AML3D Ltd: Q1 FY22- Leads Strong, Sales Slowed by COVID

Business model
AML3D generates revenue from contract manufacturing of components using its WAM® process, sales of the ARCEMY® WAM® modules and licensing revenue from these sales after the first year. The company has a manufacturing facility in Adelaide, additional capacity under development in Singapore and a strong level of interest in machine purchases due to the large scale possible using the WAM® technology.

September quarter reflects the wider economy
During the quarter AL3 confirmed an extension to the prototype body armour testing programme with Lightforce, development with Deakin University of a scandium/aluminium welding wire which removes the need for hardening heat treatment, and achieved DNV certification of the Panama chock delivered to Keppel Technology and Innovation in Singapore. AL3 has commenced further development of the ARCEMY® module and WAMsoft process software to take advantage of developments in high-strength alloys and expand potential manufacturing scale and speed by adding a second wire feed and in-line finishing machining to the WAM® process. These developments provide substantial speed and volume improvements and reduce associated post-production processing. The company operated conservatively during the quarter, recognising the likely delays in customer progress due to the impact of COVID-19.

Base case DCF valuation of $71m with upside to $124m
We’ve used the discounted cashflow (DCF) methodology to value AML3D due to the company’s early stage of development. Negative free cashflow was reported in 2021 and is expected in 2022 and 2023. We expect strong free cash generation thereafter. Using a WACC of 11.1% (Beta 1.5 vs measured Beta of 0.21, terminal growth rate of 2.2%) we derive an equity value of $71m or $0.475/share on the current issued capital of 150.4m shares. As we highlighted in our 13 October initiation report Additive manufacturing matures, our base case is premised on announced agreements and customer interest levels with a conservative conversion rate of customer inquiries to manufacturing and machine sales. We have additionally modelled a better and worse profile of future sales based on estimates of market penetration over time. We feel there is considerable upside possible in this valuation with our high valuation at $0.829/share. We expect machine sales to be biased to the end of FY22 given COVID-related slowdowns and accordingly leave our estimates unchanged following the Q1 report.