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ASX:AL3

AML3D Ltd

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ASX:AL3
- AML3D Ltd
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$0.175

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Investment Memo:

AML3D Ltd (ASX:AL3)

- LIVE

Opened: 27-Jun-2024

Shares Held at Open: 6,777,530


What does AL3 do?

AML3D (ASX:AL3) is a technology company that specialises in robotic, automated 3D printing of metal parts that are delivered at the point-of-need - meaning the parts are made closest to where customers need them.

The parts that AL3 makes are made stronger, faster and more efficiently than conventional manufacturing processes.

What is the macro theme?

Additive Manufacturing, a form of 3D printing, is now a key pillar of the US strategy to build resilience into its manufacturing supply chain.

Additive manufacturing is a new way in which we believe complex industry product parts will be built as the countries move to localise strategic supply chains.

Compared to traditional casting and forging, additive manufacturing is harder, better, faster, stronger.

Why did we invest in AL3?

3D printing product at the forefront of manufacturing innovation

AL3 sells large scale modular 3D printing systems to industrial manufacturers. Its product, ARCEMY, provides a better solution to manufacturing parts for complex industrial machinery.

Blue-chip client base including US Department of Defence

AL3 has a range of high-profile customers including the US Navy, US Department of Defence, Austal (the Australian military shipbuilder) as well as oil & gas giants Chevron and Exxon. These customers provide validation for AL3’s product in future sales as well as a network of potential smaller suppliers for AL3 to target.

Tiny EV for AL3 with proven tech with sales

At 7.3c AL3 has a market cap of ~$22M, with ~$8M in the bank has an Enterprise Value of ~$14M. AL3 is already at ~A$6.6M in revenue for the first 9 months of FY24. AL3 has invested over ~$30M building out its tech.

New sales strategy already driving revenue growth

AL3 has moved from a “sell the 3D printed parts” to a “sell the 3D printing system” strategy. This new strategy means bigger contracts for AL3 and gives customers what they want because the parts are made closer to where they are needed.

“Sell the 3D printing system” strategy opens up yearly recurring revenue

For new orders of the ARCEMY system, AL3 will now build in ARCEMY services to include software and services fees on a recurring revenue basis. This includes software licensing fees, hardware maintenance, and tech support. This is an untapped stream of revenue for AL3 and a potential source of upside for the company as the company grows.

Strong US focus as AM Forward Program rolls out

In 2023 AL3 commenced its US focused strategy. The US spends more on its defence than the next 9 countries combined and as such is easily the most lucrative defence market jurisdiction to operate in. In 2022, the US has also launched the AM Forward Program to support 3D Printing across the industrial manufacturing sector. We think that the US is the right place for AL3 to grow its business.

US distribution partner Philips has proven its ability to sell AL3’s product

AL3 has a value added reseller agreement with ~$35BN capped Philips Corporation. Philips’s sales team has already helped AL3 make two US sales, including an ARCEMY sale to the US Navy Centre of Excellence which we see as the first signs that Philips is an engaged partner and we expect their sales team to help drive the marketing of AL3’s products.

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.

What do we expect AL3 to deliver?

Objective #1: Hit $12M in revenue

According to the March quarterly AL3 will hit ~$7M revenue for FY24

We think that if they can back that up with beating $12M revenue in FY25 it would be a huge result.

Objective #2: More sales of ARCEMY

We want to see AL3 sign more large contracts via sales of their ARCEMY system (3D printing system).

AL3 already has good traction with the US Navy via the US Department of Defence and we alos want to see an expansion in jurisdictions and industries.

It also has a value added reseller agreement with ~$35BN capped Philips Corporation which has a large reach in the US

Milestones

in-progress total 8x new ARCEMY contracts

not done New ~$1M contract (New customer in US defense industry)

not done New ~$1M contract (Aerospace)

not done New ~$1M contract (O & G)

not done New ~$1M contract (New customer in non-US jurisdiction)

Objective #3: Prove recurring revenue from ARCEMY Services Deals

AL3 has built a recurring revenue component into its business model.

For each client that purchases the ARCEMY facility, AL3 has built in ongoing fees for providing ongoing support which includes software license fees of $150K a year, hardware maintenance fees of $50k a year, and tech support of $50k a year.

Milestones

in-progress Add new recurring revenue of $500K

not done Add new recurring revenue of $1M

not done Stretch target: Add new recurring revenue of $1.5M

Objective #4: More sales from manufacturing and prototype deals

In addition to the ARCEMY product, 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.

Milestones

not done 5 new manufacturing / prototype deals

not done 10 new manufacturing / prototype deals

not done New product certification 1

not done New product certification 2

What could go wrong?

Sales risk

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

Partner risk

AL3’s value added reseller partner Phillips may not close additional sales, or may not be fully engaged, and as a result AL3 may struggle to increase its market penetration across the US defense industry or other jurisdictions and industries as quickly as we hope.

Funding and dilution risk

If AL3 is unable to sell enough of its products and services and move towards sustained profitability it may need to raise additional capital to sustain itself. This funding may be secured via a capital raise at a discount, and incur dilution to existing holders of AL3 shares.

Technology and Intellectual Property risk

AL3 will need to continue to improve its technology to retain its edge in the market. Additionally, it is possible that uptake of additive manufacturing may not occur at the necessary pace to deliver the growth we want to see. In terms of Intellectual Property (IP), AL3 has patents in many jurisdictions but AL3 may need to expand its patent portfolio and competing products may enter the market. While unlikely, there is also the possibility of industrial espionage.

Key personnel risk

AL3 is expanding in the US and will need to hire key personnel to drive this shift. Hiring processes could take longer than expected, or alternatively key personnel may leave the company.

Accreditation risk

The reputation of AML3D’s products and services is largely dependent on retaining Lloyd’s Register and ISO 9001 accreditation. The loss of these accreditations would significantly impact the demand for AML3D’s products and services.

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.

What is our investment plan?

We plan to hold a position in AL3 for the next 3-5 years (and beyond) as it progresses its plan to gain significant market penetration in the large US market. We eventually may look to take some profits by selling up to ~20% of our holding (in line with our holding policy and escrow conditions) if the share price materially rerates on the company successfully delivering on the key objectives listed above.


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

Our Investment Summary

Date of Initial Coverage

27-Jun-24

Inital Entry Price

$0.064

Returns from Initial Entry

173%

High Point

306%