Plug Power Raises Some Much-Needed Cash - The Right Move At The Right Time
Dec. 06, 2019 2:37 PM ETPlug Power Inc. (PLUG)BLDP13 Comments
Summary
Discussing recent $110 million secondary offering. Deal priced almost 30% in the hole, at $2.75/sh, after a massive rally in the company's shares as of late.
Funds are required to provide cash collateral in support of the company's new, aggressive vendor financing approach but at the current run rate would become restricted entirely already in Q3/2020.
Investors might scrutinize the massive size of the capital raise and the somewhat disappointing pricing but this was absolutely the right thing to do.
Even after the offering-related retreat, shares are still up by close 100% year-to-date.
Going forward, management needs to find a way to escape the vicious circle of buying growth at either unustainably high interest rates or massive dilution to existing shareholders.
Note: I have covered Plug Power (PLUG) previously, so investors should view this as an update to my earlier articles on the company.
Alongside many of its fuel cell and hydrogen-related peers, Plug Power's shares have been in demand among investors in recent weeks. At its peak in late November, the stock was up by more than 160% year-to-date.
Even long-standing skeptics like Roth Capital analyst Craig Irwin finally turned into a bull on Plug Power stating that the company is "passing an inflection point". Consequently, he recently upgraded the shares from "neutral" to "buy" and doubled his price target to $6 while at the same time calling peer Ballard Power Systems (BLDP) "egregiously overvalued" at 17x estimated 2019 revenues.
Clearly, management's tactics has been playing out as the meteoric rise in the company's share price has finally put Plug Power in the position to conduct a massive secondary offering at $2.75/sh, raising at least $110 million in gross proceeds for the notoriously cash-strapped company.
Remember, the company was stuck between a rock and a hard place in late 2018 after bookings had slowed considerably, ending the year down 20% from 2017 levels. Moreover, with a material portion of the 2018 top-line growth derived from an accounting change, Plug Power would have faced serious challenges to show meaningful growth this year thus the decision to stimulate demand by extending vendor financing beyond anchor customer Walmart (WMT).
While certainly successful from a sales perspective, the move has vastly increased the company's capital requirements as financing partners continue to demand full collateralization of future lease payments.
As a result, Plug Power had to restrict an additional $85 million in cash for sale-and-leaseback transactions over the past two quarters alone, forcing the company into an ugly convertible note financing in early September and to sell more shares into the open market.
With the effective interest rate for the recent convertible note transaction approaching 13.5%, Plug Power couldn't continue its unsustainable vendor financing approach for much longer without a major equity raise thus management's relentless efforts to move up the company's share price in recent months.
Also keep in mind that Plug Power's year-over-year comparisons in recent quarters have benefited from the company's early adoption of a new lease accounting standard in Q3/2018 but this tailwind won't repeat next year.
With current consensus estimates calling for approximately 25% revenue growth in FY2020, Plug Power will likely have to further extend vendor financing to stimulate sales growth.
That said, at the current run rate of required cash collateral, the new funds would have become restricted at some point during Q3/2020 already.
Suffice to say, Plug Power needs to somehow break out of the vicious circle of buying growth at either unsustainably high interest rates or massive dilution to shareholders.
As the resulting liquidity and debt problems have become increasingly visible in the company's financial statements, management finally decided to address the issue in the Q3 shareholder letter:
We remain focused on finding optimal solutions to finance subscription business with key objective of continuously reducing our cost of capital and enhancing cash generation. We continue to work with our customers and project finance investors to create win-win solutions for all parties. In addition, we anticipate that cost of capital in financing our subscription business will follow the cost of capital reduction trajectory that we have seen in the solar and wind sector with substantial reduction in WACC and cost of equity to build solar and wind farms over the last decade, as we see fuel cells and associated hydrogen infrastructure to become the next renewable asset class.
Note that "subscription business" is just an euphemism for "vendor financing" and actually has very little in common with the business model of high-margin SaaS companies.
As correctly stated by management, cost of capital needs to come down substantially for Plug Power to become a viable, self-sustaining business without the need to more or less regularly dilute existing shareholders but, at least at this point, there's no apparent path to reach this target.
To be fair, raising additional equity appears vastly preferable to amassing even more high-yield debt given the company's seemingly ever increasing capital requirements.
Even after reporting two consecutive quarters of positive adjusted EBITDA, the company's free cash flow for the first three quarters was negative by a whopping $60.8 million and this number does, of course, not include the above discussed $85 million in additionally required cash collateral.
Bottom Line:
Plug Power's shares have enjoyed a great ride over the course of 2019, finally enabling the notoriously cash-strapped company to raise a large amount of much-needed capital.
While some investors new to Plug Power might shake their heads in disbelief given the massive size of the capital raise and the fact that the offering priced almost 30% in the hole, this was actually the course of action required by the company to avoid drowning in high-yield debt and enter FY2020 with sufficient liquidity.
That said, Plug Power will likely face an uphill battle next year given consensus expectations for approximately 25% revenue growth as previous benefits to year-over-year comparisons from a recent lease accounting change lapse. The only way to stimulate additional demand appears to be a further increase in vendor financing with the resulting requirements for additional cash collateral.
At the current run rate, the funds just raised would have become restricted entirely at some point during Q3/2020 already.
Going forward, management needs to find a way to escape the vicious circle of buying growth at either unsustainably high interest rates or massive dilution to existing shareholders.
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