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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.
Applied Graphene Materials |
Addressing complementary markets
Tech hardware & equipment |
Spotlight - Update
6 April 2022 |
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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
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
|
|
Research: Consumer
Borussia Dortmund’s Q222 results were affected by the imposition of new COVID-related restrictions towards the end of the period. Following the period end, the team was eliminated from the Europa League, having failed to qualify for the Champions League knockout stages before Christmas. Against this backdrop, the small downgrade in management guidance for FY22 profitability is testimony to the tight management of costs. The team is currently (comfortably) placed second in the Bundesliga so all will be looking forward to a more successful and profitable FY23. Our sum-of-the-parts valuation reduces to €11 per share.
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