AJX Research Note

Hope this calms the nerves during this tree shake - Chin up AJX'ers, fundamentals are sounds. Foster's note below.

25 May 2015

Alexium International Group Ltd (AJX.ASX, $0.52/sh, Mkt Cap $135m) Confidence in commercialisation upgrades revenue guidance. BUY PT $1.10/sh

Foster Stockbroking acted as co-Placement Agent to Alexium’s $8.45m Placement at $0.65 in May 2015. Foster Stockbroking received a fee for this service.
  
Event:

• Management update on CY15 revenue guidance.

Investment Highlights:

• Remains on target for successful first year of commercial sales: management update reinforces that CY15 remains on track for the roll-out of FR products across multiple commercial sectors and the military sector. This follows 2 confirmed contract sales generating revenue earlier in the year with up to 20 groups now into pre-production and production scale up activity.
• Sales pipeline extends to 20 customers: Over 20 customers are now engaged with AJX across pre-production, production and scale up of the company’s FR chemistries. At the end of the first quarter this was circa 15, a healthy 30% increase in the commercialisation pipeline vs end of Q1.
• Revenue guidance provided for CY15 exit rate of US$10m: guidance from management has now been upgraded to target a CY15 exit run-rate of US$10m revenue, previously US$5m. This anticipates a group of customers progressing to sales contracts across home furnishings, automotive, outdoor and military
• US regulatory change remains the driver for eco-friendly FR products: a federal bill continues to be drafted by members of congress for a reading in the House targeted before the summer break, and if approved, enacted in the 2H CY15. We view the reading of the bill will increase the awareness of AJX by US investors.
• Second phase underway for next-gen FR fabric for US Army: following the success of AJX’s FR in downselect one, the company moves into the second phase during the June quarter with an outcome due by the December quarter. AJX’s estimate of historical volumes for FR indicates a global market of US$250m is available on the back of success with the US Army.
• First mover advantage & blue sky potential: we continue to estimate a conservative 13% market share over a 4yr period could generate ~US$250m in annualised revenue and ~US$90m and US$60m EBITDA and NPAT respectively. The global market for FR across AJX’s target sectors is estimated to reach US$2.2b by 2019, based on 3% CAGR growth from new products and markets.

Recommendation

• We reiterate our BUY recommendation with a 12mth PT of $1.10/share based on our EV/EBITDA valuation range of 13-15x FY16 EBITDA.
• Recent weakness in the share price provides a buying opportunity given there is no change to the fundamentals of the company’s commercialisation program.
• We have an increased level of confidence for new contracts near term and increasing customers moving through the pipeline can support management’s CY15 revenue guidance of US$10m.