KPO (ASX) Ann: Proposed Exercise of Options &amp; Change in Substanial Holding

Originally posted by Ildsrud ↑

Today @prowiz, myself and a few others met with the KPO team in Melbourne for an informal discussion over lunch. This is part of their roadshow that they are currently doing, with 40 meetings set up over the coming week. The lunch was organised by Hartley's and Vesparum Capital. Ross MacLachlan and Tim Horgan were there on behalf of the company, with Ross taking us through some of the history and future plans for the company.

As it was an informal discussion over a meal I wasn't able to take notes, however some of the key takeaways for me (in no particular order) are as follows:

The commercialisation of the Kalina cycle into a viable has gone through a couple of evolutions, with 2 prior attempts failing due to the wrong business model and management execution. The first evolution was to own the tech and build the plants around the globe, the second being to license the tech freely with no execution risk and collect royalties. Both models failed fully grasp the need to have an economically viable model that meets the technical and execution risks involved with building a power plant. The Kalina process is not a fringe technology, but is actually well understood and taught in heat to energy curriculum around the world. Ross points to the 15 plants that have been deployed across the globe under the old management, which have been operating continuously for up to 10 years according to design. As such the technical risk isn't the issue, it is simply the business model. They are confident they have now solved that issue, having spent a great deal of time refining a viable economic model that can be rapidly deployed in a profitable and controlled manner.

It was impossible not to walk away with the knowledge that Ross wants to make things happen, and fast. He's looking to execute a strategy that sees results within 6-24 months, not 5 years. This impacts everything from making high quality hires to their team, appointing world leading vendors and EPC suppliers, and getting contracts signed and plants built. They are very focused on telling their story over the next couple of weeks to the investment community, then putting their heads down and executing the plan.

Sinopec implementation is going full steam ahead to complete the current project. They are currently working with Sinopec Engineering, who has introduced them internally to Sinopec Petrochemical, who have around 1,800 production sites. They have identified around 100 that could use the Kalina process. I took it as a strong endorsement that KPO has internal sponsors willing to promote them within Sinopec. The Sinopec Group is enormous, so signing up further plants with this one company alone could keep them busy for years.

On the China front, they have made 2 highly skilled and experienced hires recently, both who are Chinese background with over a decade experience working in North America. This means no cultural issues either not understanding the Western or Chinese way of business, but rather these guys can hit the ground running and get things done. China is a big focus market for them at the moment, given the size of the market and government demands for clean energy sourcing for industrial companies. Equally, the market opportunity outside China is massive, so they have a separate focus to execute in other markets also.

They are very focused on becoming cashflow neutral/positive within 2 years, funded by the current cash balance + option conversions. Initially they are seeking to roll out Kalina Cycle deployments whereby they earn $500k in engineering services per megawatt, followed by a recurring royalty revenue of $1.5m, so $2m total net revenue. As more plants are deployed more recurring revenue is added, while the upfront engineering fees will pay for current overheads and costs. This model allows the business to build to a critical mass to breakeven and become cashflow positive, after which the business starts to build a strong balance sheet (cash). They will be focused on partnering with customers and third party financiers who can fund plant deployments initially, and then once the KPO balance sheet is strong enough, they will start to build and own their own plants, selling the electricity output to generate enhanced financial returns. It's important to note that the company's business model does not require the company to invest any capital into projects unless they choose to, hence they can run relatively lean and execute projects without the need to raise significant funds that dilute shareholders. Ross emphasised that he is a very conservative guy when it comes to financial returns, so he is hoping they can really generate some impressive financial returns relatively quickly.

Their immediate internal target is a $150-$200m market cap, and they want to get there fast, based on plant deployments over the next 2 years (targeting 100MW of plants in production). After this point they will increasingly seek to build and own plants (selling the power), which would take them into the second phase of the business plan and give diversification to revenues streams on top of the engineering services and recurring royalty revenue. This would be part of their drive to a market cap far higher than $200m.

Ross gave a bit of a run-down on the involvement of Harringtons as a substantial shareholder. He said not only do they provide strong register support and have done so for many years through the old management structures, but they are very well connected and have made introductions to some very significant parties who can potentially act as financiers for plants into the future. They are very pleased to have them on board. The recent option conversions allowed the company to get more cash onto its balance sheet. This was important as prospective customers, vendors and EPC partners require confirmation that the company has sufficient funds to meet plant deployments, hence having ~2 years of operating cash in the bank is a big plus.

Ross said that they have had world leading EPC firms in multiple markets around the world coming to them wanting to partner with them for the rollout of plants. They are conscious of wanting to have high quality partners, and are willing to give some gross margin away in exchange for operating with the highest quality players globally. This is part of their strategy to be able to rollout plants fast and at a high quality. They will be announcing more partner signings over the coming months.

Overall it was clear that they have a clearly thought out business plan that they are very focused on executing. Ross stressed that when he came on board last year as a board director he spent considerable time developing the right strategy to deploy the technology and build a business that has a strong financial model and can grow rapidly and on a global scale. He places a fairly high importance on the people within the business, hence some of the key hires from Pristine Power in recent times. There seems to be a huge market for them to target across the globe and they are very focused on doing that in a financial considered way. They are very confident that they now have the capital, partners and business model to achieve global success. It seems there is going to be a steady stream of news over the coming months. I suspect the shareprice will enjoy a strong run as they continue to execute and sign-up sales.

Expand

Great work Ildsrud.
I will be at the Sydney lunch on Thursday and will report anything additional I might pick up.

The key here is if management can pull this off. So I am keen to meet Ross.

We know the tech works and that it is leading edge and has advantages in plant cost and opex and efficiency.

Cheers

(20min delay)
Last 1.1¢		Change -0.001(8.33%)		Mkt cap ! $29.00M

Open	High	Low	Value	Volume
1.2¢	1.3¢	1.1¢	$44.81K	3.779M

No.	Vol.	Price($)
4	2907966	0.011
3	2500000	0.010
1	35000	0.007
3	486000	0.005
0	0	0.000

Price($)	Vol.	No.
0.015	1623771	3
0.016	3712267	5
0.017	678791	2
0.022	12000	1
0.024	11000	1

Ann: Proposed Exercise of Options & Change in Substanial Holding, page-34

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