Equity Long-Short Trade #2 // Creative Technology vs Clean TeQ

After a successful call from Trade #1 posted last week which have gained 6% so far, our new equities guy is back with trade #2.

Trade #2 / We call for the following pair trading idea.

Long 14 units of Clean TeQ (ASX : CLQ) @ AUD 0.41

Short 1 unit of Creative Technology (SGX : C76) @ SGD 5.61

Our one year target as follows.

Clean TeQ : AUD 1

Creative Technology : SGD 1.80

Trade thesis as below

CREATIVE TECHNOLOGY, DREAMS THAT LAST ONLY 3 QUARTERS. A CASE OF BEING OVER HYPED AND UNDER PERFORMING.

Creative Technology Limited (SGX:C76) – obvious case for a short

Creative Technology is a once-admired audio tech company that is well known as the Company that created the sound blaster cards, revolutionising the industry.

However, since then, the share price has declined from a high of $60 to a $1 low and is now trading at $5.70. The question on everyone’s mind is whether the Company is on its way to its former glory or is this merely a hype.

Creative has recorded revenues of $13.2m for 1Q19, a YoY decline of 18%. The implied gross margin is 29%. For comparison, Apple, a global leader with its impressive supply chain records 38%.

Excluding a one time litigation settlement of $31.2m, net operating loss has reduced from $8.4m to $6.1m. This is mainly due to slightly higher gross margins, lower levels of selling and litigation expenses. Insights are as follows:

Creative has recently announced the launch of the Super X-Fi Amplifier. The underlying technology is free for download in an app and available to all consumers. Whilst there could still be further opportunities to monetise their technology via licensing and litigation, our view is that Management thinks this is limited which is why they have provided the technology for free to the public.

Creative has a track record of not been able to attain the targeted and required volume of sales due to competition in the market. Our view is that this time is no different as the industry is currently controlled by major global players.

The owner and management is a visionary, however, our view he is not making products that customers want or products that he thinks customer will want. Our view is that he is making products that he wants to showcase to the market.

Upon review of Creative’s balance sheet, we note that Management has not capitalised R&D costs for many years, if Management do not believe they can derive future economic benefits and positive cashflows from their current product line, who are we to think of the contrary?

The Company has a NAV of $1.50 which is backed by almost $1.50 in cash and cash equivalents. The NAV has continuously declined as a result of poor operating performance. Our view is that this will continue to dwindle as Creative continues on its fruitless quest to achieve its former glory.

We think this is a no brainer and hereby issue a 1 year target of $1.80 from today’s close of $5.61

Given that most spiked hype story for Creative Technology last only 3 quarters at most, we should be in line to trade much lower from now when history repeats.

THE NEXT BIG THING IN AUSTRALIAN MINING - MINING GEM TO BUILD MINE MARKET SHARE OVER BIG BOYS

Clean Teq Holdings Limited (ASX:CLQ, TSE:CLQ) – well capitalised and managed

Clean TeQ is a leader in metals recovery and industrial water treatment through the Company’s proprietary Clean-iX® continuous ion exchange technology. The Company is currently developing its the world-class “Clean TeQ Sunrise” Nickel-Cobalt-Scandium Project in Fifield, New South Wales, Australia, and also a highly innovative water technology business that has recently won contracts in China, Africa and Australia.

The Company’s major shareholders are a group of Chinese based mining industry professionals and Singapore-based international Financier Robert Friedland of Ivanhoe mines. The Company also counts major superannuation funds like AustralianSuper and financial services firm Fidelity as investors.

We will provide some insights about the metal segment of the business as the Company has recently provided a progress update.

The Clean Teq Sunrise project is a US$1.5B capex mine well positioned to provide critical raw materials for the rapidly growing electric vehicle and energy storage markets. The project will also be one of the largest conflict free cobalt mines in the world once operation and production commences in 2021.

The project has recently completed the Definitive Feasibility Study(“DFS”) and are moving into the project delivery stage with the appointment of a key EPC partner.

The DFS confirmed that Clean TeQ Sunrise can deliver large volumes of critical battery raw materials while generating outstanding financial returns over many decades. The project is forecast to deliver over US$14 billion in revenue and average annual EBITDA of US$344 million over the first 25 years of operations.

The project is well financed with large equity investors who will continue to contribute equity. The project has also secured syndicated loan agreements with major banks.

Offtake agreements with strategic counterparts have also been secured.

We note that Nickel and Cobalt prices has also doubled since the beginning of 2016 and will continue to increase.

The project has also continuously qualified for Government R&D grants which has been approved and paid out for the past few years.

Unlike Creative, Management is also comfortable to capitalise all costs on the balance sheet as they are confident of the future economic benefits of the project.

We expect forex movements to continue to be favourable for the Company as the metal prices are denominated in USD whilst their main cost base is in AUD.

The mine is expected to have one of the lowest cost base due to its shallow and significant deposit, proprietary technology and credits offset arising from Scandium, the third metal being mined.

We like the idea of the Scandium credits but have not factored this into our price target due to the infant stage of the Scandium market.

We hereby issue an upside target of $1 from today closing price of $0.41. Do note that the 52-week range is $0.38 to $1.69.

Good Luck Trading!

Prowl4equities

Any content on this blog should not be relied upon as advice or construed as providing recommendations of any kind.