Thin Film: Ready And Waiting For Scale-Up
Edison | Aug 26, 2014 06:48AM ET
Solar Thin Films Inc (OTC:SLTZ) has had a strong half with a number of positive announcements across all areas including technical development, partnership agreements and commercial orders. Importantly, management also reports strong progress in forming agreements with scale-up partners. Revenue for the half was slightly lower than we expected due to lower project and technology access fees, and product sales are still a small component of total revenue so we have lowered our forecasts accordingly. Our new forecasts also reflect an increase in the proportion of outsourced production in FY15 given the progress on signing up licensing partners.
The progress made across all areas over the last six months has culminated in Thinfilm being selected as a finalist in The Wireless Association (CTIA) E-Tech (emerging tech) Awards. Being one out of only five companies to be selected as a finalist reflects the ground-breaking nature of Thinfilm’s technology and could prove helpful in attracting new partners and potential customers. The recent agreement with EVRYTHNG also helps provide the technology ecosystem required for retailers to make the most of low cost, high-volume smart tags.
h3 Scale-up partners key to achieving forecasts/h3Forming agreements with scale-up partners remains the key milestone necessary to achieving forecasts in FY15 and beyond, and therefore it is encouraging that management has reported strong progress in that area. Our forecasts for FY15 assume an increase in the proportion of tags outsourced to third parties from 5% to 19%. This means revenue is lower but gross margins higher. Operating expenses have also been increased to reflect the higher than forecast expense in H1.
h3 Valuation: Value is in the long-term opportunity/h3The value in Thinfilm is in the long-term product sales opportunity rather than the short-term earnings from project and technology access fees. Therefore, while we have reduced our short-term earnings and revenue forecasts there is still significant upside potential if scale-up partners sign up and production ramps-up as quickly as forecast. The increase in forecast operating costs and reduction in short-term revenue only has a marginal effect on our base case DCF valuation, reducing it from NOK17.03 to NOK16.84 and the slower adoption scenario from NOK7.03 to NOK6.28.
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