Arrival ltd. (ARVL) is a U.K. based technology company that develops microfactories and manufactures electric vehicles (EVs) using an approach in contrast to Tesla’s (TSLA) gigafactories (see articles here and here). I believe lots of investors are excited about the great potential of Arrival, but as a pre-production company, it certainly has lots of associated risks. Let’s take a deeper dive.

Financial health

The company was burning its cash balance fast and would have run out of cash by Q2 2022. However, Arrival ltd. recently closed a follow-on offering (US$ 337.8 million dollars) and green convertible senior notes ($310.4 million) after it decided to take a more conservative growth plan compared to the one given in the SPAC IPO presentation.

How much cash would be left by the end of 2022 per the most recent guidance?

As of Q3 2021, Arrival had $440 million cash and equivalent, and then it raised $337.8 million via follow-on offering and $310.4 million via green senior convertible notes. So, there is about $1088.2 million or $1.088 billion.

Q4 2021 capex guidance = €110 – 120 million (~$123 – 134 million; median of $128.5)

Full year 2022 capex guidance = Q3 2021 annualized = $90 x 4 = $360 million (Q3 2021 capex =  €81 million (~$90 million))

Assume EBITDA loss per quarter = Q3 2021 EBITDA loss = $45 million. By the end of 2022, Arrival would have used approximately $128.5 + $360 + $45 x 5 = $713.5 million and the cash balance would be $1088.2 million – $713.5 million = $374.7 million.

Would all of the capex guidance for Q4 2021 and full year 2022 ($444.5 million) go to long term assets? I doubt so as they have already spent money on the three microfactories (would have cost not too much more than $50 x 3 = $150 million). So, a big chunk of the $444.5 million could be working capital (e.g., in the form of materials and inventory). I’m hopeful that Arrival will have everything it needs to get the three microfactories running at full speed by early 2023.

Arrival’s working capital

We don’t know how much working capital is needed to get to full production. But we know that

• In Q3 2021, Tesla’s working capital = assets of $25 billion – liability of $18 billion = $7 billion. The revenue for Q3 2021 was $12.06 billion (or $48.24 billion annualized). So the working capital turnover rate was $48.24/$7 = 6.89, or the working capital was 14.5% of the annualized revenue. 
• For Ford, the working capital was $107 billion – $89 billion = $18 billion. The working capital turnover rate was annualized revenue of $132.84 billion (Q3 2021 $33.21 billion x 4) / $18 billion = 7.38, or the working capital was 13.6% of its annualized revenue.

So, if we assume 20% of Arrival’s revenue as working capital to be safe, for each new microfactory, the company would need roughly $600 million x 20% = $120 million as working capital.

Growth

In Q3 2021’s earnings report, the company expects to start production in Q2, Q3, and Q4 2021 for its Rockhill (South Carolina, U.S.), Bicester (Oxfordshire, U.K.), and Charlotte (North Caroline, U.S.) microfactories on one-shift, respectively. Arrival would ramp-up its production to two-shifts in early 2023.

So far, we know that

• Capex per microfactory = $50 million
• Opex per microfactory = $15 million
• Working capital per microfactory guesstimated = $120 million
• Production volume per microfactory = 10,000 vans or 1,000 buses
• Revenue per microfactory would be approximately $600 million (based on the UPS’s ~$1.2 billion order for 20,000 vans)
• EBITDA margin = ~5.5% with $1.09 billion revenue; ~22% with $5.099 billion revenue; and ~23% with $14.135 billion revenue (see IPO investor presentation). It seems that for revenue after the first $1.09 billion (roughly two microfactories), each additional microfactory would have an EBITDA margin of slightly >23% (as the admin cost etc. would have already been covered by the first couple of microfactorie’s profits).

With three microfactories running on two shifts, Arrival would be able to generate $600 million x 3 = $1.8 billion revenue. EBITDA would be the first $1.09 billion x 5.5% + ($1.8 – $1.09 billion) x 23% = 0.22 billion or 220 million. This should be more than enough to build and run a new microfactory (capex + opex + working capital = $185 million). Going forward, as the production ramps up, every two microfactories would generate $600 million x 2 x 23% = $276 million, which is more than enough to get one more microfactory up and running and it only takes 6 months to complete one microfactory. So, it seems that Arrival’s number of microfactories could grow organically at ~50% for a number of years, say 9 years to reach ~100 microfactories (~60 billion revenue and this seems to be a realistic market share with a TAM of $280 billion for vans and $154 billion for buses given its cost advantage and agile approach).

“To achieve our mission to replace all vehicles with electric we want to create 10s of vehicle platforms and produce them in 100s of Microfactories”.

Arrival’s Q3 2021 presentation

Valuation

Revenue in 2022: approximately 2 quarters revenue recognized for Rock Hill, one for Bicester, and zero for Charlotte = $600/2 (one shift) x ¾ = $225 million. 

Revenue in 2023: approximately $600 x 3 = $1.8 billion.

Market capital ~5,925 million + $337.8 million = $6.26 billion.

$6.26 billion/0.225 billion = 27.8x 2022 estimated sales or $6.26 billion/($1.8 billion discounted by 50%) = 7x 2023 estimated sales discounted by 50% due to high risk. Assume Arrival could really grow at 50% (i.e., two microfactories could generate enough EBITDA to support one new microfactory), the price/sales multiple could deserve to be 20x. So, Arrival would be very undervalued by then.

Competitive advantages/moats

Intangible assets: Arrival has patents for its microfactory and composite material etc.

Cost advantage: Arrival’s microfactory approach is unique and does not require steel stamping or painting. Unit economics are industry leading.

Efficient scale: Compared to other van or bus manufacturers, Arrival is very vertically integrated and it has the scale of economy at the component level (e.g., some bus and van components are the same).

Risks

There’s not much room for execution errors due to the limited amount of cash available. Arrival is still a pre-production company, so risks are high.

Conclusions

Arrival, based on an outsider’s calculations, could achieve full production with the three microfactories by early 2023 without having to raise new funds and it could potentially grow organically at ~50% for many years. There may not be much room for execution errors and the risks are high, but at the current price, Arrival could be very undervalued once it starts to deliver its products to customers.

Disclosure: I’m long Arrival. This is not financial advice.