Directors at Xeros Technology (XSG) are faced with a balancing act familiar to companies seeking to commercialise early-stage, disruptive technologies: the desire to fund growth tempered by the need to reduce cash-burn. These twin imperatives aren't always easily reconcilable, but in the case of Xeros we think a switch away from contracts predicated on upfront capital commitments in favour of a license-and-lease model promises to square the circle.
- Disruptive proprietary technology
- Launch of new commercial model
- Fast-growing marketplace
- Work backlog accelerated in 2016
- Near-term cash call or senior debt likely
- Losses forecast to 2020
Xeros produces a range of innovative plastic bead (and dedicated rotating drum) systems that are used by commercial launderers as a means of significantly reducing water, detergent and energy usage. Tested and proven, Xeros's polymer science can cut water usage by up to 80 per cent, and since polymer cleaning requires very little hot water, the carbon output from laundry rooms can also be reduced by a similar margin.
The technology is also being utilised within the tanning and textiles industries. Chief executive Mark Nichols believes that "technical validation and increasing market endorsement" are reinforcing the business case. And an "estate" of 438 commercial laundry machines at the end of March supports that view.
The problem is that companies engaged in the early-stage rollout of 'disruptive' technologies have to front-load costs while they develop effective supply chains, install manufacturing capacity and build the brand. So while Xeros generated £38m in placing proceeds during 2016, leaving it with £28.9m at its December year-end (net cash was down to £23.6m by the end of March), it leached cash to the tune of £27.8m at the operating level. At some point, with a monthly cash-burn of £1.5m-£2m, it's likely that the company will either have to come to the market or take on senior debt. Management is keeping options open on both scores.
To ease the burden on cash resources, Xeros is looking to use the evidence it has now amassed of its technology's commercial potential to develop more flexible arrangements "with the objective of accelerating growth whilst reducing capital intensity". To this end, it has just launched the Symphony Project, which offers Xeros' proprietary technology on an 'open source' basis for incorporation within any brand of commercial laundry machine via "a simple retrofit pedestal". The scheme will allow manufacturers - and Xeros is in discussions with a number of industry heavyweights - to sell their own-branded products into the marketplace as well as receiving a share in the long-term savings that the technology delivers.
The commissioning of Xeros machines accelerated in 2016 and there was a backlog of 97 units at the end of March. Capital commitments linked to this backlog won't put excessive strain on the balance sheet as it's largely covered by existing inventory.
| XEROS TECHNOLOGY (XSG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 290p | MARKET VALUE: | £253m | |
| TOUCH: | 290-295p | 12-MONTH HIGH: | 290p | LOW: 150p |
| FORWARD DIVIDEND YIELD: | NIL | FORWARD PE RATIO: | NA | |
| NET ASSET VALUE: | 45p | NET CASH: | £28.9m | |
| Year to 31 Jul | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2014 | 0.3 | -6.7 | -12.9 | nil |
| 2015 | 0.5 | -10.7 | -15.6 | nil |
| Year to 31 Dec | ||||
| 2016* | 2.0 | -16.0 | -22.0 | nil |
| 2017* | 6.0 | -23.0 | -26.0 | nil |
| 2018* | 15.0 | -25.0 | -24.0 | nil |
| % change | +150 | - | - | - |
Normal market size: 1,500 Matched bargain trading Beta: 0.66 *Jefferies forecasts, pro-forma 2016 figures | ||||
