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RedFlow Draws Increased Price Target Of $0.31 From Stockbroker

RedFlow (ASX:RFX) has received an increased share price target of $0.31 from its original target of $0.20 from Morgans, which also maintained its "add" recommendation.

Morgans attributed this to the recent capital raising and its increased sales forecast.

The following is an extract from the report:

Capital raising

In June, RFX completed a placement to entrepreneur Simon Hackett and a 2 for 7 entitlement offer.

Consequently RFX should hold about $10 million in net cash at 30 June 2014.

The Board of RFX commented that this "will ensure the company is funded until approximately the end of 2015 by which time the company is expected to be cash flow positive."

Progress

RFX's proprietary Zinc Bromine battery Module is now stable, represents a compelling business case in select markets, and should be commercially produced by specialist manufacturer Flextronics by the end of CY14.

RFX's current channels to market are through three multi-billion dollar global System Integrators (SI's) - Raytheon, Emerson and Schneider Electric; and a smaller integrator SMS Global Technologies in the Philippines.

In the short term these SI's are focussed on niche applications where the ZBM is already commercially viable and overtime could reach into mass markets.

Once SI's progress from trials (we estimate 3-24 month trials depending on the application) then sales volume should increase materially.

Raytheon has already launched its RK10 and RK30 Energy Storage Systems so this could happen sooner than we think.

Future Product Developments

The Board of RFX have targeted cost reductions of at latest 40% by the end of 2015.

This comes from a number of unrelated product improvements, for example, purchasing cheaper goods which also have the added benefit of improving product performance.

In addition to lowering the cost to manufacture, the ZBM cost per kw hour can be materially decreased by prolonging its useful life.

We highlight that RFX is currently price competitive in specific applications and is not aimed at being grid competitive in Australia.

The Blue Sky Story

The Board of RFX have commented that they have "forecasted sales of at least 250-300 batteries per month by the end of 2015".

In an annualised basis, and assuming a US$7,000 sale price, this would mean 2H16 revenue of A$12.3m (based on a 94c exchange rate) or annualised revenue of A$25m.

Assuming gross profit margins are around 30% and operating costs are flat at A$6.0m pa, then RFX would generate annualised EBITDA of A$1.5m.

Our forecasts are based around this scenario but we have commenced sales ramp-up 6 months later than the Boards suggested date.

At the mid-point of their guidance range, RFX would be generating annualised EBITDA of A$1.5m. Given the substantial fixed cost leverage in RFX, from this breakeven point, every 10% increase in volume (ZMB's sold) adds 50% to EBITDA.

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