SED-ition! PART 2

Inflection or infection? Can SED pull through its critical condition?

Photo by Thomas Kelley on Unsplash

SAIETTA PART 2

We have covered 6 of the 7 parts of the 7Ps of Saietta. So now for the crucial one….

SHOW ME THE MONEY!

Price

I’ve now going to speak of Cash and forecasts.

I’ve modelled the Indian VNA operation first. This is based on the “known” production.

I’ve put the timings as based on the recent update so October 2023 for row 1 and Jan 2024 row 2 and so on. You’ll notice I’m assuming the FY2026 production exceeds the minimums (by 2X) with Indian Partner #1. And 1X for Partner#2.

SED VNA Forecast Sales Volume and Value

This translates to the following P&L. I’ve based the revenue on the above volume and selling price. I arrived at those by calculating contract value by minimum quantity to get £1400 and £500 a unit. I assume a slightly lower COS (by 1% per year in FY25 and FY26) as SED VNA moves down the experience curve. The 4% royalty to SED is included in the SED VNA COS too (and then appears as revenue in SED.

Overheads is a bit trickier but I’ve estimated largely based on Sunderland (using a lower wages rate for India) and its expenses. Where there’s a negative net profit (i.e. FY2024) this feeds to SED’s P&L as VNA shares of losses. Under VNA overheads I assume profits are shared via dividends and so “share of gains” stay in VNA until paid out as a dividend.

So, for example, in FY2026 a £17m dividend is assumed, corresponding to a VNA share of profits of £8.33m for SED (its 49% share).

SED VNA Profit & Loss

SED Profit & Loss

I then model the different royalties along with percentages. I assume Conmet’s €20m royalty will be fully realised during FY2026. (£4m and £14m).

I have used a conservative 5% for Propel and assume only £4m and £8m although at £8000/unit so £400 revenue is 40k and 80k motors. The number of existing boats in Holland alone is 500,000. And environmental restrictions in Holland will force people along the electric route in the next year or so. 80k motors may be far too low an estimate.

I also assume further engineering work for SED as well as increasing sales to companies like Ayro. On overheads I assume some savings for FY2024 based on disposals but growing costs into FY25 and FY26.

Assuming a PE of 15-20 and using the forecast PE from FY2026, then this values SED at £400m-£500m or 20X - 25X its current market price.

Yeah, yeah, yeah, but what about the cashflow?

The period up to March 2024 is a crunch time. If my estimates are accurate, and as can be seen there’s a net profit of -£11.2m in the current year, followed by a “tight” year to FY2025 where cash is positive but only just.

As can be seen the minimum cash shortfall is £7m (I’m assuming steady state working capital as it’s proactively managed), because I’m working on the basis that £11.2m net loss for FY2024 is also the cash burn figure. Also, I’m assuming SED’s assumption of “£10m to a build a factory” applies to SED VNA so 49% of £10m I’ve assumed at £5m capital to VNA.

But I anticipate a likely cash requirement to be £10m-£15m to cover eventualities.

Assuming a £10m raise at 16p per share that will equate to a 38% dilution. £15m is a 50% dilution. SED has support from a large number of IIs so the problem may actually be whether PIs even get a look in. As a PI, I will certainly be participating in any rights issue if I can.

Assuming a PE of 15-20 and using the forecast PE from FY2026 then this values SED at £400m-£500m or 9X - 12.5X its ****DILUTED**** market price.

Institutional Investors are far more capable than I am. Will 9X or more tickle their fancy? Do you think they’ve got some dry powder available? Have they any track record of supporting SED?

Did you know Amati lent SED £2.2m via convertible loans in 2021? (Which they converted to shares)

Did you know Lawrence Marazzi loaned £0.25m money to SED in 2019 free of charge? (Which was repaid in 2022)

Assets Valuation

From an ASSETS point of view, the raise will move NET ASSETS from £29m to £39m or £44m and the NAV per share drops from about 29p/share now to 24p/share or 22p/share after the 16p raise.

In other words, for each £1 of additional shares you buy in a rights issue you are receiving £1.50 of assets at a £10m raise. While you are “losing” 17.2% a share of assets through the dilution. A £15m raise is £1.37 of assets gained and 24% of assets “lost” to existing shareholders.

Obviously, not great, but does that justify the current share price crash WELL BELOW ITS BOOK ASSETS? EVEN AFTER ASSUMING A 50% dilution!

Conclusion

What you have to decide is what to do based on how you answer these 4 questions:

1. Will shareholders support with £10m-15m of funding? If the answer’s no then you need to think about how much those 24p of assets will go for in a disposal as this is going to go bust. (CLUE: will SED’s customers have considered a plan for if SED goes bust?)

2. Will the timings for FY2025 and FY2026 be faster or slower than those described? Remember I’ve factored NOTHING else in for VNA above the 2x minimum in FY2026. SED say they’re speaking with numerous other customers. I’ve factored in £20m of sales from Sunderland when its capacity is to push out £100m of product through its 4 lines (i.e. £50m worth of product through the 2 lines it still “owns”). I’ve assumed royalties from Propel, Conmet and VNA. No other royalties to any new parties.

3. Surprises. I guess it’s fair to say any adverse surprises, over the next 18 months would be difficult for SED. To be fair, we have already been surprised to be where we are today.

4. Will Buyers have done less due diligence than investors? Does the fact that buyers have green lighted SED tell you how successful this will be? Buyers will have committed far larger sums to the partnership to produce the overall vehicles and SED isn’t selling a generic widget. Nicole needs Saietta to give her an “Ooh la la”.

   There is no easy substitute if SED goes bust!

These views are my personal opinion, not advice. Written to set out the facts as I understand them and the future as I anticipate it, for my own current and future investment decisions in SED. I hope you enjoy reading my posts and good fortune in your own investment decisions.

Have a good weekend

Oak