So I wanted to add some of my thoughts on the investment case for FBR. I'll examine my current best and worst case scenarios, as I see them at the moment. Obviously these are IMO only and the actual result will probably end up somewhere between these extremes. Any figures used are estimates only, so if you disagree, please feel free to substitute your own numbers and assumptions, these are for illustrative purposes only. Be aware that I have little basis for any of my figures, other than a basic understanding of corporate finance and project management from my uni days, and some of the information contained in the EY-P report.
BEST CASE Scenario: HX is a success and FBR sell the design to CAT while retaining the rights to DST. CAT manufactures and sells HX under its own brand, purchasing units of DST from FBR for each unit produced.
Reason: Sale price allows FBR to develop manufacturing capacity for DST and fund research and design for the next application of DST. Retaining the rights to DST is key, and in-house manufacture is paramount, otherwise there will be 100 competitors in the market next week. Companies should never outsource their primary business function (you may argue that FBR's core business is R&D, however IMO DST is the core business of FBR).
Benefits: Recurring revenue! - DST sales - CAD software license (needed to operate the machine, paid by the owners of HX machines purchased from CAT) - per brick royalties, in partnership with Wienerberger - HX updates - CAT may commission FBR to update and improve HX, though they may also make their own improvements in-house. Allows FBR to move on to the next application for DST and provides funding. Snowball effect - Each new application for DST should provide recurring revenues that require little ongoing effort, and the sale of each should provide funding for the next.
Challenges: FBR has to develop in-house manufacturing processes for DST, to provide enough volume to meet CATs demand and expandable capacity for future DST applications. This takes time, know-how and funds. CAT may provide some assistance with know-how, and sale of HX will provide some funds.
Estimates: HX Sale Price - My best guess at sale price for HX puts it somewhere in the 9 figure range. Assuming a payback period of 5 years, $100k pure profit to CAT for each unit sold (including costs to establish manufacturing capacity, depreciated over time), and HX sales of 125/yr increasing by 125/yr (1,875 units over 5 years, addressing FBRs intention to capture 2% of 90,000 potential HX required globally for low rise brick and block construction over next 5 years as per EY-P report, which would require 1,800 units). This would put the purchase price at $187.5M. There is a lot of room for variation in these figures. As a large established company, CAT may be willing to have a longer payback period, the number of units produced could be wildly different and the profit per unit may be different also. There are also other ways to calculate investment figures, however I have chosen payback period for this estimate. DST sales - I have no idea what price FBR could supply DST for. I'm going to assume $50k for this estimate. That would provide revenues of $6.25m yr 1, $12.5m yr 2, $18.75m yr 3, $25m yr 4 and $31.25m yr 5. CAD software - AutoCAD software licenses run at approximately $2,600/yr. FBR could reasonably charge $5k/yr. Revenues per year: $625k yr 1, $1.875m yr 2, $3.75m yr 3, $6.25m yr 4, $9.375m yr 5. $21.875m total revenues from software over 5 years (assuming CAT sells all units as previously assumed) Per brick royalties - This is pure guessing, but I'd say maybe 10c/block. EY-P report suggests global brick and block market in 2018 to be 198B bricks/blocks, needing 90,000 HX to fulfill. From that, each HX can lay 2.2m standard bricks each year. FBW system blocks look to be 6-10x bigger than standard bricks IMO, so lets call it 10, then each HX lays 220k blocks/yr. At 10c each, that would be revenues of: $2.75m, yr 1, $8.25m yr 2, $16.5m yr 3, $27.5m yr 4 and $41.25m yr 5. All this gives FBR revenues of: Up-front $187.5m Yr 1 $9.625m Yr 2 $22.625m Yr 3 $39m Yr 4 $47.75m Yr 5 $81.875m This is without factoring in the next application of DST, which will take less time to produce now that DST has been proven, so it could well be ready in <5yrs. The delay with HX has been proving the capability of DST, so the next application and beyond will be demonstrating how DST works on that particular application, not a showcase of DST itself. This also assumes CAT does their own in-house improvements to HX. Not bad figures IMO. I love the idea of CAD licenses and brick royalties, these are infinitely scalable with no further input from FBR, so these revenue streams are basically pure profit. Even if FBR never made another DST application, the ongoing revenues from these 2 streams alone make FBR an attractive investment proposition. Keep in mind this is my picture of the best case scenario, your opinion may differ, but to me based on these figures, the company looks quite undervalued.
WORST CASE Scenario: Mark and Mike Pivac are pulling of an elaborate investment scam. They take the money and run, leaving our investment worth $0. Unless you are leveraged on FBR, which I don't recommend, your maximum loss is 100%, so you will not be on the hook for more than your initial investment.
Reason: This scenario is extremely unlikely (almost 0%). Everything that I have seen from the Pivacs indicates that they are good, honest blokes with integrity. DST is Mark's lifes work, I highly doubt he has plans to abandon it. Their handling of some information releases may have been rushed/sub par, but keep in mind this is a small company, not a blue-chip. Sure, they may have some experienced guys around them that should know better, but I am, on the whole, pretty happy with their running of the company. The negotiations with global giants like CAT and Wienerberger are a great testament to their ability and the promise of HX and DST, and Mike's admission that they have handled some releases poorly in the past (the DST video) is another sign of his integrity and honesty IMO.
As mentioned, I expect the actual result of FBR to fall somewhere between these scenarios. Another potential outcome that has been repeatedly suggested, that I honestly don't attribute a high chance to, is the potential for a takeover bid by CAT. I find this unlikely, for reasons I have mentioned in one of my previous posts, though if that eventuality were to occur, I'm pretty sure CAT would be paying through the nose for it, so I certainly wouldn't vote against it.
DYOR, and GLTAH!
FBR Price at posting:
20.5¢ Sentiment: Buy Disclosure: Held
