I was feeling a little nervous about this raise following the initial announcement. However, I think there are some very promising things that we now know. The Petra report from May this year stated “Military contract ramp-up could require capital for inventory build
Moving to US$50m of annual revenue generation would likely take two years (i.e. 2020) and could also require initial working capital (inventory) of US$10-15m. This could be debt funded, although without a credit rating, the current working capital facility attracts an annual interest rate of 15%, which is prohibitive, in our view, while the first of the two US$5m facilities is effectively fully drawn.” (Bottom of page 22). This sounds like they knew exactly what was coming. I believe they are only talking about the FRACU, not the non-combat uniform which is also mentioned on the term sheet (thanks James). The revenue for the standard uniform would have to be greater than the FR uniform wouldn’t it? (I.e. >$50m). Add those together at 30-40% margins... Pinto I miss you doing the maths for us.
I also note the following from the term sheet “The inventory capacity funding is to provide demonstrable inventory investment capacity ahead of anticipated customer production ramp-up and new product trial requirements.” Which to me matches particularly with the mattress expansion commentary which states “Quality control, capacity audits and further development activities have been initiated by the customer.” Perhaps AJX has been asked to demonstrate an ability to supply a certain amount of product in order to go ahead, and they are unable to do so under the current financing arrangements without putting the balance sheet under excessive pressure.
Even if that link is all in my mind, it is clear they were unable to supply big contracts without more $ in the bank. It’s a bit chicken and egg. They must have felt they had to take a risk that at least one of these contracts will come through (assuming they don’t announce one on Monday).
My take is they’re so confident now that at least one of these is going to drop they’re prepared to take the risk, even if none of them are signed yet. I’m happy with that because it means big growth rates are still on the cards. If by mid 2018 nothing has materialised, I suppose we’ll all be sold out and bitter.
I know there is still a lot of “potential” and “anticipated” being bandied about, but I’m inclined to agree with the more positive posters - more likely than not this is the beginning of what we’ve been holding on for.
AJX Price at posting:
38.0¢ Sentiment: Buy Disclosure: Held
