Company Overview: Carbon Revolution Limited (ASX: CBR) is involved in the manufacturing and sale of carbon fibre wheels. It also engages itself in R&D activities related to carbon fibre wheel technology. The company has matured from single prototypes to designing and manufacturing quality wheels and serves some of the reputed brands across the world.

CBR Details

Increase in Production Volumes in H2FY21 Amidst Global Pandemic & Chip Shortages: The company produces carbon fibre wheels which has benefits of fuel efficiency and range extension. It has strengthened its leadership capabilities with the appointment of Ron Collins as Vice President North America, Jon Smiles as Human Resources Director, Jo Markham as Director of Customer Excellence and Andrew Higginbotham as Director of Operations.

New Programs to Drive Growth:

• CBR has launched two new Ferrari programs in Q4FY21. Ferrari has opined that the carbon-fibre wheel option is 8kg lighter to its forged counterpart.
• The company has 8 programs in the pre-production phase, and 1 program is planned to enter the production phase in FY22.
• Agreements for detailed design and engineering are in place for 5 new programs.

FY21 Results Overview:

The company strengthened its operations during the year, despite the slowdown in the economy due to the impact of the COVID-19 pandemic.

• The total wheels sold during the period stood at 12,749 units, compared to 13,942 in the prior year.
• It posted revenues of $34.9 million during the year, compared to revenues of $38.9 million in FY20.
• There has been a significant improvement in the operating cash outflow to $9.3 million in FY21, compared to an outflow of $30.9 million in FY20.
• A total of 13 programs are in production or development.

CBR reported significant improvement in the cash levels to ~$87.25 million as of 30 June 2021, compared to ~$33.86 million as of 30 June 2020.

Cash Balance Trend (Source: Analysis by Kalkine Group)

Update on the Mega-Line Project:

• The company has updated that Phase 1 of the Mega-line project is on track and in line with the budget estimates having a capex of ~$47 million.
• The project is expected to combine automated manufacturing processes with automated part flow and achieve step changes to capacity and cost.
• CBR has placed orders for long-lead-time items and has also contracted the key strategic supplier.

Top 10 Shareholders: The top 10 shareholders together form around 56.90% of the total shareholding, while the top 4 constitute the maximum holding. Unisuper Limited and ECP Asset Management Pty Ltd are holding a maximum stake in the company at 8.60% and 7.34%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company reported negative profitability during the period. However, it posted an improvement in the ROE performance to negative 26.5% in FY21, compared to negative 302.1% in the prior year. The liquidity position improved substantially with the current ratio at 4.36x in FY21, compared to 1.75x in FY20.

Growth and Liquidity Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• COVID-19 Impact: The company has been impacted by the onset of COVID-19 pandemic, which has impacted the sales of its core products.
• Chip Shortage: The sector has also been impacted by the global semiconductor chip shortage issue.
• Profitability Risk: It is prone to the risk of subdued bottom-line performance and has to look to turn around its profitability going forward.

Outlook: The company has witnessed an improvement in its operational efficiency performance in H2FY21. It has reported a reduction in the COGS in the second half of the year driven by an increase in production volume and stability and expects the momentum to continue going forward. The company has favourable tailwinds going forward with new program launches and anticipated ramp-up of production.

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: As per a recent update, the Company’s Director Mr James Douglas has undergone a change of indirect interest in the company and has acquired 50,000 shares. As per ASX, the stock of CBR is trading below its average 52-weeks’ levels of $0.960-$3.048.   The stock of CBR gave a positive return of ~21.28% in the past one month and a negative return of ~40.80% in the past six months. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at some premium to its peers’ average, considering the expected ramp up in production, launch of new programs, expected recovery in demand and decent balance sheet. For the purpose of valuation, few peers like GUD Holdings Ltd (ASX: GUD), ARB Corp Ltd (ASX: ARB), PWR Holdings Ltd (ASX: PWH) have been considered. Considering the expected upside in valuation & current trading levels, increase in production volumes in H2FY21, rise in cash levels, new program launches, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $1.22, down by 2.401% as on 07 September 2021.

CBR Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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