Redflow (ASX:RFX) has received a Stock Rating of Add from Morgans, with an upgraded price target of A$0.39.
The target is 35% above the last traded price of A$0.29. The following is an extract from the report.
KICK STARTING SALES
RFX’s ZBM is commercial in key applications.
While trials are going well, conversion to revenue is slower than expected, which prompted the recent A$16.1m capital raising.
In the last 12 months RFX has reduced its selling price by 36% to US$44cents per kilowatt hour and we believe it’s well placed to slide down the cost curve at a faster pace than competitors (including the well promoted Tesla Powerwall).
If the ZBM follows the ~20% pa cost reduction that solar experienced, then we believe it has the potential, within a couple of years, to be one of the most economically compelling energy storage products in the market.
Use of the A$16m recently raised
Slower-than-expected sales have led us to reduce our FY16 sales targets by 20% and have led RFX to allocate the majority the recent capital raised to improving sales.
The company has said fifty percent will go towards operating expenses (increasing sales capabilities and covering an additional 12 months of cash burn);
- twenty five percent will go towards demonstration units;
- fifteen percent towards inventory (for faster delivery times); and
- the balance to machinery and offer costs.
Product performance and cost reductions are the key
RFX’s product is competitive in target markets (for example when combined with solar it’s cheaper than diesel and other decentralised generation).
However, the ongoing cost trajectory should see the ZBM become competitive with many other applications within the next 24 months, in our view.
We also note that Tesla’s recent entry into the household energy storage market demonstrates strong consumer interest.
However, we believe the economics for households do not currently work. Importantly, RFX has the potential to outpace Tesla in this market.
Tesla, for example, has committed US$4-5 billion to building its “Gigafactory” but expects this to reduce battery costs by just 30% over a five-year period.
RFX reduced battery costs by 36% in the last year and should comfortably continue to reduce end user costs.
The key deliverables for RFX are improving sales in the current target markets and delivering ongoing reductions in the cost per kilowatt hour so as to make mass market adoption a possibility.
Upside and downside risk revolves around these key items.
We are comfortable with management’s ability to deliver so retain our Add recommendation and upgrade our price target to A$0.39.
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