a review of the Moelis report

I'm sorry but this is a long post but I am sure people will give the time needed to read it.

It’s hard to know how one can write a post that tries to distinguish the fundamentals of the business from the share price debate currently underway but I am going to have a go. I don’t actually have a view about fair value of the stock but I have enough experience in working with businesses, successful, under stress or undergoing change to achieve higher performance to believe I can make judgments about Alexium from a business perspective.

Before I start, if it helps anyone, I believe that like others the company has got much of their communication wrong and having faith evidenced among many on this board, it is a hard battle to recover that. I’m not so sure they have done that well in picking the institutional or advisor partners either. And while I have some thoughts on where weaknesses lie in the business I don’t see them as terminal and I have let the company know – as opposed to griping in the background.

Like others I don’t like seeing the share price where it is. However I still retain enough brain to be able to step back and assess whether the fundamentals are still OK. I can’t even make out how people can read the announcement from today and pour vitriol.

So while I have tried to do what any well trained business performance consultant would do which is to look for whether there are factors working for or against the business, I am also going to go back to the Moelis report from early this year – which was reaffirmed, however weirdly – in their most recent release and compare that with some of the comments I have made in my posts.

I want to try to demonstrate that what I have said is only another way of saying pretty much what they said. And if that is pumping I guess you might like to tell Moelis. (Unless you are accusing both Alexium and Moelis of lying – pretty serious I would have thought)

Moelis comments
I have extracted key comments from the Moelis report. The original was published and is available with a summary on the Alexium website.

• In our opinion, regulatory change will be the biggest driving factor in AJX’s market share gain in the near term
• AJX is of the view that safe flame retardant chemicals would be very difficult to replicate without an infringement on its patents
• The customer interacts directly with AJX during the sales cycle and once a suitable chemical formulation is finalised (usually takes 6-18 months),
• The cost advantage of AJX's proposal to customers is Firstly, less volume of AJX's formulations is needed to make surfaces flame retardant compared to traditional flame retardant treatments. Secondly, because AJX's formulations can be applied to a number of different surfaces, a customer could use a cheaper material for the product and still be able to treat it. Finally, AJX's treatments are longer lasting than traditional treatments, thereby reducing the replacement cycle.
• AJX's partnership system with toll manufacturers, finishers and sales agents provide global scale and create barriers to entry
  • This structure creates a huge advantage for AJX over other major players and provides AJX with accessibility to global customer Competitors cannot handle the wide range of supply chain variations AJX can by partnering with these companies. It also makes AJX far more flexible if a change to a customer's supply chain arises.
• We see upside risk to our estimates
  • We view our revenue growth rates for the different end-user industries as We note that AJX's sales pipeline (trial customers) is lOx 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.
  • Given AJX's market leading position, partnerships with sales, toll manufacturers and commission finishers and safe products that meet stringent regulation, we expect that AJX will grow above the market growth
  • Whilst we have factored in market share growth in each of the divisions outlined above, we have not explicitly estimated new sectors for We believe this will be one of the company's major avenues for growth as its chemical formulas can relatively easily be applied to other surfaces and other countries.
  • The other 6 partnerships (all established in 2016) have 42 agents representing AJX target markets and over 50% have already initiated lab trials/
  • Products
    • Alexiflam
    • Alexiflam-NF
    • Alexiflam-SYN
    • AlexiflamSYN-FILL
  • Markets
    • Bedding and upholstery;
    • Military and workwear;
    • Transportation
    • Outdoor fabrics;
    • Plastics; and
    • Floor

(Note since then Alexicool has been launched and sales announced)

• We view our revenue growth rates for the different end-user industries as We note that AJX's sales pipeline (trial customers) is lOx 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 addition there have been as range of newsletters, reports and public releases from the company all of which provide verifiable information I have drawn upon. While people may choose not to believe the company I do not see that my propensity to believe that information makes my use of it less worthy than others who prefer to make negative comments without being able to draw on anything other than their own frustration or opinions.

So what comments have I actually made? Well I posted this diagram:



This is a pretty stock standard assessment of a company’s competitive position. I decided to look at the reasons why commercialization in this sector might fail and assess the extent to which Alexium these possibilities were present.

Customer switch costs have been described – though maybe using different terms in a range of documents. Only one might affect Alexium – to the best of my knowledge – and that is a customer’s existing inventory (of either finished goods or raw materials). The imperatives to change are discussed in the Moelis report and we have had updates on the passage of legislation in both state and federal jurisdictions – the tide is definitely turning in Alexium’s favour. As in the case of all sales the status quo is always an option but if cost is an advantage for Alexium and the external environment is favourable then it seems reasonable to assume that the Moelis opinion is justified. In terms of comparable products – Moelis state it thus:

The range of Alexiflam products is unique in the market place

• The Alexiflam range differentiates itself from the rest of the market in terms of being:
• Environmentally friendly and non-toxic - passes strict new environmental regulation;
• Cost effective; and
• Performance advantage - the formulation improves, or limits damage to the original product's It can also be laundered.
• 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.

I also wrote at length about commercialisation of Alexium with a reminder that the company changed direction in 2014 with the launch of Alexiflam – and fire retardant products. This is what I posted as a summary:




Again all of this information is available in newsletters or the Moelis report. All I have done is put it into a simple format that draws on well-established principles for analysing the strategies and competitive pressures on a business.

I don’t have data on the last factor but refer to the Moelis report that stated:

AJX's partnership system with toll manufacturers, finishers and sales agents provide global scale and create barriers to entry……… This structure creates a huge advantage for AJX over other major players. Competitors cannot handle the wide range of supply chain variations AJX can by partnering with these companies. It also makes AJX far more flexible if a change to a customer's supply chain arises.

If you aren’t clear about some of this stuff take a look at the work of Porter to start with.

Then I posted a chart on the sales process. Much of this is simply cribbed from the Moelis report with additional perspective from a presentation that was available on the Alexium website last year and the subject of a post on hotcopper as well as piecing together from newsletters.



Moelis do not comment on the qualifying./early sales process and I have probably been marginally more pessimistic about the cycle time but not substantially. I have also included terms of business which are typical in the industry. There is plenty written on the approximate sales cycle in complex sales and this fits clearly into that definition (I can give you references if you want to read more)

I do agree that last year they got it wrong on timing – though I have reread some of the news and releases and believe that shareholders themselves may have read into them as well. They have used terms such as run rate, addressable market, potential and similar. If we add logic to these words, there is no way that announcements of sales made over the later part of 2015 and early 2016 would have reached full potential annual revenue.

However that does not negate the fact that ramp up to commercialisation has been faster than most in the chemicals industry. So where does this leave us? – In my opinion:

• Progress towards commercialization is faster than “normal”
• The business has a sound strategy
• The underlying business model helps to manage cost and improve roll out/ramp up
• The sales cycle is comparatively longer and probably longer than they expected

My final comments if you managed to make it this far:

I understand that if you are trying to trade Alexium the share price might worry you, as indeed it would if you had bought in at or near some of its highs.

However what I have difficulty with is saying the business is rubbish.

Of course we could all write to Moelis and ask them why they still think it is a buy a good few months after they wrote their initial report?

And lastly it seems unreasonable to accuse me of pumping if all I am actually doing is giving a framework for my analysis and can demonstrate that it actually reflects the Moelis report. Moreover it seems unreasonable to criticize me for doing an assessment of the business itself when what you are talking about is the share price. On the other hand I am more than happy to see you piece by piece take my post apart and help me - and I guess Moelis - understand what we have got so very wrong.

As they say - do your own research. This is my assessment of the information I had and which you also have access to


As for the share price……………. that another matter

Parsifal
with that I bid you good night