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Why this small-cap ASX manufacturer could deliver tech-like returns

Lina Lim
rising arrow on staircase symbolising business growth

Carbon Revolution Ltd (ASX: CBR) is a Geelong-based advanced manufacturing company that designs, manufactures and markets single piece carbon fibre wheels. The company has earned multiple contracts with leading brands such as Ford, Ferrari and Renault and is in discussion with a number of global original equipment manufacturers (OEMs) regarding future opportunities. 

Carbon Revolution’s IPO

Carbon Revolution had an IPO price of $2.60 per share back in November 2019 and a $330 million market capitalisation at the offer price. Its share price is currently at $4.00, or a 50% return for those that managed to get in on the IPO. While the share price has soared in such a short period of time, I believe there could be a lot more steam in the engine.

In the company’s prospectus it cited that weight reduction is a key trend in global transportation. Vehicle manufacturers are focused on adopting new weight reducing technologies to improve vehicle efficiency and performance. This can allow a vehicle to have improved fuel efficiency, reduced emissions, enhanced performance and the potential to carry a larger payload. More specifically, OEMs are actively seeking technologies that can contribute to such benefits to reduce fleet emissions to meet regulatory requirements in markets around the world. Carbon Revolution’s modelling suggests that the weight reductions achieved by its carbon fibre wheels can materially improve vehicle efficiency and therefore reduce fuel consumption by 2–6% (compared to cast aluminium wheels). 

In FY19, the company reported a statutory $15.1 million revenue and statutory net loss of $27.2 million. While investors might be alarmed about the company’s significant loss, the short- to medium-term focus is not the company’s profitability, but its ability to grow revenues and establish meaningful partnerships/clients. 

High hopes for 2020

Carbon Revolution has forecasted that its FY20 revenue is expected to soar to $62.2 million. This is primarily driven by an increase in production capabilities from an approximate annual run rate of 12,000 in August 2019, to almost 32,000 by June 2020. 

The company currently has a market capitalisation of approximately $500 million. If Carbon Revolution can achieve its FY20 guidance of $62.2 million in revenue, it would value the company at 8x revenue at today’s prices. 

Foolish takeaway 

Investors can either view its potential valuation as a glass half full or empty – that a 8x revenue multiple is relatively cheap compared to other growth and tech valuations, or that the company is still loss making and a very risky investment. Either way, I would have Carbon Revolution on my growth watchlist to see how it plays out. 

The post Why this small-cap ASX manufacturer could deliver tech-like returns appeared first on Motley Fool Australia.

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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020