AL3 Signs Key Agreement For US Navy Submarine Parts

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 6,777,530 AL3 shares at the time of publishing this article. The Company has been engaged by AL3 to share our commentary on the progress of our Investment in AL3 over time.

Remember the first time you used UberEats?

The amount of choice, the speed of delivery, and the convenience?

Our 2024 Tech Pick of the Year AML3D (ASX:AL3) just signed a Manufacturing License Agreement with a US Navy intermediary...

...to increase the library of 3D printed parts that the US Navy can order from AL3.

What does this have to do with the UberEats app?

Stay with us, we will explain.

AL3 has developed a technology to “3D print” complex industrial parts for the defence, oil & gas and aerospace industries.

It’s already generating revenue, and today’s news means it should generate a lot more...

AL3’s new Manufacturing Licence Agreement enables the exchange of highly sensitive technical data and assistance required for 3D printing a wider “menu” of parts for the US Navy.

Think of it like when you first got the UberEats app.

You can quickly scroll and choose what you want from the wide range of menu items, order how many you need and it quickly comes to your door without you having to do anything...

(except to be surprised at the end of each month on how much money you spent on using it)

Today’s agreement is basically like the US Navy “downloading UberEats” for all sorts of submarine and ship parts it may quickly need from AL3.

What we want to see next is the first few orders coming through...

...and then to see if the US Navy will get as addicted to quickly and easily 3D printing parts as we are to ordering our food from UberEats.

We already know that the US Navy likes to “dine at the AL3 restaurant” with a string of deals totalling over $5.4M to date:

• $1.1M ARCEMY System sale to US Navy component supplier Laser Welding Solutions.
• $1.54M US Defense contract to facilitate copper nickel alloy qualification.
• $0.6M order to supply a prototype component to support the US Navy’s submarine programme.
• $2.2M contract to develop and metal 3D print a replacement component used in US Navy submarines.
• TOTAL: $5.4M
• [NOW] Manufacturing License Agreement - opened ended contract, no fixed term - revenue uncapped

And today’s agreement allows AL3 to print, test and validate a wider range of US Navy submarine parts.

The US Navy can now start selecting from a much larger “menu” of parts to 3D print using AL3.

We know there’s a large amount of funding for an expanded menu of parts on the table as well...

The US Navy is seeking to inject an additional US$3.9BN into the submarine industrial base in FY2025 alone to address some significant problems in its supply chain. (Source)

Blue Forge Alliance is the organisation that AL3 signed the Manufacturing License Agreement with.

This organisation will be making sure the US submarine industrial base works together and gets up to speed (more on Blue Forge below).

We think this new agreement will see AL3’s revenue grow - it's a major strategic development in its supply relationship with the US Navy.

It is also the second Manufacturing Licence Agreement that AL3 has signed in recent times.

The other one was with Boeing Defense and Space.

We covered the Boeing deal in a previous note that you can read here:

AL3’s Quarterly reveals new agreement with Boeing, and more than 500% growth in cash receipts

How the Blue Forge Alliance connects AL3 to the US Navy

Blue Forge Alliance is the name of the US Navy intermediary that AL3 signed the Manufacturing License Agreement with.

Our take is that this new Blue Forge deal significantly strengthens the relationship between AL3 and the US Naval industry and supply chain.

Blue Forge is a neutral organisation that supports the strengthening and sustainment of the US Navy’s Submarine Industrial Base.

It coordinates efforts between the giant US Navy and the massive network of smaller parts contractors that supply it.

It has access to massive amounts of data on how to make parts - and it is now sharing that data with AL3.

This means AL3 can expand the number of different parts and components that it can validate, test, manufacture and ultimately sell into the industry.

These deals are hard to get, particularly because of how sensitive they are.

The US Navy, and its subsidiaries, are very strict about which companies that they work with.

Particularly companies outside of the US.

We think that this deal further cements AL3’s position and value in the “onion” that is the US Naval industry.

AL3’s growing importance and the AUKUS deal

AL3 supplies the defence industry, and it's worth checking in on recent developments with Australia’s partners to see what they mean for AL3.

Demand for submarines is ramping up - and the existing supply chain is already stretched.

In 2021 Australia, the US and the UK signed a trilateral security and defence partnership.

Core to this agreement was to build nuclear powered submarines for Australia and the UK in order to bolster their defences in the indo-pacific region.

However, recent reporting by Bloomberg has highlighted that the agreement is not currently on schedule and delays have pushed out timeframes for outcomes:

(Source)

Essentially, it is on the US Naval Industrial base to create new fleets of submarines for Australia and the UK.

This means that it needs to increase production “fivefold” in order to meet internal demand and those under the agreement.

We think that AL3 has a role to play here.

Its 3D printing technology saves significant time and costs for the production of submarine parts, as AL3’s ARCEMY systems are mobile and those essential parts can be printed on-site.

Today’s Manufacturing Licence Agreement with Blue Forge Alliance is a testament to the importance of AL3’s technology to the industry, and validation that its proprietary manufacturing capabilities are necessary for the US Navy to meet production demand.

(Source - Defense One)

Ultimately, we think that this is just the beginning of AL3’s journey with the US Navy, and given the organisations like to keep their circle of suppliers tight (due to the security risks), we believe that this is a very defensible position for AL3.

This brings us to our “Big Bet” for AL3...

Our AL3 ‘Big Bet’:

“AL3 re-rates to a $500M market cap on achieving significant sales growth across an expanding range of industries and jurisdictions”

NOTE: our “Big Bet” is what we HOPE the ultimate success scenario looks like for this particular Investment over the long term (3+ years). There is a lot of work to be done, many risks involved - just some of which we list in our AL3 Investment Memo. Success will require a significant amount of luck. There is no guarantee that our Big Bet will ever come true.

Commercialising the Manufacturing Licence Agreements

As we mentioned above, this is the second Manufacturing Licence Agreement that AL3 has signed in the past two months.

The first was with Boeing and now, the second with Blue Forge Alliance (the integrator of the US Naval Industrial Base).

A Manufacturing Licence Agreement is an agreement between a company in the US and a foreign company that allows them to manufacture defence-related items in a foreign country.

Importantly, MLAs require the prior approval of the Department of State, because of their sensitive nature.

AL3 currently has three key product areas:

1. ARCEMY 3D Printing system sales: ARCEMY is the name of AL3’s 3D printing system that customers can use to 3D print desired parts on site. These sell for between $1M-$2M and are big contracts.
2. ARCEMY software & services recurring yearly fees: For customers that have purchased an ARCEMY 3D printing system, AL3 provides annual support through maintenance, product support and a software licensing that enables customers to use the facility. This is the Annual Recurring Revenue (ARR) side of the business.
3. Manufacturing Deals:
   AL3 sells specific 3D printed parts to various organisations. These sales contracts are generally smaller and proof of concept that will hopefully lead to repeat business. Product testing and certifications expand the library of products that AL3 can sell in this way.

These MLA’s fit somewhere between product area (2) and (3).

We recently visited the AL3 facility in South Australia, and the software and potential for smoothed out recurring revenues was a big topic that management spoke to us about.

You can read up about our site visit here: Our AL3 Site Visit, and What We Learned

Long term, with more ARCEMY units in the market, we see AL3 as more of a software company than a hardware company.

The company’s IP / secret sauce is in the welding / alloy recipes that feed their software programs that allow a user to build parts.

We think this is very hard to replicate by other companies, it has taken AL3 years to get to this point.

Add this to AL3 now being entrenched in the Boeing and US Navy supply chains via recent Manufacturing License Agreements, and we think the company is well positioned to expand its reach to smaller parts suppliers...

How does this news impact our AL3 Investment Memo?

With the Blue Forge Alliance Manufacturing License agreement in place, we see the potential for significant revenue growth ahead for AL3 - and we hope AL3 picks up more deals with not just the US Navy, but additional smaller organisations as well.

We outlined the potential for AL3 to “fan out” to this network of parts suppliers in our AL3 Investment Memo:

US Navy to help to push AL3 to its parts suppliers

The early signs are there. We want to see AL3 expand into smaller US Navy parts suppliers who are following the US Navy’s lead. In September 2023, a Navy parts supplier called Laser Welding Solutions leased the ARCEMY product from AL3 - we hope the first of many contracts for AL3 from this type of smaller organisation.

Source: 27 June 2024 AL3 Investment Memo

What’s next for AL3?

US Growth Strategy

AL3 is currently undertaking a rapid “Scale Up” strategy targeting key markets in the US.

In order to execute on this strategy their are a number of key milestones for the company including:

🔲 Opening US, Ohio facility (expected to be fully operational this quarter)

🔲 More sales of ARCEMY systems in support of US Naval industrial base

🔲 Contracts for prototype parts and alloy testing for US Navy

🔲 Bid on ITAR contracts (International Traffic in Arms Regulations)

AL3 is making progress on all of these fronts, so new deals, new contracts and new revenue could drop at any time.

Broader growth strategy

With the success of the Blue Forge Alliance and US Naval deal AL3 is also looking to broaden the scope of its services into different markets:

🔲 Aerospace manufacturing deals

🔲 Oil & gas manufacturing deals

🔲 Marine manufacturing deals

🔲 Energy manufacturing deals

Again, AL3 is making progress on all fronts so new deals could drop at any time.

What are the risks?

In the short term, the key risks we are conscious of for AL3 are “Sales risk” and “Market risk.”

As AL3’s share price increases, the expectations for future sales/growth increase.

If AL3 fails to deliver more sales and its financial performance suffers, the market may start to price in lower growth potential for the future and re-rate AL3’s share price lower.

Sales risk

There is always the possibility that AL3 does not close more sales, and its financial performance suffers as a result.

Source: “What could go wrong” section - AL3 Investment Memo 27 June 2024

At the same time, if market sentiment were to turn negative, investors might sell down high-growth, cash-burning companies like AL3 in favour of safer, profitable companies.

AL3 is dependent on investors' willingness to back currently loss-making, but potential high growth businesses as they work towards further growth and eventual profitability.

Market risk

There is always a possibility that the broader market sells off dragging AL3 shares with it. Or alternatively there could be sector specific pain ahead for the tech industry, hurting companies like AL3.

Source: “What could go wrong” section - AL3 Investment Memo 27 June 2024

Check out our AL3 Investment Memo for more risks.

Also be sure to read more about AL3 in our first note on the company:

AML3D (ASX: AL3) - Our Tech Pick of the Year for 2024

Our AL3 Investment Memo:

In our AL3 Investment Memo, you can find the following:

• What does AL3 do?
• The macro theme for AL3
• Our AL3 Big Bet
• What we want to see AL3 achieve
• Why we are Invested in AL3
• The key risks to our Investment Thesis
• Our Investment Plan