Eco Investor February 2016

Initial Public Offering

Solar IPO With Good-Looking Innovations

It's great to see an innovative solar energy company among the first IPOs for the new year. Trac Group Holdings Ltd is raising between $3.5 million and $6.5 million to begin commercializing its beautiful looking home roof system that can come with or without built-in solar energy and solar hot water.

Cleantech's political theorists will be hoping the IPO is another sign of the end of "Tony's Trashing" and the start of "Malcolm's Magic" and that more cleantech entrepreneurs are about to come out of hiding. Cleantech's business thinkers will see it as good timing with 2016 set to be a big year for the solar energy and battery storage markets. For cleantech investors, Trac Group is one for the technology punters - an early revenue business with an offer at 25 cents per share that is not underwritten.

The company has designed, built and had initial sales for its innovative and sustainable Tractile whole-of-roof system. The system is part of the new markets for Building Integrated Photovoltaic and Thermal (BIPV-T) and Roof Integrated Photovoltaic and Thermal (RIPV-T) products.

The company's key products are the Tractile Interlocking Roof System (TIRS), which is the roof framework on which the home owner can choose to add the Eclipse roof tiles, the Eclipse Solar roof tiles, the Eclipse Thermo roof tiles, the Horizon roof tiles, and battery storage or a combination of these. The lightweight, high strength roof tiles are made from composite materials and look very smart.

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A Tractile roof without solar panels (left), with part solar (middle), and full solar (right).

The Eclipse roof tiles are non-solar flat tiles that come in a wide range of colors. The Eclipse Solar roof tiles can generate photovoltaic electricity, and also if wanted solar boosted hot water. Trac Group says the Solar tile is the world's first RIPV-T roof tile that can create both electricity and solar boosted hot water from a single unit. The Eclipse Thermo Roof Tiles can interlock with the Eclipse roof tiles and Eclipse Solar roof tiles to produce solar hot water. The Tractile Solar Horizon tiles integrate with new or existing CSR Horizon flat profile concrete tile roofs and provide both solar PV energy and solar hot water. The TIRS also has all roofing components such as steel battens, flexible flashings, sealants and fixings to give a complete roof.

Trac Group also intends to sell energy storage systems from 360Storage including inverters, batteries, energy management systems and software.

Above: The Tractile Eclipse and Solar Eclipse roof tiles.

Below: A Tractile roof without PV panels.

Founder and managing director Jason Perkins told Eco Investor that the company is using a capital-light model for expansion and this includes installation which is done by outsourcing the work to 360Storage which has 75 trained distributors around Australia. The roof system is fast to install, needs up to 90 per cent less labor, and won't break as it can withstand great weight and impact. The strength and durability of the tiles comes from their composition - 30 per cent glass fibre, 30 per cent resin and 40 per cent filler made of powered mineral, he said.

On the environmental side, the system provides increased insulation for hot and cold climates, it uses cost effective and lightweight materials, and the PV output efficiency equals that of conventional PV systems. The composite material used has a greatly reduced embedded energy footprint, and the products have a long lifespan.

The solar hot water function is a booster that can work with heat pumps, instantaneous gas or electric, and gas or electrical storage tank systems.

Although it began in 2005 and became a public company in 2014, Trac Group is still an early stage business that is only now ready to begin commercial production, marketing and sales. Its success will depend on how competitive its offering is on price and technology efficiency.

On technology, the PV cells in its products have the same efficiency under Standard IEC Test Conditions as conventional PV cells, i.e. 120Wp to 160Wp per square metre. Mr Perkins said the design of the tiles will allow them to be easily updated when there is a worthwhile performance and finance gain.

On its solar thermal boosting technology, the prospectus says that under favourable but typical Australian weather conditions, the Thermo tiles can generate hot water with a temperature of 55° to 75° C, although this is typically controlled down to an operating temperature of 35° to 45° C to avoid overheating the PV cells.

On price, the products are more expensive than traditional roofing and so Trac Group is targeting the high end of the market - early adopters among award-winning architects, high net worth home buyers, builders of premium and sustainable homes, and consultants. It should be assisted in this market with the attractive aesthetics of its products and that its products have won national and international awards.

Mr Perkins said there are 12,000 architects in Australia so marketing can be well directed and cost effective.

The cost of a system depends on the size, height and configuration of the roof, but Mr Perkins said around $130 to $150 per square metre is a good guide. While it is at the top end, it is cheaper than top end Colorbond and top end terracotta.

While the initial cost makes the system suitable for higher value homes, the relatively short pay back period, in some cases five years or so, means that there is no need to upgrade the tiles as after that the energy is free. Mr Perkins also said there are likely to be less costs in roof repairs from cyclonic winds and hailstones, and the rise of electric cars should also reduce the cost of ownership. He is confident on sales.

Trac Group has patents in many countries and needs the capital from the IPO to take its products to market. The $3.5 million minimum will allow it to increase sales in Australia by launching nationally, the $6.5 million target will also allow it commence planning a roll-out into selected international roofing markets starting with Malaysia, USA and Europe. The capital means it could also continue developing or acquiring the next generation of innovative technologies.

Importantly, it wants to increase its manufacturing capacity and if the IPO is successful it will acquire the 50 per cent of Tractile Malaysia Sdn Bhd that it does not own. Tractile Malaysia owns plant and equipment that is essential for the manufacture of the Tractile products.

On the international front, chairman David Fagan, who has the company's products on his roof, says that there are 514 cities with a population of over 1 million and 211 of these cities are in countries where Trac Group has patents. Of the other 303 cities, 257 are the subject of patent applications.

So there is nothing wrong with the company's ambitions. But before it gets to that stage it needs to develop the Australian market and before it can do that it needs basic things like working capital that this IPO is designed to provide.

The company still operates at a loss. In 2014-15 its revenue was only $140,242, of which receipts from customers were $86,368. Mr Perkins said these were early test sales and so far the company has had no formal marketing. Its 2014-15 loss was $518,091. So far it has accumulated losses of around $3.7 million, which seems quite modest for an innovative technology company with international IP.

There is no guidance on when the company may achieve profitability, so think long term. Mr Perkins said the current burn rate is about $700,000 per annum, and the company needs to achieve sales of around 200 systems per year to break even.

The prospectus says the IPO will give the company access to capital markets, so more capital raisings are likely in the future. Mr Perkins said given the company's capital light growth model, any further raisings are more likely for acquisitions.

Potential investors can draw some comfort from the awards and past government grants and funding the company has won including from the Queensland Government, Ergon Energy, and Commercialisation Australia. It also recently undertook a pre-IPO capital raising of $868,382 for working capital and to prepare the IPO.

Trac Group is small. It has four employees, and Mr Perkins is a majority shareholder who controls 36 million shares and 12.5 million options. Post IPO and depending on how much is raised, he will control between 51 and 58 per cent of the company if he exercises the options.

If $3.5 million is raised the company will have 70,375,359 million shares on issue and this will rise to 82,375,359 if the maximum is raised. The initial market capitalization will be between $17.5 million and $20.5 million. However net assets will be only $3.3 million to $6.2 million depending on how much is raised.

The IPO closes on 23 February with listing expected on 3 March.

Although its sales are modest, Eco Investor is classifying Trac Group as a pre-profit security. (ASX: TRC)





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