Carbon Revolution Limited

CBR Details

Installed $9.7 million of New Industrial Equipment: Carbon Revolution Limited (ASX: CBR) is a tier one OEM supplier that has innovated, commercialised, and industrialised the supply of carbon fibre wheels in automotive industry, globally. It has a market capitalization of ~AU$364.52 million as on 16^th April 2021. As per H1FY21 results, the company has made a phenomenal capital investment of $9.7 million in new industrialised equipment. With this investment and installation in place, the overall installed moulding capacity has reached up to 80,000 wheels per annum, of which high-pressure moulding capacity has increased up to 60,000 wheels per annum.

The decision to increase the installed capacity of the company has been set on the back of robust demand outlook from automotive industry with mega-line design readiness. The primary design of the Mega-line is organized and complete for sourcing. As per the management, the existing and prospective customers are seeking significant volume in coming quarters. Moreover, the company is looking forward to winning of new wheel programs as well as extensions of existing programs in H2FY21.

H1FY21 Results Update: The company reported a decrease in total revenue by 14% to $17.2 million versus $20.1 million in H1FY20 led by reduced revenue from Sales of wheels, that fell by 10% YoY to $16.6 million, followed by decline in Engineering services and tooling by 62% YoY to $0.7 million.

100% of the revenue came from international sales in H1FY21. Further, adjusted EBITDA reported at ($8.9) million for the period. Finally, net loss after tax has reduced significantly and stood at ($14.8) million versus ($98.6) million in H1FY20.

H1FY21 Financial Performance (Source: Company Reports)

Key Risks:

The company is exposed to multiple risk and the most recent is COVID-19 related risk that could impact the operations and future demand, hammering margins, and liquidity position. Further, any material change pertaining to reduced demand or cease ordering of wheels or factory disruptions would significantly impact the production of wheels, thus reducing the ability to achieve its forecasts. The company may also experience production issues under customer contracts. On macro level, any unfavourable government policies or other authoritative directions could phenomenally impact operations. Importantly, the industrialisation plans and growth strategy may not be fruitful, or could take longer time or cost than estimated, which may negatively affect the financial position and performance.

Outlook:

The company has successfully installed new fascia technology to improve the conversion, from moulded wheels to sold wheels. This resulted in inventory reduction of ~3,100 wheels as well as better quality flow and an increase in mould rate. Further, the company is also seeing an uptick in aerospace development as helicopter wheel design progress resulted in phenomenal reduction in weight of modelling. Importantly, the company is receiving fresh interest from major aircraft manufacturers, outside the project sponsors.

The company expects rise in demand in H2FY21 and cost benefit from labour productivity with fascia introduction to result in positive gross profit in H2FY21. It expects a further decrease in wheel inventory by ~1,000 wheels in H2FY21 over and above of ~3,100 in H1FY21. Closely working with suppliers to maintain sufficient stock buffer seeing COVID-19 related circumstances, this would realise ~$2 million benefit in FY21.

Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock has a 52-week low and high of $1.34 and $3.24, respectively and is currently trading above the average of 52-week high-low range. The stock has witnessed a fall of ~11.3% in 3 months while increased by ~69.5% in 9 months and by ~72.4% in 1 year. 

We have valued the stock using a Price/Book Value multiple-based illustrative relative valuation and have arrived at a low double-digit upside for the stock.  We believe the company can trade at a discount to its peer median Price/Book Value (NTM Trading multiple), considering risks associated with frequent changes in consumer preferences.

Considering the current trading levels, investments made by the company to increase the quality of output and reduce labour cost, new order wins from the automobile industry and aerospace sphere and current trading levels, we give a “Speculative Buy” rating on the stock at the current market price of $2.50, up 0.401% on 16^th April 2021. 

CBR Daily Technical Chart

(Source: Refinitiv (Thomson Reuters)) 

Note: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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