History and valuation

It's almost impossible to value KTG as it has almost no earnings and is purely speculative at this stage, although the claimed productivity benefits to their customers seems to be compelling, so it was worth taking a closer look.

At first glance and after a bit of research, it is absolutely clear that KTG isn't a new company. In fact they have been out there selling these welding machines for around 5 years now. With tiny revenues one has to ask why their customers haven't been lining up for the product, if there is so much demand. I just don't know the answer to these questions, but it is clear that they have gone from selling the units outright to the new Weld As A Service (WAAS) model at the time of listing on the ASX. I can only guess that is because they aren't able to sell enough of them to make the business profitable and therefore had to change their business model. So this sounds quite ingenious.

Then when I dig a bit deeper, I find that just a few years ago, July 2015, there was an injection of capital into the business by an Emirates based company. This is a company associated with he royal family in Dubai and it would be fair to say that these guys are filthy rich and have billions at their disposal. That's pretty good and it meant they had a belief in the technology, but it would seem that due to the lack of success of the actual business, these guys have decided not to inject anymore funds into the business forcing them to list on the ASX in order to raise capital.

In my opinion they listed too early, but didn't have any choice as they were going broke. The reason for this is because they have only just appointed their first WAAS client with no material revenue, to see if their business model will be viable and if their systems will work. Now if you were one of the directors, wouldn't you rather come to market when the model was already proven with great revenues, especially if it was only going to take a year or two as detailed in their presentation? The answer to that question is absolutely yes, as the valuation would be much higher than it is today. If they had listed with a proven model, there would be less dilution due to a higher valuation and that would mean more value and greater ownership of the business by the directors and the board. So they had to list as they were going broke and their Emirates investors refused to plough more capital into the business. They had to change their business model as it wasn't working, but also to get the market to buy into their story.

So the overwhelming questions are

- Why haven't customers been lining up for these welding machines if the benefits are so significant?
- 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.
- 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.
- 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.
- 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.
- Why if it has world wide potential to add value is there significant director selling in the first week?


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.

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.