.

It’s worth realising that you can phrase that change differently. It’s probably better to say “EVs’ share of total global auto sales has grown 330% in just five years”. Same data, presented differently.

Despite having 16.8% market share of the European car market, the EV department at Renault is still pretty insignificant.

It doesn’t even have its own data set of sales and margins, so I can’t even put a figure on the value of its EV company.  

But the global electric vehicle market is going to grow ten-fold between 2017 and 2025, according to Renault’s forecasts. That’s why as a group it’s committed to every model being offered in hybrid or electrified format by that point.

That’s why Tesla is getting everyone so excited. The future is near.

And Tesla’s price performance has shown us that investors are absolutely desperate for pure-play green stocks.

An EV maker is worth a lot more outside of a global conglomerate than inside it.

So if we estimate that the global average of 2.6% of auto sales being electric applies to Renault, then we can have a bit of fun.

Actually, let’s make it 5%.

And let’s say that because investors are keen on EVs it makes up 10% of the company’s valuation – so €1.3 billion.

Now, you as a wealthy private investor would like to carve out the EV part of Peugeot. Ignoring the fact that it’s a group with multiple brands offering multiple engine types of the same models so it’s quite hard to ringfence a specific EV segment of the company, you offer them a 4x premium to their electric vehicle business, and they accept.

You are now the proud owner of a private EV maker with huge promise over the coming years.

But, now that it’s a standalone company rather than part of the company, it immediately gains a huge premium.

If EVs make up 5% of Peugeot’s sales (3.5 million units in total in 2019) then it sold 175,000 EVs last year. Tesla sold roughly 365,000 in the same year.

But you paid €1.4 billion for your EV maker as part of Peugeot, while the public market has decreed that standalone EV makers should demand a much higher multiple.

Tesla’s market cap-to-sales is $280 billion, divided by 365,000.

So each vehicle sold is worth $76,700 in market cap.

While each vehicle your new company sold has only delivered €8,000 of market cap per vehicle sold (1.4billion  divided by 175,000 sales).

You’re not Elon Musk, you didn’t invent PayPal, and to be honest, your cars aren’t nearly as cool, fast or popular.

But a doubling in market cap per sales is reasonable – to €16,000 per vehicle sold.

That means your total valuation doubles too, to €2.8 billion.

You’ve doubled your money but that’s not enough, we want 10x our money without lifting a finger remember.

The thing is, your company is still only subject to private valuations.

And you’re not that keen on a full IPO, roadshow, marketing, book-building, legal fees and the rest. Luckily, there’s an option which will get you a higher valuation for less effort. How good!

It’s called a reverse merger, and you do it by merging with a SPAC – a special purpose acquisition company. These are fully funded blank cheque companies that are already listed on the stock exchange – preferably in the US.

Nikola Motor, recently valued at $3.7 billion in the private market, grew seven-fold in a matter of months during its reverse-merger listing process. No IPO, no problem!

It’s worth a mention here that our very own James Allen recommended the stock as VTIQ back at $11.50, and sold in two parts for an average price of $76.50 – which was a huge contributor to the incredible returns I wrote to you about earlier this week.

Anyway, 7x in three months sounds pretty good to you, and this is what you do. SPACs are everywhere, and they’re keen to meet and talk after the success of Nikola, among other recent examples.

Six months down the line, you’re up. The time has come. The shares of the SPAC have doubled before the merger has even gone through, as investors anticipate the inevitable positive result in the merger vote.

So the valuation of Renault’s old EV division company will have grown from €1.4 billion to €5.6 billion before it’s even listed.

It lists the following week, you ring the bell on the NYSE and your work here is done. The shares triple in the first month of trading.

Your EV Arbitrage is complete. Forbes writes it up as the trade of the century.

You buy yourself a jet-fuelled private jet, houses the world over, and cut down a large swathe of the Black Forest in Germany to build yourself a nice big house with a decent acreage – and crucially, a place where you can tweet in peace, building up to your 2028 presidential run.

How to 10x your money without lifting a finger, by Kit Winder.

The Birth of the Big Green

Well I’ve laboured enough there so I think you get it, but just to be totally clear…

Investors are desperately keen for energy transition stocks, which is why stories like Tesla and Nikola have attracted so much attention, and so much capital.

But investors are completely ignoring the coming wave of competition.

And they’re treating pure-play stocks as if they’re ten times as valuable, if not more, than the same divisions which are couched as part of a wider conglomerate.

VW, BMW, Toyota and Renault are set to lead the way in the coming years, but all car makers are following suit.

It’s important not to jump into these popular stories too late. If you can’t get in early like James and his subscribers, it’s better to look beyond the companies that are making headlines in national papers. 

All jokes aside I like quite like Peugeot, but if you want pure plays, there are heaps of those too. And that’s where James and I come in. We’re looking beyond the big names to find the best, small energy transition stocks that you haven’t heard of… yet.

And next week, we’re putting on a show.

I spent the last month interviewing a range of incredible guests for an online clean energy investing summit. It’s completely free and online so you can watch it from the comfort of your home.

And it goes live tomorrow.

For a diverse range of interviews outlining where the transitions (there are more than one) are heading from here, then…

Sign up here.

You’ll get a bunch of free reports from James himself, and keep a special eye out for his keynote address halfway through the week.

The €1.4 billion needed for the EV Arbitrage trade may be out of your reach, but this is free for all, and a great place to start.

Click this link to put your name down for the summit.

Best wishes and see you there,

Kit Winder
Editor, Southbank Investment Research

Category: Energy

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