Thanks @Wini

I've had a bit more of a look at the Tritium brochures and data sheets (please excuse the unqualified amateur electrical engineering).

The RTM75 (stand alone chargers) look like they definitely have some sort of other rectifiers in them.

• The top 3 units in the rack which are highlighted as liquid cooled are the DC:DC modules.
• The two AC:DC rectifiers are on the bottom. Its hard to tell from this image but I geeked out on youtube and found the following https://youtu.be/mfyO-o85U-8?t=884 which shows that they are also plugged into the liquid cooled backbone ... and definitely are not the Rectifier RT22.
• As you point out, the entire charger still has a dirty big fan in the bottom to expel heat.
• So that knocks out about half of Tritium's forecast production (based upon the transition to modular units highlighted by Tritium)

Geeking out on the same video, they talk about the PKM150 and NEVI with mention of power cabinets but didn't actually feature any of the cabinets in the video. There are no pictures of the inside of the cabinet either in the data sheets. However, the one thing that worries me with the extrapolation of RFT's relationship with Tritium is that this Power Cabinet seems to be able to support up to 360KW of DC output for the USA in the NEVI spec (https://tritiumcharging.com/product/nevi-150/) and 300Kw for worldwide which might indicate that they have two different types of rectifiers inside the unit. The fact that 360Kw is not cleanly divisible by 50Kw might not be good news for RFT's revenue if you are relying on the US Federal EV charging Stimulus to help justify the future growth for RFT. Maybe the RT22 is in the rest of the world version.

Thanks for the excellent analysis @RhinoInvestor and @Wini, 

Tritium or not, if the RFT product line is truly high-quality as emphasised by Nicholas on the call, I think it will inevitably find a place in this rapidly expanding fast charger market. So based on my belief in the company's integrity (ie. If they say they're quality, they're quality) I'm confident contracts are just a matter of time, and the current pricing continues to represent a buying opportunity.  

At ~70m market cap I think the long term downside is pretty limited given the conservative nature of the owners and high level of skin in the game, I don’t think they’ll throw this opportunity away, although their conservatism probably limits the short term upside because we're not going to see overly adventurous sales targets announced to the market.  

It sounds like there's been good progress in the non-tesla side of the fast charging market in the US recently, a few dot points from a Bloomberg NEF article below

A few months ago a group of major automakers (BMW, GM, Honda, Hyundai, Kia, Mercedes, Stallantis) announced a US$10bn build-out of 30,000 fast EV chargers, adding to the ~25,000 already installed, 19,000 of which are Tesla's fast charging network. 

The pipeline of announced fast charger installs in the US is now over 110,000, with Bloomberg estimating it needs to reach 390,000 in the US by 2030. 

Europe has ~50,000 installs and plans to add another 150,000 by 2030. Fast charging operator Allego recently announced it expects its charger investments to pay back in 4.2yrs with a 10yr IRR of 29% - ie. A green light on economics. 

ENPH is on a trailing P/E of 71 which is high but it's growth has also been astounding. RFT is on a trailing P/E of 16.

A P/E of 70 worries me because one slower quarter can really cause a re-rate. Of course it could be like PME and just keep going.

Thanks for alerting me to ENPH. I like the company so I'll keep it on my watch list.

Yeah but foward PE is a much more reasonable 35ish and from what I know of their products and roadmap, the multi year forecast looks plausible. Their tech is excellent and more importantly, they appear to have the software development chops to deliver really well rounded products which I suspect will be a significant challenge for a company like RFT.

Screenshots from TIKR for ENPH context:

Yep, I accept all that. I like the look of ENPH too on what I know.

Perhaps I misread your original post which I interpreted as saying RFT was " hideously expensive". On a forward P/E its probably about 8.5. . Apologies if I misinterpreted..

On a related tangent, Graham Witcomb over at Intelligent Investor recently wrote the following about OCL (added emphasis is mine) which definitely got me thinking more about multiples:

We've found a gem for you. The company is in software, it has a $320m market cap, revenue is up 50% over the past five years and profits have doubled. Plus, it has some serious competitive advantages, with locked-in customers of the highest quality – governments and regulators.

Unfortunately, this is no free lunch. The stock trades on a price-earnings ratio of around 40. And your psychic, tarot-reading sister-in-law thinks the share price is guaranteed to fall 25% over the next six months. Should you buy?

If you’re like most level-headed value investors, you’ll agree to the business’s qualities but take one look at that high price-earnings ratio and figure the stock is probably overvalued. You might decide to wait for a better price.

That would be a mistake. As you might have guessed, the stock we’re talking about is Objective, only it’s the Objective you would have seen in mid-2018.

Revenue didn’t just grow over the following five years, it accelerated, rising 70%. Profits, mind you, tripled during that time due to the business’s fixed costs and operating leverage.

Objective’s price-earnings ratio has expanded a bit since 2018 and currently sits in the mid-40s. The share price has gone from $3.50 to $12.30, an annual return of almost 30%.

And here’s the punchline – your sister-in-law was right. Anyone who bought in mid-2018 would have endured a 25% decline straight after jumping in … then another 25% decline in 2020, and then a 40% decline in 2022. And they still would have tripled their money.  

So, the question is, what would have been a fair multiple of earnings to pay at the outset, assuming you wanted a 'normal' 10% return on your investment? What multiple would have felt like there was a margin of safety? Would 20 have let you sleep at night? 30?

Given the growth, and where we’ve ended up, investors could have paid up to around 85 times earnings – or almost double what Objective’s share price was at the time – and still have got a good deal.

None of this is proof that Objective is currently undervalued. We’re short on crystal balls and we can’t say for certain where profits will be five or ten years from now. Our point is that while most of us know that growth is valuable, it’s easy to underestimate just how valuable it can be. As your certainty in that growth increases, so too should the multiple you’re willing to pay for it.

For context PME is on a forward PE of 105ish according to TIKR and has forecast revenues/earnings in FY27 of $250M/$127M.

I think Enphase are extremely well placed and capitalised to capture a significant portion of the "electrification of everything" market and think now might be a great time to get onboard (and maybe keep a small allocation for RFT 'cuz they're Melbourne representin' and seem like good folks).

Ah, no I was trying to say ENPH don't look hideously expensive at the moment on a forward looking basis (they were way more expensive in previous years with forward PEs in the 100-150 range).

[Edited to correct the TIKR screenshot which was originally posted with PME's ratios by accident instead of ENPH's]

Oh, and here's ENPH ratios for @Rick because I know how much you love some tasty tasty RoE:

Wanna try a McNiven's stockval for ENPH? :)

@loshell I think it's always tricky to compare micro caps and large caps. Operationally, ENPH is a much lower risk but because you have more certainty over the operations and growth you are offsetting that with valuation risk. The valuation is down from its lofty peaks but 35x is still very rich and any missteps would likely see it come down.

In contrast, RFT is likely trading on <10x earnings for FY23, but operationally there is much more risk given the size and reliance on one niche (rectifiers for DC fast charging). I think this is where qualitative research has to take over simply because we don't have historical execution to fall back to. From the work I have done, I think RFT has a best in class product with the RT22. 96% efficiency vs most peers at 94% is a big edge, but also it is much more compact which is important as more chargers become modular.

Right now we only have one customer for the RT22 (i-charging) which is a risk in itself, but also worth noting that customer stumped up for a $30m order with a decent pre-pay of $500k to secure supply. Given the Tritium relationship I would think they would move across to the RT22 over time as well.

But I think most importantly is the recent result gave us a glimpse of what this business could look like if they can maintain the execution and win new orders. High margins, high ROE and extremely capital light. The execution is a risk, but there is the potential to be exceptionally profitable and cash generative if they can.

Hey @loshell ENPH might be a much better faster growing company, but valuation does matter. A fast growing company can outpace its multiple but its still good practice to look at what rate of growth the company might need to achieve in order to justify its price tag.

Let's take a quick look at these two companies: ENPH and RFT. Say you want to make the average market return of 10%, over the next five years based on their current share prices.

If you want to achieve a 10% CAGR on ENPH's stock price, it would mean that by the end of fiscal year 2027, the price would need to be $314. According to the information from TIKR you provided, the forecast for ENPH's earnings per share (EPS) in fiscal year 2027 is 8.21, which means the company would have to compound earnings by 25% annually for the next five years without any mistakes. Even if this happens, the stock would need to trade at a multiple of over 38x its earnings in fiscal year 2027 just to achieve the average market return. To beat the market, the company would have to either exceed forecasted earnings over the next five years and continue to trade at the same multiple, or meet forecasted earnings and trade at a higher multiple.

In comparison, for RFT to achieve the average market return with a 10% CAGR, its stock price in fiscal year 2027 would need to be 7.9 cents. Assuming a terminal price-to-earnings (PE) ratio of 15x in fiscal year 2027 (which is roughly the market average), RFT would only need to achieve a CAGR of 13%. This is actually lower than their average CAGR of 18% for the past five years, and their terminal EPS would only need to be 0.52 cents (keep in mind, RFT generated 0.27 cents in earnings per share in just the last six months).

Remember as Buffett says, price is what you pay, value is what you get. Everything has a value, and nothing is worth an infinite amount. I can make a great return on a mediocre company if I value it correctly and pay the right price. Conversely I can make a mediocre or bad return on a great company (even a fast growing company) if I disregard value.

@Wini > I think it's always tricky to compare micro caps and large caps.

Indeedy, and I have close to no useful experience to draw on in this regard so am inclined to tread carefully and welcome any/all comparative discussion from the Straw-hive-mind.

> Operationally, ENPH is a much lower risk but because you have more certainty over the operations and growth you are offsetting that with valuation risk.

Right. So how do folks think about a 30 year old company that only now is starting to show signs of scalable promise vs a 17 year old company that has "made it", is scaling nicely and for whom there do not appear to be any significant long term headwinds in sight? Taking a 5-10y view, the execution and scale risk for RFT feels to me way higher on an absolute risk basis (completely subjective, I know) than the valuation risk for ENPH, especially if you believe ENPH will continue to successfully expand their product offering and grow market share.

> 96% efficiency vs most peers at 94% is a big edge

Does anyone know what the upfront capex cost differential is (if any) to the end buyer of the chargers for that 2% efficiency gain?

> It is much more compact which is important as more chargers become modular

Where's the pressure coming from to make more space efficient chargers when we're talking about already very bulky units and they're being placed in spots like car parks, petrol stations and the like (as far as I know) which aren't typically space constrained such that an extra few tens of centimeters would make a difference?

Great commentary and worked examples @Vandelay.

We should also put on the table for this thread of discussion the "risk" of RFT becoming successful enough to be an acquisition target given its small fish status, which would likely (in the event of a cash buyout) force its investors into violating the first rule of compounding i.e. to never interrupt it unnecessarily ;)

Yep companies can get taken over.

It sucks and more annoying if you truly believe in the company's potential. But I don't think it's a risk of capital loss. "The risk that matters most is the risk of permanent loss.” Howard Marks. If it happens you can just put your capital into something else, maybe even ENPH - if I think the odds are in my favour that it will beat the market from the share price at the time.

Right, the acquisition "risk" is all about the capital gains tax event you'd get lumped with and then whether you can jump to another option with the remaining proceeds or not e.g. if ENPH's valuation is back up above 50x or 100x earnings and you think that's too rich you'll have to sit on your $ or invest elsewhere.

I'm not really sure how to think about acquisition risk, but it's definitely something worth giving some thought to if you're not a shorter term investor/trader. A number of my holdings having been acquired over the last 12m and while it feels nice to have "backed a winner" in so far as someone else sees value like I did and ponyed up for it, you then realise the intended long term investment you were happy with and believed in just got pulled out from under you and you're left thinking about the opportunity cost of not having held something else that wasn't acquired and is happily compounding away and has gone up in price.

Yeh I hear you @loshell it does suck when a favourite company gets acquired. And yes you'll have to pay tax on the profit portion (as you would if you eventually sold ENPH down the line in 30 years). Obviously I'd rather that not happen.

I just used ENPH as an example of a company to move your capital to. Obviously you'd just pick the best opportunity available at the time, you don't necessarily have to replace a like for like company, and if ENPH wasn't good value at the time o wouldn't cycle my money into it, but maybe it fell to 20x current earnings and it is good value, maybe it too gets taken over after I buy it?! This is a lot of hypotheticals. If I was going to avoid investing in companies because they could possibly get taken over then I would have a small universe. I don't think it's worth worrying about.

@Vandelay It is worth worrying about if you have multiple companies to weigh up who operate in the same space/market, have market-beating growth prospects and a reasonable belief that the respective probabilities of acquisition are materially different.

If today I invest $1 in RFT and $1 in ENPH, and reasonably believe due to expected growth + market cap that RFT's likelihood of acquisition by cash is higher in any given year than ENPH over the next 5, 10, maybe 20 years, then each year I hold both, I run a higher risk of RFT's compounding being terminated and therefore paying CGT on a smaller pie than the eventual larger pie I expect ENPH to have grown to because it was able to be left alone for longer.

Hypotheticals and assumptions abound indeed, but on the face of it my intuition (which I'm testing publicly here, so please poke holes in it) for RFT vs ENPH is that ENPH is at a scale/size where an all cash acquisition is diminishing in probability year on year, meaning an investment in ENPH today has a higher probability of being able to compound for longer than an investment in RFT.

Sorry @loshell I probably didn't articulate myself well enough. I meant I don't think we should worry about prospective company's getting taken over. For me it isn't high on the list of potential "risks". You may disagree. But I do agree we should look to put our $1 in the best risk vs reward opportunity available to us.

I am definitely biased because I recently bought RFT after their last result. But my opinion on the ENPH vs RFT opportunity debate is that for ENPH to be a market beating investment from here and justify its current price it must perform exceptionally well, without misteps, for a long period of time, and hope that the market sentiment is generous enough to keep giving it a high multiple. Whereas RFT can just do ok and still outperform. If it performs well, I believe the upside is material. The asymmetry to me appears in my favour for RFT not ENPH.

I appreciate the thoughtful disagreement. That's why I love strawman.

@loshell, let’s assume ENPH was delisted and PE ratios are no longer relevant, and all that matters is our future returns on what we pay for the business.

What could we afford to pay per share for ENPH so we get a reasonable return on our investment? Currently we are paying US$196 per share for US$6.07 worth of equity in the business (a PB of 32.4x). Will that give us a good return? We don’t have enough information to answer that.

Next we need to know what the internal rate of return is for the business, or the normalised Return on Equity (ROE). Over the last 7 years ROE has increased from 25% to 48%. That’s a solid track record for internal rate of return and it looks like a quality business to me. However, it is the future ROE we are more interested in for a valuation. According to data on Simply Wall Street, and based on earnings forecasts from 17 analysts, the ROE for the next 3 years is expected to be c. 33% per year. So the analyst aren’t expecting the same ROE going forward as over the last two years.

Now if we paid book value (shareholder equity) for the business and 100% of the earning were reinvested back into the business each year to return 33% ROE indefinitely, your annual return on your investment would be the same as the business, 33%. But, we are not paying book value for the business. We are currently paying 32.4x the book value. Is that good value? We still don’t have enough information.

The last piece of critical information is our minimum required rate of return (or our ROI). I try to find businesses that have the potential to provide me with a minimum of 15% ROI.

This is the logic behind McNiven’s StockVal formula. The most critical value in the formula is the adopted future ROE. If you get this wrong the valuation turns out to be absolutely meaningless.

Using ROE of 33%, a required return of 15% and assuming 100% of all earnings are reinvested, I get a valuation of $28.30. Sounds ridiculous compared to the current price, right?

If I plug in a required return of 10% I get a valuation of $64. Still sounds ridiculous.

To get a valuation of $196 I need to use a required return of 5.7%. I wouldn’t be happy with the level of risk for a 5.7% return.

From this I would conclude that either the business is way over valued, or I am underestimating the future ROE for the business.

Let’s assume ENPH could continue it’s historical ROE indefinitely at 48% and we were happy with a return of 8.5%. Then we could pay the current share price of $169. While ENPH looks like a great business, I think it is far too expensive.

When I first looked at this business I went straight to the ROE data. That told me it was a high quality business. The next thing I looked at was the PB ratio (32.4x). That told me it was a very very expensive high quality business. Generally I would not waste any more time and move on to find another high quality business that is not so expensive.

Having said that, when people get caught up in using historical PE ratios to value a business based on future earnings, valuations can be distorted for a very long time. Worst still most share advisors seem to talk about share prices relative to historical share prices to determine good value. That also helps to distort share prices for a very long time.

Cheers

Rick

@loshell Whoops! I’ve used the other ROE data. Let me know what future ROE you expect from ENPH and what your minimum required return is and I can give you a valuation.

Cheers

Rick

Apologies @Rick, I only realised my mistake with the ratios a few moments before you posted.

I haven't done anywhere near enough work on ENPH to have any informed predictions to offer so failing that, TIKR forward ROE estimates from FY23 onwards are 49/42/32/28/25%

@loshell given those forecast ROEs, in a best case scenario you might use a forward ROE of 40%. At the current share price of US$169 you could only expect a return on your investment of 7% to 8%. I would like to see a higher return for that level of risk I would be taking. If you required a minimum 10% return, that would bring the valuation back to c. $100. So while ENPH is a high quality business, I think it’ is still too expensive at the current price. Looking at the level of insider trading since June last year, I think some insiders might agree.

I agree 96% efficiency vs most peers at 94% is a big edge. That’s 33% less heat to deal with, or conversely 50% more power for the same size footprint. More importantly, it indicates they’ve got top engineers that will enable them to keep innovating.

The new Porsche has an 800 V battery compared to the Tesla of just 350 V. So this is a rapidly moving target so innovating is survival. 800 volts requires Silicon Carbide transistors which RFT uses. So they are well placed currently and In future if the voltages keep rising, Excuse the pun.

@actionman > I agree 96% efficiency vs most peers at 94% is a big edge.

An edge it may be, but at what upfront cost to the end customer i.e. what's the capex vs opex tradeoff?

It's possible competitors are designing to a price point rather than maximal efficiency, and if a customer's electricity price is cheap or free (e.g. charging from local renewables), or they charge the vehicle owner for the power, the charger customer may care more about capex.

>That’s 33% less heat to deal with, or conversely 50% more power for the same size footprint.

You mean 50% more power used by the rectifier to deliver the rated output power right i.e. 52.1kW vs 53.2kW of input to deliver 50kW of output?

@loshell what's the capex vs opex tradeoff? - That's a good point.

The op-ex I guess is essentially determined by the cost of the support and maintenance which is largely dependant on reliability which in turn is influenced by heat. Electricity prices are rising and losses could also become reasonably significant (about $1 per charge, so save 33c). A good analogy is that in a large commercial building fluro lighting was used because they run cooler than incandescents and therefore last something like 8x longer which means less frequent visits by crews even though they cost much more per bulb. So higher efficiency may have a similar cap-ex/op-ex ratio, but I don't know. That would be a good question to ask RFT.

In terms of buying lower cap-ex units, I guess that is always a risk. Apple is designed in California, made in China, so they are higher cap-ex hardware, but they lead with innovation in fast moving tech, with significant complexity and services overlaid. After watching the RFT video I am thinking that there is more to chargers than I expected. Who knows, once your whole energy system is integrated it may have a lot in common with other tech industries.

> You mean 50% more power used by the rectifier to deliver the rated output power right i.e. 52.1kW vs 53.2kW of input to deliver 50kW of output?

I wasn't referring to total power input. I meant that 96% is a 4% loss or 2 kW vs 94% which is a 6% loss or 3 kW on a 50 kW charger. So RFT could make a 50% more powerful charger of 75 kW for the same 3 kW loss. I.e. in the same size cabinet. To put it in perspective, a home heater that plugs into a normal powerpoint outputs 2.4 kW on maximum. Porsche uses 350kW chargers so they would stack 7 of the RFT units (each unit is 18cm high). That stack would have to dissipate 14 kW of heat. That's 6 home heaters in one cabinet! That's a fire risk and would need a significant cabinet to keep cool, and could be a maintenance nightmare. Hence my comments on op-ex of a cheaper unit that would have to dissipate 22 kW of heat.

ENPH missed some estimates and has been brutalised. Dropped as low as $120US recently and is today trading around ~25x forward PE. Looks to me like there's possibly a bit further to drop too, although I'm pretty interested at the current price.

With RFT continuing to execute well as discussed here recently, and ENPH's future still looking bright, my thought bubble of dual holding ENPH and RFT is looking like something I may put into action imminently using some windfall from the crazy rally of NVIDA I have been an unexpected beneficiary of...

I'm always a little skeptical of Australian manufactures having worked for some previously, so I watched the video out of interest and a lot of points seem to make sense to me:

• Design is in Melbourne, manufacturing in Malaysia, sales in Singapore - all smart choices IMHO
• 30 y/o business in Australia has a long history of power conversion technology (remote telecoms infrastructure, industrial, mining etc)
• Chargers have to be certified to different standards in Australia, US, Germany etc for radio frequency interference and this requires knowledge/specialisation
• EVs have complex power requirements to control the power flow to charge quickly and within the battery specifications
• International standards are being upgraded to enable the charging infrastructure to be shared with different vehicle brands and allow vehicles to supply power back out to the grid/home (called V2X).
• Vehicles have onboard chargers (from AC) but these are low power (slow) and can't always do V2X well, so it makes sense to have external chargers that are far more capable
• EV fast chargers supply huge amounts of power: 50V to 1000V, 125A that weighs 50kgs for a medium spec device. To do this efficiently and cost effectively you need to use advanced circuits and transistors that can operate up to 100kHz in switching frequency. This enables smaller light weight units, with low power loss and less heat to dissipate.
• New transistors are recently available on the world market to enable this and they are scaling rapidly to supply more volume (see Silicon Carbide and GaN MOSFETs by Wolfspeed - NASDAQ:WOLF)
• Component shortages are mitigated by designing circuits that can use substitute components (they use Altium ASX:ALU and I guess their Octopart service)

So I think the reason this business works is that it is in a big market with significant complexity that is moving fast and a there is a long runway. Australian manufacturers can definitely play in this space and I am convinced Rectifier Technologies fits this well with significant expertise, IP and the business model that has been proven. I like this better than Codan which I am a familiar with previously. I think the EV tailwinds and the electric revolution will throw up multiple ways to win.

I will have to read up on the financials that others have posted here!