Industrial Machinery│Australia│Equity research│June 7, 2016 IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP Powered by EFA Redflow Consumer offering to open the door We reinstate coverage of RFX following its recent capital raising. We expect RFX ■ to end FY16 with ~A$12.5m of net cash and sales ramping up. After many years of trials RFX recently received its first small commercial orders ■ from a variety of system integrators. We expect sales to accelerate as commercial orders generate revenue and cash. RFX now fully outsources contract manufacturing to global giant Flextronics, has a ■ Battery Management System for ease of installation and use, and is generating small commercial sales, which places RFX one step closer to success, in our view. That said, after a stellar share price performance, RFX is now trading in-line with ■ our price target so we move to a Hold recommendation. Key obstacles have been overcome and sales have started After prolonged testing System Integrator partners have placed small commercial orders for telecommunications and commercial applications and further orders are expected. RFX recognised that slow sales were a result of pain points in integrating the Zinc- Bromine Battery Module (ZBM) so a Battery Management System was built to ease integration and remove a major barrier to sales. Ease of system integration, improved quality control and the ability to manufacture in volume through global contract manufacturer Flextronics, means sales are expected to increase meaningfully from here. Substantial work on the ZCell (RFX’s residential battery) including residential inverters, enclosures and sales channels has been undertaken. Installations are now expected in Q1FY17. This should stimulate residential sales in the near term, and as customers gain comfort with the ZBM, should result in increased commercial adoption. Where to from here Having raised A$12.9m through a placement and entitlement offer, RFX will use ~50% of the funds for working capital, 28% for the residential product, 12% to outsource manufacturing of the large batteries and 8% for ongoing product improvement. With funding under control and RFX generating small commercial orders, the focus now moves to growing commercial sales. History has proven that customers are slow to gain comfort with new technologies but a number of leading integrators have finally crossed the chasm and the residential ZCell should also help early adopters gain comfort that the ZBM is a high quality product with a strong commercial case, in many applications. Investment view – recommendation back to a Hold, for now We now forecast RFX to achieve an EBITDA profit in FY18. Our DCF-based valuation and price target have increased from A$0.39 to A$0.60 on higher medium-term sales expectations. However, the fact that RFX shares have nearly tripled since the start of this calendar year, and now trade in-line with our valuation, results in us downgrading our recommendation from an Add to a Hold. The reward for success remains significant and closer to achievement, in our view. Over the medium term we see upside potential for RFX shares and achieving this comes down to execution. For now we await conversion to larger sales, before getting more excited about the upside potential (of which we see plenty). SOURCE: MORGANS, COMPANY REPORTS HOLD (previously ADD) Current price: A$0.58 Target price: A$0.60 Previous target: A$0.39 Up/downside: 3.9% Reuters: RFX.AX Bloomberg: RFX AU Market cap: US$166.7m A$226.3m Average daily turnover: US$0.50m A$0.67m Current shares o/s 393.5m Free float: 76.9% Price performance 1M 3M 12M Absolute (%) 53.3 79.7 134.7 Relative (%) 51.8 75.3 137 Nick Harris T +61 7 3334 4557 E [email protected]Financial Summary Jun-14A Jun-15A Jun-16F Jun-17F Jun-18F Rev enue (A$m) 5.34 2.04 3.27 13.05 53.65 Operating EBITDA (A$m) -3.15 -12.04 -14.13 -9.72 1.06 Net Prof it (A$m) -3.60 -12.44 -14.56 -9.99 0.26 Normalised EPS (A$) (0.017) (0.049) (0.040) (0.025) 0.001 Normalised EPS Growth (55%) 190% (19%) (36%) FD Normalised P/E (x) NA NA NA NA 871.0 DPS (A$) - - - - - Div idend Y ield 0% 0% 0% 0% 0% EV/EBITDA (x) NA NA NA NA 223.3 P/FCFE (x) NA NA NA NA 145.6 Net Gearing (99%) (90%) (94%) (23%) 101% P/BV (x) 11.20 11.50 15.83 55.22 40.40 ROE (42%) (99%) (105%) (115%) 5% Normalised EPS/consensus EPS (x) 1.98 61 103 144 186 228 269 311 0.130 0.230 0.330 0.430 0.530 0.630 0.730 Price Close Relative to S&P/ASX 200 (RHS) Source: Bloomberg 1 2 3 4 5 Jun-15 Sep-15 Dec-15 Mar-16 Vol m
IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP
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Redflow
Consumer offering to open the door
We reinstate coverage of RFX following its recent capital raising. We expect RFX ■to end FY16 with ~A$12.5m of net cash and sales ramping up.
After many years of trials RFX recently received its first small commercial orders ■from a variety of system integrators. We expect sales to accelerate as commercial orders generate revenue and cash.
RFX now fully outsources contract manufacturing to global giant Flextronics, has a ■Battery Management System for ease of installation and use, and is generating small commercial sales, which places RFX one step closer to success, in our view.
That said, after a stellar share price performance, RFX is now trading in-line with ■our price target so we move to a Hold recommendation.
Key obstacles have been overcome and sales have started After prolonged testing System Integrator partners have placed small commercial orders for telecommunications and commercial applications and further orders are expected. RFX recognised that slow sales were a result of pain points in integrating the Zinc-Bromine Battery Module (ZBM) so a Battery Management System was built to ease integration and remove a major barrier to sales. Ease of system integration, improved quality control and the ability to manufacture in volume through global contract manufacturer Flextronics, means sales are expected to increase meaningfully from here. Substantial work on the ZCell (RFX’s residential battery) including residential inverters, enclosures and sales channels has been undertaken. Installations are now expected in Q1FY17. This should stimulate residential sales in the near term, and as customers gain comfort with the ZBM, should result in increased commercial adoption.
Where to from here Having raised A$12.9m through a placement and entitlement offer, RFX will use ~50% of the funds for working capital, 28% for the residential product, 12% to outsource manufacturing of the large batteries and 8% for ongoing product improvement. With funding under control and RFX generating small commercial orders, the focus now moves to growing commercial sales. History has proven that customers are slow to gain comfort with new technologies but a number of leading integrators have finally crossed the chasm and the residential ZCell should also help early adopters gain comfort that the ZBM is a high quality product with a strong commercial case, in many applications.
Investment view – recommendation back to a Hold, for now We now forecast RFX to achieve an EBITDA profit in FY18. Our DCF-based valuation and price target have increased from A$0.39 to A$0.60 on higher medium-term sales expectations. However, the fact that RFX shares have nearly tripled since the start of this calendar year, and now trade in-line with our valuation, results in us downgrading our recommendation from an Add to a Hold. The reward for success remains significant and closer to achievement, in our view. Over the medium term we see upside potential for RFX shares and achieving this comes down to execution. For now we await conversion to larger sales, before getting more excited about the upside potential (of which we see plenty).
Over the last 6-12 months the RFX team, Chaired by Simon Hackett, has focused on a number of issues considered to be customer pain points or obstacles to sales. Manufacturing is now fully outsourced to Flextronics including supply chain management of components (i.e. procurement and quality assurance of most components). In parallel with manufacturing improvements, the ease of integration improved through the introduction of the Battery Management System (BMS). The advanced BMS is a key development as this cost effectively optimises the battery usage and provides flexibility to all customers in how they use the energy in their system. The BMS will be deployed in all batteries from large commercial installations to individual residential systems.
RFX found that despite having a quality product with favourable economics, this alone wasn’t sufficient to generate healthy sales. In mid CY15 it was recognised that one of the critical obstacles delaying sales was difficulty of integration. RFX had (and still has) chosen to partner with System Integrators which has expertise in installing batteries; however, it became apparent that the technicalities of integrating a Zinc Bromine Flow Battery are different to the technicalities of integrating lithium and/or lead acid batteries. For example, the ZBM can be 100% discharged at which point most inverters disconnect whereas competing products are typically limited to around 70% depth of discharge due to the composition of their chemistry. This difference alone has ultimately meant it has taken longer for system integrators to integrate the RFX battery into their systems and take the product to market. System integrators are there now but it has taken some time. For a live example of a telco tower powered by RFX’s ZBM, see Figure 12 on page 11.
With this in mind, Executive Chairman Simon Hackett resolved to improve the ease of integration via a Battery Management System (BMS). The BMS is predominately a software control system which allows for:
Ease of commissioning (configuring the ZBM for the appropriate usage case and allowing for a much simpler physical cabling connection to the household).
Connecting the ZBM (via WiFi or Ethernet) to the internet allowing remote connectivity to the ZBM for:
- users to remotely manage and monitor their consumption;
- management and diagnostics (tweaking, outputting appropriate data and/or remote problem resolution);
- remote data logging; and
- infield software updates.
Optimisation of the ZBM maintenance cycle, which now has reduced impact on battery operations or availability.
In addition to the BMS, RFX focused on the development of an aesthetically appealing outdoor enclosure for the residential market (and commercial market if required). This enclosure (pictured in Figure 2 on page 4) addresses all the feedback received to ensuring a safe operating installation. Combined with the natural fire retardant nature of the electrolyte, there is a significantly higher likelihood of a safe and easy installation compared to other technologies.
Figure 2: The refined focus for both ease of integration and residential applications
SOURCE: COMPANY DATA
With the BMS operational, RFX moved onto tackling issues relating to the residential application (ZCell). The key obstacles here included:
Access to approved inverters. RFX now has access to appropriate Australian approved inverters (to connect the battery to the household) and is in the progress of finalising two others; and
Establishing a channel to market. We understand RFX has engaged with retail solar installers in Australia with a view to having a number of installers available (per region) to whom RFX can direct any retail requests for ZCells.
Recap of the main investment thematic
The use of batteries to store energy is potentially one of the most transformational industrial advances of our generation. The ability to store power in a cost effective manner will dramatically change the way the world works as it overcomes the key stumbling point, which is the intermittent nature of renewables. RFX is at the forefront of this storage trend and is, in many cases, already offering a cost effective solution relative to the current alternatives.
We are not alone in this thinking. AGL Energy CEO, Mr Andy Vesey, recently commented that “AGL was expecting a 60% reduction in the cost of batteries over the next five years, while performance would improve as investment poured into the chemistry and material science underpinning the technology”. He also noted that advances in battery storage will “change the world” of energy investment over the next few years (Source: AFR 25/05/2016).
Figure 4 (on page 6) shows that, on our estimates, RFX has reduced the cost per kilowatt hour of its naked battery by 62% in the last two years (from A$0.95 per kw hour in the ZBM 1 to A$0.38 in the ZBM 3).
The key, in our view, remains that RFX’s position on the cost curve remains relatively high (i.e. it is at the start of the cost reduction cycle and has a long way yet to go). Despite being at the start of the cost curve, RFX’s product is already cheaper (on warranted kilowatt hours fully installed) than competing technologies like the lithium ion-based Tesla Powerwall.
We calculate that the installed cost per warranted kilowatt hour for Tesla’s Powerwall is A$0.72 and the installed cost per warranted kilowatt hour for Redflow’s ZCell ranges from A$0.55 to A$0.65. This means, in our view, that for regular uses RFX’s ZCell offers better value. The Powerwall costs less in terms of upfront dollars (capex), but looking at the fine print, it has less warranted throughput than a ZCell. The Powerwall warranted throughput is almost half of Redflow’s so the cost per kilowatt hour warranted and installed for a Powerwall is actually 27% higher than for a ZCell. See Figures 6 and 7 on page 8 for details.
As Figure 3 illustrates, Li-ion has been around for some time. It was originally mass produced in laptop batteries and has started to fall down the cost curve. Tesla’s Gigafactory (making batteries for cars and households) has propelled lithium ion into investors’ minds but the rare earths constrain cost reductions (as shown by recent price increases in lithium). The lithium carbonate price has risen from US$5,500/t in 2014 to the current US$10,000/t. ASX listed producer Orocobre (ASX:ORE) recently predicted that strong demand will maintain this stronger pricing over the next three to five years - as battery production continues to rise, with a longer term projected price of US$8,500.
The benefits of volume growth, contract manufacturing and technological improvements (i.e. greater efficiency) have driven a large decline in solar prices per kw hour. The focus has moved for some onto batteries. While Li-ion costs have room to move, the technology has been around for a long time so, in our view, has less scope for cost reductions than flow batteries. For RFX the cost reductions have only just begun.
Figure 3: The historical cost curve of solar and Li-ion
SOURCE: CLIMATE COUNCIL - BATTERY STORAGE FOR RENEWABLE ENERGY AND ELECTRIC CARS
As Figure 4 on page 6 shows, RFX has improved cost significantly but it has only just started mass manufacturing and by virtue of containing no expensive rare earths (unlike Li-ion) has more room to slide down the cost curve. We expect this to happen for RFX through a combination of lower input costs due to contract manufacturing (buying and building in volume) and a longer useful life, which increases throughput and therefore lowers the cost per kilowatt hour. Figure 4 shows that, on our estimates, RFX has reduced the cost per kilowatt hour by 62% in the last two years - from A$0.95 per kw hour in the ZBM 1 to A$0.38 in the ZBM 3 (this is the uninstalled or naked battery cost). It’s important to note that this large price reduction happened before RFX outsourced to a contract manufacturer so we expect there is more room to move on this price over coming years.
We also note that all RFX’s product pricing is USD denominated (apart from the ZCell for the Australian residential market). This provides a natural hedge to manufacturing costs, which are also USD denominated.
Figure 4: RFX’s ZBM cost per kilowatt hour trajectory, so far. Without the benefits of full scale contract manufacturing or volume growth
SOURCES: MORGANS, COMPANY REPORTS
While the cost trajectory is heading in the right direction, the economics of household storage (versus buying off-grid in a metro area) are, unfortunately, not yet financially viable for either Redflow’s ZCell or Tesla’s Powerwall. However, there are early adopters and first movers who have expressed interest in the ZCell and for whom the economics are not the primary motivator. We explore this in more detail in the latter part of this research report.
Furthermore, don’t forget that the economics are positive in a number of other applications – hence the commencement of small commercial sales (in telecommunications and commercial applications). We also expect RFX’s and other household storage economics to improve over time but note that, on our estimates, over half the fully installed costs of a ZCell are outside of RFX’s control (i.e. include inverters and labour related to installation).
However, there are a number of economically viable solutions that can drive sales…
Many non-metro and off-grid applications are currently powered via diesel generators for rural and remote locations (such as farm water pumping stations) and diesel generators in conjunction with traditional lead acid batteries (for off-grid telco applications). For off-grid telco applications the cost is often related not only to the per kilowatt hour economics but regular battery replacements due to theft and/or product failure due to high temperatures and/or high saline environments. In both instances the cost per kilowatt hour of the current legacy solutions is typically in excess of US$1.00.
The RFX’s ZBM 2.0 sells for a recommended retail price of US$8,000 (US$0.27 per kilowatt hour) but has additional costs to make it a fully operational commercial solution. RFX’s residential solution (the ZCell) is not designed as a business focused product but we can use it as a reference point since we have a fully installed price per kilowatt hour of around US$0.43 (A$18,500 / 30,000 kilowatt hours = A$0.62 / 0.7 = US$0.43). The commercial version (ZBM 2.0 including system integrators parts and installation) should be cheaper than the ZCell residential product. However, even if the costs were identical, RFX’s product is still at least half the price of using diesel (US$1.00 per kilowatt hour) and much cheaper than using diesel plus lead acid batteries and having to regularly replace batteries due to degradation and theft.
Consequently, the economics of RFX’s product work well in their existing applications such as mobile phone towers (in remote and rural areas without robust electricity grids) and off-grid applications. Not surprisingly these applications are gaining traction and RFX has noted “first small commercial orders” from a variety of system integrators.
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One recent example is where RFX delivered batteries to a commercial customer, in Wilunga, South of Adelaide. This customer chose to pay A$40,000 to have solar and two RFX batteries installed (~20kws per day) rather than spend A$150,000 to extend poles and wires 600m to his facility. Source:http://reneweconomy.com.au/2016/redflows-hackett-2016-is-inflexion-point-for-battery-storage-91076
Another noteworthy example of the positive economics is that Ergon Energy estimates “battery storage deployed at the grid level could avoid costs associated with building and upgrading the network, potentially reducing costs by 35%” (Source: page iii of Climate Council report). Ergon Energy is a Queensland supplier of electricity to over 733,000 customers across over one million square kilometres (or 97% of the state of Queensland). It makes logical sense that RFX as a QLD supplier of batteries can assist Ergon through its microgrid product the Large Storage Battery.
More on the ZCell or residential applications
RFX’s residential product, the ZCell, is initially expected to be priced at between A$17,500 and A$19,500 fully installed. At the mid-point this equates to A$0.62 per kw hour, which means the ZCell (when combined with solar PV which costs around A$0.06 per kilowatt hour to generate) is not currently a cost competitive solution relative to buying power from the grid in a metro location.
Despite the Tesla Powerwall having a lower headline price (in terms of upfront capex), the installed price per warranted kilowatt hour is most relevant to consumer economics and the Powerwall is, on our calculations, more expensive than a Redflow ZCell as it costs A$0.72 per kilowatt hour (installed and warranted). Refer to Figures 6 and 7 on page 8 for details on how we come to this price.
The residential economics are not yet favourable but that could change over time.
Currently it costs around A$0.06 per kilowatt hour to generate power from solar (a ~seven-year payback) and around A$0.62 per kilowatt hour to store energy (based on the high end of RFX’s installed price and with a shareholder discount).
This means solar PV plus storage still has negative economics at 68c per kilowatt hours versus buying off grid for A$0.20-0.40 per kilowatt hour. However, that doesn’t mean innovators and early adopters won’t buy a residential storage solution.
Figure 5: Residential price per kilowatt hour (warranted and fully installed)
RFX’S ZCELL IS WARRANTED FOR 10KW HOURS PER DAY OVER 8 YEARS (30,000KW HOURS) WHILE TESLA’S
POWERWALL IS ACTUALLY WARRANTED FOR 16,025KW HOURS OVER 10 YEARS WHICH AVERAGES 4.4KW HOURS PER DAY. REFER TO FIGURES 6 AND 7 ON PAGE 8 FOR DETAILS SUPPORTING THE WARRANTY CALCULATION.
SOURCE: MORGANS ESTIMATES AND COMPANY DATA
If we add the cost to generate power from solar PV (6c) to the storage price (A$0.62 at the mid-point) then the 68c cost per kilowatt hour (for solar and storage) is well out of the money versus buying off grid directly in the metro. In my case buying off grid costs an average of A$0.35 per kw hour (including the daily connection fee).
If we adjust for peak and off-peak consumption and include the daily connection charge, then peak prices are around A$0.40 versus off-peak at A$0.26. Despite the large spread in peak versus off-peak costs, household storage (just for peak usage), still isn’t economic on our estimates. However it’s not far off.
From a Net Present Value perspective (and assuming zero cost to generate because storage is plugged into a Solar PV that has already paid itself off) then the economics are as follows. Financially you’re A$10,413 to A$7,904 worse off in today’s dollars (Net Present Value using a 7% Weighted Average Cost of Capital) but that is a small price to pay, in some people’s opinion, for being environmentally conscious/considered.
Figure 6: ZCell NPV (Net Present Value of the fully installed product and warranted kw hours) based on the lower end of installed price after the A$1,000 share holder discount
We calculate annual saving on 29,200 kw hours of energy that is warranted for use from the battery (the sum of row A x 365 days per annum).
We calculate the net saving is 27c per kilowatt hour being
1) Not having to pay 35c per kilowatt hour to buy power off the grid (because the battery is charged off solar during the day which we assume has already paid itself off so the power is free).
2) Losing the 8c per kilowatt hour solar rebate which is what the energy retailer is currently paying consumers to sell solar energy into the grid in QLD.
Hence the net saving is 27cents being 35cents (saved) minus 8c lost (rebates not received for selling the solar power because you are using your solar to charge your battery).
SOURCE: MORGANS RESEARCH, COMPANY
Note, the ZCell NPV becomes a negative A$8,291 if we chose to ignore the lost income (rebate offered) of 8 cents per kilowatt hour.
Figure 7: Tesla Powerwall NPV (Net Present Value of the fully installed product and warranted kw hours)
#1. We calculate the annual saving on 16,025 kw hours of energy warranted for use from the battery (the sum of row C x 365 days per annum). We calculate the net saving is 27c per kilowatt hour being
1) Not having to pay 35c per kilowatt hour to buy power off the grid (because the battery is charged off solar during the day which we assume has already paid itself off so the power is free).
2) Losing the 8c per kilowatt hour solar rebate which is what the energy retail is currently paying consumers to sell solar energy into the grid in QLD.
Hence the net saving is 35cents (not spent) minus 8c (rebates not received for selling the solar power because you are using your solar to charge your battery).
SOURCE: MORGANS RESEARCH, COMPANY
Note, the Powerwall NPV becomes a negative A$6,971 if we chose to ignore the lost income (rebate offered) of 8 cents per kilowatt hour.
For a detailed third-party review of the Redflow ZCell refer to
However it’s a big addressable market and price certainly isn’t the only consideration
Despite residential storage having a negative NPV in metro, there is still a segment of the market that is not price conscious and is prepared to pay a higher price for a number of reasons including environmental awareness, testing new products (at home before considering installing it in a commercial
environment) and of course there are many locations that are not buying power at metro prices (like pumping stations in farms that are off-grid or mobile phone towers).
Australian solar sensitivity analysis
In Australia, 1.4m households have solar installed (source: https://www.cleanenergycouncil.org.au/technologies/solar-pv.html). If 2.5% of these or 35,000 households decided to buy a RFX ZCell then this would generate over A$100m in EBITDA for RFX, on our estimates. Cracking this market alone would be sufficient to turn RFX into a highly successful business.
Whether or not 2.5% is a reasonable number remains to be seen but our logic for using this number is based around segmenting consumers in-line with the technology adoption curve. In academic literature, and in our experience in the real world too, around 2.5% of the population is classified as “innovators” and another 13.5% is classified as “early adopters”. If we add the innovators and early adopters together we have 16% of the market which is, interestingly in Australia, about the percentage of households that have solar. While it’s difficult to quantify it’s reasonable to assume that many of the solar early adopters went there because of a combination of environmental and economic reasons (i.e. they wanted to feel good about what they were doing but could also see good economics in solar).
Figure 8: Sensitivity analysis – there are 1.4m Au households with solar. What if...
SOURCES: MORGANS, COMPANY REPORTS
It is worth noting that if RFX were successful in selling to households, as illustrated above, then this clearly would not happen over a single year but perhaps spread over 5-10 years. Furthermore, if and when the economics of storage improve, we would expect more households to adopt solar and storage so the addressable market could easily exceed 1.4m households. RFX would also need to share this market with other battery operators like Tesla and Panasonic so the above would likely be spread across perhaps four main manufacturers. We do not currently forecast anything as significant as this in our numbers but are simply trying to illustrate there is significant upside potential.
Furthermore, originally a portion of solar was installed when there were government rebates which made them attractive investments (a 40c per kilowatt hour government rebates for selling solar PV into the grid or 8c now in QLD). On 31 December 2016 146,000 NSW households come off this government-subsidised feed-in tariff and are a logical target market for RFX’s ZCell.
Figure 9: Sensitivity analysis – there are 146k NSW households on solar rebates which are expiring this year
SOURCES: MORGANS, COMPANY REPORTS
Innovators Early adopters
Au households with solar 1,400,000 1,400,000
Assumed storage takeup 2.5% 13.50%
Number of households 35,000 189,000
Recommended Retail Price to RFX 13,429 13,429
Revenue 470 2,538
Gross profit (at 30%) 141 635
OPEX 13 13
EBITDA 128 621
Innovators Early adopters
Au households with solar 1,400,000 1,400,000
NSW solar PV on 40c feedin tarrifs 146,000 146,000
Another example of an already economic market is using the ZBM (or two of them per site) to support remote mobile phone towers (where power costs currently exceed $1 per kilowatt hour). There are 5m of these globally and 1.8m new towers expected to be installed in the next four years that are off-grid or bad-grids (i.e. potential users of the ZBM). There are a number of system integrators selling to this market so we simply presume that RFX operates through one of these SIs who holds 30% market share (i.e. RFX’s addressable market is 30% of 1.18m sites or 354,000 sites). Selling two ZBMs per site to just 1,700 sites (0.53% or half of 1% of the addressable market) would be sufficient to see RFX reach breakeven. While winning a meaningful portion has much greater upside potential, we are not forecasting this in our numbers, just illustrating the upside potential.
Figure 12: RFX’s ZBM in a live telco application (supporting a remote off-grid mobile tower)
SOURCE: MORGANS RESEARCH, COMPANY
Microgrid
RFX’s LSB (Large Storage Battery) is a ~0.7MW system that consists of around 60 ZBMs connected together and built into a shipping container. These can be used to power large sites (i.e. a commercial location) or to time shift (meaning grids don’t necessarily have to be upgraded for peak consumption which prevents large upfront capex). Ergon Energy estimates “battery storage deployed at the grid level could avoid costs associated with building and upgrading the network, potentially reducing costs by 35%” (source: page iii of Climate Council report).To date LSB sales for micro-grid applications have been limited but given a recommended price of around A$758,000 (US$500,000) a few sales from this category have the potential to move the dial in a meaningful manner.
Figure 13: RFX’s LSB can be used for peak shaving in grids
SOURCE: MORGANS RESEARCH, COMPANY
Sales strategy
RFX’s sales are through system integrator channels as listed below. Their residential product (the ZCell) is due to be installed by solar installers in Q1FY17 and RFX aims to initially have a number of installers in each key geographic location.
RFX raised A$12.4m in 1HCY16. The company had net cash of A$4.3m at 31 December 2015 and shortly thereafter received a A$1.9m R&D tax credit. On a pro-forma basis (including the recent capital raise) RFX had A$18.5m in cash as at 31 December 2015.
RFX has an average underlying cash burn of A$600,000 per month (A$7.2m pa). RFX expects around A$5.5m in one-off costs (with a cash impact – see use of funds below) over the next 12 months. RFX generated A$225,000 worth of sales in 1H16 and from a cash flow perspective has already announced a substantially stronger first quarter in 2H16.
We have reduced our short-term forecasts materially as RFX has recently raised capital because short-term sales have not eventuated as originally expected. Offsetting this we have increased our forecasts over the medium term which, combined with 16% higher share count, results in our DCF-based valuation increasing from A$0.39 to A$0.60. We apply a 15% Weighted Average Cost of Capital for our DCF based valuation.
Following the significant share price rise over this calendar year, the share price is now trading at our revised price target and we reduce our recommendation from an Add to a Hold. We see substantial upside potential upon successful execution and await further details of commercial sales to increase our confidence in the outlook.
RFX has, in our view, a game changing energy storage product that is ripe for mass market consumption. To date the company has not succeeded in getting this product to market to generate meaningful sales. We believe the product is now very stable and has impressive economics (i.e. a powerful business case which creates financial, social and environmental value for end customers). This means the key risks and rewards for RFX relate primarily to revenue generation.
There have been many superior technologies that have failed commercially due to poor sales and marketing execution. Beta versus VHS tapes and in the early days Apple versus Microsoft are two prime examples of superior products that failed to gain favour with the mass market and therefore generate meaningful revenue.
RFX suffers a similar risk/reward profile, in our view. The company needs to get its product to market for commercial adoption in order to generate sufficient revenue for RFX to become a self-funding business. The reward for success is substantial (as illustrated in our sensitivity analysis). However, failure to reach this point in a timely manner could result in the company requiring additional capital (as just experienced), potentially missing the opportunity or being outmanoeuvred by a competitor. The ability to capture the market opportunity would create substantial upside for shareholders from current levels, in our view. The risk/reward now comes down to RFX’s execution skills and its ability to generate meaningful product sales.
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Regulatory disclosures Analyst owns shares in the following mentioned company(ies): Redflow. Morgans Corporate Limited was the Lead Manager to the placement and rights issue by Redflow Ltd in March 2015 and received fees in this regard.
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