Investment Matters

A Carbon Revolution (ASX:CBR)

Last week, clients became owners of shares in Carbon Revolution, a company that has received a large amount of media coverage over the last few weeks.

Its heavily oversubscribed (10x) initial public offering last Friday was a resounding success, with its share price gaining over 30% on its first day of trading and has returned more than 40% to date.

Carbon Revolution is a Geelong based manufacturer of carbon fibre wheels.

It is the only company globally to have successfully developed and manufactured single-piece carbon fibre automotive wheels to OEM (Original Equipment Manufacturer) standards.

The company has been able to do so through leveraging technology first developed at Deakin University’s material science research and development arm. It now holds over 41 patents for its proprietary technology which have been filed in multiple jurisdictions globally.

 

Evolving revolving

Advances in technology have allowed wheels to progressively become lighter and sturdier, as manufacturers have moved from steel-based wheels to cast aluminium, forged aluminium and then magnesium wheels.

Single piece carbon fibre wheels represent the latest (r)evolution in wheel manufacturing.

Wheels made from carbon fibre are both stronger and lighter than alternative materials, with high tensile strength, high stiffness and low density. Their unique properties also confer resistance to corrosion and fatigue.

This provides two key advantages for car manufacturers:

       1. Performance

  • Improved acceleration and road handling (due to lower rotating unsprung weight - weight that is not supported by a car's suspension when it is in motion).
  • Improved noise, vibration and harshness performance

       2. Efficiency

  • A reduction in fuel consumption by 2-6% (Source: Carbon Revolution)
  • A resultant reduction in CO2 emissions. 

 MI23FY20

Source: Carbon Revolution

Firmly positioned

To date, Carbon Revolution has won 9 contracts with OEM’s globally.

This includes contracts with Ford Motor Company, Ferrari S.p.A. and Renault.

As such, its wheels have featured on cars such as:

-          Ford Mustang GT350R

-          The new Ford GT

-          Ferrari 488 Pista

-          Renault Megane R.S. Trophy-R

This is significant, as it is difficult to engineer and manufacture wheels that meet OEM standards, with respective to performance, quality specifications and testing requirements. It is harder still to do this in a manner that is repeatable and reliable.

Carbon Revolution is unique in that its technology, as well as the close relationships it has developed with OEM’s has allowed it to produce products within stringent specifications.

 

Growth in motion

Given their performance benefits, OEM’s are increasingly adopting carbon fibre wheels, particularly in the high-performance and luxury segments.

Thus, over the short to medium term, Carbon Revolution is targeting the luxury and high-performance segments of the new vehicle market. It estimates that its addressable market size is between 36 million to 56 million wheels per annum.

However, as production efficiencies are garnered through scale, automation and technology, it is anticipated that carbon fibre wheels will be adopted more widely in mainstream vehicle segments. This is due to their benefits with respect to CO2 emissions and fuel consumption, as well as their superior performance attributes.

To put the impact carbon wheels may have in perspective, “start-stop” technology, which now features in a number of new vehicles, achieves a reduction in fuel consumption of between 4-10% (Source: Government of Canada). The 2-6% reduction brought by adopting carbon fibre wheels is therefore significant.

The automotive new vehicle wheel market was estimated to be approximately 429 million wheels in 2018 (Source: QUBE forecasts). Carbon Revolution anticipates that over time, composite and carbon fibre reinforced plastic wheels may constitute a significant portion of the overall new vehicle wheel market.  

The company is well positioned for this growth, having recently expanded its manufacturing facility, with the footprint of its operations increasing from 3,000 m2 to 10,000 m2. This should allow it to materially increase its production capacity in the coming years.

Furthermore, it is currently undertaking an industrialisation program, designed to increase its manufacturing capacity as demand continues to grow and its unit costs continue to decrease.

 

Our participation

Clients with an allocation to Australian Equities participated in a capital raising that was conducted by Carbon Revolution, as part of its initial public offer (IPO).

The company raised A$91m in proceeds from the capital raising, which will be put towards research and development and working capital.