Avio's stock price takes a dive
Is there a single cause for the poor performance of the Avio stock?
Issue 72 Subscribers 2,973.
Welcome to the first Wednesday edition of the Europe in Space newsletter. This is the first of a number of strategic changes that I am going to be making to the newsletter. You can read more about those changes here.
Thank you to Latitude for sponsoring its night issue of the Europe in Space newsletter. Latitude is an innovative French launch startup developing Zephyr, a 17-metre tall launch vehicle capable of deploying 100 kg payloads to SSO at an altitude of 700 kilometres.
To my 53 new subscribers, enjoy your first issue, and, as always, if you have any comments, suggestions, or tips, you can reply to this email.
On 8 September, Avio announced its positive half-year results. That day, the company's stock closed at €8.69. The positive results saw the stock's price subsequently jump to a high of €9.21 by Thursday, 14 September. However, come Friday, the stock would take a drastic downward turn towards hitting historic lows. The stock is currently trading at €8.06, which is its lowest point since Avio was listed on the Italian Stock Exchange in April 2017. So, what happened?
While Avio has recently secured huge development contracts, it has struggled to execute on its now historic order backlog. That news is, however, not new. What happened on Friday, 22 September, that was the catalyst to the stock’s poor performance?
Avio announced its half-year financial results for 2023 on 8 September. The company’s net result for the first half of the year was down from the same period last year and stood at just €3.9 million. However, thanks to €370 million in technology development projects and €110 million in defense production contracts, the company was able to report a record-high order backlog of €1.4 billion and a record-high cash position of over €100 million. For context, the company's cash position over the same period in 2022 was €40.9 million. However, despite these historic numbers, Avio currently cannot deliver on its two primary revenue streams.
In 2023 thus far, Vega accounts for 56% of the company's revenue, and Ariane accounts for 19%. The other 25% comes from defense and technology development projects.
The company's Vega rocket is set to complete Europe's final launch of 2023 in October, carrying two primary payloads and a number of CubeSats. Following that flight, the original Vega vehicle will perform at most two additional flights. The retirement of Vega was supposed to have come at the same time as Avio was ramping up the production of Vega C. However, a launch failure in late 2022 and the failure of the Zefiro 40 engine test in June, which was meant to validate the stage fit for flight, has meant that Vega C remains grounded. The results of an independent enquiry into the cause of the Zefiro 40 test failure are expected to be published by the end of September.
While the fate of Vega C does precede the publishing of the company's HY filing, the company's financial report did indicate that the Vega C return to flight mission will not occur in 2023, which, although not a complete surprise, was noteworthy. However, considering the stock's initial boost following the announcement, it's unlikely that this was the cause of the historic lows we are currently seeing.
Ariane 6 delays have had a significant effect on Avio. The company is primarily involved in the development and production of the P120C boosters through Europropulsion, which is a 50/50 partnership between Avio and ArianeGroup. The booster has already completed its development and has proven itself in flight aboard the first two Vega C missions. Despite the second mission being a failure, the P120C booster aboard the Vega C VV22 mission performed without incident. The booster production is being held up by the grounded of Vega C but, more importantly, by the delays in the development of Ariane 6. This is because while Vega C utilizes just one P120C booster per flight, Ariane 6 will utilize either two or four boosters per flight. Production of the booster will, as a result, be primarily driven by Ariane 6.
On August 8, ESA director general Josef Aschbacher stated in a LinkedIn post that the debut of Ariane 6 would slip from late 2023 to sometime in 2024. A more precise timeline was to be announced following the completion of a long-duration hot fire test. This announcement appears to have had little effect on the Avio stock price. On August 8, the stock closed at €9.23, and by the end of the week, it had risen to €9.31. However, on 21 September, ESA announced that the long-duration hot fire that had been scheduled for 3 October would have to be postponed. The postponement was caused by an anomaly that affected the rocket's core stage vector control system that had been detected while preparing for the long-duration test following an initial four-second hot fire test. Although this announcement does appear to have caused a more pronounced downward trajectory of the Avio stock, it was already on a downward trajectory when the announcement was made.
In early September, Italian business and financial news outlet Il Sole 24 Ore Radiocor reported that Leonardo, Avio’s largest single stockholder, was looking to reduce its exposure to the launcher segment of its space business by downsizing its share in Avio.
In 2003, Leonardo, which was at the time called Finmeccanica, purchased its initial stake in Avio, which amounted to approximately 14%. In 2017, Leonardo grew its stake in the company with an additional 14%, paying €43 million. At the time the deal was concluded in mid-March 2017, nine flawless Vega missions had been completed, with the vehicle maintaining a 100% success rate. The most recent increase in the company's stake in Avio occurred in 2020 with the acquisition of an additional 3.75% at a cost of €14 million. At the time, Avio was working towards returning Vega back to flight after the vehicle's first failure in July 2019. The failure resulted in the largest ever insurance claim for a satellite launch failure at €345 million for the loss of FalconEye 1. With the completion of this last transaction, the company now has a 29.63% stake in Avio.
For its part, Leonardo has denied plans to sell all or even part of its stake in Avio.
“There are no ongoing talks regarding Leonardo’s stake in Avio Spa,” a Leonardo spokesperson explained in response to questions from European Spaceflight. “The Space sector is and remains central within the Company’s strategic vision, and launchers are an important part of the Space ecosystem.”
While stocks can certainly live and die on the word of a rumour, the timeline really doesn’t seem to add up. It wouldn’t have helped, but the stock appeared to remain steady immediately after the rumour was reported, and with the announcement of Avio’s half-year financials, the stock improved before eventually taking its dive.
In order to get to the bottom of the stock's poor performance, I spoke to Caleb Williams, an analyst from the business intelligence agency Quilty Space. Williams also identified the delayed Ariane 6 debut and Vega C return to flight as aspects that would not inspire overwhelming confidence from investors. However, he also noted that Avio was still on target to meet the revised guidance set by the company's management team for 2023. So, the company's performance is within expectations. His conclusion was that the market may just be pricing the Avio stock what it's worth. Williams bases this conclusion on a comparison of the performance of the Avio stock in relation to its revenues against those of other publicly traded aerospace and defense companies.
“It seems the market is just pricing the hype out of the stock and fairly valuing them like other aerospace and defense hardware providers and government contractors,” explained Williams.
So, is Avio’s time as a €10-a-share company a thing of the past? That does not seem to be the overwhelming consensus. Independent Italian investment bank Intermonte published its second-quarter outlook for Avio on 12 September. The top-line conclusion from the analysis was that Avio's order book was at a record high and that the company now needed to focus on execution. Despite the fact that the execution is far from a foregone conclusion, Intermonte gave the stock an Outperform rating with a target of €11.70. It should be noted that although the report did take into account the fact that the debut of Ariane 6 had slipped to 2024, the delay of the long-duration hot fire test was not taken into account as it had not been announced when the analysis was published.
According to MarketScreener, Intermonte is currently the only institution attributing an Outperform rating to the stock. The overall consensus is a Hold rating.
I want to preface this conclusion by stating unequivocally that this analysis in no way constitutes a recommendation to buy or sell Avio stock. European Spaceflight is not a financial institution, and this analysis has been done for academic purposes only.
The single event that sits closest to the initial dive that resulted in Avio’s historically low stock price was the delay of the Ariane 6 core stage long-duration hot fire test. On its face, the announcement only added to the downturn. However, this assumes that the individuals trading the stock were operating on the same information as the rest of us. Could they have got word about the anomaly early?
Alternatively, the initial dip may have just represented a readjustment following the jump in the stock price that followed the announcement of the company's half-year financials. In fact, the stock appeared to stabilize on 18, 19, and 20 September at approximately €8.83. Then, following the announcement of the delayed long-duration hot fire test, the free fall began. Considering all the facts, this appears to be the most likely scenario.