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Itaconix Plc – Capital Network: Breakthrough opportunity

Writen by Ed Stacey

PROGRESS YTD

Itaconix PLC (LON:ITX) reported H1 results (18/09/2017) which showed good progress, with revenues of £0.3m (H1 2016 ongoing: nil) and new collaborative partnerships in key product segments.

In this report we examine some of the drivers which are supporting this rapid commercial adoption of Itaconix PLC (LON:ITX) technologies, including productspecific performance attributes and the long-term mega-trend towards environmental sustainability in specialty chemicals.

INVESTMENT THESIS

Itaconix PLC (LON:ITX) has transformed (and renamed) itself in recent years towards a tight focus on specialty polymers for home care, personal and consumer health care, and industrial products. The H1 results demonstrate that the strategy is now delivering real commercial progress. Some of the drivers include:

• A patented production process that combines the versatile chemistry of Itaconic acid with breakthrough economics. • A range of bio-based products which can replace petrochemical ingredients. Industry-wide changes are being driven by consumer preferences, regulatory changes and the “Together for Sustainability initiative within the specialty chemicals sector. • Virtually limitless headroom for growth, with addressable end markets of $30bn. • Existing commercial revenues growing strongly. • Strategic partners including Akzo Nobel, Croda, and Solvay broaden the available channel to market.

In this report we examine some of the drivers in detail, with an overview of product categories and key differentiators.

SHARE PRICE DRIVERS / CATALYSTS

At this early stage of growth we don’t believe that there is any basis to value the shares on 2017/18 multiples. But by 2020 we believe the company could be generating £12m of revenue which would imply the shares trade on a 2020 multiple of 1.2x EV/Sales compared to peers on 3-4x (e.g. Croda plc.). With growth potential extending well beyond 2020, it’s unlikely that the market would value Itaconix this cheaply, in our view.

In the meantime, we believe the main driver for the share price will be adoption of Itaconix products by additional commercial customers. We expect progress across all three end markets – home care, personal and consumer health care, and industrial.

The company does not publish a medium-term financial route-map. However, some fairly compelling indicators can be found in the notes to the accounts. In particular we would draw attention to the notes in the interims results release regarding intangible assets (note 10, and in particular the value of the intellectual property) and also the contingent consideration (note 12). The contingent consideration is also described in more detail in the announcement of June 20th 2016 closing the Itaconix corp. acquisition.

In the interim results release, the company states that the contingent consideration remains at $4.3m (vs. $4.2m at Dec 31st 2016). This is the performance-related additional payment to Itaconix Corp former shareholders, which is linked to revenue targets. It is our understanding that this contingent payment would correspond to a revenue figure of $15m (£12m) in 2020.

Furthermore, the interim statement reiterates that the company expects gross margins of around 40% on its specialty chemical revenues, and also that the fixed-cost base is to be reduced by £1m from 2018 due to the operational reorganisation programme.
Putting all of this together, we arrive at the following medium-term outlook for revenues and costs.

We argue that the market gains a much more tangible basis for valuing Itaconix as we approach 2020. On our revenue forecast of £12m the company would be valued (at current share price) on an EV/Sales multiple of 1.2x. With the revenue growth outlook stretching out to 2030 or beyond, we believe it likely that the market would begin to apply a higher multiple. We note for example that UK-listed speciality chemical group trades on 3.5x (consensus numbers for 2017e from ft.com)

FULL REPORT CONTINUES…

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