Accsys Technologies — Warning of lower demand

Accsys Technologies (AIM: AXS)

Last close As at 22/06/2024

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Research: Industrials

Accsys Technologies — Warning of lower demand

In its trading update for the first four months of FY24, Accsys warned of weaker building materials and construction markets, caused by the higher interest rates and high inflation environment. Distributors are facing significantly lower volumes and high levels of destocking, which is now also felt by Accsys. Assuming market uncertainty continues, Accsys expects FY24 revenue to be below consensus and EBITDA to be significantly below consensus. We contacted the company and according to management it expects to be (just) compliant with debt covenants. On lowered estimates and a raised risk profile, our discounted cash flow (DCF) now points at a value of €0.93 per share (previously €1.25).

Johan van den Hooven

Written by

Johan van den Hooven

Analyst

Accsys-Technologies_resized

Industrials

Accsys Technologies

Warning of lower demand

Trading update

General industries

8 September 2023

Price

73p/€0.83

Market cap

£160m/€183m

€1.17/£

Net debt (€m) at 31 March 2023

44.1

Shares in issue

220.2m

Free float

35%

Code

AXS

Primary exchange

LSE

Secondary exchange

Euronext Amsterdam

Share price performance

%

1m

3m

12m

Abs

(26.6)

(3.3)

(17.6)

Rel (local)

(25.4)

(0.7)

(19.2)

52-week high/low

107p

54p

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

H124 results

21 November 2023

Analyst

Johan van den Hooven

+44 (0)20 3077 5700

Accsys Technologies is a research client of Edison Investment Research Limited

In its trading update for the first four months of FY24, Accsys warned of weaker building materials and construction markets, caused by the higher interest rates and high inflation environment. Distributors are facing significantly lower volumes and high levels of destocking, which is now also felt by Accsys. Assuming market uncertainty continues, Accsys expects FY24 revenue to be below consensus and EBITDA to be significantly below consensus. We contacted the company and according to management it expects to be (just) compliant with debt covenants. On lowered estimates and a raised risk profile, our discounted cash flow (DCF) now points at a value of €0.93 per share (previously €1.25).

Year
end

Revenue
(€m)

EBITDA*
(€m)

Net profit*
(€m)

EPS*
(€)

EV/sales
(x)

EV/EBITDA
(x)

03/22

120.9

10.4

1.9

0.01

3.3

38.1

03/23

162.0

22.9

9.5

0.05

1.1

7.6

03/24e

154.0

11.8

(3.0)

(0.01)

1.3

14.5

03/25e

170.8

21.1

5.4

0.02

1.1

8.9

Note: *EBITDA, net profit and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items. EBITDA includes 60% share in Accoya US joint venture.

Trading conditions have softened

Accsys stated that trading conditions in the building materials, construction and residential housing markets in the UK, Europe and North America have continued to soften, caused by the higher interest rates and the higher inflation environment. Distributors of building products in Europe and the US have seen significant volume declines year-to-date with high levels of destocking. Accsys has also been facing a weakening in demand. Assuming continued market uncertainty and persisting weaker market trends, Accsys now expects FY24 revenues below previous consensus of €175m and EBITDA significantly below prior consensus of €27m.

Lower estimates also push up leverage ratios

Accsys is taking measures to reduce costs and to optimise working capital, which is currently too high given the lower market demand. We believe that cost savings might be limited to low single-digit millions of euros as the company has been tight on costs over the past few years due to restricted financial options. We have lowered our FY24 revenue forecast by 11.5% and our EBITDA forecast by more than 50% and expect a modest recovery in FY25. According to management, Accsys will be compliant with covenants in FY24, although it might be close to threshold limits given the lower-than-expected results.

Valuation: DCF offers limited upside

We have lowered our estimates and raised the company’s risk profile due to the potentially sustained subdued market conditions and the higher financial leverage (WACC +120bp to 11.2%). Our DCF for the Arnhem plant and the Accoya USA JV indicates a value per share of €0.85 (previously €1.10). The option value for the Hull project adds €0.08 (down from €0.15 as costs are higher while the restart of construction is uncertain). This implies a group value per share of €0.93 (previously €1.25). On our revised estimates Accsys is trading at EV/sales of 1.3x and EV/EBITDA of 14.5x in FY24e.

Warning of softer demand in FY24

Accsys stated that in the first four months of FY24 (the fiscal year ending 31 March 2024) both revenues and sales volumes were higher than last year. However, the main message from the trading update was that trading conditions in the building materials, construction and residential housing markets in the UK, Europe and North America have continued to soften. Higher interest rates and the higher inflation environment were mentioned as reasons. Distributors of building products in Europe and the US have seen significant volume declines year-to-date with high levels of destocking. Accsys itself has also been facing a weakening in demand.

Assuming continued market uncertainty and persisting weaker market trends, Accsys now expects FY24 revenues and volumes below consensus and EBITDA significantly below consensus. The company has taken measures to reduce costs and to optimise working capital and will also accelerate its sales approach to stimulate demand in Europe and the US.

Lowering estimates

We have adjusted our estimates following the company’s warning of softer demand and below we summarise our changes and other assumptions for our model.

We have lowered our volume estimate for the Accoya plant in Arnhem from 73,700m³ (+16% yoy) to 65,750m³ (+4%). Previously we anticipated a further ramp up of the fourth reactor in Arnhem, which has been operational since September 2022 and increased the capacity of the Arnhem plant to a maximum of 80,000m³. Accsys has previously communicated to expect a ramp up to full capacity of the fourth reactor in two years, but we now expect this to take around four years. When the Accoya plant in the US is operational, we expect Accsys to transfer the sales volumes in the US to the new plant, which means that the Arnhem plant would have an estimated 10,000m³ additional volume to fill. Our new estimates assume volume growth of around 10% y-o-y for both FY25 and FY26.

We still expect a 10% lower average sales price level in FY24. Accsys significantly increased its sales prices last year, including an energy price premium, to compensate for the strong increase in input costs, particularly energy and acetyls prices. Now that energy prices have come down from their peak levels, the energy price premium is no longer in place. For FY25 we still expect the average sales price to remain flat.

The price level of acetic acid has come down considerably during the first half of CY23, which on the one hand eases the input pressure but on the other hand results in lower revenues from the sale of the by-product acetic acid. In FY23, this revenue increased 24% y-o-y on 6% higher volumes. We anticipate a decline of 15% y-o-y in FY24 revenues from the sale of acetic acid.

We already assumed a normalisation in gross margin to 32.6% in FY24 from the high level of 34.0% in FY23, which was mainly driven by the company’s aggressive price policy (despite input pressure, gross margin increased by 420bp in FY23). The easing of input pressure will have a positive impact, but this will be more than offset by the underutilisation in the Arnhem plant now that volumes will be significantly lower than previously anticipated. We now expect a gross margin in FY24 of 29.3%, recovering to 30.6% in FY25.

Accsys has indicated it will invest more in sales and marketing to push sales of its products in Europe and the US. This will of course have a negative impact on margins in the short term.

Accsys has announced it will take measures to counter the effect of the lower-than-expected volumes. According to the company it will simplify the organisation and further optimise efficiency in the Arnhem plant. We previously thought that the company was already lean and mean in its operations, so we expect savings of only low single-digit millions of euros. In FY23, the costs of the Corporate segment (corporate and general administration costs including the head office) increased 34% to around €10m, which compares to the company’s group EBITDA of €23.6m (before the result of the Accoya USA JV). We think that part of the cost optimisation programme should be focused on this Corporate segment.

Based on the anticipated lower gross profit and stable operating costs, we have significantly lowered our FY24 EBITDA estimate from €26.1m to €13.7m. This excludes the result of the Accoya USA JV, which we still expect to be a negative €1.9m as cost levels will increase ahead of the finalisation of the construction of the plant, which is still expected to be operational in July/August 2024. In its reporting, Accsys includes the EBITDA of the JV in its group EBITDA number, although the 60%/40% JV is equity accounted for. The EBITDA including the JV is therefore expected to drop to €11.8m. With an expected pick up in volumes in Arnhem in FY25 and break-even of the Accoya USA JV, we expect FY25 EBITDA margin including the JV to improve 340bp to 12.3% (down from 16.8% previously).

There was no update on the Tricoya project in Hull, which is on hold, and the company is still accessing the viability of restarting the construction of this project. As there is a chance of continuation, we still add an option value to the overall DCF value for Accsys.

Exhibit 1: Change in P&L estimates

€m

FY23

FY24e

FY25e

Actual

Old

New

Change

Old

New

Change

Sales

162.0

174.0

154.0

-11.5%

190.8

170.8

-10.5%

Gross margin

34.0%

32.6%

29.3%

32.7%

30.6%

EBITDA normalised*

22.9

24.2

11.8

-51.2%

32.1

21.1

-34.3%

EBITDA margin

14.6%

15.0%

8.9%

16.8%

12.3%

Net profit (reported)

(39.0)

8.1

(3.0)

-137.4%

15.4

5.4

-64.6%

Net profit (normalised)

9.5

8.1

(3.0)

-137.4%

15.4

5.4

-64.6%

Source: Edison Investment Research. Note: *EBITDA includes 60% share in Accoya USA JV.

The lower results in FY24 clearly push up the leverage ratios of Accsys as the lower cash generation obviously has a negative impact on the net debt level, which we now expect to increase from €44m in FY23 to €55m in FY24. Based on our revised estimates, forecast net debt/EBITDA increases to >4.0x. For the covenants, however, the Hull project should be excluded, which means adjusting net debt to remove the €6m NatWest credit facility and revising EBITDA upwards to remove €6m in operating costs at Hull. Adjusted for these amounts, the net debt/EBITDA ratio would be 2.5x, which is in line with the company’s covenant of 2.5x. According to management, the company is expected to be compliant with its covenants assuming the market does not continue to deteriorate but may be close to the permitted thresholds.

We also want to note that Accsys’s debt facilities are due to mature in October 2024 and we would expect the company to seek to refinance or extend the facilities relatively soon to avoid these being classified as short-term debt on its balance sheet. We think it would be logical for the company to seek to address any tightness in the covenant threshold in any refinancing or debt extension agreement.

Lower valuation on lower estimates

We value Accsys using a DCF model as there are no other listed companies with a similar business profile. The company is currently trading at 1.3x EV/sales and 14.5x EV/EBITDA for FY24e.

Our model includes the estimates for the four reactors in Arnhem as we have taken our Hull estimates out, awaiting further announcements. We add a separate value for the Accoya plant in the United States, which we still expect to be operational in mid-2024 (July/August) following the start of construction in April 2022.

We have lowered our estimates as described above, and within our DCF model we have raised the beta from 1.25x to 1.5x to incorporate the increased risk of sustained subdued market conditions and the company’s higher leverage ratios. We now use a WACC of 11.2% versus 10.0% previously. The DCF value of the four reactors in Arnhem and the Accoya USA JV now indicates a lower value per share of around €0.85, versus previously €1.10. The option value for the Hull project adds €0.08 (down from €0.15 previously because it will take longer to be operational as no decision has been taken yet on whether to continue, while operational costs are higher than previously anticipated). All in all, our revised total group value stands at €0.93 per share (previously €1.25).


Exhibit 2: Financial summary

€m

FY21

FY22

FY23

FY24e

FY25e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue (reported)

99.8

120.9

162.0

154.0

170.8

Gross Profit

33.1

36.0

55.2

45.0

52.2

EBITDA underlying, Accsys definition (incl share Accoya USA JV)

10.1

10.4

22.9

11.8

21.1

EBITDA underlying, excl share Accoya USA JV

10.1

10.6

23.6

13.7

21.0

EBITDA reported

10.2

10.3

22.1

13.7

21.0

Depreciation & Amortisation

(5.7)

(6.2)

(8.3)

(9.3)

(9.5)

EBIT normalised

4.4

4.2

15.3

4.4

11.5

Exceptionals (Edison definition)

0.1

(0.1)

(87.5)

0.0

0.0

EBIT reported

4.5

4.1

(-72.2)

4.4

11.5

Net Interest

(4.1)

(2.3)

6.1

(3.7)

(4.2)

Result of associates/Accoya USA JV

(0.1)

0.0

(1.0)

(3.6)

(1.1)

Profit Before Tax

0.3

1.8

(66.0)

0.7

7.2

Reported tax

(1.3)

(1.0)

(2.8)

(0.1)

(0.7)

Profit After Tax

(0.9)

0.7

(68.8)

0.6

6.5

Minority interests

1.4

1.6

30.8

0.0

0.0

Net profit (normalised)

1.3

1.9

9.5

(3.0)

5.4

Net profit (reported)

0.3

2.4

(39.0)

(3.0)

5.4

Average number of shares (m)

164.9

190.4

210.7

219.8

220.2

Average number of shares, diluted (m)

173.3

198.9

219.1

226.8

227.2

EPS normalised (€)

0.01

0.01

0.05

(0.01)

0.02

EPS normalised diluted (€)

0.00

0.01

0.04

(0.01)

0.02

EPS reported (€)

0.00

0.01

(0.19)

(0.01)

0.02

DPS (€)

0.00

0.00

0.00

0.00

0.01

Revenue growth

9.8%

21.1%

34.1%

-5.0%

10.9%

Gross Margin

33.2%

29.8%

34.0%

29.3%

30.6%

Normalised EBITDA Margin

10.1%

8.8%

14.6%

8.9%

12.3%

Normalised Operating Margin

4.4%

3.5%

9.4%

2.9%

6.7%

Reported EBIT margin

4.5%

3.4%

-44.5%

2.9%

6.7%

BALANCE SHEET

Fixed Assets

155.6

195.3

151.4

160.6

161.6

Intangible Assets

10.9

10.8

10.5

10.1

9.8

Tangible Assets

144.4

181.3

110.1

111.6

107.9

Investments & other

0.3

3.2

30.9

38.9

43.9

Current Assets

72.5

79.8

75.1

72.5

84.2

Stocks

12.3

20.4

29.9

33.6

35.7

Debtors

9.8

13.2

14.4

14.4

15.9

Other current assets

2.8

4.2

4.1

4.1

4.5

Cash & cash equivalents

47.6

42.1

26.6

20.4

28.1

Current Liabilities

42.3

45.7

42.5

39.4

40.9

Creditors

9.5

16.7

17.9

16.2

17.1

Other current liabilities

22.2

16.4

14.0

12.7

13.4

Short term borrowings

10.6

12.7

10.5

10.5

10.5

Long Term Liabilities

49.2

56.5

61.6

66.6

66.6

Long term borrowings

49.2

56.5

60.2

65.2

65.2

Other long-term liabilities

0.0

0.0

1.4

1.4

1.4

Shareholders' equity

136.6

172.9

122.5

127.2

138.3

Minority interests

37.2

35.5

0.0

0.0

0.0

Balance sheet total

228.1

275.1

226.5

233.1

245.8

CASH FLOW

Op Cash Flow before WC and tax

10.2

10.3

22.1

13.7

21.0

Working capital

8.3

(9.2)

(6.1)

(6.7)

(2.5)

Exceptional & other

(1.9)

(1.5)

6.7

4.1

4.6

Tax

0.1

0.1

0.1

(0.1)

(0.7)

Net interest

3.4

2.9

(6.1)

(3.7)

(4.2)

Net operating cash flow

20.1

2.6

16.7

7.3

18.1

Capex

(12.4)

(45.3)

(30.2)

(10.5)

(5.5)

Acquisitions/disposals

(1.1)

(3.8)

(29.0)

(8.0)

(5.0)

Equity financing

9.4

34.9

19.2

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

Other

(3.9)

(3.3)

6.4

0.0

0.0

Net Cash Flow

12.1

(14.9)

(16.9)

(11.2)

7.6

Opening net debt/(cash), including lease

24.3

12.2

27.2

44.1

55.2

Closing net debt/(cash), including lease

12.2

27.2

44.1

55.2

47.6

Source: Accsys Technologies, Edison Investment Research


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This report has been commissioned by Accsys Technologies and prepared and issued by Edison, in consideration of a fee payable by Accsys Technologies. 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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General disclaimer and copyright

This report has been commissioned by Accsys Technologies and prepared and issued by Edison, in consideration of a fee payable by Accsys Technologies. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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United Kingdom

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SIGA Technologies — Notable CMO appointment to position for growth

SIGA Technologies has announced the appointment of Dr Jay K Varma as executive vice president and chief medical officer, while he remains a director on the board. Leveraging his prior leadership roles managing COVID-19 and other infectious diseases, Dr Varma will have practical insights that could aid SIGA’s efforts in raising awareness of infectious diseases and could enhance the company’s global procurement and treatment strategies. We believe Dr Varma’s appointment could support efforts for generating new procurement contracts.

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