Considering the Moelis report has been quoted several times as a reference point over the weekend, I thought I'd show a few more of the 'positive' facts from the report as they weren't mentioned and I like people to get an even view on proceedings.
(I've included extracts from both reports)
From the Moelis report.
(March report 2016)
We have initiated coverage of Alexium International Group (AJX) with BUY rating and 12 month target price of $1.20.
The range of Alexiflam products are unique in the market place:
To our knowledge, no other player has safe flame retardant chemistry with minimal impact to the surface's existing properties while meeting customer needs. In our opinion, regulatory change will be the biggest driving factor in AJX’s market share gain in the near term. Studies have shown that brominated and halogenated products appear to be persistent and bio-accumulative and can disrupt thyroid and estrogen hormones, causing developmental effects. Since 2003, 12 US states and Washington DC have banned certain types of brominated chemicals and the EU and Australia have banned brominated and halogenated products.
We see upside risk to our estimates
We view our revenue growth rates for the different end-user industries as conservative. We note that AJX’s sales pipeline (trial customers) is ~10x the size of its list of “won” clients. As regulation continues to push the flame retardant market towards solutions like AJX’s, the company should continue to convert those trial customers into sales and pursue new sales opportunities. In our numbers, we have assumed that AJX converts 1 trial customer into a revenue generating customer per year.
Similarly, we have taken the conservative approach on gross profit margins. In the past management have guided to average GP margins of 40%, we are currently estimating mid 30% margins to allow for some margin erosion in order to win new customers.
Valuation
We issue a BUY rating and a 12 month target price of $1.20, an estimated 80.5% total return.
Our 12 month target price is derived from the future value of our fundamental valuation, less dividends to be received between now and the target date.
At the same time jurisdictions are banning brominated and halogenated products, companies still need to apply some flame retardant treatment in order to comply with stringent fire safety regulations. Even if they are in a jurisdiction that does not currently ban brominated and halogenated products, companies are mindful that using these treatments could open the door to future liability. Hence, many are now looking for a safe and environmentally friendly way to treat their products. For example,furniture manufacturer Herman Miller, has a “Design for the Environment" program that is aiming to eliminate hazardous components, including halogenated flame retardants. The company is trying to eliminate all halogenated compounds from new products being developed, and they will then work at redesigning existing products.
IP portfolio protects AJX’s position as only safe player
AJX has an extensive IP portfolio with over 20 patents in 9 countries and 3 patent applications are pending. Those 3 applications specifically relate to flame retardant chemical treatments and emulsions and overlap with the existing patent library. No other player has environmentally friendly flame retardant chemistry with minimal impact to other properties while meeting the customer needs. Most competitors are still producing brominated or halogenated products and at a higher price point to customers as more chemicals need to be used to achieve the same result. AJX is of the view that safe flame retardant chemicals would be very difficult to replicate without a company infringing on one or more of its patents. The current patents are for ~20 years, no current patent has <16 years to expiry and they cover all markets AJX currently operates and seeks to enter.
New markets
We believe AJX will enter new markets as its chemical formulas can relatively easily be applied to other surfaces and other countries.
For instance, not included in our estimates or management’s CY16 revenue forecast of ~US$18.5m is any contribution from its latest customer win in the floor covering sector. This market is expected to grow by ~5% p.a. to 2019.
After a period of restriction, we have updated our estimates to account for AJX's $6m equity raising to fund development into new markets and categories, take advantage of new sales opportunities and fund working capital.
In addition, AJX announced that it has received a new purchase order from a fiberglass epoxy manufacturer.
Impact
The new purchase order gives us greater confidence in AJX's sales trajectory for its Coatings and Polymers division. AJX has guided to CY16 revenue of US$4m for the division, split 22% 2H16 and 78% 1H17. We view the Coatings and Polymers division as the growth driver of AJX in the medium-term, the company estimates the market will reach US$6.6bn by 2019.
Investment View
We reiterate our BUY rating and 12 month target price of $1.20. We view AJX as a strategic investment leveraging increased scrutiny on stringent fire safety regulations and banning of toxic and harmful chemicals in traditional brominated and halogenated flame retardant products.
They've kept the same 12 month target of $1.20 as predicted in their first (March) report, this is in line with what they say about being conservative in the 'we see upside risks to our estimates' (above) section, even though they state
"For instance, not included in our estimates or management’s CY16 revenue forecast of ~US$18.5m is any contribution from its latest customer win in the floor covering sector. This market is expected to grow by ~5% p.a. to 2019."
And on top of that out of the May updated version Moelis state
"In addition, AJX announced that it has received a new purchase order from a fiberglass epoxy manufacturer"
Moelis never moved their predicted 12 month target of $1.20 or an estimated 80.5% total return, even after we received a new fiberglass client, this clearly shows that their own comments about being on the conservative side are to the extreme.
And on top of that again, we've won yet another US $5 million annual contract for our ground breaking PCM in the mattress ticking sector.
