Material profit

A turbo-charged period of discovery during the last century produced thousands of different compositions of matter classed as industrial materials – plastics, metals, ceramics, and semiconductors. Incredibly, US materials supplier Sigma-Aldrich’s database includes 102m chemical structures of which over 60m are unique, from drug-like compounds to synthetic building blocks for chemical synthesis.

Crucially, new materials for the 21st century are being developed here. More than 150 years since Brummie inventor Alexander Parkes unveiled ‘Parkesine’ – the first man-made plastic – producing and processing materials is worth £170bn a year to the UK, or 15 per cent of GDP. But even plastic is changing, and other materials like silicone have hit their peak in terms of power performance. Replacements are needed, and new materials developed in British labs will not only make Star Trek technology a reality, but the companies behind them incredibly rich. After extensive research, we’ve uncovered a number we think could change the world.

End of the Silicon Age

Obituary writers have been busy penning the death of the Silicon Age – the victim of miniaturisation enshrined in Moore’s Law – and fascinating new materials are emerging in the race to develop smaller, lighter, faster and better gadgets.

Carbon has taken an early lead. Viewed very much as silicone was in the 1950s, it is highly likely to replace silicon transistors one day. Having already shifted from aluminium to the superior conductivity of copper in the late ‘90s, chip makers are now using wire just nanometres thick – about 5,000 times thinner than a human hair, widely considered the limit for this technology.

Where next? Step forward graphene – the original atomic chicken wire and the biggest thing in materials science for decades – ‘bucky balls’, or fullerenes – a hollow spherical cluster of carbon atoms – and carbon nanotubes – essentially rolled up graphene – all of which are allotropes of carbon. All are incredibly exciting and potentially disruptive, game-changing materials on which the inevitable revolution in consumer electronics, energy and cutting-edge medicine will depend.

“It would take an elephant, balanced on a pencil, to break through a sheet of graphene the thickness of Saran Wrap (clingfilm),” is the claim, now famous and oft-repeated, made by Columbia University professor James Hone six years ago. Arranged in a honeycomb lattice just one atom thick, graphene is the thinnest, strongest material known to man and an excellent conductor. But it’s not the only kid on the block, even in the embryonic world of two dimensional materials.

Molybdenum disulfide (MoS2), Silicene and Germanane (GeH) – all better conductors than silicon – might knock graphene off its perch. And away from computer chips, the geeks in white coats are tinkering with other possible game-changers like copper foam, morphing materials, shape memory alloys, dielectric electro active polymers and ‘metamaterials’.

Work on the latter is particularly interesting. Properties of metamaterials, an artificial matter, are determined not by composition but by structure – how the materials are put together. Proven to bend light around objects, rendering them invisible, the US military has funded lots of research into cloaking devices. And BAE System (BA.) has already made a flat antenna lens that acts like a traditional curved lens. “This breakthrough could revolutionise the design of aircraft, ships, radios and satellite dishes,” says the defence contractor. A team at Southampton University, headed by professor of physics Nikolay Zheludev, is making progress here, too.

A seven trillion-dollar market

“Developing new materials is a heroic effort,” says Graeme Purdy, chief executive at Aim-listed materials developer Ilika (IKA). “It can take 10 years from idea to first commercial prototype.” Even for established materials like Polyaryletheretherketone (PEEK) – a high-performance plastic developed by Victrex (VCT) since the late 1970s when still part of ICI – getting new parts for passenger aircraft rubber-stamped can take up to eight years.

It’s not cheap either. David Wong, who runs materials developer Surrey NanoSystems, admits that the capital investment required “is pretty huge. It can take many years and millions of pounds to commercialise high-end technology.”

There are, however, rich rewards. In 2012, accountants Deloitte argued the case for an approach which it called Advanced Materials Systems (AMS). Substituting natural materials with synthetics – like vinyl seating and Formica worktops – was the big driver of growth in the materials industry for 50 years, until the 1970s when custom materials took over. But times have changed.

“Creating new molecules or compositions of matter is no longer enough to capture differentiable value in the market,” argues Deloitte. Now, companies will better create value by collaborating and combining existing materials, process technologies and new business and operating models – the Boeing 787 Dreamliner was born of this approach. Pharmaceutical companies realised this in the 1990s, using robots to speed up testing techniques. The consumer electronics industry followed, and now processes perfected by companies like Ilika can mix and test different elements much faster, cutting that 10-year timeline to just a few years.

And the market is colossal. By 2030, Deloitte says, the AMS market could be worth more than $7 trillion (£4.1trn), of which the share for materials providers will have quadrupled to $400bn a year. That’s a big number, but realistic given the dozen or so ‘megatrends’ likely to play out during the coming decades.

Hungry for more

The World Economic Forum picks nine megatrends that define unmet needs this century; among them an ageing population, emergence of megacities, energy scarcity, climate change, growing demand for food and technological progress. That will require alternative fuels, better extraction techniques for shale gas, more efficient batteries, new building materials and superconductors.

Aerospace and automotive manufacturers have already demanded huge advances in materials technology, reducing weight to improve fuel efficiency. That and the use of new composite materials is what make Boeing’s 787, the Airbus A350 and their new single-isle jets work. But fast-forward to 2050, and Airbus dreams of biopolymer membranes which control light and temperature inside the plane, and self-mending morphing materials that will remember your body shape. Compositions of fluid and gas may even replace solid materials.

For now, demand among plane manufacturers for established materials such as PEEK is still growing. Lightweight and incredibly resistant to extreme temperatures and dangerous chemicals, it has already replaced metal parts on the new generation of fuel-efficient planes. But car manufacturers love it as well, and phone makers would struggle to develop smaller, more durable devices without it.

But devices need power, too, which means smaller batteries. Traditional lithium-ion batteries have had a habit of catching fire – think Sony laptops, Tesla sports cars and the 787 Dreamliner – and require heavier protective parts. Now, flammable liquid electrolytes are being replaced with solid ceramic or polymer alternatives – so-called solid-state technology. That’s perfect for hybrid vehicles, consumer electronics and wireless sensors. It’s an incredibly valuable market, too. According to reports, the industry could triple by 2019 to more than $33bn.

Make a material profit

Hundreds of publicly-quoted materials companies call London home. Johnson Matthey (JMAT) made its name inventing the catalytic converter and now produces all kinds of metals, metal oxides and other materials. High temperature insulation material Superwool makes Morgan Advanced Materials (MGAM) millions, Alent’s (ALNT) impact resistant solder is in demand and conveyor belt giant Fenner (FENR) has scientists developing new polymeric materials.

At the other end of the scale, there are tiny, high-tech operators either improving existing materials, or designing brand new ones. But investing here – with no guarantee of widespread adoption, or payback – requires courage. It’s incredibly expensive for companies, too, and the so-called ‘valley of death’ – the time between scientific discovery and commercialisation – claims many victims. Meagre government funding hasn’t helped, but things are changing – money is pouring in and graduates in materials technology are now among the best paid.

Timing, however, remains impossible to predict, and convincing potential customers to try something new can be depressingly difficult. The benefits, then, must be significant. We’ve put some of the more interesting opportunities under the IC microscope and assessed their potential.

Graphene – it's the dog's...

Graphene is without doubt the hottest new material of our time: hardly surprising given its disruptive potential and the magnetic pull of Manchester, where Andre Geim and Konstantin Novoselove first isolated graphene a decade ago, creating a Mecca for both graphene firms and government funding. A number of different production techniques are in use, but each yields both benefits and drawbacks.

Hundreds of companies are now making graphene both here and abroad. “We can make graphene quite easily,” says Surrey’s Mr Wong. “You just need a carbon source.” That much was proved a few years ago when scientists at Rice University made high-quality graphenevia carbon deposition on copper foil from dog faeces. Others, thank goodness, are using more conventional means.

Graphene Nanochem (GRPH), formerly Malaysian speciality chemicals group Platinum Nanochem, reversed into Biofutures International in March last year and is initially focused on graphene-enhanced drilling fluids and additives. The Malaysian management team is, however, hard to pin down. Applied Graphene Materials (AGM) joined Aim in November followed by Haydale Graphene Industries (HAYD) just last month.

Of the three, we like Applied Graphene Materials best. It’s already demonstrated it can make graphene to the right quality, consistently and in volume, and is now testing the benefits when added to existing materials such as polymers, composites, paints, coatings, lubricants and oils. Blended with composite material, it could remove the need for autoclaves – a large pressure cooker used to heat the resin – saving plane manufacturers a fortune. It could work on boat hulls and wind turbine blades, too.

And management certainly has the right pedigree – former Umeco man Jon Mabbitt is running the show, chairman Bryan Dobson spent over 33 years with ICI and Croda (CRDA), and non-executive director Sean Christie is currently Croda’s finance chief. They’re a sensible bunch, too, and having tripled the share price since listing at 155p, are keen to cool things down, wise given broker N+1 Singer doesn’t expect a profit until 2017. Further customer collaborations will sweeten the investment case. Wait until then to buy.

Elsewhere, coating expert Oxford Advanced Surfaces (OXA) reckons it can chemically “functionalise” graphene, an essential part of the commercialisation process. It’s a skill, too, and one that Haydale believes it can achieve with its own plasma process. Cientifica (CTFA), formerly Avia Health Informatics, might also be worth watching. Reinvented as an incubator for early-stage advanced materials companies, it is interested not in making graphene, but in the commercial applications. A recent deal could see it buy half of applications developer Rainmaker – “several new products” could hit the market within 12 months.

Ilika

Four months ago, Southampton University spin-out Ilika (IKA) was a £13m business with a proven knack for speeding up the discovery of new materials. Testing lots of different materials on a single chip to find out which works best already helps companies like Toyota, Toshiba, Shell and iPhone parts maker Murata slash development times by three to four years. Ilika takes a cut of the millions saved in R&D.

But in January, Ilika became the first to make a stacked solid-state cell battery, which could halve the size of smartphone batteries and cut the recharge time to just 10 minutes. That news tripled Ilika’s share price, yet a subsequent placing at 60p was oversubscribed, and an exercise of warrants at the same price took new funds to over £6m. That’s enough to finance an assault on a market for micro-batteries, used to power wireless sensors, tipped to be worth over £1bn by 2017. Car batteries will follow, and work on new superalloys with Rolls-Royce (RR.) and materials for the big aircraft manufacturers is promising. Speculative buy.

Versarien

Making a smart device smaller but increasing the power generates lots more heat. Cooling systems, then, are both crucial and lucrative. According to BCC Research, the $11bn thermal management market will be worth nearer $15bn by 2019. Versarien (VRS) owns exclusive rights to next-generation advanced materials, including a porous copper – VersarienCu – structurally similar to bone, coral or sponge. It’s up to 10 times more effective than alternatives at transferring heat, and cheaper, too.

GE, a German electronics company, and others are currently testing the material, but Versarien is already selling more reliable and higher performance water-cooled PCs to gamers. Applications for electric vehicles and mobile devices will undoubtedly follow. What’s more, it’s just bought graphene developer 2-DTech. Graphene and copper foam will be used either separately, or together, and, according to chief executive Neill Ricketts, “makes the early commercialisation of graphene related products far more likely in the near term on an industrial scale”. The share price has doubled since we identified Versarien as a possible game-changer last November. Now we’d like to see interest turned into contracts. Buy on weakness.

IQE

Remember, we said silicon is dead, or at least dying a slow death? Well, IQE (IQE) has a possible alternative – gallium nitride (GaN). The Welsh company makes wafer products for wireless devices such as smartphones made by Apple and Samsung, and claims that “GaN is much better material than silicon in virtually all aspects except cost”. IQE uses GaN for high-speed data applications, and it is certainly better than silicon at handling high voltages, high temperature, and high power. Large-diameter wafers (silicon discs), which layer GaN over silicon carbide (SiC), bring costs down, too.

“Gallium Nitride is fast becoming the material of choice for amplifiers, switches and other devices in base stations,” says IQE. And the potential could be huge. According to Lux Research, the power electronics market will be worth $15bn in 2020, with SiC and GaN taking a 22 per cent share. And GaN could “revolutionise residential and commercial lighting.” In the UK alone, lighting uses a fifth of all electricity generated, but roll-out LED alternatives and the country’s electricity bill could shrink by up to 15 per cent.

True, IQE’s expansion has not come cheap and net debt is uncomfortably high. Still, a compound annual growth rate of 17 per cent out to 2016, according to N+1 Singer, renders the shares, on just nine times forward earnings, too cheap. Buy.

Revolymer

Spun out of Bristol University, Revolymer (REVO) turns existing commodity polymers into new polymers with better properties – chewing gum that won’t stick to the pavement, train seats or your shoe is, perhaps, its best-known idea. However, raising £25m at 100p when it listed on Aim in 2012 has proved to be the highlight. It’s now worth half that after a promising recovery began to unravel in January when long-standing chief executive Dr Roger Pettman jumped ship at short notice.

And 2013 was “a year of mixed fortunes”. Sales of its nicotine gum nudged £0.5m and losses narrowed, but Revolymer is struggling to nail big deals in so-called Consumer Specialities – things as diverse as kitchen cleaners, coatings and sealants used on building sites, and cosmetics. Improve here and the shares may well hit broker Panmure Gordon’s 93p target price, not before.

Victrex

Victrex (VCT) is unique in many ways, not least that it is focused on just one product: PEEK. Still, when you’ve invented a polymer this strong, light, resistant to heat and easy to mould, one is all you need. And the combination of those qualities explains why chief executive David Hummel calls PEEK “the plastic of last resort”.

After 35 years of almost single-handedly developing PEEK, the super-substance found in semiconductors has replaced metal parts on new fuel-efficient planes – every Boeing 787 uses a tonne of it, but Victrex thinks that could double in time. Comac, China’s ambitious state jet maker, likes it, too. Every modern car uses at least some PEEK, mainly in ABS brake systems, but in time it should also replace other hard-wearing parts in gearboxes and engines.

Margins are high, there’s no debt and volume growth in mid-single-digits is forecast this year. Management is unruffled by newer materials, either. “Graphene gets a lot of airplay,” says a company spokesperson, “but it’s behind the curve in terms of PEEK, which is a growing market. Even if graphene is proved, there’s a lot of catching-up to do and there’s reputational risk for the automotive and aerospace industries.”

Victrex does, however, export much of what it makes, so the strong pound affects earnings. A forward PE ratio of over 19 is not cheap, either, so despite its obvious charms, we continue to rate the shares a hold.

Nanoco

Quantum dots improve the colour and energy efficiency of LCD TVs. They make LED lights better, too, and solar cells more efficient. The potential is enormous, and Nanoco (NANO) is the only company able to make commercial quantities of these particles of semi-conductor material without using harmful heavy metal substances like cadmium. A contract with Dow Electronic Materials overcomes capacity issues, too.

Unfortunately, as with many high-tech firms, the euphoria that precedes a rapid ascent has petered out, and the share price has almost halved since September. That’s understandable given commercial contracts are proving elusive, and delays at a new factory in South Korea have put back production until early next year. Earnings are predicted to soar in 2017, but the road to commercialisation is a bumpy one, and investors will need more convincing.

Hardide

A new coating developed by Russians during the Cold War only found its way to Britain’s Hardide (HDD) after the fall of the Berlin Wall. At just 2,000th of an inch thick, it’s a true nanotechnology coating, created when gases are introduced into a vacuum and heated to 500ºC – the gases react and coat the surface of metal components uniformly. It’s harder than sand, resists corrosion, is flexible and prevents leaks, perfect for oil drilling and fracking. Hardide coatings are an ideal alternative to toxic hard-chrome plating, too, the type used on thousands of aeroplane parts and which will soon be restricted or banned.

A lengthy test programme with Airbus is nearly over. Winning business here could be a game-changer, but helicopter-maker Augusta Westland is also considering the technology and GE has already signed a $1.3m supply deal with Hardide. While the share price has yet to recover from destocking during the financial crisis, things are looking up and we rate Hardide a speculative buy.

Find the unlisted gems

Clearly, investing in any new technology is high risk, but picking a single materials company from a cast of thousands can seem like a lottery. That’s why it can make sense to let the experts do it for you.

Following IP Group’s (IPO) recent acquisition of smaller rival Fusion IP, there are just two so-called intellectual property (IP) commercialisation companies listed in London. Imperial Innovations (IVO) is the other. Each will mine their affiliated universities for ideas and, for the estimated one-in-a-hundred worth setting up as a company, will act like venture capitalists, establishing a board and provide much of the early-stage funding.

The aim is to recoup their investment with profit on top, usually via an IPO. David Baynes, former CEO of Fusion and now chief operating officer at IP Group, once told me, “Of the companies we take on – one-third will be good, one-third will break-even and the other third will blow up. It’s about finding the gems.” Both IP Group and Imperial think they’ve found a few.

IP Group put money into Revolymer, Ilika, Applied Graphene Materials and Oxford Advanced Surfaces long before they hit the stock market. It backs Xeros Technology (XSG), too, the Leeds University spin-out whose tiny, recyclable nylon polymer beads replace much of the water in commercial laundries. A domestic model would be the Holy Grail.

And tucked away in IP Group’s portfolio is an exciting company called Surrey Nanosystems. Born out of the Advanced Technology Institute (ATI) at The University of Surrey eight years ago, the company has discovered how to grow carbon nanotubes at temperatures low enough to make more efficient CMOS computer chips. It’s a technique that also enabled Surrey to develop the world’s blackest material – Vantablack – perfect for coating aluminium parts used on space missions and for night vision cameras. It’s generating interest and is already making sales.

Watch out for Plaxica, too. A product of Imperial College, it uses sugars from non-food crops and waste material to make polylactic acid (PLA), a cheap bio-degradable plastic ideal for packaging, car parts and electronics. The market is tipped to be worth $1bn by 2016. Econic

Technologies, another Innovations investment and chaired by former Johnson Matthey director David Morgan, makes plastic from chemically modified waste carbon dioxide (CO2). Mixing unreactive CO2 with epoxides creates biodegradable polycarbonates, suitable for the $40bn-a-year market for polyurethane like foams, plastics and polyesters.

Obviously, neither IP Group, nor Innovations invest solely in materials development. Early-stage investors have, typically, been more interested in telecoms, therapeutics and medical technology. Incubators like these are, however, often the safest way to hook up to the high-risk sub-sector. But the unpredictable nature of realisations means revenue is lumpy. Shares in IP Group (Hold, 216p, 4 March 2014) have drifted back from February highs despite record full-year results, and much depends on progress at highly-rated DNA and protein analyser Oxford Nanopore.

Innovations has been the much better performer over the past two months, due in no small part to the listing of cat allergy firm Circassia (CIR) in March, which crystallised a £37m gain. Innovations’ three materials companies are, however, worth only £47m (at 31 January 2014), or one-fifth of its portfolio. Not a pure-play on materials, then, but exciting enough to justify both a big premium to net assets and our upgrade to buy last month (403p, 1 April 2014).

You might also want to consider tax-efficient Enterprise Investment Schemes. Parkwalk Advisors, for instance, is planning a couple of new funds later this year. Having previously invested in Surrey Nanosystems, Revolymer and Xeros, we’re told The University of Cambridge Fund III will probably launch in the second half of 2014, and The University of Oxford Isis Fund II will open in the fourth quarter.

“No doubt both funds will probably have some exposure to materials technology but it’s difficult to be specific at this stage,” says Parkwalk’s Moray Wright. But recent Oxford spin-out Designer Carbon Materials, which will cost-effectively make commercially useful quantities of bucky-balls, is of interest. “Should the company require subsequent funding then the University of Oxford Isis Fund would be an obvious investor,” admits Mr Wright.

Share prices of material producers