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Product Review Img Vertical

Date : 07/03/2022

K-TIG Limited

ASX :

KTG

Market Cap : $65.2 Million

Buy

52 Week Range : $0.26 - $0.55

Share Price : $0.355

With a game changing product, KTG is reshaping the welding industry. We recommend a 'Buy'.

Company Analysis

K-TIG (ASX: KTG) is the developer and manufacturer of a patented, high productivity welding technology known as Keyhole TIG (K-TIG).

K-TIG is a transformative, industry-disrupting welding technology that seeks to change the economics of fabrication. K-TIG’s high-speed precision welding technology welds up to 100 times faster than traditional TIG welding, achieving full penetration in a single pass in materials up to 16mm in thickness and typically operates at twice the speed of traditional plasma welding.

K-TIG technology reduces multi-hour conventional TIG welds to just 3 minutes whilst providing the sort after the cleanliness of TIG/GTAW, and finishes to a quality standard that meets the most demanding requirements of the nuclear, aerospace & defence industries. In addition to 50x to 100x speed advantages over TIG/GTAW, the K-TIG technology reduces power and gas consumption by up to 95% and dramatically reduces labour costs.

K-TIG works across a wide range of applications and is particularly well suited to corrosion-resistant materials such as stainless steel, nickel alloys, titanium alloys, carbon steels, and most exotic materials. It easily handles longitudinal and circumferential welds on pipes, spooling, vessels, tanks and other materials in a single pass.

The technology was originally developed by CSIRO. However, now, K-TIG owns all rights, titles and interest in and to the proprietary and patented technology and has been awarded Australian Industrial Product of the Year and the DTC Defence Industry Award.

K-TIG was re-listed on ASX in October 2019 with a new licensing revenue model, providing Welding-as-a-Service (WaaS) to ensure long term recurring revenue generation and strategic relationships with customers.

The keyhole process is a game-changer for the welding industry. Due to the keyhole TIG welding technique, K-TIG can offer a product that significantly reduces production time without compromising on quality or cost.

K-TIG makes welders far more efficient every day. With K-TIG’s industry-leading technology, its customers can:

  • Achieve greater depth in penetration and superior speed than conventional GTAW
  • Greatly reduce the cost of welding
  • Increase profitability

K-TIG technology has already been exported to 20 countries by various fabricators from small to large. In addition, K-TIG has dramatically improved productivity in a wide range of industries and applications, including process pipe fabrication, pipe & tube mills, and tank & vessel fabrication. The firm’s customers range from multinationals like GE and Siemens to industry specialists such as Bilfinger, Darchem, Titan Metal Fabricators, RV Industries and many others.

K-TIG actively partners with leading advanced manufacturing centres such as the Nuclear Advanced Manufacturing Research Centre (NAMRC) in the UK, the Defence Materials Technology Centre (DMTC) in Australia and GE Global Research Centre in the USA.

The Welding-as-a-Service Business Model

K-TIG provides its disrupting technology to customers on a subscription basis, in what the company refers to as WaaS. The business model itself has a lot of benefits that should see T-KIG grow in a sustainable manner as it scales up its operations. The characteristics of K-TIG’s business model are:

  • Recurring revenue engine
  • Service delivery via cloud-linked controller
  • K-TIG becomes a long-term partner
  • Licencing based on linear metres welded
  • Revenues are now linked to the production of lines of its customers
  • Long-term, recurring revenue streams

The cloud enablement of the technology allows K-TIG to continuously support its customers in real-time. The systems can be updated remotely, allowing new services and capabilities to be delivered to the entire global installed customer base automatically and at a minimal cost.

At the heart of the system are a cloud-enabled multi-processor controller and communications platform, which allows K-TIG to deliver its services on a subscription basis. The licence fee will adjust automatically in line with actual production and utilisation.

K-TIG’s objective is to fundamentally change the economics of its customer’s welding and create the basis for a long-term relationship that delivers dramatic and permanent competitive advantage, productivity gains, cost savings, and increased margins.

Disruptive Technology is led By A comprehensive Business Model

K-TIG has three vertically integrated pillars of the business to drive growth.

Bread and Butter – Sale of Keyhole TIG welding units through a combined direct sales force and distribution partner strategy focused on localised representation and support. Differentiation is through the company’s patented technology and advanced controller, allowing simple integration with 3rd party welding systems. Recurrent revenue is generated through software-enabled functionality.

Welding Cell Solutions – Development and sale of standard turnkey welding cells that integrate K-TIG technology with commercial automation and welding sensor technology. Differentiation is through the provision of Industry 4.0 solutions that enhance productivity and address the weld quality data gap.

Fabrication Joint Ventures – Entering the fabrication market in a niche, highly regulated, high-quality applications such as Nuclear, Defence, Hydrogen, etc. Open technology solutions are on their way to becoming industry standard, and K-TIG is knocking at the door! K-TIG is looking to use this vehicle to develop Welding Cell Solutions Differentiation through establishment of highly automated fabrication processes that focus on extreme quality and productivity.

K-TIG has successfully built out the infrastructure required to ramp up its engagement with distributors to tackle the +USD 20 billion global welding market. Distributors are integral to the company’s growth strategy as they enable it to meet the complete needs of their customers for an automated welding system. K-TIG has 3 distribution partners:

  • Tier One Distribution Partners – Welding Automation System Manufacturers and Integrators
  • Tier Two Distribution Partners – Welding Equipment Suppliers who have relationships with automation system manufacturers and integrators
  • Tier Three Distribution Partners – Welding Technology Influencers who can provide referrals

After developing the infrastructure to support and manage distribution networks; the company is accelerating its rollout by signing two new tier-one distributors in FY22 (Key Plant UK and MITUSA). The distributor pipeline is healthy with the company in discussions with fifteen potential tier 1’s, and K-TIG is anticipated to add additional 2-3 distributors in each of the coming quarters.

K-TIG’s Competitive Advantages

Quality Welds at a Lower Cost Than Traditional Welds

The company’s Keyhole TIG / GTAW system is a productivity multiplier that welds thicker materials faster and at a higher quality than other welding methods. This technological edge results in dramatic productivity increases and can give customers a distinct advantage over competitors.

Due to the remarkable welding speeds and production output of the K-TIG system, K-TIG’s customers can meet even the tightest production schedules. The cutting-edge technology of K-TIG allows customers to make significant savings without compromising on high-quality output.

Part of a Manufacturing Ecosystem

The K-TIG system can be integrated with most welding automation components, including positioners, rotators, headstock, tailstock, turning rolls, column & boom manipulators, longitudinal steamers, buggies, carriages and robots. With the K-TIG system, their customers get more than just the torch. They are getting an advanced TIG welding system to support the productivity of their operations.

Continuous Technical Support Based on Specific Requirements

K-TIG continues to work with its customers and offer technical support to ensure all their needs are met. The company’s robust welding system delivers reliable results, allowing customers to easily meet all major code requirements like ASME, AWS, API, BS, CSA, CEN and AS/NZS. This is validated by K-TIG’s sales in more than 20 countries, enabling customers to achieve high performance and compliance with these key codes. There is a broad range of case studies across a spectrum of industries to show the successful application of K-TIG technology.

Expertise From K-TIG’s Relationships with Strategic Partners

K-TIG adopts an end-to-end approach in assisting customers and partners by helping to improve processes that occur before and after welding operations. K-TIG’s distributor and strategic partner network continues to expand to provide solutions and innovation for their customers, staying ahead of the curve in welding automation.

Advanced Controller System and Software

The K-TIG advanced controller system brings in benefits such as:

  • Unlimited parameters
  • Ease of use
  • Reporting functionality
  • Raw and formatted data
  • On-device storage for secure content
  • Cloud-enabled capabilities

The K-TIG software continues to receive proactive updates to keep its competitive edge as sharp as possible. This support is designed to keep the K-TIG system working at optimal levels and ready for challenges its customers may face. Why is this important? Well, K-TIG operates a subscription model with their customers, and customer satisfaction becomes that much more important to generate recurring revenues.


Source: Tradingview.com

FY2021 Set the Growth Strategy Rolling

Despite a challenging macroeconomic environment because of the global Covid-19 pandemic, K-TIG achieved several key milestones during the year.

KTG Successfully raised $5.6m (before costs) via a private placement with strong support from existing major shareholders, new institutions & family offices, sophisticated investors. They established USA operations and appointed two senior business development executives to drive the USA market expansion. Then KTG went on to sign a USA distribution agreement with Key Plant, including the establishment of a demonstration facility in Houston to showcase the technology to new clients across aerospace, defence and oil and gas industries providing a platform for sales acceleration.

KTG then successfully demonstrated the weldability of High Hardness Armour, HHA, which advanced K-TIG’s eligibility for upcoming Defence procurements, both nationally and internationally. The company achieved first sales into the USA nuclear waste container industry.

KTG successfully developed welding procedures for A516 Grade 70 Carbon Steel – a high strength, low alloy steel plate used globally to make critical components for heavy industries. K-TIG’s partner Axiom Precision Manufacturing secured $1m in funding from the Australian government to fast track the deployment of advanced welding technology to the Australian multi-billion-dollar defence industry.

KTG signed an MOU to develop advanced keyhole welding procedures for Hanwha Defense Australia and Hanwha Defense Corporation (collectively referred to as “Hanwha”), where K-TIG will work with Hanwha to develop automated welding procedures for the manufacture of components of the Land 8116 and Land 400 Phase 3 vehicles. Further, KTG signed a distribution agreement with UK based WB Alloy.

The firm continued the development of welding protocols for A106B and A333 carbon steels. A new contract was signed with USA based integrated logistics supplier DT Gruelle Group to manage K-TIG’s USA supply chain. Finally, KTG strengthened the executive management team to support continued international growth and allow the business to execute on several strategic fronts.

To this day, K-TIG remains focused on accelerating its strategic pillars, including enhancing its presence in the USA, UK and European markets, advancing K-TIG’s technology in the multi-billion-dollar defence industry and undertaking R&D, in house and in conjunction with innovative customers, to develop welding solutions for other metals such as aluminium, other exotics and other highly specialised industries.

K-Tig’s customers range from Global 500 companies such as GE to industry specialists such as Bilfinger and Aibel, to the world’s pre-eminent advanced manufacturing development centres such as:

  • The Nuclear Advanced Manufacturing Research Centre (NAMRC) (UK)
  • The Defence Materials Technology Centre (DMTC) (AUS)
  • The GE Global Research Centre (US)

Company Updates

As we have established so far, the key to K-TIG is its quality and simply fantastic welding technology. It is industry-leading and so advanced that it consistently combines increased productivity with high-quality results.

The first half of FY22 has also seen the company keep its momentum going with many key announcements that fortify and boost its fundamental value.

Growth Momentum Builds

The September quarter has seen significant progress in achieving several strategically important milestones in the defence, UK and customer acceleration strategic pillars.

K-TIG reported:

  • Quarterly sales revenue of $729k representing 30% growth over June 2021 quarter;
  • Quarterly cash receipts of $960k representing 105% growth over June 2021 quarter;
  • Cash at the bank of $4.2m.

UK Nuclear Deal

During the quarter, K-TIG announced that it had entered into a Memorandum of Understanding with the UK’s Sheffield University-based Nuclear Advanced Manufacturing Research Centre (Nuclear AMRC). Under the MOU, K-TIG will develop a robotic welding cell to fabricate the nuclear waste containers to be utilised in the upcoming UK nuclear power plant decommissioning.

The Nuclear AMRC is developing a technology demonstration facility in conjunction with the UK nuclear decommissioning regulator to prove and demonstrate technologies that will be instrumental in the decommissioning of the UK’s 17 nuclear power sites in the future. The centre will have the fabrication capability for the 3m³ stainless steel boxes used to house decommissioning waste. That waste primarily comes from the Magnox Swarf Storage Silo, Pile Fuel Cladding Silo and First-Generation Magnox Storage Pond, which are legacy nuclear waste storage facilities decommissioned as part of the “Retrievals” stream at the Sellafield nuclear site.

The role of the Technology demonstration facility is to de-risk the fabrication process and provide resources to the UK industry to allow it to modernise its fabrication capability to Industry 4.0 standards and participate in the ongoing decommissioning activities across the seventeen future sites. The company is also working with the incumbent sector players on near-term opportunities to fabricate nuclear waste containers.

Customer Acceleration

The company continues to build sales momentum with strong progress made during the quarter, both in the US and UK markets. During the quarter, the company saw its sales pipeline continue to grow month on month as potential customers responded to the increased capabilities of the USA subsidiary. The record sales have been delivered on the back of the infrastructure developed in the USA, which includes on the ground sales force, demonstration sites, distribution agreements, and in-country dispatch and servicing. This approach is now being replicated and rolled out in the UK.

Defence

On 11 October 2021, K-TIG announced that it had completed the first round of armoured steel coupon welding procedure development under the previously announced Memorandum of Understanding with Hanwha Defence Australia and Hanwha Defence Corporation to develop the world’s first advanced keyhole welding procedures for the automated welding of Armoured Steel. Under the MOU, K-TIG developed welding procedures and supplied independently performed weld quality test results for test coupons of specific armoured steels to be used in Hanwha’s Redback and Huntsman vehicles being offered to the Australian Army under the Land 400 and Land 8116 procurements.

During the quarter, the company has also continued to work with Defence Primes to demonstrate the advantages of keyhole TIG welding to their applications. In particular, significant interest has been generated in the Maritime sector, focusing on lightweight/low distortion structures. K-TIG expects this to turn into commercial opportunities in the coming quarters.

Research and Development

K-TIG continues to expand the range of metals that it has developed independently verified welding protocols. In addition to K-TIG’s ongoing development of carbon steel welding solutions, K-TIG continues to undertake R&D, in house and in conjunction with innovative customers, to maintain technology leadership through:

  • Development of Evolve 3 Controller to support optional advanced functionality that allows market segmentation and recurrent licence revenue;
  • Development of additional value-adding functionality such as weld inspection, automated seam tracking, robotic interfaces, multi-torch application; and
  • Development and sale of turnkey welding cells integrating K-TIG Systems with appropriate automation and weld procedure IP to provide additional value and reduce customer risk.

The Adrian Smith Effect

Managing Direct Adrian Smith brings a ton of experience into the firm. He has demonstrated a history of growing innovative and disruptive business to business companies in Managing Director and Chief Executive Officer roles. Mr Smith has large public company and private SME board experience.

Skilled at working with technology and business entrepreneurs to transition companies from small start-ups into sustainable enterprises, Mr Smith brings a strong focus on managing people and relationships to deliver exceptional performance. Mr Smith is currently also the Non-executive Director of Universal Motion Simulation, UniSA Ventures, and an Advisory Board Member of elmTEK. Previously, he was the Managing Director of Rheinmetall Defence Australia Pty Ltd. and was the founder and Chief Executive Officer of Sydac, a simulation and training business. Sydac was founded in 1988 and culminated in becoming the world’s #2 supplier of railway training systems with a staff of 135 offices in Australia, Europe and India before negotiating an exit with German multinational Knorr-Bremse GmbH.

Industry Analysis

K-TIG’s technology sets it apart from the traditional welding technology in the industry. Conventional welding has significant limitations that the industry has simply had to accept until now. The table below demonstrates how K-TIG solves some of the challenges of traditional welding.

K-TIG is also targeting a diverse range of industries with its technology.

Investment Thesis

Like the September quarter, the December quarter has also seen significant progress in achieving several strategically important milestones in the defence, UK and customer acceleration strategic pillars. K-TIG reported:

  • Record quarterly cash receipts of $1.5m, which is a 60% growth over the September 2021 quarter and 235% over the December 2020 quarter;
  • Record quarterly revenue of $1.0m, which is a 44% growth over the September 2021 quarter and 157% over the December 2020 quarter. This growth was achieved with only one distributor actively selling K-TIG systems;
  • K-TIG has delivered greater than 200% annualised growth in revenue over the last 5 quarters and expects this to continue as new distributors are engaged and market awareness increases;
  • K-TIG in the quarter added three new distributors and expects to add additional new distributors each quarter for the foreseeable future;
  • The company had $3m cash as of 31 December 2021.

K-TIG successfully welded the armoured steel provided by and in the joint geometries specified by Hanwha Defense Australia and Hanwha Defense Corporation during the December quarter. K-TIG stepped up its engagement with the GBP 1.5bn UK nuclear decommission waste containers sector and is actively targeting the current phase of 3m3 waste boxes. The company also actively progressed the engagement with Defence Primes in the Australian Maritime Defence sector to target the lightweight structures of current awarded contracts.

Customer acceleration continued to build sales momentum, with strong progress made during the quarter in the US and UK markets. During the quarter, the company saw its sales pipeline grow month on month in the US and UK markets as potential customers responded to the increased capabilities. It looks like the

Following the successful build-out of infrastructure in both the US and UK with on the ground sales force and demonstration sites, K-TIG continues to expand third-party sales channels to complement K-TIG’s direct sales force. A key focus of this strategy is the appointment of welding integration distributors who represent proficient fabrication technologies and services.

During the quarter, K-TIG formalised three new distributor appointments across the Middle East, Europe and SouthEast Asia with the appointment of:

  • Semicom Lexis Ltd., a new distributor to supply integrated K-TIG products across Israel, focused on the military, aerospace, defence, medical and security industries.
  • Spanish manufacturer MetaWelding, a company that specialises in a wide range of manufacturing metals such as carbon and stainless steel, duplex and super duplex steels.
  • Jacom Vietnam Ltd, a privately-owned company with clients in key industries ideally suited to K-TIG’s capability across the oil and gas, aviation, shipbuilding and steel fabrication sectors.

The distributor pipeline is healthy, with K-TIG in discussions with fifteen potential tier one (welding automation system manufacturers and integrators). The company anticipates adding additional distributors in the coming quarters.

During the quarter, the company announced the appointment of Ms Trish White and Mr David Acton to the Board of Directors as non-executive directors. Ms White is a professional director and advisor who brings substantial board-level experience in strategy, business development, major project and risk management, acquisition and integration, and corporate governance. Ms White has a unique set of skills and capabilities formed over a career that spanned roles in broadcasting and defence, national infrastructure projects, senior cabinet minister, senior executive and non-executive directorships.

Mr Acton has extensive international equity capital markets experience and long-standing relationships with institutional investors both in Australia and internationally. Mr Acton has been a Senior Advisor at Rothschild Australia with a focus on Equity capital markets since 2017. Before 2017, Mr Acton spent 25 years at global investment banks in equity research, distribution and capital markets.

Pipeline

KTG’s technology is disrupting the welding industry and the growth momentum that has built up is evidence of that.

Aimed at improving future sales growth, the company has committed considerable resources in the December 2021 quarter to refine its marketing strategy, making large investments in understanding its market segments and unique buy drivers. This has resulted in the development of a new website and a review of the use of social media and e-communications as well as K-TIG’s CRM system in preparation for an ongoing series of focused and instrumented marketing campaigns aimed at driving lead generation growth moving forward. These campaigns will be rolled out progressively from January 2022.


Source: KTG

The first half of FY22 has thus been extremely bullish for KTG. Operational and financial metrics are positive, and the firm continues to progress in its growth phase – scaling its business. At the end of the half-year, KTG reported:

  • Revenue growth of 234% to $1.78m (31 December 2020: $0.53m);
  • Cash receipts increased by 405% $2.31m (31 December 2020: $0.36m);
  • Continued sales momentum and increase in sales pipeline as potential customers responded to the increased capabilities of the USA subsidiary and Australia, UK and Europe market expansion
  • The net loss for the consolidated group for the half-year ended 31 December 2021, after providing for income tax, amounted to $3,170,438 (31 December 2020: $1,779,987).

The increase in loss is mainly attributable to the significant investment of several strategic areas focused on defence, USA, UK and customer acceleration pillars and increase in employee benefit expenses due to key management appointments and share-based payments.

KTG also has a strong Balance Sheet that comprises of:

  • Cash of $2.98m
  • Amounts received in advance $0.74m
  • Net assets $3.37m

In February, KTG announced that it had received binding commitments to raise $4 million (before costs) in new equity via a fully committed share placement to institutional and sophisticated investors. The Placement was completed at an issue price of $0.35 per share.

A total of 428,571 shares are also to be issued to Directors Ms White and Mr McIntosh and will be subject to shareholder approval to be sought at the earlier of an extraordinary general meeting of the Company or an Annual General Meeting anticipated to be held in November 2022. This will ensure that the new directors are completely engaged in the long-term shareholder value growth of KTG.

The net proceeds from the Placement will accelerate the growth strategy in nuclear and defence, new strategic partner alliances to increase market penetration, R&D and ongoing working capital requirements.

Additionally, KTG also shared an update about a month on their Nuclear Deal. KTG signed a formal agreement with the Nuclear AMRC. The project will see K-TIG and the Nuclear AMRC collaborate to develop the robotic welding cell within a Nuclear Industry Technology Demonstration Facility. This will optimise the Sellafield Tranche 2 ILW container design and steady-state manufacturing processes. K-TIG will own all Intellectual Property developed by the project, meaning it can commercialise ILW welding cells and create a competitive advantage to become a supplier to Sellafield in its future procurement activities.

The project will harness the latest robotic automation technology, sensor integration, statistical process control, QC, QA and welding procedure automation to develop a world-leading robotic welding cell. The intention is to be adaptable to service the decommissioning of nuclear power sites around the world. The project will be delivered in three phases concluding no later than December 2023. K-TIG General Manager UK and EU Ben Hall are Chair of the Steering Committee which will govern the project.

While the primary focus of the K-TIG Nuclear AMRC collaboration is to develop a turnkey robotic welding cell suitable for Sellafield Tranche 2 ILW containers, the project paves the way for an adaptable solution to what is a global issue. According to the International Energy Agency, around 200 commercial reactors will be shut down between 2020 and 2040. Across the globe, nuclear facilities are ageing, with two-thirds of reactors 30 years or older. Up to 17,000 3m³ of stainless steel boxes are expected to be needed by Sellafield as part of its GBP 1.5 billion procurement plan currently scheduled to commence in FY 2023/24. There is also the potential for a further 50,000 containers. Therefore, the pipeline from this leg of the business is extremely robust, and KTG is well-positioned to generate a lot of revenues and cash flows in the future.

Recommendation

K-TIG has an exceptional product that is reshaping the welding industry. With a highly scalable business model that is underpinned by the stability of recurring revenues, KTG continues to expand globally. The firm remains focused on accelerating its strategic pillars, including enhancing its presence in the USA, UK and European markets, advanced K-TIG’s technology in the multi-billion-dollar defence industry and undertaking R&D, in-house and in conjunction with innovative customers, to develop welding solutions for other metals such as aluminium, other exotics and other highly specialised industries. We thus recommend a “Buy” on K-TIG.

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