Accsys Technologies — Accelerated growth

Accsys Technologies has proprietary acetylation processes and production facilities, which enhance the durability and stability of softwood species making them suitable for a wider range of chiefly external building products applications (see page 5). The company has recently undertaken a significant investment phase to expand capacity on one site (Arnhem, the Netherlands) and is in the process of establishing a new one (at Hull, the UK) and is continuing to develop its market presence internationally both directly and through licence agreements. Note that Accoya and Tricoya are registered trademarks and this applies to all subsequent references in this report.

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 group PBT for the first time in that year. Our analysis shows that the current 79p equity valuation can be explained through a DCF-based approach, which identifies three distinct elements, as follows:

We also provide a sensitivity analysis to show the effect of price/cost inflation on our DCF and to illustrate by example the significant valuation upside potential from simplistic licence agreements. Given significant market opportunities, this approach aims to highlight additional value potential beyond known facilities, although new production licences are likely to be more complex than we have shown. As licences tend to be defined by region, there is scope for several of these contractual arrangements to be signed.

In FY18, Accsys reported a group EBITDA loss. Key financial drivers in the year were a lower Accoya gross margin (reflecting customer and licensing mix effects), increased Tricoya development activity (including design, hiring and construction phases) and well-controlled group and R&D costs. In March 2017, Accsys secured funding from a combination of new equity, partners co-investing and bank facilities to invest in production facilities. Our three-year estimate horizon covers this period of expansion, during which we forecast group revenues will grow from c €61m in FY18 to c €114m in FY21 – achieving a positive EBIT position during FY20 – and we anticipate that group net debt will be c €62m at the end of our forecast period. We expect the key themes that will define the group’s financial performance in the period under review are the deployment of project funding and further commercial development of Accoya/Tricoya volumes.

Accsys already has scale and an international market presence with two established, recognised and IP-protected brands. That said, given the scale of its addressable markets, penetration is relatively low partly due to constrained capacity. The challenge for Accsys is to reaffirm (or improve upon) the current commercial proposition for its Accoya and Tricoya wood products as significant new capacity comes on stream to support volume growth. Expansion at Arnhem and newbuild at Hull carry different risk profiles in our view but completion on time and bringing the expected operational performance and levels of profitability are key to the business case. As a manufacturer and exporter, FX movements can influence local market competitiveness. The cross rates of local operating currencies (ie sterling and euro) versus US$ and the NZ$ are relevant for materials costs.

Accsys is a chemical technology company focused on the commercial development of IP based on the acetylation of solid softwood and wood elements,1 making more building product market segments accessible to producers and widening the choice for end customers. We show some of the installed applications in later sections. With an established market presence and new capacity coming on stream, the company is positioned to undergo a significant growth phase.

Accsys has developed proprietary, IP-protected wood acetylation processes that enhance the properties of certain softwood tree species, enabling their use in a wider range of (typically exterior building product) applications. Acetylated softwood is sold internationally under the Accoya (solid form) and Tricoya (wood elements) brands. The company has operated an acetylation plant from a single site in Arnhem since 2007 and has been operating at its current rated operating capacity of c 40,000 cubic metres. Exhibit 1 shows that the majority of revenue is currently generated from the sale of acetylated wood. Geographically, c 80% comes from a wide range of European countries and the Americas and Asia-Pacific territories are also significant end-markets.

The group strategy has been to commercialise its acetylation IP through a combination of in-house processing, licence and third-party partner arrangements. The Arnhem plant has been used to demonstrate proof of concept and also seed and supply markets directly, via distribution/agency agreements and in support of developing overseas territories. Having reached capacity at Arnhem – supporting Accoya wood sales and establishing Tricoya demand – Accsys is undertaking a phased expansion of the site and constructing a new standalone Tricoya facility near Hull, UK to facilitate further anticipated growth in both brands.

The current executive management team – along with the chairman – came together in 2010, led by CEO Paul Clegg who joined the board in 2009. At this time, the company had experienced a downturn due to licensee funding difficulties in a global recessionary climate. Building on the technical platform, management has successfully improved operating performance and increased volumes and international market penetration through the development of new customer agreements, supply chain partners and licensees. This was a necessary precursor and platform for the current funded expansionary phase.

Through careful market cultivation and backed by investment and operational improvements over time, Accsys is well positioned and has a clear expansion strategy for its next phase of growth funded by cash on hand and established finance facilities. In the following sections, we identify two phases in the company’s development to date and discuss the operations as context for the significant current investment programme. We conclude with a look at the market position and prospects.

A forerunner company was established in 1999 to explore acetylation chemistry technology applications on cellulose materials. Further development and incorporation with other related IP was followed by Titan Wood’s formation in 2003 to specifically pursue wood acetylation, with the company acquiring IP in its own right and a scale pilot plant in that year. When Titan Wood listed on AIM in October 2005, it did so to fund the construction, commissioning and ramp up of its process and wood acetylation production facility in Arnhem. This investment completed in March 2007, with an initial capacity of 30,000m3 per annum. Initial Accoya wood revenues were recorded in FY07 and FY08 but were dwarfed by significant upfront licence income. These payments reduced sharply as the construction of full scale third-party production facilities under licence did not proceed, with the global financial crisis as a backdrop at the time. Accsys continued to develop its market presence through an active phase of establishing overseas sales, marketing and distribution agreements, together with local approvals supported by production at Arnhem. By 2009, nameplate capacity reached 40,000m3 per annum. The other notable achievement in this year was the launch of Tricoya-based panel products in conjunction with partner, Medite. As a result of the stalled licence development referred to earlier, the financial (trading and cash flow) performance deteriorated significantly and precipitated a change in management.

Paul Clegg joined as NED in April 2009 and became CEO later that year. A new executive team and group chairman were in place by the end of 2010. Equity funding rounds in FY10 and FY11 (€17m and €28m net respectively) served to first, stabilise the group financial position and second, put in place sufficient cash resources to develop the business further including increasing capacity at Arnhem. Together, these steps signified an increased emphasis towards in-house production under full control to drive growth. Accoya wood volumes built steadily to FY13 reflecting the increase in sales, distribution and agency agreements and yielded improving production economies of scale, aided by a new supply/technical support agreement with BP Acetyls. Production volumes and revenues accelerated sharply over the following four years and the Arnhem plant effectively operated at its increased, 40,000m3 capacity in FY17 and is profitable as a standalone site. Having launched in FY12, Tricoya/Medite revenues reached €7.8m in FY17, which has formed the foundation to proceed with the new JV structure and standalone Tricoya facility at Hull. A number of other new licence agreements have been progressed to varying degrees, the most significant of which is with Rhodia Acetow (originally as part of Solvay) under which supply commenced in FY17 with a medium-term aim of building a third-party Accoya facility.

We summarise these achievements from FY11 to FY17 in financial terms as follows:

We illustrate the operational growth of the business in Exhibit 7, which shows the increase in wood volumes (both solid Accoya wood and solid Accoya wood used by Medite, which is chipped into elements for Tricoya products), increased plant utilisation at Arnhem and the associated revenue generated from wood sales.

Exhibit 8 above shows the development of group (including non-wood) revenues and the geographic spread of where that income was generated. Accoya has wide market acceptance within and outside European markets. At the end of FY18, Accsys had 64 Accoya distributor, supply and agency agreements in place and coverage territory includes North America, much of Europe and south-East Asia together with Australasia and selected countries on the South American (Brazil, Chile) and African (Morocco, South Africa) continents. This includes a handful of Accoya licensees: terms typically include defined, exclusive sales territories, sales and marketing support, volume supply agreements and usually a finite length of time to build a self-operated facility which then generates royalty flows back to Accsys. The most significant current Accoya licensee is:

There are examples of licence agreements signed under previous management teams that have not progressed to the licensee’s plant construction stage, but they remain group customers, albeit at relatively low volumes. These include Diamond Wood (China, ASEAN countries)2 and Al Rajhi Holdings (Gulf Cooperation Council countries)3. The current Accsys management team’s preference is to be a co-owner in future production-based licence agreements as at the Hull facility.

Medite Europe (part of Coillte Panel Products) was the first Tricoya licensee, having exclusivity in the UK, Republic of Ireland and the Netherlands. Following a joint development agreement, the first Tricoya MDF panel products were sold in 2011. An extended licence agreement (July 2013) included provision for a dedicated Tricoya manufacturing facility. The subsequent formation of a new Tricoya consortium includes Medite’s involvement as a co-investor in both TTL and TVUK with a minimum 40% volume offtake from the new Hull facility once it is operational. Most recently, FINSA (an established private European MDF and chipboard manufacturer) signed a user licence agreement on 16 March 2018 with exclusive rights to manufacture high-performance, wood-based panels from Tricoya in Spain and Portugal (with non-exclusive distribution rights in other territories).

FY17 was a watershed year for Accsys as having achieved full Accoya production run rates, foundations were put in place – including secure funding – for its next phase of expansion. Ongoing market development and volume growth is a clear strategic objective and we are able to frame the scale of medium-term management aspirations in the context of the significant investment at Arnhem (to increase Accoya capacity) and underway at Hull (to build a standalone Tricoya plant).

We now provide an operational overview of these facilities noting similarities and differences. We understand that the basic acetylation chemistry is common to both Accoya and Tricoya processes; wood reacts with acetic anhydride under controlled heat and pressure cycles to change naturally occurring free hydroxyl groups – which absorb and release water – into an acetyl group, producing acetic acid as a by-product. Exhibit 9 illustrates the Accoya production process, simply described as solid soft wood fed into an acetylation reactor vessel to produce enhanced-property Accoya wood.

The first Tricoya facility is under construction; note the following process differences to Accoya:

The sizeable capital cost of these facilities together with the accumulated know-how (ie patent protected process and equipment IP developed over an extended period) represent significant barriers to entry into this modified wood market in our view. The patent position is enforced globally – the use of territory licence agreements is a tangible example of this. Together with an established supply chain (including co-invested partners) and extensive international distribution relationships in place, we believe that Accsys is well positioned to capitalise on its market position by scaling up capacity and achieving sustainable profitability.

Engie Fabricom is the engineering, procurement and construction (EPC) contractor for both the Arnhem expansion and the new facility in Hull (having also undertaken the front-end engineering and design for the latter facility). Engie Fabricon is an integrated design through to construction and commissioning engineering contractor with extensive experience in process industries including chemicals. We summarise expected developments at the two Accsys sites, as follows:

Arnhem: installation of the third reactor vessel and ancillary equipment (including the backbone infrastructure for a fourth reactor) began in H216 and was commissioned into production in June 2018. It is expected to be operating at full run rate capacity by the end of FY19.

Hull: Located at Saltend Chemicals Park on a site adjacent to JV partner BP Acetyls’ facility, groundworks began in July 2017 and we understand that structural steelwork activity has begun and the reactor vessel has been ordered. Full commissioning and the start of commercial production is anticipated by mid-2019 and we expect Accsys to report on construction milestones as the project progresses.

Arnhem reactor three coming into service represents a 50% increase in Accoya wood capacity (from 40,000m3 to 60,000m3), alleviating allocation pressure – given that Arnhem has been operating at capacity – and allowing for volume growth to re-start. (While the same or possibly better gross margin characteristics should apply to the incremental volume, opex should be relatively stable and so it would be reasonable to expect some EBIT margin improvement at Arnhem.)

For illustration, assuming that Hull is in service at the beginning of FY20 and all of the Medite Tricoya volume (FY17 c 8,300m3, say increased to 10,000m3 by that time) is transferred to Hull, this has two effects with positive margin implications:

Having been capacity constrained for the last two years, Arnhem now has a significant opportunity to capitalise on its extensively developed distribution network and to provide strong support to existing and prospective new licensees in helping to grow their markets. From an investor’s perspective, there is a clear and visible growth trajectory from an established base. Moreover, within this timescale, Accsys has the option to add a fourth Accoya reactor at Arnhem (a further 20,000m3). There is understood to be an 18-24 month development-to-commissioning cycle for this and conceivably a decision to proceed could be taken within our estimate time horizon. Overall demand levels for Accoya will be central to the business case to further expand Arnhem taken in the context of an expected shift of volume to Hull in 2019.

As stated in the March 2017 Placing and Open Offer prospectus, management’s assessments of long-term achievable scale are as follows:

Tertiary and higher-specification sector penetration: The market sizes indicated will include segments that are not being addressed (eg interior millwork) but we believe relevant exterior and other applications are also material markets. Accsys has grown wood revenues from below €10m in FY10 to c €51m in FY17, achieving profit on a local but not yet group basis. Supplying to a wide range of projects internationally has showcased the versatility of its modified wood. End-market segments include retail, offices and leisure (eg hotels, marine, velodromes) where cladding and decking uses dominate and public spaces (eg bridges, art installations, boardwalks) with other functional and structural requirements. We believe that tertiary projects have been significant drivers of volume. There has also been higher-specification private residential newbuild (including apartments) and other restoration work, including windows and doors. Market penetration has been largely gained through specialist channels (eg specifiers, architects) and growth largely driven by repeat business. The broad Accsys distribution network already facilitates project activity; it is likely to require increasing support (eg local stock availability) in key territories for the next growth phase.

Scaling up – a multi-market, multi-channel perspective: The prospective Accoya and Tricoya capacities referred to earlier (ie 80,000m3 and 40,000m3 respectively) offer excellent medium-term volume growth from the current base. At the same time, they are clearly insufficient to deliver management’s indicated long-term volume aspirations. We expect Accsys to retain a premium positioning for its modified wood and – while unlikely to develop mass-market usage in the near term (eg retail) – we offer some growth perspectives for investors to consider.

Deeper entry into timber window and door markets (and roofline, weatherboarding etc) would enhance the company’s presence in both newbuild and secondary residential sub segments. Noting multiple and fragmented routes to market (eg merchants, fabricators, installers, specifiers, contractors) this clearly broadens supply chain servicing requirements. Consequently, Accsys will need to cultivate these channels and also maintain a significant end customer profile to pull through product demand. Increased capacity will facilitate increased demand and channel requirements and also lower unit production costs to open up more segments. Sustainability agendas are becoming increasingly important, especially in developed building markets, which are typically regional and served locally. Climactic conditions also influence markets with different material preferences (eg between timber, plastic and metal-based products) across both European countries and US states, for example. We believe that Accsys’s modified wood is capable of being deployed in a wide range of environments and applications and the range of market opportunities is broad. With finite near-term capacity available, it would be reasonable to expect Accsys to pursue a selective expansion strategy in developing these markets rather than one which is purely volume-driven.

In the medium to longer term, in order to supply 1 million+ m3 pa of (either Accoya or Tricoya) material, it is clear that a significant scaling up of facilities is required, which could be achieved directly or, more likely we feel, through international partnerships involving co-investment and the construction of new plants, which bring the added benefit of reducing transport costs in non-European markets. Announcements of significant new partners – and associated investment would represent potentially significant markers of progress towards longer-term, higher volume targets. Accsys has noted interest in developing new capacity in North America and Asia and discussions regarding potential licence arrangements with a number of large MDF manufacturers are underway.

Given the expected rate of revenue growth and P&L transformation, it would be easy to view Accsys as a fledgling building products business. In reality, it already has scale and an international market presence with two established, recognised and IP-protected brands. We acknowledge that the level of penetration is relatively low as a specialist product but also due to constrained capacity.

Pricing: Market development is the key challenge and opportunity facing Accsys. Accoya is a premium product, which is positioned by reference to its performance, sustainability and lifecycle (rather than product or installed) cost. Tricoya-based products have similar or improved performance characteristics to alternative materials and price competition is likely to be influenced by demand elasticity/substitution effects as well as overall market activity levels.

Capacity: The new Arnhem reactor is now operational and our model assumes that the new capacity is substantially available throughout FY19. During annual maintenance periods, all reactors are shut down simultaneously owing to shared infrastructure at what is the sole Accoya production facility. Disruption here would immediately affect capacity availability and achievable volume/revenue. Note that we have not factored in the establishment of any third-party production (or associated royalty revenue streams) under licensing arrangements over our three-year horizon. The new Hull Tricoya facility is the first of its kind; process engineering specialist Engie Fabricom – which also undertook the Arnhem expansion – has undertaken the detailed design work and is the main engineering, procurement and construction contractor. Groundworks commenced in July 2017 with commissioning anticipated in mid-2019 and we expect Accsys to report on construction milestones over the next 12 months or so. We have assumed that two thirds of full annual capacity is available in FY20 and we have modelled volume at c 50% of this. This is equivalent to 12,000m3 and, in context, this compares to the c 8,500m3 current Medite demand. (Note that Medite also has minimum offtake agreements in place.) In the event that the opening of the Hull facility is delayed sufficiently to affect these assumptions, we would expect the volume to be supplied from Arnhem, as it is currently, albeit from a higher, fully costed, process.

FX: Most obviously, relative euro strength (reporting currency) and favourable translation effect into sterling (the share price currency) serves to compress the valuation, other things being equal. The transactional picture is more complex: euro strength compared to sterling and the NZ dollar (sources of group and timber costs respectively) is beneficial, but more than half of Accoya revenue comes from exports which are invoiced in euros (save for North American countries). Clearly, alternative wood products are available; as they are also largely imported relative sterling weakness should have a comparable competitive pricing effect (depending on suppliers’ base currency). Note that when the Hull facility comes on stream in FY20, this will broaden the group’s sterling costs but revenues are expected to be denominated in euros.

Raw materials: In the context of larger, established global markets, Accsys’s input volume requirements while growing are not significant. We consider its raw material supply chain to be stable. Radiata pine is the dominant Accoya wood feedstock sourced from New Zealand, which has an extensive plantation, harvesting and export industry in this species. While adverse events could temporarily affect supply, we would expect inventory and alternative supply options (both in New Zealand and, possibly, Chile and Australia over time) to provide a buffer. We believe that Tricoya’s species base is much wider. Acetic anhydride is manufactured globally; cigarette filter production is the dominant end-market. BP Chemicals (the largest European producer) has supplied Arnhem for some time and will be the sole supplier to Hull. While the usual risks relating to a sole source/single site supplier apply, we believe that Accsys could source elsewhere at short notice if necessary. Acetic anhydride (a combustible liquid and an irritant) and process by-product acetic acid both need specialist handling and storage, requiring robust health and safety policies.

We expect Accsys to be EBITDA positive from FY19 and achieve an overall operating profit in the following year. However, the current investment phase to generate higher future profits is giving rise to higher finance costs, which more than offset this trading contribution on our current estimate horizon. Hence, conventional, short- to medium-term earnings valuation metrics cannot be applied here at present. Consequently, we rely on a DCF-based approach: on our calculations, the current equity value is effectively accounted for by a fully operational Arnhem site, some UK tax losses and the (group’s share of) cash in TTL/TVUK. Additional upside can come from several different areas:

These are realistic expectations in our view and below we show how variations to our assumptions affect the valuation. We have not included any upside in our analysis for Accsys’s shareholding in Cleantech Building Materials shares (emanating from an earlier investment in Diamond Wood and carried at zero book value at the end of FY17), but we will monitor newsflow here as it occurs.

Our model projects c €147m group capital employed at the end of FY21, being the first full year of expected operation of the Hull Tricoya facility. For illustration purposes, attaining a 10% ROCE yardstick would be equivalent to a c €15m EBIT outturn. This compares to our projected c €6.5m group EBIT for FY21 currently. This is not entirely representative of the group’s profit potential in our view – not least because we have not modelled the Hull facility at its full run rate – and we discuss some other potential influences on profitability and cash generation which are not currently incorporated in our earnings model.

Our base model is built around the known capacity profiles at Arnhem (ie 40,000m3, increasing to 60,000m3 from FY19, 80,000m3 from FY22) and Hull (ie 40,000m3 single reactor, operational from FY20). We have assumed a consistently high utilisation rate of available capacity at Arnhem and a gradual build up at Hull (to c 95% by 2026). As well as activity levels, business mix is an important determinant of group profitability and the supply partnerships with Rhodia Acetow (for Accoya) and Medite (for Tricoya) are significant, especially during our estimate horizon. For obvious reasons, the commercial terms behind these agreements are not publicly available so our model uses back-fitted assumptions versus reported results. So our DCF calculation is volume-driven, based on the end FY18 position, the three further years modelled and published here with projections out to 10 years in total and terminal growth rate. There was a c €4m group net debt position at the end of FY18 and we have allocated €39m net debt to the Accoya DCF5 and €35m net cash to the Tricoya DCF.

Ahead of a discussion of our DCF valuations, in the context of the ROCE points above, we note:

We now show our interpretation of Accsys’s current share price by breaking the valuation down into three parts, as follows:

We have assumed that average pricing, opex and corporate costs all increase by c 2% pa with stable underlying gross margins. The capital cost of the fourth reactor is factored into FY21, with operational cash generation from FY22. This allows for a period of build-up of volume at Hull and migration of current Medite volume from Arnhem and, as an incremental investment, makes a valuable contribution to cash generation. Our DCF factors in c €39m net debt at end FY18 for wholly owned activities; excluding the Loan Notes the Accoya DCF is 57p per share.

We have not made any explicit valuation of the accumulated Accoya IP in the group. We take potential licence activity (see below) as a proxy for the extraction of value from this IP over and above the group’s own physical manufacturing activities as we currently understand them.

The Arnhem manufacturing profit is taxed in the Netherlands at c 21%. Accsys does not generate profits in the UK but incurs significant group (corporate, sales and marketing, legal, administration) costs. TVUK is a separate trading entity and we do not believe that UK costs can be offset against profits generated elsewhere in the group. As one would expect, simply deleting these costs from the DCF would significantly raise the valuation. We have taken a UK tax rate of c 19% of this putative value increase as a proxy for UK tax losses which could be carried forward. There could be some inter group re-charges (of UK costs to the Netherlands profit centre,) but we do not have visibility of this and have not made any allowance for it in this illustration. As at the end of FY18, the annual report noted an unrecognised tax asset of €26m largely in respect of UK subsidiary trading losses. The calculation basis for this figure is not known and, conservatively, we have not included it in our calculation.

The March 2017 Placing and Open Offer prospectus included an implied equity valuation of c €35m for TTL (the owner of all Tricoya-related IP and majority shareholder in TVUK, the operational vehicle for the construction and operation of the new Tricoya facility at Hull). This valuation is based on the shareholders’ total funding commitments at that time. Accsys retains a 75.1% share currently and we have applied this percentage to our modelled Tricoya DCF.

Taking a similar approach to the Accoya DCF above, once Hull reaches c 80% capacity (towards the end of FY23) we thereafter assume average pricing and opex increase by c 2% pa with stable underlying gross margins. The significant upfront capital investment required to establish this plant (c €60m) is a material component of this calculation, as is the c €35m cash on hand position at the end of FY18. In order to match the €35m implied valuation above, our underlying DCF is effectively neutral. We would expect this to be a relatively conservative stance compared to management’s own projections.

It should be noted that Accsys management considers that the rate of volume increase at Hull described above is conservative, ie there is an internal expectation that the higher utilisation levels can be achieved more quickly. This would obviously have a positive effect on profitability and a favourable impact on the Tricoya DCF calculation. We should add that once the facility has been commissioned and is in production, we would expect to align the discount rate with that of Accoya (ie 10% currently). We have assumed no further capacity expansion beyond the initial 40,000m3; leveraging off an operational site as with Arnhem’s fourth reactor. Such incremental investment, cash flow and returns could disproportionately enhance our current model but we prefer to see the cash flow characteristics of the initial plant operational phase – as well as some indication from management that such investment is under active consideration – prior to making provision for this.

We now consider variations to the current valuation, which offer some insight into positive potential impacts of licence agreements and some pricing sensitivity analysis.

1. Licence agreements – further volume growth opportunities:

Management’s preference is to retain an economic interest in future production licence agreements, as seen at Hull (via TTL/TVUK) for example. Rhodia Acetow is the furthest forward among existing production licensees currently; in the absence of any definitive details to construct and operate its own plant at this time, we have assumed that Accsys continues to supply all volume sold by the company. Given a significant number of variables (eg ownership split, initial and subsequent cash requirements, scale, territory) we consider that we could not usefully model an indicative new licence agreement of this type. We have therefore elected to illustrate potential licence value through a more traditional royalty-based model, but acknowledge that this may not fully represent future management intentions. (Such revenue streams have high gross margins and positive cash flow; we believe that a royalty stream back into the UK is also a possible way in which to access the UK tax losses referenced earlier.) Exhibit 11 shows a range of licensee volumes against a range of WACC inputs. Taking one combination as an example, the DCF value to Accsys arising from a single licence building to 100,000m3 volume pa by 2028, discounted at 12%, equates to 26p/share.

(Note that our illustrations effectively assume no resulting dip in volume from Accsys operations ie no impact on the core valuations above). Exhibit 11 shows value that could accrue from a single licence under a range of volume assumptions; there is potentially scope for multiple active regional licensees in markets much larger than the current European heartland including North America and Asia. We will assess any actual new licences as they are signed, using provided information to reappraise our valuation analysis accordingly.

2. Inflation sensitivities:

As previously stated, the Accoya and Tricoya DCFs above both assume average pricing, opex and corporate costs increasing by c 2% pa (with stable underlying gross margins). The central case of Exhibit 12 shows the combined DCF value for these two business streams as 63p per share (ie consistent with Accoya 43p/share added to Tricoya 20p/share stated earlier). Exhibit 12 also shows the effect on this combined valuation if we flex the assumptions in each area.

Compared to the central +2% assumption, zero inflation for both businesses results in a 21% reduction in DCF value (to 50p/share), while 4% inflation generates a 24% increase (to 78p/share).

Accsys fully consolidates subsidiary company operations with minority adjustments for TTL (from FY16 onwards). Since 2009, financial model development has been characterised by reducing group operating losses as increasing Accoya revenue and profit contributions have narrowed the differential with group costs (including business development, R&D and central items). FY18 reported a group EBITDA loss: Accoya gross margin reduced (reflecting customer and licensing mix effects), Tricoya development activity stepped up (moving from design to hiring and construction phases), while group and R&D costs were well controlled.

Group revenues are currently chiefly comprised of Accoya wood sales plus licence income (from contracted licensees) and other income (a combination of commercially saleable acetic acid by-product and recharged sales and marketing costs) and mix can influence group gross profit margins. Our modelling assumes c 90% Arnhem capacity utilisation and a stable pricing environment. From FY20, we also incorporate Hull, assuming two-thirds of nameplate capacity is available and is c 40% utilised. The primary drivers of our financial model are as follows:

Following major capex, higher interest costs reach c €4.7m in FY20 in our model. We anticipate the first group pre-tax profit in FY21 but note that tax is payable on profits generated in the Netherlands (at c 21% tax rate) across our estimate horizon. While Accsys is in this business development and investment phase, we do not anticipate any dividend declarations.

At the end of March, Accsys had c €4m net debt from €18m net cash a year earlier substantially due to high levels of investment in the year, net of new equity funding and subsidiary shares in TTL issued to co-investors (as announced in March 2017, received in FY18). We expect Accsys to become modestly operating cash flow positive in FY19 with good improvement in the two following years. With our earnings profile and a period of heavy capex – particularly establishing the Hull Tricoya facility and the assumed acquisition of Arnhem land and buildings (which is subject to financing) – we anticipate that Accsys will move into a c €53m net debt position at the end of FY19. Currently, we expect this to rise further in FY20, effectively due to the tail of the Hull capex programme.

Accsys has long-term funding arrangements in place including c €27m term loans (c €17m Royal Bank of Scotland to 2023, c €10 Rhodia Acetow to 2025) and c €18m loan notes (c €12m BGF, c €7m Volantis, both 2021-23). These sources include industrial partners with aligned interests. Funding requirements for the Arnhem site purchase funding are under active consideration. While we see Accsys attaining operating profitability by FY20, the larger interest and tax effects feed into lower retained earnings and net assets by the end of this period. However, by this time, the balance sheet as modelled is transformed with a significantly higher fixed capital base and naturally higher working capital investment as business model maturity increases along with revenue development.