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Summer Series: Rectifier Technologies Limited (ASX: RFT)

HOSTS Alec Renehan & Bryce Leske|30 December, 2019

We continue our 2019/20 Summer Series, where we take a shallow-dive into companies that have been selected by the Equity Mates community. We had 180 submissions for companies to explore, so randomly picked 10. The idea of these episodes is to show how you can begin to research a company, where to look for information and what are some of the key things to consider.

Today we look at Rectifier. Rectifier specialises in developing and manufacturing high reliability and high efficiency power conversion products.

In this episode we:

  • discuss what the company does
  • take a look at their financial position and financial summary
  • breakdown key elements of their operations
  • get a history lesson from Ren
  • have a crack at a valuation
  • close with a fun fact

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All information in this podcast is for education and entertainment purposes only. Equity Mates gives listeners access to information and educational content provided by a range of financial services professionals. It is not intended as a substitute for professional finance, legal or tax advice. 

The hosts of Equity Mates Investing Podcast are not financial professionals and are not aware of your personal financial circumstances. Equity Mates Media does not operate under an Australian financial services licence and relies on the exemption available under the Corporations Act 2001 (Cth) in respect of any information or advice given.

Before making any financial decisions you should read the Product Disclosure Statement and, if necessary, consult a licensed financial professional. 

Do not take financial advice from a podcast. 

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Bryce: [00:01:15] Welcome to another episode of Equity Mates, a podcast where we help you learn to invest in forty five minutes or less. We break down the world of investing from beginning to dividend so that you can hopefully make some returns. My name is Bryce and as always, I'm joined by my equity buddy Ren. How's it going, bro? [00:01:30][15.2]

Alec: [00:01:30] I'm very good. Bryce. How are you? [00:01:31][1.2]

Bryce: [00:01:32] You look pretty tight on the other end that [00:01:33][1.4]

Alec: [00:01:35] you were smashing these episodes out. [00:01:37][2.2]

Bryce: [00:01:37] I'm well, I'm well, yes. Back for another one of our Christmas episodes Deep Dive on a on a company that has been recommended by one of our community members out there in the Equity Mates [00:01:47][9.6]

Alec: [00:01:48] world recommended being a general and loose term. Not a specific recommendation. [00:01:53][5.3]

Bryce: [00:01:54] Absolutely recommended that we have a look at it and expose it to the rest of the community, blow the lid on it, and [00:02:01][7.4]

Alec: [00:02:01] recommended that way to amateurs, not experts, not giving advice. Have a look and general discussion about it. [00:02:10][8.7]

Bryce: [00:02:11] Yes. So Ren we move into the microcaps with this one very close to a microcap anyway, with a market cap. [00:02:20][9.5]

Alec: [00:02:21] Size is a microcap. [00:02:22][1.0]

Bryce: [00:02:22] Yeah, well Chris christianise. So he's his Cut-Off was fifty mil. So I think just outside [00:02:29][7.3]

Alec: [00:02:30] of Christmas Bryce. [00:02:30][0.4]

Bryce: [00:02:32] Anyway, today's company Ren is Rectifier Technologies Ltd are F.T.. It's Tica. Yeah. Currently trading at a whopping four and a half, four and [00:02:42][10.4]

Alec: [00:02:42] a half cents, one point [00:02:43][0.6]

Bryce: [00:02:44] forty four cents. So you would know the market. Yes. So four and a half cents market cap of sixty dollars million. So quite small. [00:02:53][9.4]

Alec: [00:02:54] Yeah. [00:02:54][0.0]

Bryce: [00:02:55] Definitely not falling into the top one hundred or so, that's for sure. So rectifier technologies, they have been been around for a while. Their roots are in manufacturing power or specialising in power conversion. Yes. So pretty timely I guess now going into the electric vehicles and stuff which we'll touch on a bit later. [00:03:15][19.9]

Alec: [00:03:15] But I mean, we converted before there is demand. Yeah, yeah, yeah. Electricity has done nothing for us. [00:03:24][8.7]

Bryce: [00:03:25] It's done pretty well over the years. [00:03:26][0.9]

Alec: [00:03:28] But you are right, electric vehicles are looking like a big boon for this company opportunity. [00:03:34][5.3]

Bryce: [00:03:34] Yeah. Yeah. So they were pretty successful in the telecom market back in the nineties. I think that's where they sort of really developed the, I guess their speciality and then have gone through a number of listings and mergers and acquisitions with companies since then, primarily around the AC DC converter. [00:03:52][17.7]

Alec: [00:03:53] Yes. [00:03:53][0.0]

Bryce: [00:03:53] Model, which I know you have a bit of some history, [00:03:56][2.7]

Alec: [00:03:57] so I don't well, I mean, everyone sort of knows that there is AC and DC power, if not from anything else from the band. Yes, but I guess to understand what this company has been doing, you have to understand the actual history behind it. So here's a brief history of A.S.A.. [00:04:18][20.9]

Bryce: [00:04:18] So I'll take a say. [00:04:20][1.5]

Alec: [00:04:21] Thomas Edison, when he first invented found electricity, he basically invented DC Power and Nikola Tesla, who was around at the same time invented ASAP, shall I say, power can be more easily converted to different voltages. And essentially what happened then was that a war of the currents developed as Edison and Tesla went head to head, trying to convince everyone of the merits of their respective forms of electricity, I guess. And so, you know, a lot of the early American stuff, because it was Edison was direct current thought the war of the currents ended when George Westinghouse, the name might sound familiar from appliances. So he partnered with Nikola Tesla and used AC power on all of his household appliances. So if we jump forward to today, a lot of our household appliances, our TV dishwasher and stuff like that use AC power and then things like smart phones, things that use batteries are DC power. If you've ever wondered why your laptop power cord has that big box in the middle that's converting AC power today, say power. And so when we think about electric vehicles, they're going to need to do something similar. They're going to need DC because they're battery storage. And so when these guys have a real opportunity is to convert the AC that is running into the house today, save for the electric car. And that's what they've been doing for big telcos and data centres and stuff like that. Yeah, interesting. Yes. [00:05:56][95.3]

Bryce: [00:05:57] Well, thanks for the history of electric vehicles, the electricity DC, as I say, the current wars. I was thinking [00:06:06][8.5]

Alec: [00:06:06] more of the clearance or the Clarence. I don't think I didn't come up with that [00:06:09][3.4]

Bryce: [00:06:11] for well, so. Interestingly, Ren Rectifier is if you do want to get access to this sort of market, as we alluded to there before, it is, I guess, a market that now with the advent of electric vehicles and the growth in the demand for battery powered stuff, you know, you might want to get access to it. It's the only electric vehicle equipment supplier and distributor on the ASX at the moment. [00:06:39][28.0]

Alec: [00:06:39] Yeah, I always find that claim a little bit like whatever like maybe 40 years ago. If you could only invest in ASX and you wanted to get exposure to these things, it was a meaningful climb to say we're the only one doing X or Y on the ASX. But these days I'm like, great, I'm going to the States. If I think Tesla's Powles better technology than you all go there. If I think the Germans are doing something interesting, I can just as easily go there. The fact that you're Australian like a great support Australia, but vehicle business is ruthless. [00:07:15][36.2]

Bryce: [00:07:16] Yeah. Now that's a fair call. I guess the barrier to entry to investing in overseas markets is a lot lower now. So to your point, making these sorts of claims, I guess, is no longer probably as big of a drawcard or a marketing opportunity that it used to be. [00:07:32][16.2]

Alec: [00:07:33] Yeah, but I mean, you know. Well, that's well done by the only one that's good. [00:07:36][3.3]

Bryce: [00:07:36] So from my point of view, Ren something that stood out is they announced it in November and it's one of their latest research and development projects which has significant implications on the electronics vehicles industry. And that is a high efficiency bidirectional power conversion platform. [00:07:53][16.6]

Alec: [00:07:54] Yes, not. [00:07:55][1.4]

Bryce: [00:07:56] But essentially what it means is that they've developed a platform that not only means the electric vehicle can charge and have the electricity converted, but also it means that they can then put power back into the grid as well. So pretty, I guess, important and a good step towards a more sustainable environment. [00:08:19][22.3]

Alec: [00:08:20] Yeah, and potentially a good way for electric vehicle owners to profit off spikes in electricity demand. True. Depending on how smart the platform is. But I imagine it is if you can set parameters where if the electric vehicle is fully charged and electricity prices go to X, start feeding it back into the grid and selling it into the grid and catch [00:08:44][24.2]

Bryce: [00:08:44] them, then the next morning [00:08:45][0.7]

Alec: [00:08:46] we'll know, then you charge it when it's cheap. So, for example, electricity prices generally spike and electricity demand generally spikes on really hot days between like 4pm and 8pm, because that's when people get home, turn on the air conditioner, turn on their appliances. That's when we generally say like brownouts, where the grid has to just shut down for like 20 minutes at a time in different parts of the city. If you got home, plugged the electric vehicle in, and then it could be basically used as battery storage for the grid. And you could then feed it back in when prices were high in that time of peak demand. And then you could charge it overnight when prices are lower because everyone's asleep and turn the air conditioning and stuff off, potentially. That's a really useful thing for people to get access to. I was trying to say, you like the Tesla Powerwall could do something similar. I couldn't say it on any of its products because that's not to say it can't. I just had a cursory glance at a few of the information sheets. But if it is something that this company can offer that Tesla car like, that's that's a big tick for them. Yeah. Yeah. [00:09:53][67.1]

Bryce: [00:09:57] Equity Mates, my question, though, is, and I don't have the answer to this, but how much electricity would you really actually be selling back into the grid? Is it in actually a meaningful amount? [00:10:07][10.6]

Alec: [00:10:08] Well, I mean, it's meaningful is a relative term. Like you're not going to quit your day job because if you can save some money on your power bills like that, [00:10:16][8.0]

Bryce: [00:10:16] we may be talking a couple hundred bucks or something I would not like. [00:10:20][3.8]

Alec: [00:10:20] Yeah, well, maybe if you actually looked at your electricity bills, [00:10:23][2.3]

Bryce: [00:10:24] I guess [00:10:25][0.2]

Alec: [00:10:26] it's a good question. I couldn't tell you. [00:10:28][1.9]

Bryce: [00:10:28] Yeah. Like, I wonder how many watts or kilowatts an electric vehicle actually holds. Like, what's the full charge, I wonder. Probably should have looked for but anyway. [00:10:39][11.1]

Alec: [00:10:40] Yeah, yeah. [00:10:40][0.4]

Bryce: [00:10:41] So let's move to the financials Ren. And as we said at the start of the show, this is bordering on a small micro-cap stocks. So potentially, potentially a lot of upside pending the success of these new developments that are pushing out into your point, Ren if it is something that differentiates them from Tesla and I guess Tesla vehicle owners go out and buy and, you know, good opportunity for them. But yeah, 60 million dollar market cap, it falls within the industrials sector. Depending where you look. It's got a pay of 28, 29 and the sector price to earnings twenty six. The reason I say, depending where you are, it's because of Ren. And I have been comparing notes and we've realised that depending on which source you look at and depending where they pull their data from, some of this information can't always be aligned. Which to us is a very [00:11:32][51.5]

Alec: [00:11:33] confusing this shouldn't be the case. But Yahoo finance sort like so it should out and the numbers are wrong or the annual reports lying. So we're going to say your numbers are wrong. [00:11:42][9.7]

Bryce: [00:11:43] Yes, it's totally weird. And we'll probably get into that in a second where we compare revenue. But weird. [00:11:47][4.7]

Alec: [00:11:48] Yes. [00:11:48][0.0]

Bryce: [00:11:49] Doesn't help our case trying to make investing. You know, over the years, Ren, they've managed to grow earnings per share at 48 percent a year is what I've come across. So pretty impressive earnings per share growth. Interesting to see how that plugs into your DCF, if that is what you've chosen to do from a valuation point [00:12:08][19.1]

Alec: [00:12:08] on that earnings per share, though, how much of that just came in the last year? [00:12:12][3.5]

Bryce: [00:12:12] I couldn't tell [00:12:13][0.8]

Alec: [00:12:13] you. Yeah, okay. The reason I ask is because you flagged at the start around the opportunity for electric vehicles. And so what we can say is their revenue this year was up one hundred and forty one percent from seven point eight million to eighteen point nine million. And the company has explained that that was mainly driven by electric vehicles, which contributed twelve point three percent sorry, twelve point three million to its revenue number. So if you look at its earnings numbers and the caveat on this is we're now very skittish about what numbers are correct and which ones aren't. [00:12:49][35.7]

Bryce: [00:12:49] But we're going with annual report figures. [00:12:51][1.5]

Alec: [00:12:52] I'm not buying the net income. So the earnings after tax and everything net profit went from sixty thousand to two point one. Three million. [00:13:03][11.9]

Bryce: [00:13:04] Yeah. [00:13:04][0.0]

Alec: [00:13:04] Significant increase. Yeah, yeah, yeah. And that's sort of been this push into electric vehicles. So that's a massive increase just on the last year alone. And I think that will skew the average high. The other thing is, if you look between 17 and 18, it's net profit dropped and if you look between 16 and 17, it's net profit also dropped there. So it's been it hasn't been a bottom left to top right incremental growth every year story. Yeah, but I guess that makes sense when it's looking at a new market and pushing out new products and stuff like that, which does if we get into valuation, which does create a bit of a question around, will the trajectory like do you average it out if the trajectory has been a little bit up and down? So but with that in mind, if we if we have a crash, so the current price is four point four cents and its earnings per share point one sixth of a cent. So you've got [00:14:03][59.3]

Bryce: [00:14:04] have zero point zero zero one six [00:14:05][1.1]

Alec: [00:14:06] zero point zero zero one six. Yes. Yeah, yeah. All right. So if we start with the discount cash flow, well, you've actually already done the first one, which is the relative valuation, the price to earnings compared to what sector? Yeah. And it was a little bit higher, sort of twenty nine compared to twenty six for its sector. Yeah. Twenty nine is expensive, but if the growth opportunity is there then it's not outrageous [00:14:31][25.2]

Bryce: [00:14:32] and it's all [00:14:32][0.4]

Alec: [00:14:32] relative as well. Yes. Yeah. So if we look at the discount cash flow and we say that the earnings are a fraction, so point one sixth of a cent and we assume that it grows at 10 percent for 10 years, and then after that just grows at the rate of inflation and we use the 10 percent discount rate. And that's the discount rate that both Warren Buffett and Roger Montgomery suggest. To use and we're not going to disagree with them because they both made a lot more money than us. So if you plug those assumptions into a DCF calculator, you get a share price of three cents a share, which is a little bit cheaper than what the current share price is. But really, it's not out of line. And I think the 10 percent growth, given that revenue at one hundred and forty percent last year, 10 percent growth might be quite conservative. [00:15:25][52.8]

Bryce: [00:15:26] What do you have as your annual growth rate after the 10 years? [00:15:29][3.2]

Alec: [00:15:30] Inflation. So three I said three percent. [00:15:31][1.7]

Bryce: [00:15:32] Three percent. Interesting. So I'm just sort of plugged in inflation at two percent. I just want to run through those figures again. Ren. So you've got 10 percent annual growth rate for 10 years, levelling off at two percent thereafter and three percent sorry, levelling off at three percent thereafter. And your risk is 10 percent discount rate. Ten percent what you [00:15:53][21.5]

Alec: [00:15:53] get zero point zero through. [00:15:54][1.0]

Bryce: [00:15:55] The valuations come in slightly below what it's currently trading at, right? Yes. Yes. With your 10 percent assumption over 10 years, have you actually based that on anything or are you just going you know, it just may help explain how you came up with that 10 percent? [00:16:10][14.9]

Alec: [00:16:10] No, I haven't. Based on anything. Okay. Yeah. I mean, like, it's basically a bit above market. But if we were to plug in last year's growth rate, its revenue growth was one hundred and forty one percent. The number we get would be a little bit absurd if we flip it around, though, if we go to the reverse DCF, which essentially asks, given the assumptions that you've put in and given the current share price, what's the growth rate that is required to justify that share price? And what we get is fourteen point one four percent. So realistically, no, no, no, not an outrageous growth rate if you assume that, you know, this new push into electric vehicles is going to bear fruit. I would [00:16:55][45.0]

Bryce: [00:16:55] point. So if I then bring in the quantitative analysis that Morningstar have done and as I said, it takes into consideration a number of the factors you've been talking about, Ren cash flow and revenue, as well as economic, financial, health, those sorts of things. They're coming in with a fair value of five cents. So, yeah, pretty close to its trading price at the moment. So we're not far off. [00:17:15][19.9]

Alec: [00:17:15] No, no. And then the last one is if we do the Roger Montgomery style, where you take its book value and its return on equity and you use that as the basis of a valuation, its book value per share is one cent, its return on equity. And given it's been quite variable, I've just taken the average of the last five 1/2 years, that is eighteen point four percent and it's not paying a dividend. So if you go to Roger Montgomery's table, you say the book value times by the multiply that that return on equity number tells you to use. You get a share price of two point seven cents per share. So again, a little bit lower than the current share price. I guess the market is expecting a higher return on equity as this new technology push emerges. [00:18:09][53.5]

Bryce: [00:18:10] Fair enough. So to close out Ren, any fun fact? [00:18:13][3.2]

Alec: [00:18:13] Well, I mean, I've given you this whole history of the war of the currents, so [00:18:17][3.6]

Bryce: [00:18:18] I had to close that then. Where do you think this falls in your circle of confidence? [00:18:21][3.4]

Alec: [00:18:22] I mean, I'm not I'm not an electrical engineer by any stretch, so it's probably a little bit outside. I think that the energy market more generally, I work a little bit in my day job and I'm starting to understand it a little bit more. But yeah, probably just outside. [00:18:36][14.2]

Bryce: [00:18:37] I would agree. I think certainly probably more outside than yours. You've got a bit more exposure to this sort of stuff in terms of the technicalities around how it all works from DC. I see all that sort of stuff. Definitely not in my wheelhouse, but I can understand the macro trends that it's trying to get involved in. [00:18:54][16.8]

Alec: [00:18:54] I think the thing is, though, it can very much become in your circle of competence if the technology is proven to be successful. And it's less about making a bet on how this technology compares to other new battery power converters, it becomes more a consumer product that is really just exposed to the basic forces of supply and demand based on electric vehicle utilisation and the other competitors in its industry and how they compete on price and brand and stuff like that. Like if the conversation shifts from technology to consumer products, then it probably is right in our wheelhouse. And the analogy for that is probably how Buffet made the call around Apple. Apple became less cutting edge technology company that you had to understand the technology side of things and it became more and more consumer products. And now Buffett's biggest holding. [00:19:50][55.7]

Bryce: [00:19:50] Yeah. So I guess the point is, don't don't be worried and excluded if it's not in the warehouse at the moment. Just. Keep an eye on it and see how you go. [00:19:57][7.2]

Alec: [00:19:58] Oh, study electrical engineering, [00:20:00][1.4]

Bryce: [00:20:01] it's also true. All right, Ren We'll leave it there. Looking forward to diving into our next stock next week. [00:20:06][5.4]

Alec: [00:20:06] Sounds good. [00:20:06][0.0]

More About

Meet your hosts

  • Alec Renehan

    Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

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