It’s doubtful that the childhood game of conkers will often be used in these pages to explain the investment case for a company. Yet the practice of soaking horse chestnuts in vinegar and then baking them hard is, in a very crude fashion, a way of explaining what Accsys Technologies (AXS) does.
- Strong demand drives production growth
- Five-fold capacity increase underway with investment in new plants
- Partnerships with Eastman and Petronas pursuing new ventures in US and Malaysia
- Hull plant delay proves execution risks loom
- Is growth already priced in?
Of course, the London-based company’s technique is much more scientific, involving a process originally developed within BPthat is now protected by almost 400 patents.
Essentially, though, Accsys uses acetylation – think ‘pickling’ – to change the cellulose structure of a soft wood, making it more durable and highly water-resistant. This allows it to be used outside without the wood swelling, warping or rotting. Accsys gives a 50-year guarantee on above-ground use of its products and 25 years for products that are either used below ground or submerged in water.
Early-stage investors into the company may already be rolling their eyes, having heard (and potentially bought into) the initial hype more than a decade-and-a-half ago.
The shares started trading on Aim at 285p in October 2005. That share price accounts for a five-to-one consolidation in 2014. From there, the shares quadrupled to more than 1,200p by July 2007 as the company signed deals to license plants in China, Africa and the Middle East. These never reached fruition, though. The company’s shares fell as quickly as they had risen and were below 200p by the end of 2009. The price never recovered, with shareholders being diluted through a string of share issues to finance Accsys’ cash-guzzling operations.
The only plant currently operating is the company’s own facility at Arnhem in the Netherlands which, for most of its history, had failed to generate enough profit for the company to break even. But the addition of a third reactor in 2019, increasing capacity to 60,000 cubic metres (m3) from 40,000, changed this. A fourth reactor being added by next April will bring total capacityto 80,000m3.
This is part of a push that began in 2019 to grow production to 200,000m3 by 2025. Importantly, a market appears to exist for the increased output as demand for the company’s hardened wood outstrips supply.
Accsys sells two products. Accoya is its premium brand made at Arnhem from treated solid wood. This comprised 99 per cent of the company’s first-half sales of €56.2m (£47.9m). Its other product, Tricoya, is made from treated wood chips. It is cheaper to make and is eventually expected to have a bigger market. Independent market research puts the addressable market for the products at 2.6m m3, of which Tricoya’s share will be around 1.6m.
The products are billed as a replacement for “high-performance” materials used in external cladding, decking and for windows and doors of both residential and commercial buildings. As such, it competes with uPVC, aluminium and hardwoods.
A good wood?
Chief executive Rob Harris argues Accoya and Tricoya are more sustainable than alternative products – especially natural hardwoods that can take hundreds of years to grow and are often sourced from areas where deforestation is rife.
The softwood used by Accoya is from New Zealand, while Tricoya’s wood chips are sourced in the UK. Both are certified as sustainable by the Forest Stewardship Council and the company argues that although its softwood is lugged halfway around the world “the efficiency offered” by ships that comply with the International Marine Organisation’s latest fuel standards is substantial. Moreover, the chemical used in its acetylation process is not toxic and produces acetic acid as a byproduct, which can be reprocessed and reused by Accsys or sold off.
The small amount of Tricoya produced so far has been made from chipped Accoya, but a dedicated plant is set to open in Hull next year that will produce 30,000 metric tonnes of wood, or about 40,000m3 of panels.
The Hull plant is “essentially sold out”, Harris says. “The demand is really strong for that material”.
The plant's delivery has been a painful one, though. A consortium made up of Accsys, Ineos (which bought out BP’s chemicals arm last year), MDF manufacturer Medite, Volantis and the government’s Business Growth Fund set up a consortium to build the plant in 2017, with the initial expectation that it would complete in early 2019. It has faced a string of delays, though, and in June main contractor, Engie Fabricom UK, terminated its agreement, leaving the consortium to finish the job off itself. The plant is expected to be commissioned in July.
The Tricoya plant and the fourth Arnhem reactor should take capacity up to 120,000m3. Combined, they are expected to transform Accsys’s revenue and earnings.
Broker Numis forecasts a 22 per cent increase in its top line for the year to March 2022 to €122m and a 31 per cent jump in the following year to €160m. Accsys has consistently made a 30 per cent underlying gross profit margin on Accoya and expects to earn 40 per cent on Tricoya. Due to the fix cost nature of much of its plants, profitability will also benefit from the more of its manufacturing capacity it can utilise.
Numis forecasts pre-tax profit will almost quadruple to €3.8m next year and virtually treble again in 2023 to €11.1m. Broker Investec has been bold enough to push its forecasts out to 2025. It sees the year bringing in €218m of sales and €32.4m profits before tax. A lot needs to go right for this to be achieved, though.
Firstly, Accsys needs to maintain production margins in the face of rising raw material costs. It has done so thus far because the wood supplied from New Zealand is covered by long-term agreements, which sheltered it from wildly fluctuating timber prices that doubled from the beginning of the year to May, before subsiding again to January levels. The price of the chemical used in the acetylation process, acetic anhydride, is linked to gas prices and has soared as a result. Despite this, “we are managing to flex our pricing power muscles”, Harris says, and the gross margin made when producing Accoya in the six months to September remained above 30 per cent.
The company also needs to hit its ambitious production targets, which involve delivering on proposed plants in the US and Malaysia. It has credible partners for both.
In the US, it has gone a long waydown the road of starting work on an Accoya plant. This will initially contain tworeactors and have 40,000m3 capacity, with the potential to grow to eight and 160,000m3, respectively.
It is working with Eastman on the project, which will be built at a cost of $130m (£98m) next to the chemicals giant’s Kingsportsite in Tennessee. Accsys has a 60 per cent stake and brings its patented technology, as well as experience of manufacturing and marketing the product.
Eastman is taking the remaining 40 per cent and will manage the plant’s construction, as well as providing feedstock. The plant will take two years to build, but will only start once debt funding (55 per cent of the cost) is finalised. Accsys sold €37m of shares at 140p in May to fund its equity commitment.
In Malaysia, it is working with Petronas on a Tricoya plant, but this will only be progressed once the Hull facility has been up and running for six months. The pair are conducting an ongoing feasibility study and have identified a site.
Assuming the debt for the US joint venture is secured, the company shouldn’t face financing pressures. As of 30 September, it had net cash of €2.4m and agreed a €60m refinancing deal in October that halved its funding costs.
The key question for investors to consider is whether the execution risks for its projects are properly reflected in its valuation. At 168p, the share price only makes sense if the company is able to achieve rapid growth. For example, Investec’s long-range 2025 EPS forecast would put it on a PE ratio of 19 times, which if achieved would look attractive for a rapidly growing venture with patented technology.
A longer-term consideration is how potential changes to its business model might affect its future value. Although it had initially proposed an asset-light model based on licensing its technology, the failure to deliver these has led to it building its own plants and embarking on joint ventures.
Each new plant should, at least in theory, make future projects less risky and if they generate enough cash to reinvest in others, does licensing still make sense?
Harris says no decision has been made on the likely model for future ventures. Like a good conkers player, he is focused on cracking what Accsys Technologies has in front of it.
|Company Details||Name||Mkt Cap||Price||52-Wk Hi/Lo|
|Accsys Technologies (AXS)||£322m||168p||194p / 116p|
|Size/Debt||NAV per share*||Net Cash / Debt(-)*||Net Debt / Ebitda||Op Cash/ Ebitda|
|Valuation||Fwd PE (+12mths)||Fwd DY (+12mths)||FCF yld (+12mths)||P/BV|
|Quality/ Growth||EBIT Margin||ROCE||5yr Sales CAGR||5yr EPS CAGR|
|Forecasts/ Momentum||Fwd EPS grth NTM||Fwd EPS grth STM||3-mth Mom||3-mth Fwd EPS change%|
|Year End 31 Mar||Sales (€m)||Profit before tax (€m)||EPS (c)||DPS (p)|
|Source: FactSet, adjusted PTP and EPS figures converted to £|
|NTM = Next 12 months|
|STM = Second 12 months (ie, one year from now)|
|*Converted to £|