The biggest strategic driver for CUI remains the potential for the GasPT product to...
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.
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.
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.
During the last 12 months, the company has transformed itself. Following the acquisition and successful integration of Itaconix Corporation, the group completed its transformation to a pure-play specialty chemical company via the divestment of the nicotine gum business, and finally the re-launch of the group in March 2017 under the name Itaconix plc. The interim results are effectively our first look at the company in its completed form.
The H1 results show an encouraging start to the ramp-up of commercial revenues under the rebranded company, with specialty chemical revenues of £0.3m (H1 2016: nil). In addition the company has announced new commercial sales agreements as well as partnering agreements that represent an expanded channel to market.
Some of the key highlights include:
• An exclusive supply and joint marketing agreement was signed with Croda for the ZINADOR odour control product, January 23rd.
• A joint development agreement with Akzo-Nobel was signed, covering multiple potential products, January 27th.
• An efficiencies program was launched to re-profile the cost base, May 18th. The interim results statement confirms that annual cash savings of £1m are expected from 2018 onwards.
• First hair styling product, RevCaretmNE, launched.
• Pursuant to the January 27th announcement, product-specific agreements were signed with Akzo-Nobel on products for coatings/construction (27th July) and chelants (5th September).
The partnership agreements are a particularly important highlight. As we will discuss later in this report, the market opportunity for Itaconix is very broad, and one of the challenges will be to find fast enough channels to market to support rapid expansion. We believe that the commercial partnerships which have been agreed during the first half are a significant step in enabling expansion.
The main take-away, in our view, is that the company has completed its transformation to a pure-play specialty chemical company with a product portfolio that offers unique advantages in terms of performance and sustainability. This realignment has begun to bear fruit in terms of initial commercial sales, and important progress has been made in expanding the route to market to enable substantial growth going forward.
Itaconix designs and manufactures polymers for use as functional ingredients within products for home care, personal and consumer health care, and industrial use. The polymers that Itaconix has developed offer advantages in terms of functionality, sustainability, and cost. Some of the immediate applications include:
Chelant: These are chemicals which bind calcium ions in water which would otherwise react with soap, creating “soap scum” and limiting the effectiveness of laundry and ADW (automatic dish washer) cleaning systems. This segment has been an early success story for Itaconix, driven partly by environmental regulations.
Hairspray: Polymers are used to give hair styling products their “hold”. Other applications exist in various personal care products.
Paints and sealants: Polymers can form the main body of a coating or sealant when it dries, and/or be used as an additive to improve the qualities of the product.
Odour control: Polymers can act as odour absorbers for use in home care, personal care, and industrial or agricultural applications.
Encapsulation: An active ingredient can be trapped in micro-particles of polymer, being released eventually by temperature or pressure or other stimulus. This is used for example in controlled release of bleach in laundry.
The following table is a full list of Itaconix current products:
Itaconix plc was originally listed on the UK stock market in 2012 as Revolymer plc, with a focus on gum and also certain specialty polymers. CEO Kevin Matthews joined in 2014, and the company shifted its focus purely to the specialty polymers side. This process was accelerated in 2016 with the acquisition of Itaconix Corp in the US, and the disposal of the nicotine gum business. The group was renamed Itaconix plc.
The acquisition was financed via equity issuance, which was supported by the shareholder base including the major shareholders Woodford Investment Management and IP Group. It is our understanding that the major shareholders have been supportive of the process of reorienting the business.
The following schematic shows the main developments that created Itaconix plc.
The residual holding in Alkalon may one day prove to be a valuable asset, but for the purposes of this report we are focussed on Itaconix own managed business, which are more likely to be the driver of value for the shares, in our view.
The main attraction in acquiring Itaconix Corp was the intellectual property which the company had developed. Their proprietary process, which was patented in 2008, builds polymers using Itaconic acid. This is an organic compound derived from fermenting corn, and it provides a very flexible tool kit for producing multiple different polymers. Each new product that is developed can give rise to an additional patent, so the lifespan of the intellectual property can be extended.
What Itaconix Corp developed is not just a new chemical or a new production process, it’s a new platform for creating a whole range of new polymer products. Acquiring a whole new chemistry platform was a rare opportunity for Revolymer, and it’s this technology which is allowing the combined group to address multiple different market niches with new and highly differentiated solutions.
The use of Itaconic acid to produce polymers has long been known as a highly versatile technology. However, existing processes were too expensive to be applied commercially. The following chart shows the economic advantage of Itaconix’ process.
We estimate that the immediately addressable market for Itaconix’ current product range is around $1.4bn, compared with the company’s current revenue run-rate of $1.4m. The end markets that can ultimately be addressed amount to $40bn. The following diagram illustrates the relevant markets.
We next consider some of the specific applications that are most immediately relevant to Itaconix.
Chelants are agents which can bind metal ions in solution. A particularly important application is the use of chelants to bind calcium ions in water, thus preventing the calcium from reacting to form soap-scum. Chelants are used in this way in industrial and agricultural applications, as well as in dishwasher and laundry detergents, which are the most immediately addressable applications for Itaconix.
The “Together for sustainability” agenda is an important driver here, as well as changing legal regulations. The most widely used chelants are phosphates. But these cause significant environmental problems as they drain away in our waste water. There are also significant environmental concerns about other 1st generation chelants.
The EU has recently banned phosphates for use in dishwasher detergent, and similar bans are in place in several US states. We believe that household chemical companies will continue to seek alternatives to phosphates and other pollutants across all applications, firstly in the EU and US and eventually throughout the world.
The following chart shows the performance of Itaconix chelant products compared with 1st generation chelants (environmental concerns), 2nd generation chelants, and bio-based chelants.
MGDA is produced by the German chemical company BASF, whilst many of the other chelants in the market are off-patent and are produced by many different suppliers around the world.
The chart shows that Itaconix offers a performance advantage when compared with either the newer clean chelants or with the older generations.
We believe that the market opportunity for Itaconix is to offer a replacement for either the older unsafe chelants, or for the newer but lower performance products, with environmental regulations creating the catalyst for customers to change their formulas.
The next chart shows the current state of the market for chelants, with environmentally safer products in green and other in red.
Itaconix products are a very small part of the overall market, and hence not featured in the chart above. But the regulatory driver has created an opportunity for Itaconix to establish market share quite rapidly, and for this reason the chelant segment has been one of the early commercial successes for Itaconix, and represents the largest proportion of the company’s revenues in 2017e.
Micro-encapsulation is a process whereby tiny particles or droplets of an active ingredient are encased in a protective layer to allow their controlled release. This is done to protect sensitive or unstable active ingredients used in everyday products, such as bleach actives used in laundry and ADW, and fragrances. This is a growing market, as more end uses are continuously being developed. The following chart shows the global market for micro-encapsulation agents, with a CAGR of 13%.
For Itaconix, the most immediately addressable markets are again in household products. The company has been successful in encapsulating sensitive bleach actives used in laundry and ADW detergents, including the technology licensed to leading international chemical group Solvay. The Itaconix solution offers controlled release at lower temperatures, which is something that the detergent makers are keen to develop.
Another currently addressable application for Itaconix is the controlled release of fragrance in homecare and personal-care products, with the potential to replace formaldehyde in applications where end users would prefer a safer alternative.
Polymers are used in hairsprays and mousses to give structural support to the hair. This is already a well developed application in the hair care industry, but Itaconix products offer tangible advantages when compared with existing products in the market. Firstly, they are biobased rather than being derived from petro-chemicals, and this is increasingly a consideration for consumers. Secondly, the Itaconix RevCare NE 100S product offers performance advantages, described in the table below. .
The table compares RevCare with some of the leading incumbents.
Itaconix is accessing this significant market via direct engagement with the major hair styling formulators, and using third party distributors to reach medium and smaller sized players. The commercial objective for Itaconix is to start signing customers during the 2017/18 timeframe. Webelieve that progress on this front would be a very positive catalyst for the share price.
There are three main applications currently addressed by Itaconix in the coatings and sealants sector:
• Binder. This is the polymer based resin which makes up the actual structure of a paint layer when it dries.
• Adhesion promotion. Specialised polymers alter the surface properties of the paint or sealant as a liquid, making it stick more strongly to the target surface.
• Dispersant. Many pigments have a tendency to flocculation (clumping or clotting). A polymer dispersant can be used to keep pigment, or other minerals, in evenly dispersed suspension.
There are a number of different attributes which give Itaconix’s products a competitive edge in different applications. Details can be found at www.itaconix.com/products. We would highlight in particular the application of Itaconix BIOBIND as a binder for low-VOC paints. Volatile Organic Compounds are chemical vapours which are released by paints (and other household or industrial products). These can be unpleasant to smell, or even harmful to human health. The paints and coatings industry faces pressure to reduce VOCs in their products, and we believe this is a positive catalyst for Itaconix. This is another example of the “Together for sustainability” agenda.
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)
The following tables include our forecasts for Itaconix P&L, balance sheet, and cash flow.
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