Breathless - (VDTK)
30/6/2020
(119264)
Breathless
Good gracious! It would be folly to guarantee that Verditek (VDTK) is going to switch from a cash-strapped, loss-making weakling to a revenue-rich, booming business in the twinkling of an eye – but it looks very much as if it could.
Pause for breath. Read and recite all of the sensible cautions. This is a small, relatively young company, cash is tight, the technology is relatively new to the market, there have been no sales or revenues until very recently, it has been slow to gain traction, and the chief executive only arrived a few months ago. Fairy tales do come true, sometimes.
Verditek, it seems, is no fairy tale. Quite suddenly, powered by the ambitions of new chief executive Rob Richards, it has switched from chasing a series of alluring but mostly smaller scale opportunities to seeking to secure major orders in more substantial markets. If it succeeds, the outlook will be transformed.
The company makes lightweight, flexible solar panels which have crucial advantages over the panels we see frowning darkly from the roof of assorted factories and houses, and are mostly mass produced in China. The weight and flexibility of the Verditek kit means it can be used in many more places than the traditional panel, and it can be transported cheaply and fixed easily.
Go to the Verditek website at https://verditek.com/ and there are pictures of it in action in all sorts of applications. At this stage, it is not clear how far along the way to firm orders these examples might be. We know the panels are selling on the curved buildings, and there are serious talks going on over other ideas – possible military use and the top of trucks – but while these are nice ideas, it seems as if these are small beer, and any early volume might come from elsewhere. Paul Harrison, one of the founders who is not on the board, has talked in an informative video at https://vimeo.com/427963339/dcc3b0dc0b about doing a deal with one of the world’s biggest trucking companies.
In the newly minted 2019 annual report, Richards points to the importance of solar panels in providing an alternative source of electrical power which removes the need for using diesel fuel for generators. Diesel is expensive and especially costly to transport. Harrison explains that the cost to the Australian army of transporting fuel to Afghanistan was $200 a litre. Ordinary solar panels are heavy to transport, reflect light, and get obstructed by dust. Verditek panels are light, durable, work in the shade, repel dust, and can be camouflaged.
What’s not to like? There are talks with a tier one Aussie defence company and trials are close. Others, impressed by the massive fuel savings and easy transportability, are also talking. It is part of the Verditek advantage – replacing wet fuel with dry.
At this point, the company is not able to confirm many definite orders. Toggle between the Harrison comments and those from Richards and it is clear that firm orders are expected soon. How soon and how large, we don’t know.
There are already smaller orders in South Asia, South East Asia, and Europe. One has been announced – just over a week ago there was one from SAF Group (part of Caterpillar) for kit which replaced diesel generated power at gas transmission sites in Pakistan. Apparently it was not massive, but not too small.
The first order from the oil and gas industry appears to be close. The company has been targeting companies in Australia, and there could be action from the mining, marine, and agriculture industries (it is not clear whether all of these are from Australia). There are possibilities in South Asia and in South Africa where the mining industry is beset with problems from the erratic state energy supply.
Harrison talks of a big Aussie deal with panels in containers to service the mining industry. He says it could be possible to save $3m a year, and points to the incentives introduced by the government in Canberra, allowing a concession for a year which would allow companies to cut capital costs by 50% on installing what could be a high margin product for Verditek.
Richards reckons that the global lightweight solar market could be worth $28bn by 2022, so there is plenty of room for Verditek. There are a couple of competitors in Australia, but they can be beaten on price.
There is a huge potential market in agriculture in Australia dealing with water dams for cattle. These are easily polluted and the cattle get sick. It is possible to filter the water, but that is very energy intensive. A solar panel would power a lightweight portable water treatment plant in the field.
The dreadful bush fires in Australia have also illustrated the vulnerability of the power system there. Power lines and such are burnt out and the rural fire and emergency services could use a solar system which would supplant that nicely.
There is also talk of a massive 2 gigawatts untapped opportunity in the Middle East where there is a vast number of drilling rigs whose power needs could be better served by flexible solar panels. This looks like low hanging fruit, and just a part of the potential would provide a vast market.
Among the other opportunities there is keen interest in the marine market. Several companies are talking to Verditek, and there could be an initial order soon. The volume might be relatively low, but margins could be high.
There appear to be a host of possible orders in the background generated by a team of eight experienced salesmen working on commission and recruited by Richards from his previous contacts. This report by no means covers them all as, hopefully, we will discover in the months ahead.
Small wonder that there are already plans to enlarge capacity at the Milan plant, which has put the coronavirus pause behind it and is now in production. It can be enlarged from 20mw to perhaps 55mw. Then there is the 10mw factory in Portugal to come, and maybe two other new plants to follow, with perhaps the technology licensed out to another.
All of this leaves the £1.86m loss for 2019 looking irrelevant. While production is still building up, it is possible that the company could hit breakeven for 2020. The Harrison interview suggests that the time for preparation is over. The kit has been tested to destruction in heat and cold, hammered by hail the size of golf balls, and guaranteed to last. The proper certificates have been secured, and there are no technical problems.
Assuming production of 20mw for 2021 and the base price of about Euros 1 per watt, Harrison projects that EBIT profits could reach £6m. In fact, there are opportunities for selling some product at Euros1.5 or more per watt. At 8.20p, the company is capitalised at £24m.
Such sums look sketchy at this stage. On the cautious side, it is worth emphasising that there are still no orders of great substance, simply the clear conviction in the company that they will come soon. If they do, projections look conservative, nothing to take seriously. If this works, they could quickly be left behind, but we are still at the ‘if’ stage.
We have little idea how quickly production can be expanded, and how soon the Milan factory could be joined by others, even if all goes well. There is talk of free cash flow in 2020. That suggests that there are no plans to raise extra funds by issuing more equity and diluting what we have, but if orders flow in as fast as some project, who knows what extra cash might be useful to accelerate growth?
Then we get to the cream on top of the cake. Right now, it is just a beautiful dream, one which has yet to come true. There are potentially exciting possibilities in a biofilter project and an interest in liquid gas absorption technology, but the real thriller is in the graphene solar project being developed jointly with Paragraf.
That company appears impressive, with a pedigree out of the immensely valuable chip technology which made ARM Holdings worth billions. Paragraf and Verditek have a 50/50 project which has created a working graphene integrated photovoltaic cell that converts sunlight to electrical energy with busbars or backplates. The second stage is working on improving performance, developing patents and commencing commercial discussions for the product.
This could be revolutionary, allowing graphene solar cells to be incorporated into all manner of electric-powered products from portable computers to cars and way beyond. Should it succeed, it would take Verditek into an altogether different dimension. Instead of speculating on adding tens of millions to the market value of the company we are looking conservatively at hundreds of millions. Progress has been hampered by the coronavirus, but there could be real progress late this year, early next.
Harrison suggests such a breakthrough could raise the solar energy conversion from the low 20% area to the high thirties or more. That might be over ambitious, but ...
At present there is no need to count value in the Verditek share price for the Paragraf project. It stands up well without it. The prospect of success with the current lightweight flexible solar panels ought to be sufficient to multiply the current share price if and when orders come through. This report does not properly cover all of the opportunities for selling such panels.
New chief executive Rob Richards is absolutely confident he and his new sales team can generate substantial orders across a variety of industries, and quickly. In the weeks and months ahead, there could be a strong flow of encouraging news.
It requires only one or two substantial orders to demonstrate his credibility and confirm that Verditek shares look remarkably cheap. Absolute proof of transformation to a big winner has yet to emerge, and it would be unwise to suggest that Verditek is bound for glory just yet – but the odds look favourable, and it is not too late to buy and enjoy the ride.
I have a holding in Verditek.
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