Moving to EBITDA positive

Accsys Technologies 19 December 2018 Update
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Accsys Technologies

Moving to EBITDA positive

H119 results

General industrials

 

19 December 2018

Price

104.50p

Market cap

£123m

£/€ 1.12

Net debt (€m) at end September 2018

34.2

Shares in issue

117.9m

Free float

91.1%

Code

AXS

Primary exchange

LSE

Secondary exchange

Euronext Amsterdam

Share price performance

%

1m

3m

12m

Abs

1.0

4.0

34.4

Rel (local)

5.9

14.7

51.8

52-week high/low

115.0p

73.4p

Business description

Accsys Technologies is a chemical technology company focused on the development and commercialisation of a range of transformational technologies based on the acetylation of solid wood and wood elements for use as high performance, environmentally sustainable construction materials.

Next events

FY19 year end

March

Analyst

Toby Thorrington

+44 (0)20 3077 5721

Accsys Technologies is a research client of Edison Investment Research Limited

Accsys continues to make positive progress and is now generating revenue from its latest investment at Arnhem. We expect the new, under-construction Tricoya facility to follow suit within the next year, at which point annual group revenue potential will be around €150m according to management. In the near term, we expect to see an EBITDA positive outturn in FY19.

Year end

Revenue (€m)

EBITDA* (€m)

PBT* (€m)

EPS* (€)

P/E (x)

EV/EBITDA (x)

03/17

56.5

(1.5)

(4.5)

(0.05)

N/A

N/A

03/18

60.9

(3.5)

(8.8)

(0.07)

N/A

N/A

03/19e

71.6

2.0

(6.0)

(0.04)

N/A

86.6

03/20e

94.9

7.8

(4.0)

(0.04)

N/A

23.9

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

Enlarged Arnhem facility improving performance

Increased revenue, Arnhem profitability and a halved group EBITDA loss were the financial highlights in H119. Behind this, Accsys achieved a c 8% uplift in Accoya volumes or c 21,400m3 sold in the period, which included the third reactor at Arnhem coming on stream. Based on previously released five-month data, the implied September throughput was c 4,500m3, which is approaching the enlarged annual capacity (ie 60,000m3) on a monthly run rate basis. Elsewhere, other costs appeared to be well controlled and the current investment phase resulted in a €34m net debt position at the end of September. As expected, no interim dividend was declared.

Markers of progress for unchanged estimates

Encouragingly, with new capacity coming on stream, demand indicators remain supportive and management expects the group to become EBITDA positive in H219. This was already factored into our estimates, which are effectively unchanged following this release. In the remainder of this year, we see sustained higher throughput at Arnhem, further development of both Accoya and Tricoya markets – with an improving mix – and solid progress moving the new Hull Tricoya plant towards construction completion all as important benchmarks of progress. Discussions with potential partners for the construction of new plants in the US and Asia are ongoing, although no timeline or other details are available.

Valuation: Making progress

The Accsys share price is off its highs for the year (116p earlier this month) but has made strong progress during 2018, rising c 36% YTD. We have revisited the Arnhem/Accoya component of our DCF valuation and the current share price is consistent with a c 6% inflation uplift (in prices and opex). A strong pull through of demand on new Arnhem capacity and/or realising production output at Hull (affecting our volume and discount rate assumptions respectively) should both support a higher share price. In FY21, the first expected full year of operation of the Hull Tricoya plant, Accsys is valued at 1.6x revenue and 13.6x EV/EBITDA.

H119 results overview

Interim results continued to provide evidence of the growing demand for Accsys Technologies’ acetylated woods and contained progress reports on new capacity projects. The latter investment dominated cash flows with the company ending September with €34m net debt. We made no material changes to our estimates.

Exhibit 1: Accsys Technologies interim splits

Mar y/e (€m)

H118

H218

FY18

H119

H119

% chg y-o-y

Group revenue

28.3

32.6

60.9

31.6

11.6%

Accoya

28.3

32.4

60.7

31.1

+9.9%

Wood revenue

26.2

30.1

56.3

28.1

+7.1%

Licence income

0.0

0.0

0.0

0.5

n/m

R&D

2.1

2.3

4.4

2.5

+19.6%

Tricoya

0.0

0.2

0.2

0.5

n/m

Group operating profit

-4.3

-2.3

-6.6

-3.0

Accoya

0.0

2.0

2.0

1.3

Tricoya

-1.2

-1.2

-2.5

-1.3

R&D costs

-0.7

-0.7

-1.4

-0.6

Corporate costs

-2.3

-2.4

-4.7

-2.5

Accoya sales volume m3

19,826

22,850

42,676

21,379

+7.8%

Split Accoya:Tricoya*

83:17

81:19

75:25

Source: Company. Note: *Accoya output from Arnhem used for Tricoya purposes (all revenue shown as Accoya). Note that there were scheduled shutdowns in the first half of both years but none in H218.

Bringing the third reactor at Arnhem on stream during H119 facilitated an increase in Accoya volume shipments, supplemented by higher pricing and licence income to deliver a 12% group revenue uplift. A small price uplift in Q418 aided progress and although the average overall selling price was slightly lower due to mix, an improved manufacturing margin was achieved (+100bp y-o-y to 21%). Given capacity constraints, all customers were on allocation; and lower priced volumes for Tricoya grew fastest (primarily to Medite) as Accsys continues to develop this segment. The company was profitable at the Arnhem facility business level, reducing the EBITDA and EBIT loss at group level as other costs appeared to be stable and well controlled.

Including the third reactor (adding 20,000m3), annualised Accoya capacity is now 60,000m3 and volume throughput should rise during H219. For FY19, we have modelled 49,000m3 of volume sold, implicitly requiring c 27,600m3 in H2 (versus c 21,400m3 in H1). A price increase has been flagged to customers for January 2019 and, although there are some input cost rises, this together with higher volume is expected to increase gross margin and profitability.

The new-build Tricoya facility at Hull is expected to complete by mid-2019, with a commissioning phase to follow. At the end of September, c €38m of assets under construction were held on the balance sheet, which we believe to be the invested capital in the project at that time. As mentioned above, market development ahead of this dedicated capacity coming on stream is continuing with c 5,300m3 sold in H1 (compared to c 8,100m3 in FY18 as a whole) from chipped solid Accoya wood produced at Arnhem. We have modelled 9,500m3 of Tricoya sales for FY19 as a whole.

For the record, our FY20 model assumption is for the sale of c 11,000m3 of Tricoya chips with around three-quarters of this being produced at Hull (just over a quarter of expected annual capacity) and the remainder, as now, from Arnhem. In the event of slippage in the commissioning phase of at Hull, we believe Arnhem could substantially cover Tricoya volume requirements, although at a lower gross contribution margin. There is no indication that this will be necessary and, of course, any such requirement would be temporary, if it arose at all. Our current expectation is that the expanded capacity at Arnhem will be used to meet growing demand for solid Accoya wood and demonstrate the robust underlying manufacturing margin from this facility.

Moving through the heavy investment phase

Expenditure on capacity expansion was the dominant cash flow feature of H119 and substantially explained the movement from a c €4m group net debt position at the end of FY18 to c €34m net debt at the end of September.

Preparatory work for the latest capacity expansion phase began in FY17, ramped up in FY18 (installing backbone infrastructure at Arnhem and breaking ground at Hull) and has continued into FY19. Total capex in H119 was €34.8m:

€18.3m Tricoya plant and machinery

€9.8m net Arnhem land and buildings freehold acquired (previously leasehold)

€4.9m Arnhem – Accoya third reactor now fully commissioned

Implicitly there was a further €1.8m other, presumably relating to existing operating assets plus a small amount of capitalised costs.

Elsewhere in the cash flow statement, an EBITDA loss of €1.4m in H119 was half of the level seen a year earlier. A small working capital inflow – a favourable payables movement more than offsetting raw material-related inventory absorption – effectively resulted in a neutral trading cash performance. Additionally, cash interest costs were matched by a tax receipt so there was no debt impact there either.

In July, Accsys announced it had issued €5.7m new shares to VP Participaties BV, to bring a new investor onto the register and provide funds for the development of new markets. Lastly, there was a small adverse translation effect on sterling cash balances being used to fund the Hull capex programme mentioned earlier.

Cash flow outlook: with regard to capital projects, the third Arnhem reactor will have moved from construction completion during H119 to its fully operational phase in H219 doubly benefitting cash flow. Specifically, we anticipate that Accsys will generate c €3m EBITDA in H219 and although we have modelled some working capital investment, we nevertheless expect a positive trading cash inflow in the period. Increases in net interest costs more than absorb this inflow leading to a small pre-capex cash outflow overall. Ongoing capital investment to develop the new Hull Tricoya facility dominates expected H219 spending of c €14m (noting a significant reduction versus H119 as the current Arnhem expansion phase is complete).

Overall, the c €16m outflow for the second half leads to an estimated c €50m net debt position at the end of FY19. We expect to see year-end net debt peaking at c €63m in March 2020 – the y-o-y movement being entirely driven by capex, substantially the tail off the Hull investment. The implicit neutral cash flow performance pre-capex in FY20 develops to become c €3m positive overall free cash inflow in FY21 in our model and, hence, indicates a maturing, post investment cash profile. We have not made any provision for further expansion capex apart from the above. Realistically, the decision to invest in a fourth reactor at Arnhem and/or co-invest in possible new overseas facilities via partnerships may be taken within our time horizon.

On track investment and trading expectations

We initiated coverage of Accsys in July and have made no substantive changes to our estimates since then or following the interim results announcement. Given the significant investment programme that is underway, ongoing operational delivery against expectations is a noteworthy positive. As a reminder and as alluded to above, we expect Accsys to be EBITDA positive from FY19 and achieve an overall operating profit in the following year. We expect EBIT to exceed financing costs in FY21 and hence generate positive group PBT for the first time in that year.

Exhibit 2: Financial summary

€'ms

2012

2013

2014

2015

2016

2017

2018

2019e

2020e

2021e

March

UK GAAP

UK GAAP

UK GAAP

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

15.002

18.822

33.512

46.077

52.769

56.529

60.911

71.623

94.873

114.500

Cost of Sales

 

 

(15.050)

(15.474)

(25.753)

(33.842)

(34.597)

(42.175)

(47.270)

(52.009)

(66.887)

(78.976)

Gross Profit

 

 

(0.048)

3.348

7.759

12.235

18.172

14.354

13.641

19.614

27.986

35.524

EBITDA

 

 

(10.386)

(7.944)

(4.111)

(1.275)

2.384

(1.484)

(3.500)

1.999

7.786

13.451

Operating Profit (before GW and except.)

(12.545)

(10.200)

(6.488)

(3.750)

(0.288)

(4.197)

(6.577)

(2.615)

0.701

5.416

Intangible Amortisation

 

 

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

Exceptionals

 

 

(2.281)

0.000

(0.726)

(2.670)

0.000

0.033

(1.650)

0.000

0.000

0.000

Other

 

 

0.000

(0.430)

(0.905)

(1.098)

0.000

0.000

0.000

0.000

0.000

0.000

Operating Profit

 

 

(14.826)

(10.630)

(8.119)

(7.518)

(0.288)

(4.164)

(8.227)

(2.615)

0.701

5.416

Net Interest

 

 

(0.086)

(0.038)

(0.071)

(0.135)

(0.178)

(0.300)

(2.174)

(3.400)

(4.700)

(4.700)

Profit Before Tax (norm)

 

 

(12.631)

(10.238)

(6.559)

(3.885)

(0.466)

(4.497)

(8.751)

(6.015)

(3.999)

0.716

Profit Before Tax (FRS 3)

 

 

(14.912)

(10.668)

(8.190)

(7.653)

(0.466)

(4.463)

(10.401)

(6.015)

(3.999)

0.716

Tax

 

 

0.536

(0.355)

(0.699)

(0.607)

(0.402)

(0.666)

0.251

0.195

(1.231)

(1.499)

Profit After Tax (norm)

 

 

(12.095)

(11.023)

(8.163)

(5.590)

(0.868)

(5.163)

(8.500)

(5.820)

(5.230)

(0.783)

Profit After Tax (FRS 3)

 

 

(14.376)

(11.023)

(8.889)

(8.260)

(0.868)

(5.129)

(10.150)

(5.820)

(5.230)

(0.783)

 

 

 

 

 

 

 

 

4.990

 

 

 

 

Average Number of Shares Outstanding (m)

 

80.7

83.9

87.5

88.5

89.6

90.4

111.2

116.3

117.9

117.9

EPS - normalised (€)

 

 

(0.15)

(0.13)

(0.09)

(0.06)

(0.01)

(0.05)

(0.07)

(0.04)

(0.04)

(0.01)

EPS - FRS 3 (€)

 

 

(0.18)

(0.13)

(0.10)

(0.09)

(0.01)

(0.05)

(0.08)

(0.04)

(0.04)

(0.01)

Dividend per share (€)

 

 

0.0

0.0

0.0

0.0

0.0

0.0

0.00

0.00

0.00

0.00

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin (%)

 

 

-0.32

17.8

23.2

26.6

34.4

25.4

22.4

27.4

29.5

31.0

EBITDA Margin (%)

 

 

-69.2

-42.2

-12.3

-2.8

4.5

-2.6

-5.7

2.8

8.2

11.7

Operating Margin (before GW and except.) (%)

-83.6

-54.2

-19.4

-8.1

-0.5

-7.4

-10.8

-3.7

0.7

4.7

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Assets

 

 

34.715

31.425

29.413

29.562

31.252

32.520

71.488

115.416

122.249

119.632

Intangible Assets

 

 

7.579

8.226

8.333

10.014

10.980

10.839

10.657

10.436

10.219

10.002

Tangible Assets

 

 

25.614

22.271

20.740

19.548

20.272

21.681

60.831

104.980

112.030

109.630

Investments

 

 

1.522

0.928

0.340

0.000

0.000

0.000

0.000

0.000

0.000

0.000

Current Assets

 

 

32.387

29.638

26.161

24.066

22.590

61.268

63.505

40.422

39.743

37.333

Stocks

 

 

3.120

4.860

6.053

7.894

8.345

11.796

13.125

14.441

14.572

13.205

Debtors

 

 

3.000

3.439

4.091

3.912

4.967

7.402

9.178

10.349

14.391

18.347

Cash

 

 

24.574

20.467

15.185

10.786

8.186

41.173

39.698

12.003

7.003

2.003

Current Liabilities

 

 

(3.649)

(3.621)

(5.821)

(10.701)

(9.842)

(14.599)

(21.414)

(27.063)

(31.189)

(34.698)

Creditors

 

 

(3.385)

(3.357)

(5.557)

(10.437)

(9.488)

(14.144)

(18.029)

(20.370)

(24.496)

(28.005)

Short term borrowings

 

 

(0.264)

(0.264)

(0.264)

(0.264)

(0.354)

(0.455)

(3.385)

(6.693)

(6.693)

(6.693)

Long Term Liabilities

 

 

(1.960)

(1.924)

(1.871)

(1.799)

(1.947)

(22.718)

(40.084)

(55.171)

(62.430)

(54.676)

Long term borrowings

 

 

(1.960)

(1.924)

(1.871)

(1.799)

(1.947)

(22.718)

(40.084)

(55.171)

(62.430)

(54.676)

Other long term liabilities

 

 

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

Net Assets

 

 

61.493

55.518

47.882

41.128

42.053

56.471

73.495

73.604

68.373

67.591

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

(3.717)

(8.938)

(3.257)

(3.873)

0.452

(1.304)

(1.756)

0.888

7.369

14.149

Net Interest

 

 

(0.019)

(0.038)

(0.102)

(0.138)

(0.186)

(0.248)

(0.671)

(3.200)

(4.500)

(4.500)

Tax

 

 

0.000

0.795

0.344

0.263

0.229

(0.745)

(2.013)

0.815

(1.231)

(1.499)

Capex

 

 

0.888

0.501

(1.054)

(1.108)

(4.052)

(2.608)

(29.895)

(48.952)

(13.897)

(5.397)

Acquisitions/disposals

 

 

0.000

0.000

0.000

0.000

0.956

18.317

0.000

0.000

0.000

0.000

Financing

 

 

(0.178)

3.597

(1.130)

0.461

0.124

0.050

26.728

5.718

0.000

0.000

Dividends

 

 

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

Net Cash Flow

 

 

(3.026)

(4.083)

(5.199)

(4.395)

(2.477)

13.462

(7.607)

(44.731)

(12.259)

2.754

Opening net debt/(cash)

 

 

(27.596)

(22.350)

(18.279)

(13.050)

(8.723)

(5.885)

(18.000)

3.771

49.861

62.120

HP finance leases initiated

 

 

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

Other

 

 

(2.220)

0.012

(0.030)

0.068

(0.361)

(1.347)

(14.164)

(1.359)

0.000

0.000

Closing net debt/(cash)

 

 

(22.350)

(18.279)

(13.050)

(8.723)

(5.885)

(18.000)

3.771

49.861

62.120

59.366

Source: Company, Edison Investment Research

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The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Germany

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United Kingdom

New York +1 646 653 7026

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US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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New Zealand

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United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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