I’ve really enjoyed the discussions on this forum over the past few weeks. My participation to date has been one from working off a limited knowledge of the company & what I hope is reasonable business acumen, aided slightly by my previous experiences as a shareholder of RFX some time ago. I’ve only maintained a surface interest in the company announcements over the past two years.
Based on positive feedback I’ve tried to perform a small scope of due diligence on the company with a focus on the last 1-2 years. Apologies for the length of the post for any who attempt to read it, I’ve tried to limit it.
There continues to be high cash burn year on year. The moving of operations to Thailand has generated initial savings of 10% attributed to freight & labour savings- The company is targeting cost savings of a further 20% pre Thailand cost per battery (totalling 30%) but this is not expected until monthly sales volume reaches 250 batteries (see 2019 April investor presentation).
There is a strong narrative for targeting cost reducing measures throughout company announcements over the last two years. This can be interpreted as a positive sign however I am wary of the limited scope of current cost reductions.
Without knowing the current manufacturing cost per battery to the business or gross profit margin I can’t help but feel the current operating costs of the business are above a sustainable level.
It is my opinion that the company needs to reach current maximum production of 250 units per month & quickly due to current cash burn. What effect will 250 batteries have on cash out vs in? The figures are not known but reaching current capacity is a step in the right direction & will certainly give the company a better chance at securing further investment via equity or debt financing. The financials in the quarterly reports that follow such an achievement will be very interesting.
In the 2019 Investor Presentation the company states its medium term goal is to achieve manufacturing capabilities & sales of 1000 batteries per month. This would be a fantastic achievement but I have to ask myself the following questions-
- What is the significance of this number?
- What timeframe is the medium term?
In the recent presentation the company lists the following under its ‘Investment strategy’ content- “Pursue options for further strategic investment and other non-equity financing options as Redflow hits further inflection points of growth and targets break even position”
I also have to ask myself the critical question- What is the breakeven point? How many batteries per month? Is this at current gross margins or targeted gross margins?
I remain comfortable with the company’s new found capacity to manufacture their battery on a scalable level & quality (ISO 9001 certification targeted for June 2019). The company states in the CEO address to shareholders on the 26
th of November 2018-
“Reliable manufacturing of quality batteries for the first time in the company’s history.”
This further highlights my previous perception that the company until recently did not have the product or platform for strong sales.
Without going into heavy due diligence on every key staff/board member.
The company has clearly undertaken a restructuring of recent times with the changing of roles, additional hiring of skilled staff & value adding board members.
To name a few- Trudy Walsh as CFO in August 2018 & Ben Sheppard leading sales as Chief Commercial Officer also August 2018.
The most important new is potentially Tim MacTaggart employed as Redflows Chief Deployment Officer in February of 2019. As quoted from the March 2019 quarterly “Tim is responsible for driving & managing the implementation & operational support capabilities of the business as the company increases sales & delivers more batteries to customers.”
Equally important to securing the sales of batteries in the near future is the functional ability to successfully deploy them with the necessary support capabilities (after care).
It’s apparent to me that Tim Harris & the board have a clear understanding in their minds of what’s needed to progress the company- Since acquiring the reliable manufacturing capacity of 250 batteries the company has attempted to launch a sales & deployment team to capitalize on its new found capabilities. It’s far too early in my opinion to be positive or critical of the new structures success. It’s unlikely that both the volume sales & operational readiness are going to be generated overnight.
I can see that the company has had its focus across multiple markets over the last year including the residential, however recent report language suggests that confidence of sales in the residential market is lower than at the time of the CEO’s company address on the 26
th of November 2018.
As quoted from that address “Currently QLD, VIC & STH AUS all offer battery support schemes. Needless to say, we are engaging with industry bodies & state governments for the broadening of these schemes to include our batteries.”
The latest in language from the company regarding Redflows residential aspirations is from the April, 2019 presentation.
“We expect residential sales will remain limited unless significant participation opportunities in Australian battery schemes emerges”.
The company’s language is however more confident at continuing to target the telecommunications sector & broader commercial opportunities. Hopefully building on existing relationships & ground work that has been laid over the past 2 years.
In conclusion I find the following,
- Cash burn remains an issue of worthy concern-The break-even point is a critical target for shareholders, what number of batteries that is per month is unknown. Quarterly reports will need to be monitored closely. This is not a stock you can place in auto-pilot mode.
- Will the company have the capacity to raise further funds as needed in the form of either equity or debt financing whilst also maintaining control of the number of shares on issue?
- New found manufacturing capacity is promising, easily upgraded to 450 batteries with A$2-3m capex
- The company restructuring is positive, there appears to be a clearer understanding of the company’s target markets & a plan to execute on short term goals.
- Sales remain a concern, this will remain a concern until proven otherwise via strong sales. The new head of sales Ben Sheppard & team will need to start producing volume sales if the existing cash burn is going to be relieved, eventually resolved.
- Will Tim MacTaggert be able to successfully design & implement the deployment & support framework to compliment the sales team?
- The company needs to continue to address any criteria in the due diligence process that prevents it from participating in current/future government support schemes/subsidy programs.
- We have not heard much from Simon Hackett or any word on his or the boards participation in the current capital raise. Despite Tim Harris looking at home in his role as the CEO I would encourage the company to leverage Simon's high profile, many investors are invested solely on his association with Redflow.
- The program aiming to achieve ISO 9001 certification in June is positive, it can only assist the sales department- “ISO 9001is defined as the international standard that specifies requirements for a quality management system (QMS). Organizations use the standard to demonstrate the ability to consistently provide products and services that meet customer and regulatory requirements.”
Thank you to those who read this far. I look forward to any discussion that may result from this post. As a non-holder I have tried to express myself whilst hopefully keeping the post in neutral territory without a flowing sentiment out of respect for shareholders. This is only my understanding to date & the reality of the company’s true circumstances may be very different from my understanding. My only aim is for good discussion & for everyone to draw their own thoughts & conclusions.
Regards, Dan
(20min delay)