CIIG Merger Corp (NASDAQ:CIIC) will close its SPAC (special purpose acquisition company) merger with Arrival Group, a UK electric vehicle (EV) company, sometime in Q1 2021. CIIC stock has slowly been rising in anticipation of this event. I suspect it will continue to rise, like so many other EV stocks recently, especially those involved in SPAC mergers.
Ever since the merger deal was announced on Nov. 18 CIIC stock has been moving up, in fits and starts. For example, the stock peaked at $36.03 on Dec. 7, a gain of $25.48 or 237% from Nov. 17. This was the day before the merger was made public.
However, since then CIIC stock dropped to a recent low of $27.75 on Dec. 15, which seems to have formed a base for the shares. As of Friday, Dec. 18, it was up by 4.8% to $29.08.
Estimating Enterprise Value
As mentioned in my last article on CIIC stock, CIIG Merger Corp will have 606.179 million shares outstanding. This can be seen on page 42 of the slide presentation. When the merger closes, the symbol will change to ARVL.
Therefore, using the price of $29.08, CIIC stock (ARVL) will have a pro forma market capitalization of $17.627 billion. Moreover, we can also calculate its enterprise value by deducting the net cash the combined company will have at the close.
The same slide presentation says that the Arrival Group will have $669 million in cash at the combination of the SPAC and Arrival. As a result, the pro forma enterprise value is $16.958 billion.
This is 315% higher than the $5.392 billion enterprise value used in the public announcement or the slide presentation on page 41. The main reason is that CIIC stock (later ARVL stock) is up by 291% since the $10 per IPO price for CIIC stock. That was the price assumed in the original announcement on Nov. 18.
Present Value EV-to-Sales
But here is the main point about the valuation. In its presentation, Arrival says it expects to make $14.135 billion in sales by the year 2024, or three years in the future. This forecast is on page 40 of the slide presentation. Most of these sales will be from electric vans, large vans and buses.
Therefore, its EV-to-sales multiple is just 1.20 times (i.e., $16.958 billion EV divided by $14.135 billion in 2024 sales). This is basically not that expensive a ratio. The market, for example, could easily end up paying 1.5 to 2 times sales, at least on a present value basis.
For example, the present value of 2024 sales, at a 15% discount rate means that the $14.135 in 2024 sales are worth only 57.175% of that right now. This is due to the opportunity cost, or inflation and risk element forecasting sales three years in the future. That brings the present value of its 2024 sales to $8.08 billion.
As a result, the revised EV-to-sales multiple is 2.1 times. In other words, it seems at this price, CIIC stock looks to be at full value. That is the same conclusion I reached in my last article on the stock.
What to Do With CIIC Stock
Mainly due to momentum investing and other growth stock strategies, it is possible that CIIC stock could still keep on rising. It is completely possible that a hot stock like this can move into overvaluation territory.
Therefore, just because I say that the stock is now at full value does not mean it will get even more overvalued. The truth is that this often happens.
Moreover, it’s not as if this situation is static. Over time, as the company’s sales grow, the stock will no longer be at full value. In fact, frankly, depending on how far out you want to forecast sales, and then discount this to the present, CIIC stock could seem undervalued.
Many EV stock investors like to look out 10 years in the future when forecasting EV sales. The idea is that over time the level of EV adoption or penetration in society will increase on an exponential basis. So, even though these outlying years have higher discount factors, the present value of the stock rises.
That is why even though it looks to be at full value, it’s still likely the stock will rise over time. This is also more likely to happen as the actual merger date approaches in Q1 2021.
In the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.