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Hi, welcome to this week's ITPM flash head check here. It's Sunday the 7th of September. It's great to be back in the seat following the software as a service flash a couple of weeks ago. And you might have noticed that Durolingo, one of the names mentioned, fallen 20% since then. And Salesforce is basically flat after inline earnings. And I very much stand by my derating trade on Salesforce CRM because I don't think inline numbers with very little operational leverage is good enough in this sub sector at this valuation. So make sure you keep an eye on all the other software names whose moat is very much under threat.
Now a couple of months ago I did a winning the data race data center race flash and outlined a stock called iron. This stock has basically doubled over the last couple of months and I've switched out of that into a lovely little stealth data center trade and the stock is Kimor CC. It's a $2.34 billion chemicals company and it's got three business divisions. Thermal and specialized solutions. This is basically refrigeration and cooling. Titanium technologies which is industrial coatings, laminates, construction, furniture and packaging sectors and advanced performance materials which is basically your consumer electronics. And if you have a little look at the chart, you'll see that it's had tough love for 3 years like pretty much all the material stocks outside of uranium. And then with a stock chart like that with no sign of a cyclical recovery in place, having a forward PE of 10, an EV to E uh EV to sales ratio of 1 looks just about right. And the problem with all these material stocks, they just can't generate any revenue growth. You will see though that the stock has rallied about 50% off the lows through the summer. When you look at the quants, you will see it's still got very little sales growth. There is a bit of earnings leverage coming throughout a couple of years, but this is rallying off the lows.
Now, this company's only $2 billion market cap. It's got $4 billion of debt. They've recently cut their dividend, hence the tough love. This is everything that you don't want from a low P sec uh cyclical. But as I said, the stock's 50% off the summer lows. And the first question is why now? Why is this stock rallying? Why should we buy it now? And before we get to the excitement of the stealth data center play, let's see what's happening with their existing operations.
Now, the refrigeration segment is doing great. Q225 saw a 25% increase in net sales driven by the Option refrigerants business and this is due to the global shift to low global warming cooling solutions under the US AIM act getting rid of FCFs and all the household fridges and freezers must be compliant but by the end of 2026. The CC and Honeywell are effectively by patent a duopoly in this area of the market. They've got the best kit. There's regulation in place and all new fridges and freezers are likely to use one of these two as their new cooling system. So this is a genuine driver of the stock.
Now the second little catalyst on its existing businesses is their cost cutting program. And like most cyclicals that can't really drive the revenue line, they're managing their cost very effectively. And Kimor has got a $250 million cost-saving program, half of which should be in the bag by year end. So that's the second driver. The third little catalyst is also the easing legal overhang, and this is helping their cash flow, release of reserves, that sort of thing. The legal overhang was a New Jersey PFAS settlement, the details of which are pretty irrelevant for the trade thesis. So there are three genuine little catalysts why the existing business is rallying off the lows. The forward quants are improving. The other two divi business divisions are doing poorly. Right? There isn't any sign of the cyclical recovery. You can look at even companies like Texas Instruments that is just saying the same thing. But who doesn't like a genuine turnaround story with a forward PE of 10 if there is a genuine potential transformative catalyst?
And the real kicker for this trade is a stealth data center trade. The action in this trade is in next-g liquid cooling for data center technology and the two-phase immersion cooling to PIC tech offers potential to reduce data center cooling energy by up to 90% that basically you know all the chips and wiring and stuff is immersed in liquid. This liquid is totally recyclable. Uh it's very exciting. We all know about the energy consumption used, the amount of water used and of course we all know the capex plans out to 2030 are just enormous as Mark Zuckerberg just recently do told Donald with his plans out to 2030. Now whether or not this actually happens is moot. The you know the market is still growing and getting bigger and all the problems will only get larger with it. So if you're buying Kimors today, it's because you think this is going to be a winner in next generation liquid cooling and the news flow over the summer's been really really supportive.
So they've done four major partnerships. One with NTT data and Hibaya. This is for full scale field trial of the Option 2 the 2P50. Optium that's just their liquid cooling nextg uh product. This happened in March and in May they teamed up with Navin Florine and this is for uh industrial scale manufacturing of Optium. They've done a tie up with data vault. This is for again mass adoption and scaling up and most importantly in August and this is why it's really time to buy this stock. It's the data that's coming out of their big partnership with Samsung. So in August Kmore Keores achieved a qualification milestone when Samson along with all the other partnerships said that Option has achieved commercial scale immersion tank fully meeting all the reliability compatibility and cooling uh targets for Samsung's SSDs solidate drives. Now Samsung's SSDs are the market leader in data centers. They've got 35 to 40% market share. So Kimor has got potentially the best nextg liquid cooling and they're doing in does they're really scaling up all the testing with the market leader the data center SSDs. This could be massive.
Now what's the total addressable market for nextg liquid cooling management think it's around half a billion out to 26 and much like all estimates for 2030 capex you know who knows big multiples of where we are now and the industry sort of estimates are sort of 34 billion but remember kimor makes $6 billion in annual revenue so the capex projections. Quite frankly, who cares? Remember that this is a bombed out cheap stock forward P of 10 transforming its business. And being market leader in nextgen calling will shift the obviously the quants up, but obviously the rating who says it can't go to a P of 20. That means the stock doubles off higher numbers. Right?
So onto the structure. Now, when we look at the options chain, we've only got September, October, and January 26. I've gone straight to the January 26s. Remember, you're not buying this for the refrigeration business doing a bit better. Bit of operational leverage, small earnings beat. You're backing this company to become a real data center player. I definitely want next earnings, not for the beat, but for the story. There should be a lot more data coming out. All the headlines I think will be positive and we know what rer ratings mean. Look at iron.
Now remember, there's nothing more bullish than buying a big out of the money call, waiting for it to rally, and then selling the short leg against it. This will improve your returns further. The trade I'm outlining now though is just the basic longdated out of the money vertical call spread. And you can buy the January 90 20 sorry for $110. And then you can sell on Monday the January 25s for 30. So 94 longs versus 94 shorts will give you a 7 12 grand net spend. And if Kimor is above 25 by January of next year expiry, you're going to make just shy of 40 grand. That's over a 500% return. I think this is a lovely little trade. Remember, the whole data center trade is a trading sector, right? You've got to make sure you're going to get paid. you keep chasing the stocks that are bottom left to top right, the chances of getting a really big return like this is much much lower. So out of iron into Kimor, a nice January out of the money vertical could be a five bagger. I look forward to seeing you next time on the ITPM flash. Cheers.
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