Carbon Revolution Limited

CBR Details

Business Update: Carbon Revolution Limited (ASX: CBR) deals in Auto parts that involve designing, manufacturing, and markets lightweight carbon fiber wheels, which is used in transportation industries.

Q1FY22 Financial Highlights-

• The company has posted a decline in its revenue by 28.1% to $6.2 million in Q1FY22, compared to $8.7 million in Q4FY21 and wheel sales were 2,100, which is in line with the company's expectations.
• The net cash flow from operating activities (including Government grants) in Q1FY22 stood at $11.8 million against $8.5 million in the previous quarter.
• The company has received receipt from customer of $8.88 million in Q1FY22.
• The company's cash balance stood at $63.9 million as of 30 September 2021 vs $87.2 million as of 30 June 2021.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Material Risk- The company has faced a significant challenge due to a shortage of semiconductor chips, and if the uncertainty continues, it might impact its earnings going forward.
• Impact of COVID-19 Pandemic- The global automotive industry has been adversely impacted during the COVID-19 due to demand squeeze and supply disruption. Any continuous disruption might affect the company financials.

Outlook:

• The company focuses on operational delivery and enhancing OEM relationships which might support the growth going forward.
• The company is on track to secure a formal agreement to design and engineer its four new wheel programs and further focuses on gaining two additional agreements at the end of FY22.
• The management expects a higher sale in the H2FY22 than H1FY22 due to a new program in the second half, the gradual ramp of the two new Ferrari programs.

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: The stock of CBR is currently trading below its average 52-weeks' levels of $0.960-$3.048. The stock of CBR gave a positive return of ~7.07% in the past three months and a negative return of ~58.57% in the past nine months. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount to its peers’ average EV/Sales multiple, considering the shortage of semiconductors, supply risk and demand squeeze, etc. For the purpose of valuation, peers such as GUD Holdings Ltd (ASX: GUD), Bapcor Ltd (ASX: BAP), PWR Holdings Ltd (ASX: PWH) and others have been considered. Considering the current trading levels, indicative upside in valuation, investing in carbon revolution, improving economic condition, four new wheel programs, optimistic outlook, and the key risks associated with the business, we recommend a 'Speculative Buy' rating on the stock at the closing price of $1.050, up by ~0.478% as on 29 October 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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