Stocks’ Details

South Mountain Merger Corp.

Business Combination with Billtrust: South Mountain Merger Corp. (NASDAQ: SMMC) is a special purpose acquisition company, focussed on forming a merger or a business combination with one or more businesses in the FinTech industry. As of 22 October 2020, the company’s market capitalization stood at ~$350.62 million. On 19 October 2020, the company announced that it has entered into a definitive business combination agreement with Billtrust, a leader in B2B order-to-cash solutions, to form a combined company with an implied estimated enterprise value of ~$1.3 billion. The combined company will be renamed BTRS Holdings Inc., and it will trade on the NASDAQ under a new ticker. The transaction is expected to be completed in early 2021, subject to receiving necessary approvals and fulfilling all the legal and regulatory conditions.

Expected Growth in Top-line: Billtrust is a leading provider of cloud-based software and integrated payment processing solutions. For H1FY20, the company’s net revenue stood at $50 million, up 11% on pcp, despite COVID-19 challenges. Billtrust’s non-GAAP gross margin stood at 69% in H1FY20, up 18% on pcp. From 2020 to 2022, Billtrust expects its net revenue and gross profit to grow at a CAGR of 19% and 20%, respectively.

Financial Projections (Source: Company Reports)

What to Expect: Billtrust currently has an opportunity to expand into large, new markets with compatible trends. Following the completion of the business combination, Billtrust is expected to be debt-free with around $200 million in cash, offering significant capital flexibility to pursue organic and inorganic growth opportunities.

Key Risks: The company is exposed to the risk related to the changes in the market, financial, political, and legal conditions. Further, the company is exposed to the risks related to the impacts of COVID-19 pandemic. There is also a risk that the combined entity might not realize the anticipated benefits of the proposed business combination.

Stock Recommendation: The stock of SMMC has provided a return of 14.6% in the past six months and a return of 8.4% in the last three months. The stock is currently trading close to its 52-weeks high price of $12.15. On the technical analysis front, the stock has a support level of ~$10.15 and resistance of ~$11.96. Over the last three year (2017 to 2019), the company has incurred net losses. Considering the company’s current trading levels, limited financial information, losses on the balance sheet, and associated key risks, we suggest investors to “Avoid” the stock at the closing price of $11.22, down by 1.234% on 22 October 2020.

Pivotal Investment Corporation II

Merger with XL Fleet: Pivotal Investment Corporation II (NYSE: PIC) is a blank check company formed for the purpose of creating a merger or a business combination with one or more businesses or entities. On 18 September 2020, the company announced that it has entered into a definitive merger agreement with XL Fleet, a leader in vehicle electrification solutions for commercial and municipal fleets. The merger with PIC will help XL Fleet to advance and accelerate the market growth of its electrified powertrain solutions and expand its product offerings. Following the competition of transaction, the combined entity will have a pro forma implied enterprise value of $1 billion and net cash of $350 million to fund growth. The proposed transaction is anticipated to close in Q4 2020, subject to necessary approvals.

Overview of XL Fleet: XL Fleet is a leading provider of fleet electrification solutions with a flexible proprietary electrification powertrain platform. In 2019, the company reported total revenue of $7.2 million and EBITDA loss of $13.1 million. For 2020, the company expects its revenue to grow by 192% on 2019 to $21 million. The company expects to incur an EBITDA loss of $9.9 in FY20. From 2019 to 2024, the company expects a significant improvement in its revenue and EBITDA, as demonstrated in the below table.

Financial Projections of XL Fleet (Source: Company Reports)

What to Expect: XL Fleet is expected to have $350 million of cash at the transaction close. It intends to use these funds to increase organization capacity, scale up sourcing and operations, securing distribution partners internationally, roll out to attractive applications segments and finance vehicles and infrastructure and for general corporate purposes. This merger will help XL Fleet to advance and accelerate the growth of its industry-leading fleet electrification business, including a rapid expansion of its product offerings.

Key Risks: The company is exposed to the risks related to the growth of XL’s business and the timing of expected business milestones. The combined entity’s future performance is exposed to the risk related to the changes in domestic and foreign business, market, financial, political, and legal conditions.

Stock Recommendation: Due to XL Fleet’s proven management team and its strong demonstrated growth, PIC is of the view that XL Fleet is a unique opportunity to invest. The stock of PIC has corrected by 20.14% in the last one month and is inclined towards its 52-weeks low price of $9.5. On the technical analyses front, the stock has a support level of ~$10.01 and resistance of ~$10.89. Considering the proposed business combination with XL Fleet, expected improvement in XL Fleet’s revenue and EBITDA over the coming years, and PIC’s current trading levels, we give a “Speculative Buy” recommendation on the stock at the closing price of $10.19 on 22 October 2020.

Palantir Technologies Inc.

Direct Listing in Late September 2020: Palantir Technologies Inc. (NYSE: PLTR) is primarily involved in developing enterprise data platforms for organizations with complex and sensitive data environments. The company’s stock recently started trading on NSYE, following the completion of its direct listing in late September. As of 22 October 2020, the company’s market capitalisation stood at ~$15.95 billion.

Awarded $36 million Contract by NVATS: On 2^nd October 2020, the company announced that it has been awarded $36 million one-year indefinite delivery, indefinite quantity (IDIQ) contract with the National Center for Advancing Translational Sciences (NCATS) to support its Secure Scientific Platforms Environment.

Awarded $91.2 Million Contract from U.S. Army Research Lab: On 1 October 2020, the company had announced that it has been awarded a $91.2 million two-year contract from the U.S. Army Research Laboratory for research and development (R&D) of artificial intelligence (AI) and machine learning capabilities. Under the contract, PLTR will help in integrating and managing all relevant data for U.S. Army Research Laboratory for research and development. Further, it will help in preparing the data in uniform and open formats, and curate data to train AI models. 

H1 FY20 Highlights: In the first half of FY20, the company generated $481.2 million in revenue, reflecting a growth rate of 49% over the same period last year. Over the same period, the company’s net loss decreased to $164.7 million, compared to a loss of $280.5 million in H1 2019. In H1 2020, the company’s platforms were used by 125 customers, including some of the largest and most significant institutions in the world.

H1FY20 Results (Source: Company Reports)

Focus Areas: In the near term, the company is focused on building partnerships with commercial enterprises and increase reach within existing customers. Further, the company is focused on pursuing significant expansion of its government work with U.S. allies abroad. The company is committed to investing in an account-based sales force to identify new customers and opportunities.

Key Risks: The company is exposed to the risk related to Ownership of its Class A common stock. As per the company’s prospectus, its shares of Class A common stock (on an as-converted basis) have a history of trading in private transactions. During 2019, Class A common stocks were sold at a low price of $4.50 and high price of $6.50. Notably, in 2020, the stocks were sold at low price of $4.17 and high price of $11.50. The company is also exposed to the risks related to COVID-19 pandemic and its associated impacts. PLTR’s future results may also get impacted by the stiff competition in the market. Considering the above risks, we assume that stock carries high risk-reward profile.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Looking ahead the company is focused on broadening its reach through partnerships that establish its platforms as the central operating system for entire industries. On the technical analysis front, the stock has a support level of ~$9.20 and resistance of ~$9.91. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like Zendesk Inc (NYSE: ZEN), Ceridian HCM Holding Inc (NYSE: CDAY), and Paycom Software Inc (NYSE: PAYC). Considering the company’s improved revenue and narrowed losses in H1FY20, its future focus areas, and recently awarded contracts, we give a “Buy” recommendation for the stock at the closing price of $9.68, up by 5.22% on 22 October 2020. We also suggest investors to consider the risk-reward profile as well while taking any investment decision.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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