I think it's a great time to get set, here's Canaccord's latest:...

I think it's a great time to get set, here's Canaccord's latest:

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Column 1 0 SES' 3Q21 result was a touch below our expectations. Revenue of $7.5m compared to CGe of $8.2m. A 10-day shutdown during Chinese New Year, shipping delays and equipment repairs were all factors impacting the 8.5% miss to our estimates. Nonetheless, the quarterly demonstrated +33% group revenue growth on pcp and +75% growth in bioplastics revenue. Management flagged 4Q21 revenue to be in excess of $8m sales, noting that demand across all bioplastics segments remains strong. In addition, the capacity expansion was reiterated, which should leave the business in a strong position to double sales over the coming years. We believe SES remains in a strong position to continue to capitalise on the shift away from single-use plastic with the product, capacity and balance sheet to fund growth. We have made some adjustments to our forecasts as we moderate our assumptions regarding traditional plastic products. Our price target has been revised to $0.37 ($0.38 previously), and we retain our BUY rating.

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Column 1 0 Key points Group sales slightly weaker than expected – Group sales for the quarter were $7.5m, which was slightly weaker than the $8.2m we had forecasted. This was driven by both the traditional plastics division (~$2.34m vs CGe 2.6m) and the bioplastics division (~$5.16m vs CGe $5.6m). Management provided clear reasons for the top-line miss – The main cause was a 10-day factory shutdown over Chinese Lunar New Year. In prior periods, management had built excess stock leading into the holiday period, allowing deliveries to continue as normal while employees took holidays. This year, increased customer demand meant spare capacity was unavailable for this purpose, leaving the company with not enough finished goods for a short period. An equipment fault in the traditional plastics division also impaired production capacity during the period. Operating cash outflows driven by working capital build – A negative operating cash outflow of -$1.6m was reported for the period, but the company flagged ~$2m of this was due to investment in working capital (raw materials and receivables) to support increased sales of biopolymer products. The company has a solid balance sheet with $12.5m cash and no debt, so we are unfazed by the company deferring positive operating cash flow in order to secure greater sales growth. Capacity expansion continues, implying customer demand remains strong – SES has been investing in production capacity at both its Chinese and Malaysian facilities to the tune of $1m for the nine months of FY21 to date. Management believes that once complete, this allows for $13-15m of sales capacity per quarter. This implies annual sales of $52-$60m p.a. of sales capacity, which compares to our FY22 forecast of $47.3m. SES noted that it continues to assess further capacity expansion opportunities, both brownfield and greenfield. New compostable film cast line moves into testing phase with customers – This potential development has been flagged by the company in prior commentary, but we are encouraged to see the cast film plant is now producing a proprietary compostable resin formulation “for evaluation by several converters”. If successful, we believe the transition from blown film production to cast film production could mark a step-change in sales growth for the bio film division due to vast capacity and efficiency improvements. Earnings and price target changes – We have tempered our estimates for Traditional product sales to reflect the miss but have maintained our estimates for Bioplastics given the outlook provided by management. Our FY21-FY23 revenue estimates fall by 3.6%, 1.8% and 1.0%. Our price target moves to $0.37 per share (from $0.38). We remain positive on the outlook for SES, underpinned by structural tailwinds, an expanding product portfolio, capacity expansion and a global market opportunity. We retain our BUY rating and see the recent pullback in the share price as a buying opportunity.

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