Applied Graphene

Addressing complementary markets

Applied Graphene Materials 6 April 2022 Update
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Applied Graphene Materials

Addressing complementary markets

Tech hardware & equipment

Spotlight - Update

6 April 2022

Price

20.88p

Market cap

£13m

Share price graph

Share details

Code

AGM

Listings

AIM, OTCQX

Shares in issue

64.3m

Net cash at end January 2022

£4.2m

Business description

Applied Graphene Materials develops graphene dispersions that are used by customers to enhance the properties of coatings, composites and functional materials. It also manufactures high-purity graphene nanoplatelets using readily available raw materials instead of graphite.

Bull

Understanding of dispersion technology enables AGM to support customers developing commercial applications.

Standardisation of some graphene dispersion products reduces length of sales cycle.

Introduction of AGM’s own anti-corrosion primers reduces dependence on customers incorporating dispersions in their own coatings and selling the end-products themselves.

Bear

Revenue development dependent on success of individual customer product launches.

Extensive testing required prior to customer acceptance.

Supply chain challenges diverting customer attention from new product formulation.

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

Applied Graphene Materials is a research client of Edison Investment Research Limited

Supply chain issues affecting the global coatings industry meant that although Applied Graphene Materials’ (AGM) H122 revenues were similar to those in H121, they were below management expectations, leading the company to moderate its full year expectations. Nevertheless, the company made progress on multiple projects during the period, strengthening its position by taking it into complementary markets.

Historical results and consensus estimates

Year
end

Revenue
(£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

07/19

0.1

(4.6)

(4.8)

(7.9)

0.0

N/A

07/20

0.1

(3.1)

(3.5)

(6.1)

0.0

N/A

07/21

0.1

(3.2)

(3.6)

(5.6)

0.0

N/A

07/22e

0.1

(3.7)

(4.1)

(5.8)

0.0

N/A

Source: Company accounts. Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Issues in the broader supply chain hit revenues

At £46k, H122 revenues were similar to H121 (£42k) but lower than H221 (£81k) because of supply chain issues within the coatings industry, which took resources away from new product development. EBITDA losses widened by 9% year-on-year to £1,723k as a result of rising utility costs and a small increase in staff numbers. Net cash (excluding IFRS 16 lease liabilities) reduced by £2.1m during H122 to £4.2m at the period end. Management estimates that this gives a cash runway beyond January 2023, potentially enabling AGM to convert the opportunity pipeline into meaningful annual revenues during the intervening period.

Expanding into complementary markets

AGM made meaningful progress on its pipeline during the period, with five customer projects reaching completion. As a result, AGM has potential for growth from multiple sources: it intends to launch a chemical resistant coatings portfolio in April; its anti-corrosive dispersions for use in extremely harsh environments are currently being trialled on a section of the UK’s coastal defences; an undisclosed US customer in the car care market is expected to launch a graphene-based product range ‘imminently’; it is awaiting formal customer approval for the conductive coating developed to reduce losses from power transmission line connectors; and customer Infinite Composites is increasing its build-rate of tank systems using AGM’s dispersions.

Scenario analysis

The scenario analysis in our September note extends to annual revenues of £25m, which is a very small proportion of the total global protective coatings market (2021: US$12,220m). Our analysis shows that the pipeline at end H122 (£3.2m on a probability weighted basis) is not sufficient to take AGM to cash break-even, which would be reached, in our view, at annual revenues of around £10m.

H122 performance affected by COVID-19 and supply chain issues

At £46k, H122 revenues were similar to H121 (£42k) but lower than H221 (£81k). Although the coronavirus related restrictions that adversely affected H121 eased during H221, in H122 customers in the coatings industry struggled with a combination of COVID-19 related personnel absences and a lack of availability of basic raw materials including resins, solvents and additives such as titanium oxide. This meant that customers were focused on supply chain management, which pulled R&D resources from creating new products incorporating AGM’s graphene dispersions to evaluating alternative source materials for established products. As a result, revenues from the supply of dispersions for evaluations were lower. In addition, the revenues relating to customer products launched in FY21 and early H122 were modest, reflecting the relatively small size of these customers.

Exhibit 1: H121, H221 and H122 P&L summary

£000s

H121

H221

H122

Notes

Sales revenue

42

81

46

Production orders of graphene and evaluation quantities of graphene to commercial partners

Cost of sales

(146)

(217)

(278)

Including utility costs and some staff costs

Gross loss

(104)

(136)

(232)

Negative gross margin as very low levels of utilisation

Normalised operating expenses

(1,407)

(1,471)

(1,451)

Share-based payments

(67)

35

(40)

EBITDA

(1,578)

(1,572)

(1,723)

Depreciation and amortisation

(214)

(195)

(183)

Reported operating loss

(1,792)

(1,767)

(1,906)

Finance costs (net)

(2)

(4)

0

Reported loss before tax

(1,794)

(1,771)

(1,906)

Tax

178

213

207

Accrued R&D tax credits.

Reported loss after tax

(1,616)

(1,558)

(1,699)

Adjusted EPS (p)

(3.3)

-

(2.6)

Dilutive impact of funds raised in January 2021

Source: Applied Graphene Materials accounts

EBITDA losses widened by 9% compared to H121 to £1,723k and by 10% compared to H221. Operating expenses (adjusted for share-based payments) were similar to both H121 and H221. However the cost of sales jumped by £132k compared to H121 to £278k as a result of rising utility costs and a small increase in staffing numbers.

Cash runway extended beyond January 2023

Net cash (there was no debt and excluding £7k IFRS 16 lease liabilities at end H122) reduced by £2,094k during H122 to £4,214k at the period end. Investment in tangible assets including the capital element of lease obligations was similar to H121 and H221 at £106k. £74k was invested in intangibles related to patents as all R&D is expensed. The cash outflow included a £231k increase in working capital, primarily a reduction in payables, which were unusually high at the end of FY21. Management reiterated its view that the company’s cash runway extends beyond January 2023, potentially enabling it to convert the opportunity pipeline into meaningful annual revenues during the intervening period.

Commercial progress

An examination of AGM’s sales pipeline shows that AGM is continuing to work with its customers to progress graphene enhanced products through to launch. Five projects were completed during H122 compared with nine in H221 and two in H121. The five projects completed in H122 included three car care products, Stanvac-Superon’s conductive coating (see below) and a project with Infinite Composites. The rate of customer launches was slower than in H121 because of the wider problems affecting the coatings market referred to above. The pipeline at the end of H122, including launched products, represented £3.2m in annualised revenues on a probability-weighted basis. This is lower than the value calculated at the end of FY21 because several projects have been discontinued and the sales opportunity relating to completed projects has been revised downwards to reflect recent sales experience and the ongoing difficult trading environment.

Exhibit 2: Pipeline development

Date

Agreement on scope of sampling and engagement

Initial testing and interpretation of results

Repeat testing for consistency and review of results

Final product trials, formulation and specification

Final commercial agreement

Completed (cumulative)

Total

Value*

End H122

74

60

13

15

6

24

192

£3.2m*

End FY21

79

70

15

9

8

19

200

£3.7m

End H121

39

54

19

8

5

10

135

£3.7m

End FY20

19

57

18

12

3

8

115

£3.6m

End H120

12

45

14

13

8

5

92

£2.9m

Source: Applied Graphene Materials data. Note: *Value of projects at development stages 1–5 is probability weighted. Value of completed projects is at full sales opportunity.

Significant customer developments since the start of FY22 include:

Development of highly conductive coating: Stanvac-Superon, which is a large manufacturer and exporter of welding consumables, protective coatings, aerosol sprays and stainless steel wires, has introduced a speciality conductive coating incorporating AGM’s Genable dispersed graphene materials, which has been formulated for use on industrial power transmission equipment. The inclusion of AGM's graphene dispersions means that the contact power loss in copper and aluminium electrical cable joints that are coated with Stanvac-Superon’s new graphene-enhanced protective coating is 30–50% less. This offers significant energy savings over time. The first customer application is well underway and Stanvac-Superon expects it to be approved shortly. Stanvac-Superon intends to offer the product to customers in the power transmission, electrical distribution and railway industries, as well as other high energy consumers such as steel mills, smelters and refineries. The product will be sold in India and across Stanvac-Superon’s export network of 70 countries.

Opening a complementary route to market for anti-corrosion coatings: AGM has incorporated its proprietary graphene nanoplatelets material in two new prototype paint systems: one is a primer suitable for standard applications such as urban and industrial environments, the other a primer for harsh environments such as offshore and marine applications. These product introductions are a significant step for AGM because up to now the company’s route to market has been primarily through the sale of dispersions of graphene nanoplatelets to paint and coatings manufacturers. These manufacturers use the dispersions to enhance the properties of their paints and coatings, which they sell to end-users. The two new primers present a complementary route to market that enables end-users considering the adoption of graphene to test and evaluate its potential benefits quickly by applying a ready-made formulation from AGM itself. Management expects that these new Genable primers will accelerate adoption of its products in the protective coatings space. AGM is working closely with the UK Environment Agency (UKEA), which is currently trialling AGM’s graphene-based primers on sample structures forming part of an extensive network of coastal defences in the north-east of England. AGM is currently working on a top coat to complement the primer product for the UKEA.

Protective floor coatings application represents a bridgehead into the anti-chemical corrosion segment: AGM is working with a leading floor coatings manufacturer on protective barrier floor coatings for concrete. The customer has completed the test phase and is now planning its marketing campaign for the product. AGM intends to use the data collected during the test phase to address other applications where a chemical resistant coating is required, including pipelines, transportation vessels and storage tanks. Based on this data, it expects to launch a chemical resistant coatings portfolio in April.

Scenario analysis

The scenario analysis presented in our September note extends to annual revenues of £25m, which is a very small proportion of the total global protective coatings market (US$12,220m in 2021, according to Mordor Intelligence). While higher revenues are possible, we have not presented those because AGM has yet to achieve product approval with any of the larger players in the protective coatings market, which management notes are highly conservative, and the projects in the aerospace sector have not yet reached the commercial stage. Our analysis shows that, even if AGM were able to convert the probability-weighted sales opportunity of £3.2m in annualised revenues within a year, this would not be sufficient to take AGM to cash break-even, which we estimate can be reached at annual revenues of c £10m. We note AGM will require additional capital investment of c £2m to support £10m of revenues.

Exhibit 3: Financial summary

£’000s

2018

2019

2020

2021

Year end 31 July

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

77

50

83

123

Cost of Sales

(250)

(472)

(215)

(363)

Gross Profit

(173)

(422)

(132)

(240)

EBITDA

 

 

(3,984)

(4,559)

(3,084)

(3,150)

Normalised operating profit

 

 

(4,295)

(4,902)

(3,530)

(3,559)

Amortisation of acquired intangibles

0

0

0

0

Exceptionals

(307)

0

(168)

0

Share-based payments

0

0

0

0

Reported operating profit

(4,602)

(4,902)

(3,698)

(3,559)

Net Interest

57

67

33

(6)

Profit Before Tax (norm)

 

 

(4,238)

(4,835)

(3,497)

(3,565)

Profit Before Tax (reported)

 

 

(4,545)

(4,835)

(3,665)

(3,565)

Reported tax

1,046

908

476

391

Profit After Tax (norm)

(3,192)

(3,927)

(3,021)

(3,174)

Profit After Tax (reported)

(3,499)

(3,927)

(3,189)

(3,174)

Minority interests

0

0

0

0

Net income (normalised)

(3,192)

(3,927)

(3,021)

(3,174)

Net income (reported)

(3,499)

(3,927)

(3,189)

(3,174)

Basic average number of shares outstanding (m)

42.7

49.4

49.4

56.4

EPS - normalised (p)

 

 

(7.5)

(7.9)

(6.1)

(5.6)

EPS - normalised fully diluted (p)

 

 

(7.5)

(7.9)

(6.1)

(5.6)

EPS - basic reported (p)

 

 

(8.2)

(7.9)

(6.4)

(5.6)

Dividend (p)

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

(35.1)

66.0

48.2

Gross Margin (%)

N/A

N/A

N/A

N/A

EBITDA Margin (%)

N/A

N/A

N/A

N/A

Normalised Operating Margin

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

1,959

1,800

1,696

1,702

Intangible Assets

78

155

276

427

Tangible Assets

1,881

1,645

1,420

1,275

Investments & other

0

0

0

0

Current Assets

 

 

11,111

7,681

4,522

7,090

Stocks

56

52

74

93

Debtors

197

171

281

276

Cash & cash equivalents

10,443

6,135

3,685

6,308

Other

415

1,323

482

413

Current Liabilities

 

 

(949)

(993)

(929)

(1,097)

Creditors

(949)

(993)

(908)

(1,023)

Short term borrowings

0

0

0

0

Finance leases

0

0

(21)

(74)

Long Term Liabilities

 

 

0

0

(4)

0

Long term borrowings

0

0

0

0

Lease liabilities

0

0

(4)

0

Other long term liabilities

0

0

0

0

Net Assets

 

 

12,121

8,488

5,285

7,695

Minority interests

0

0

0

0

Shareholders' equity

 

 

12,121

8,488

5,285

7,695

CASH FLOW

Op Cash Flow before WC and tax

(3,984)

(4,559)

(3,084)

(3,150)

Working capital

(12)

68

(199)

99

Exceptional & other

44

376

(182)

32

Tax

631

0

1,316

461

Net operating cash flow

 

 

(3,321)

(4,115)

(2,149)

(2,558)

Capex

(319)

(193)

(342)

(218)

Acquisitions/disposals

0

0

0

0

Net interest

0

0

41

(6)

Equity financing

9,375

0

0

5,552

Dividends

0

0

0

0

Net Cash Flow

5,735

(4,308)

(2,450)

2,770

Opening net debt/(cash) - excluding lease liabilities

 

 

(4,708)

(10,443)

(6,135)

(3,685)

FX

0

0

0

0

Other non-cash movements

0

0

0

(147)

Closing net debt/(cash) -excluding lease liabilities

 

 

(10,443)

(6,135)

(3,685)

(6,308)

Source: Company accounts


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This report has been commissioned by Applied Graphene Materials and prepared and issued by Edison, in consideration of a fee payable by Applied Graphene Materials. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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This report has been commissioned by Applied Graphene Materials and prepared and issued by Edison, in consideration of a fee payable by Applied Graphene Materials. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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London +44 (0)20 3077 5700

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New York +1 646 653 7026

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NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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