1) almost impossible to value KTG
Note that K-TIG has disclosed earnings in the Prospectus (see section 3.6 and 6.4(b)) for previous years. As noted in section 3.6, these revenues were on the basis of unit sales and you can see from the accounts the high margin on the systems. Keyhole TIG was close to break even in 2017/18 and then essentially stopped selling and stopped selling efforts from December 2018 as it focused on potential corporate transactions which were coupled with a change in revenue/business model – ultimately leading to an RTO with Serpentine Technologies and a move to the WaaS licencing model.2) KTG isn't a new company
It is correct that sales have been over 5 years. However, it must be remembered that there had been a lot of change in how the company has operated and it started with a pretty embryonic unit. The company initially started its selling through engaging Distributors around the world to sell the K-TIG system. This did not prove to be at all successful. When you think about it, a distributor selling other welding systems as well, which was usual, would be able to sell 10-20 conventional TIG systems to a single K-TIG system, from a productivity perspective, and even then probably still not achieve the same productivity as the single K-TIG system, but the Distributor would make more sales. In addition, they would also get to sell the high priced wire consumables a TIG system needs which is not the case with a K-TIG system. Hence, they were more interested in selling conventional systems compared to a new innovative K-TIG system. This stultified growth in the early years. K-TIG then moved away from using Distributors and moved to having its own sales force. This had a positive impact on sales although K-TIG was stretched with its small salesforce. It then became a combination of considering how the revenue could be grown coupled with a realisation of the fact that the K-TIG System was providing significant financial and productivity benefits to its users which were not being shared by K-TIG. With each of the various business models being considered at the time, each required new capital, coupled with the fact that a number of the Keyhole TIG shareholders had been locked in for some time and with no ability to monetise their investments. Ultimately this led to the deal with Serpentine and the proposed Public Offer. This also crystallised the decision to move to the WaaS licencing model. As a result, the company would move from an all upfront one-off high margin sale to a monthly fee in arrears long term recurring revenue model and the significant impact that that had on cashflow and its timing during the transitionary period. Hence K-TIG need to have a level of comfort that the Public Offer funds were coming in before it could go out and market the licencing model. This all crystallised in August 2019. Bear in mind also that the move to the licence model was only determine in April 2019 and thus was still in its infancy in August. The WaaS licence approach is extremely novel in the fabrication industry and hence K-TIG was not sure how it would be received. Precision Fabricators’ quick take up after it had been enquiring about acquiring a system for over a year, surprised the company, even to the extent that we did not have a formal binding document prepared at that stage. To summarise, K-TIG did not move to the WaaS licence model because it could not sell the systems, quite the opposite. It did it because it believed it could build a better, long standing revenue stream by implementing WaaS and thus get a slice of the benefits the customers were receiving by using the system by receiving a fee for every meter welded using the system. It was the decision to move from a cash up front sale approach to a monthly fee in arrears approach that meant the company needed capital to cover the impact on cash flow.
3) injection of capital into the business by an Emirates based company in July 2015
The interest of the Royal Group in the technology is correct. The significant investment in the company, whilst very small by their standards, is an endorsement of that. However, the company’s desire was to have a broader ownership basis and to be listed and this is the approach adopted rather than continuing unlisted. Whilst it is up to the Royal Group as to what they do going forward, it is interesting to note that not only have they maintained a Board position on the merged entity, but they have a considerable un-escrowed bundle of shares and have shown no desire to sell them.
4) listed too early, but didn't have any choice as they were going broke
It is always hard to judge when is the right time to list. It needs to be noted that Keyhole TIG has been an unlisted entity since 2010. One might argue that they had perhaps taken too long to list. The need for funds is as outlined above – the move from upfront one off unit sales to a monthly fee in arrears licence model. The Precision Fabricators agreement is the first WaaS Licence Agreement which, as outlined above, happened very quickly after a long period when a unit sale could not be locked down. How material the actual revenues are from Precision, only time will tell. If they achieve the sort of sales they talk about and hence there are the production levels that would follow, the licence fees would be quite high. However, given they are on a fee calculated according to their level of usage (meters welded), other than their obligation to pay a minimum monthly fee, it is hard for K-TIG at this very early stage to estimate what the actual fee to be paid might be.
To your overwhelming questions:
- Why haven't customers been lining up for these welding machines if the benefits are so significant? The company has, in the short period it was selling the units, sold them into 20 countries with over 40 units sold. These are not simply hobbyist welding systems you buy from Bunnings. They require a not inconsiderable capex decision to be made by customers not only in relation to the K-TIG system, but also the rest of the other parts of their fabrication line in order to match the significant step change in productivity brought by the introduction of the K-TIG system. The move from a capex decision to an opex decision by adopting the licencing approach is anticipated to assist these decisions greatly, particularly once the customers have a better understanding of the WaaS licence approach.
- Are there other products out there that can achieve a similar result? Keep in mind that a lot of companies producing TIG Welding machines would have huge resources available to them to develop leading tech. No one yet has been able to reproduce the performance of the K-TIG System. The company is not so naïve that it thinks this will never happen – that is why it continues to develop the welding technology as it can, added the layer of the benefits of the Controller and continues to develop that so that it can provide greater control/quality and functionality, but also now added the WaaS licence approach, something the larger producers are unlikely to adopt. K-TIG continues to target the areas it can make significant difference for its users. It readily acknowledges that there are other existing welding technologies which perform as well as if not better that K-TIG in certain situations (metal types, thicknesses, etc), but K-TIG is not targeting those areas.
- Why hasn't another large welding machine manufacturer brought them out or taken a stake in their business. This would make the most sense as they would have amazing relationships with all the companies they need to sell too. Who knows whether that might happen down the track, particularly as we are now more visible. At the moment, given the short period we have been operating, we have not made the impacts on their customers which might cause them to act, after all it is an enormous industry, but we do know they are keeping an eye on us and have, in the past, attempted to derail our sales from time to time.
- If it is the only welding machine of its kind, how good are the patents world wide? Quite often small changes can be made to a product in order to avoid legal litigation. It's not like a pharmaceutical product, which needs trials taking years to gain an FDA or TGA listing. This is key, because if another company was selling a similar product outright, you would think that their customers would prefer to buy that and pay it off in just a few months, rather than paying a lifetime of WAAS fees. This would be the reason why this model has never been used in the past, not because KTG are the only ones ever to come up with the idea.Attempts have been made to copy, but have not yet been successful. We know there is a first mover advantage and we are therefore trying to keep ahead of these entities. K-TIG has independent verification of the system and its reliability and output (see the GE case study for example). The fabricators we are targeting want quality and reliability, which K-TIG brings and which cannot be said for some countries which are notorious for copying. As mentioned, the WaaS licence model is novel for this traditionally conservative industry. The approach has added benefits for K-TIG of providing an ongoing relationship with the customer, plus the equipment now remains our property which comes back to us in the event that the licence finishes. Hence, they do not end up lying around or moving to another country which may be interested in pulling it apart and trying to reverse engineer it.
- Why haven't they sold hundreds of these units when the product has been available for years. Paying for the welder up front wouldn't be an issue for a billion dollar company, especially if it pays for itself in just a matter of months as stated in their presentation. See the commentary above. This is about making the customer competitive again as compared to low cost fabricators in low labour cost countries. They have to win that market back which is an unknown thing and hence the possible benefits of changing their decision from a capex to an opex one. The Argentinian water pipe project situation is not the norm. Clearly in that case he had won the contract and therefore did not have any market risk.
- Why if it has world wide potential to add value is there significant director selling in the first week?It was indeed unfortunate that Kieran Purcell was faced with the personal circumstances where he had to sell 881k shares. It was not everyone’s desired outcome and it was managed by way of a crossing so that as little disruption to the market was done. Kieran has been incredibly supportive of the company in the past and helped it out many times when it has needed it. That aside you will note that the Top 20 has not changed significantly since the re-listing.
While the product sounds amazing, there are a lot of questions which are very hard to answer at this stage, making it very hard to value. I would probably be prepared to take a position in it at around $0.10 unless they could prove that there was actual demand for the product and that the tech, which lets face it isn't rocket science, is proven that it can't be copied. That still values the company at over $15m which is significant with so many unknowns.It is not up to us to opine what is the correct share price. Save to say there are many examples out there where the market has valued similar stages of company much higher.
This is just my opinion and I could have some of the above questions answered, which could completely change my mind on this investment opportunity. For me its just too speculative at present to justify its current valuation.Each investor has a different risk appetite and therefore will take a different view on valuation. That is not something the company can or should opine on.
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