RBC Capital reiterates Nikola’s price target following Romeo’s acquisition

Written by Cláudio Afonso | info@claudio-afonso.com | LinkedIn | Twitter

Following the acquisition announced earlier today, RBC Capital analyst Joseph Spak reiterated a Sector Perform rating and $8.00 price target on Nikola shares. The analyst believes the manufacturer bought Romeo Power “in order to keep their own operations “on track” adding that Nikola expects to reduce costs “by 30-40% by the end of 2023 and provide annual cost savings of up to $350mm by 2026”.

“Nikola is Romeo’s largest production customer, so the transaction vertically integrates operations by bringing battery and BMS engineering capabilities and manufacturing in-house,” Spak said.

“But also, as of 1Q22, RMO has $66.9mm of cash and equivalents on hand but burned ~$43mm in 1Q22. So we believe it’s possible that Nikola purchased their supplier in order to keep their own operations “on track”, the analyst added”.

Nikola expects the transaction to reduce non-cell related battery pack costs by 30-40% by the end of 2023, and provide annual cost savings of up to $350mm by 2026. Nikola has identified three areas where they see the most significant opportunity for savings: 1) Enclosures – switch from machined to casted enclosures (requires investment of ~$750k). 2) Electronic boards – leverage Nikola‘s existing supply base to secure better pricing and more consistent delivery. 3) Thermal/other – combined purchasing power and supply relationships provide additional savings on material sourcing,” the analyst concluded.

Earlier today, the company announced it acquired Romeo Power for $144 million in an all-stock transaction allowing a “significant operational improvement and cost reduction in battery pack production”.

The proposed exchange ratio implies a consideration of $0.74 per Romeo share and represents an approximately 34% premium to Romeo’s July 29, 2022 closing share price and values 100% of Romeo’s equity at approximately $144 million, Nikola said.

Last week, the company said that is less than 0.25% of the outstanding shares for the approval of its proposal to increase the authorized number of shares from 600 million to 800 million. The approval will provide the company “greater flexibility to support the future growth of the business and advance its vision of clean and sustainable commercial transportation.” the company said. To get the approval, Nikola needs now less than 1 million shares until next Monday, 11:59 pm (EST) on August 1.

Nikola will report its Q2 2022 financial results on August 4 followed by a conference call and webcast at 9:30 a.m. ET with the management team. The company announced a Q&A platform to allow verified retail and institutional investors to submit and upvote questions that will be answered by the management.

Written by Cláudio Afonso | info@claudio-afonso.com | LinkedIn | Twitter