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ValueTrack | Initiation of coverage | 28 February 2017 ENERGICA M.C. Sector: Electric Motorcycles VALUETRACK Analyst Marco Greco Tel: +39 02 80886654 [email protected] Ready to scale up Skype: marco.m.greco Fair Value (€) €4.1-€4.6 High performing electric motorcycles manufacturer Market Price (€) €3.01 Founded back in 2014, Energica Motor Company has a clear Market Cap. (€m) 35.1 mission in mind: to create high performance - high powered electric motorcycles with top quality components. KEY FINANCIALS (€m) 2016E 2017E 2018E REVENUES 2.5 11.4 25.3 Waiting for Spring EBITDA -2.5 -2.1 -0.6 EBIT -4.1 -4.3 -3.3 Despite its young age, Energica has already gone a long way. Almost all the R&D effort, models development, output capacity rollout and vendor NET PROFIT -3.9 -4.1 -3.3 financing strategy has been finalised while network distribution set up is on EQUITY (*) 4.7 3.6 0.3 going and marketing activity is mounting. Everything is ready for sales to NET FIN. POS. (*) -2.4 -2.9 -5.2 scale up in the next to come Spring season. EPS ADJ. (€) -0.33 -0.35 -0.28 DPS (€) 00.0 00.0 00.0 High performance motorcycles Source: Value Track (2016E-18E estimates) (*) Assuming a €3mn equity injection in 2017FY Energica’s motorcycles, EGO and EVA, share outstanding features: they use lithium polymer batteries that support Fast Charge (from 0 to 80% in 30 RATIOS & MULTIPLES 2016E 2017E 2018E min), are the first electric motorcycles with enabled ABS technology and can reach a maximum speed of respectively 240 and 200 km/h. Moreover, the REVENUES GROWTH (%) 341% 363% 122% innovative Vehicle Control Unit manages and monitors all relevant EBITDA MARGIN (%) nm nm nm components, continuously adjusting the power delivered by the electric NET DEBT / EBITDA (x) nm nm nm engine while riding. NET DEBT / EQUITY (x)(*) 0.5 0.8 nm EV/SALES (x) 15.2 3.3 1.6 Trendy, high-growing market EV/EBITDA (x) nm nm nm The e-PTW reference market is very promising, with growth rates expected P/E ADJ. (x) nm nm nm to be fostered by technological improvements, anti-pollution regulations, P/BV (x) 7.4 9.7 nm fiscal incentives, enabling infrastructure expansion and changing lifestyles. Source: Value Track (2016E-18E estimates) Within this scenario, we believe that Energica has a first mover advantage (*) Assuming a €3mn equity injection in 2017FY since big players are still at a prototyping phase. STOCK DATA Financials: “Out of the red” by 2019-2020 FAIR VALUE (€) 4.1-4.6 We estimate Energica to achieve break-even at the Net Profit level with MARKET PRICE (€) 3.01 2,000 units sold per annum and this should take place by 2019 or 2020. SHS. OUT. (m) 11.7 Obviously the longer the loss-making period, the higher the amount to be MARKET CAP. (€m) 35.1 funded with additional resources. FREE FLOAT (%) 13.1% AVG. -20D VOL. ('000) 15,620 Base case valuation at €4.1-€4.6 but time is crucial RIC / BBG EMC.MI / EMC IM Energica’s valuation is subject to a number of question marks regarding the 52 WK RANGE 1.91-3.82 time (and the start-up losses) needed before reaching “maturity”. That said, Source: Stock Market Data our valuation analysis points at a €4.1-€4.6 base case fair value but we note that every year of delay in reaching “maturity” negatively affects this figure. ValueTrack | www.value-track.com | NOT FOR DISTRIBUTION IN OR INTO THE UNITED STATES, CANADA, JAPAN OR AUSTRALIA ENERGICA | Initiation of Coverage | 28 February 2017 | Marco Greco VALUETRACK Executive Summary Born to shine, born to grow Energica Motor Company is a very young company - it was officially founded back in 2014 near Modena, in the centre of the Italian motor valley - with a clear mission in mind i.e. to create high performance / high-powered electric motorcycles with top quality components. Energica Motor Company was born as a spin-off of CRP, a Group with an experience of more than 45 years in the world of Formula One alongside the major international teams and specialised in high tech machining and 3D printing. CRP group had started years before to accumulate knowledge and expertise on electric motorcycles. Their first competitive superbike eCRP, arguably the ancestor of today’s Energica models, won the 2010 TTXGP European championship. In 2016 the company was admitted to AIM Italia stock market and started the large-scale production of high-end electric models EGO and, later on, EVA. Ahead there is the introduction of further models maybe derived from EsseEsse 9, a concept now at development stage. A promising market The e-PTW reference market is unanimously viewed as very promising, with great foreseen growth rates driven by a variety of supporting factors such as: ! Technological improvements; ! Anti-pollution regulations; ! Fiscal incentives; ! Charging infrastructure expansion; ! Changing lifestyles and curiosity for a different riding experience. Energica is a first mover, but big players are sounding the field It has to be specified that e-PTW market is not homogenous, with a mass-market segment on the one side of the range and a high-value segment on the other one, with interesting premium pricing and performances. Energica naturally belongs to this second segment, called High-Powered Electric Motorcycles (HPEM). In the HPEM arena, Energica has for sure a first mover advantage. Indeed, such segment is for the time being not so crowded, as we have found only some small (artisanal) companies already active from a commercial point of view, while big (and potentially dangerous) players are still at a prototyping phase. Go to market strategy. Everything else done, now it is time to engage prospect clients Despite its young age, Energica has already gone a long way. Almost all the R&D effort, models development, output capacity rollout and vendor financing strategy has been finalised while network distribution set up is on going and marketing activity is mounting. Completing the business network should also allow for a greater economic performance, particularly in markets such as California, where potential customers are way more responsive to technological innovation in the motorcycles industry. Indeed, HPE motorcycles are strongly affected by both customers misleading perceptions on electric engines and by comparison with traditional vehicles. Until now, Energica has focused its resources on reaching outstanding performances of its vehicles and addressing the main issues of electric motorcycles, like battery autonomy and recharging time. At NOT FOR DISTRIBUTION IN OR INTO THE UNITED STATES, CANADA, JAPAN OR AUSTRALIA 2 ENERGICA | Initiation of Coverage | 28 February 2017 | Marco Greco VALUETRACK present, it is seeking to take advantage of the opportunities available in the market with new innovations. Alongside customer acquisition strategies, the company has started to carry out some customer- fidelization initiatives (Value Promotion Plan), focusing on improving the riding experience (Fast Charge Infrastructure Program) and making attractive price promotions for recurring customers (Used Market Warrantee + Agos commercial partnership). Financials: “out of the red” by 2019-2020 We believe Energica has potential to become a “growth company” over the next foreseeable future, thus completing its ramp-up phase and starting making money. We expect cash generation to be negative until break-even sales volumes are reached, which we believe to happen in 2019-2020. Our base-case estimates foresee Energica reaching EBITDA breakeven, selling ca. 1,300 bundles (motorcycle plus spare parts), between 2018 and 2019. In the same period, OpFCF should turn positive, ending eventually the cash absorption phase of the lifecycle. Given this turning point, we see the company ending 2019 with € 60.8mn revenues that imply more than EBIT breakeven and positive cash flows. We underline that the company is aware of its funding needs. Indeed Energica is actively raising additional sources of funds, such as: ! Shareholders’ loan; ! New credit lines; ! Recently issued bonds and warrants (see the recent deal with Atlas Capital Market). In this regard, the shareholders’ loan may be seen as a positive signal of confidence. We also note that in our financial model we are including a ca. €3mn capital injection aimed at ensuring a balanced Debt to Equity ratio. The main risk we see is a possible delay in market demand growth that would lengthen Energica’s loss-making period. This would potentially lead to a greater funding gap to be covered with additional resources. !!!! Many thanks to Matteo Abate, Adalberto Natoli and Gabriele Ramaioli for their support in writing this equity research report. NOT FOR DISTRIBUTION IN OR INTO THE UNITED STATES, CANADA, JAPAN OR AUSTRALIA 3 ENERGICA | Initiation of Coverage | 28 February 2017 | Marco Greco VALUETRACK Valuation As a matter of fact, Energica for the time being can be considered an early stage / expansion company whose valuation is obviously subject to a number of question marks regarding the time (and the start- up losses) needed before reaching “maturity”. In these cases we believe it’s appropriate to run multiple valuation methodologies in order to have a robust cross check. In particular, we apply two main methodologies: ! Discounted Cash Flow model returning a €4.1 fair value per share in our base case. ! Valuation at maturity i.e. the so-called Venture Capital method driving a ca. €4.6 fair value per share which is heavily dependent on the time needed to get to maturity. Discounted Cash Flow Model Applying a DCF model to a young company such Energica can be a tricky exercise due to the number of possible pitfalls to be taken into consideration, the main one regarding a proper WACC calculation.