Special purpose acquisition companies (SPACs) have presented investors with attractive investment opportunities. Bloomberg reports that January 2020 was a record month for SPAC listings. Looking at some of the recent business combinations, Tuscan Holdings (THCB) is worth considering for the long-term.
On Feb. 1, Tuscan Holdings announced a business combination agreement with Microvast. The latter is a provider of battery technology for commercial and speciality electric vehicles. As the business combination was announced, THCB stock surged by 50%.
The surge has been followed by some correction, and THCB stock closed at $19.89 on Feb.10. These levels are attractive, potentially providing fresh exposure for long-term investors. Let’s discuss Microvast and the potential growth catalysts in a bit more detail.
The Big Market Opportunity
Microvast designs low-cost batteries that are specifically targeted towards commercial electric vehicles. The company’s batteries have already been integrated into almost 30,000 vehicles in 19 countries. Therefore, if the growth outlook for commercial EVs is strong, Microvast stands to benefit.
According to estimates by Research and Markets, the global commercial EV market is expected to grow at a CAGR of 41.1% between FY2020 and FY2028. Workhorse Group (WKHS) estimates that the annual addressable market for last-mile electric delivery vehicles in the United States is $18 billion.
Therefore, Microvast is catering to a big addressable market. The company is positioned for annual top-line growth of 40% to 50% over the next decade, even if its growth is largely in-line with the commercial EV growth outlook.
Well Positioned to Deliver Strong Numbers
In the next five years, it’s likely that Microvast’s revenue growth will accelerate significantly.
The company already has $1.5 billion in contracted revenue through FY2027. In addition, it is expecting $4.1 billion in potential additions to the order backlog. Given the growth outlook for commercial EVs, the estimates appear realistic.
From $101 million in revenue for FY2020, Microvast has guided for revenue of $2.3 billion in FY2025 and $6.8 billion for FY2030. The company also expects to deliver an EBITDA margin of 20% by FY2025. If the EBITDA margin target is achieved, Microvast is likely to report strong free cash flows.
It’s worth noting that in FY2021, the company expects to begin battery production in Germany. Furthermore, in FY2022, the company’s battery production will commence in Clarksville, Tennessee. Establishing a global production presence will help the company to lower costs and achieve greater economies of scale.
On Feb. 5, Microvast also announced a joint development agreement with Oshkosh Corporation (OSK). As a part of this agreement, Microvast will be developing tailored battery solutions for Oshkosh electrification projects. The latter has also agreed to invest $25 million in Microvast. These agreements are likely to boost the backlog and provide credibility to the company’s solutions.
As a matter of fact, Microvast also has R&D partnership with BMW. Talking about R&D, the company has more than 550 patents and patent applications. Having a technological edge will be a differentiating factor for the company.
From a financial perspective, the merger is expected to provide $822 million in gross proceeds to the combined entity. Additionally, the cash buffer will help in financing the construction of the manufacturing facility in the U.S. and Europe. Therefore, the company will be well financed for the next 18-24 months.
Concluding Views on Tuscan Holdings
Given the outlook for the commercial EV industry, the merger agreement between Tuscan Holdings and Microvast is likely to create value.
For FY2020, the company reported negative EBITDA. However, for the current year, the company is likely to turn profitable at the operating level, reflecting another stock upside trigger.
Overall, with industry tailwinds, a robust order backlog and capacity expansion, Tuscan Holdings is worth considering for the next three to five years. The next leg of stock upside is likely once the merger is closed. (See Tuscan Holdings stock analysis on TipRanks)
Disclosure: No positions.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
