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Ocean Financial Group Pty Limited
ABN 29 116 173 703
Level 14, 470 Collins Street, MELBOURNE Vic 3000
Telephone: +61-3-9620 0722 Facsimile: +61-3-9629 9100
Mobile: 0411 66 43 83 Email: [email protected]
_______________________________________________________
is a Corporate Authorised Representative of
Falconer Bellomo & Co Ltd (AFSL No. 244315)
October 2005
Citrofresh International Limited (ASX:CTF)
Current Share Price $0.315
Shares on Issue 37.51m
Options on Issue 34.51m
Market
Capitalisation $12.4m
Fully Diluted
Market Capitalisation $22.7m
Executive Summary
Citrofresh International Ltd (CTF) is a world leader in organic micro-biocide technology. The company’s lead product, Citrofresh® is a broad spectrum sanitizer and disinfectant used in a number of dilutions and applications within the following markets.
• Food & Agriculture
• Cleaning, Sanitising and Disinfection
• Human Health/Personal Hygiene
• Animal Health
We believe CTF stands to benefit from the following trends:
• Global trend towards the reduced use of synthetic chemicals in favour of organic & natural alternatives
• Urgent demand for biocides that have broad-spectrum efficacy against micro-organisms which have become immune to traditional products
• Rapidly growing global biocide market in response to emergency disease outbreaks (i.e. FMD, Avian) and bio-terrorism
CTF has a unique technology with significant near term revenue and profit potential. Substantial R&D has been spent and the company is at the registration and commercialisation stage. We like the low cost, high growth business model which relies on distribution partners to reach into world-markets.
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Index
Executive Summary..............................................................................................................1
Index.....................................................................................................................................2
Synthetic Chemicals..............................................................................................................3
Natural Vs Organic...............................................................................................................3
Going Organic.......................................................................................................................3
Background..........................................................................................................................4
The Citrofresh® lead compound..........................................................................................4
Science..................................................................................................................................4
Laboratory Tests....................................................................................................................5
Market Sectors.......................................................................................................................5
Food & Agriculture.......................................................................................................................5
Cleaning, Sanitising & Disinfectant..............................................................................................6
Human Health / Personal Hygiene...............................................................................................7
Animal Health...............................................................................................................................7
Accreditation & Regulatory Approvals................................................................................8
Operations & Finance..........................................................................................................8
Risks......................................................................................................................................9
Valuation..............................................................................................................................9
Capital Structure.................................................................................................................10
Disclaimer Appendix...........................................................................................................11
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Synthetic Chemicals
Over the last thirty years Governments have progressively moved towards increased restrictions of chemicals used in the food industry. It began in the 1970’s as consumers became more informed about the health risks associated with many organo-chlorine compounds such as dioxins, DDT and polychlorinated biphenyls (PCBs) – which cannot be broken down by the body. Most PCB’s have been banned or severely restricted. Similarly sulphites were banned from use on fresh produce in the mid 1980s. More recently, 12 toxic chemicals - known as the ‘dirty dozen’ are in the process of being banned under a new international treaty called The Stockholm Convention.
However, because of their long term damage PCBs continue to contaminate. The World Health Organization (WHO) estimates that up to half a million people die each year as a result of poisoning, due to pesticides and natural toxins. This was illustrated in the global salmon farming industry which was thrown into crisis in January 2004 when a study published by Science Magazine revealed high levels of toxic contaminants found in farmed salmon. The study, ‘Global Assessment of Organic Contaminants in Farmed Salmon’ showed that farmed salmon were contaminated by banned organo-chlorine chemicals, PCBs, dioxins and pesticides on average 10 times higher than in wild salmon. It questioned whether the health risks outweighed the health benefits of eating oily fish.
Natural Vs Organic
In supermarkets many foods and personal care products claim to be natural but few are listed as organic. The natural movement started in the 1980’s and moved into the mainstream during the last decade as consumers became aware of the adverse effects of chemicals. Natural products don’t contain synthetic or artificial colours, flavours or preservatives. By definition natural means anything naturally occurring in the environment. Many so called natural products are still produced using non-sustainable farming methods with the use of pesticides, irradiation and genetic engineering.
Going Organic
Organic is defined as ‘an ecological production management system that promotes and enhances biodiversity’. The key distinction between natural and organic is that organic products are produced without the use of chemical pesticides, irradiation or genetic engineering and are grown within a farming system that is sustainable and environmentally friendly. Agricultural regulatory bodies recommend that where suitable alternatives to chemicals exist their use should be encouraged. As a result many farmers have turned towards organic agriculture. Organic agriculture has seen double digit growth rates over the last fifteen years and is now practiced in most countries of the world. Supermarket chains in part devote themselves to ‘organic only’ products and the movement has become mainstream. As knowledge builds, organic replacements are becoming more a part of the marketplace.
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Background
The Citrofresh® technology was developed Mr. Ravi Narain, Managing Director of CTF, initially as an organic preservative and sanitizer for the food industry. He initially formed a company called GDM Technologies Pty Ltd as the manufacturer of Citrofresh® products. Laboratory testing, field trials, and certification began in the late 1990’s with commercial production facilities being established in 1998. The product was initially registered with the Australian Quarantine Inspection Service (AQIS) as a food preservative for seafood export and has since been developed into a broad-spectrum micro-biocide for various applications and markets. CTF listed on the Australian Stock Exchange in August 2004 and has the world-wide exclusive distribution and marketing rights to the Citrofresh® product range
The Citrofresh® lead compound
Citrofresh® is a broad-spectrum micro-biocide. It is non-toxic, biodegradable, non-carcinogenic and non-allergenic. Even in its concentrated form, it is not harmful to the skin. Solutions may be disposed of by pouring down the drain without harm to the environment.
Citrofresh® Compound Attributes
Certified Organic (NASAA)
Efficacy at low dilution (i.e. 1%, 2%, 4%)
Hospital Grade Disinfectant (dilution 10%)
Efficacy against bacteria (gram-positive and gram-negative)
Efficacy against fungi (yeast and mould)
Efficacy against viruses (enveloped and non-enveloped)
Biodegradable and environmentally friendly
Non-toxic, non-carcinogenic, non-mutagenic
Safe to use on food with ‘no withholding period’ post application
Enhances the ‘organoleptic properties’ of food (i.e. look, feel and s
mell)
Little taste, odour and colour (slight citric taste in concentrate form)
Can be used in both hot and cold phases (stable up to 130 degrees C)
Effective and stable at various pH ranges (2 to 12)
he anti-bacterial and preservative properties of natural acids (e.g. ascorbic acid) have long
Residual effect (48 hours)
Science
T
been known. The problem is that they are not considered very active and are therefore often mixed with chemical compounds. Citrofresh® is a unique combination of organic acids and bio-flavonoids extracted from the pith of oranges, which when blended with other organic ingredients create a synergistic effect enhancing its efficacy as a biocide. One of the additives, Yucca Schidegra (or Joshua tree) has long been recognized for its medicinal properties as it aids in breaking down the bio-films that cling to surfaces that house large quantities of bacteria. Citrofresh® acts mechanistically by destroying the cellular membrane of a micro-organism. Citric acids are believed to change the pH level of micro-organisms, thereby diverting their focus from growth and reproduction.
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aboratory Tests
ls have verified the efficacy of Citrofresh® since the late
990’s. More recently CTF announced the results of an in-vitro laboratory study completed
e been designed to overcome the short-comings of most chemical
gents which are either toxic, corrosive, irritant, have poor or no biodegradability and
ood & Agriculture
L
Independent laboratory tria
1
by Retroscreen Virology based in the UK. Retroscreen confirmed that Citrofresh exhibits significant virucidal activity (in vitro) against HIV-1 Virus, Human Influenza A Virus, Urbani SARS Virus and Human Rhinovirus. The results confirmed that equal or less than 5% concentration and equal or less than 5 minutes contact time will be effective against those viruses. Investors note: The tests were undertaken under controlled laboratory conditions and they should in no way be construed as medicine or vaccine trials. The company has since initiated pre-clinical (in vivo) efficacy trials on animals. Market Sectors
Citrofresh® products hav
a
which in many cases may be carcinogenic. Citrofresh® micro-biocide technology is the ‘base product’ from which many Citrofresh® products are derived. Competing products are mostly chemically-derived and contain quantities of chlorine, quaternary ammonia, caustic soda, organo-chlorine, sulphites and/or other combinations of synthetically produced compounds. Such products have limited safe applications. Citrofresh operates in the following markets:
F
In the food industry Citrofresh® products are used to reduce bacterial spoilage, mould and
extend the shelf-life of fresh produce. Citrofresh® contains no carcinogenic dioxins and
to
it requires no with-holding period post application. The company is targeting the potable water treatment industry i.e. food wash, as a replacement for chlorine. The global wholesale chlorine water and food treatment industry is estimated at US$500m – US$1billion and the total water treatment chemical market at US$2 billion. Chlorine is highly corrosive, has high transport risk and is being phased out in some countries. The company is working with local and international groups to accelerate the adoption of the Citrofresh® technology for food export and for supermarkets as a fresh produce spray. In the agricultural industry the company has developed a total plant health management
ystem which is a cutting edge micro-biocide and nutrient technology designed to improve
s
plant health and increase yield. The benefits are a reduction in the number of fertilisers and insecticides required and the output of higher grade produce. It also promotes soil bio-diversity. In 2002 the global market for organic food and drink was valued at US$23 billion. CTF is targeting the agriculture & aquaculture markets where growers are increasingly looking for non-chemical alternatives. The company is expanding relationships with local and international distributors in this market.
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leaning, Sanitising & Disinfectant
C
In the US$3 billion disinfectant market CTF is targeting the hospital grade and general
ousehold sectors. In May 2005 the company received Hospital Grade Disinfectant
h
Approval from the Therapeutic Goods Administration (TGA). This followed a comprehensive testing program showing efficacy against a diverse range of bacteria, fungi and other viruses. Disinfection of surfaces is a critical component of infection control in healthcare facilities. The Centre for Disease Control and Prevention (CDC) recommends strict disinfectant hygiene standards with special attention to frequently touched surfaces. Chemical disinfectants have a limited application compared to Citrofresh® which can be utilized as a non-toxic fog spray. The product is non-harmful to the skin and its disposal does not affect the environment. In the hand sanitizing market CTF is targeting hospitals and healthcare facilities. Good
and hygiene is the number one precaution to reduce the risk of hospital acquired
eaning market
h
infections. The use of alcohol-based hand hygiene products is among the major recommendations of the CDC. Infections acquired in hospitals and healthcare institutions in the USA affect approximately two million people resulting in nearly 100,000 deaths at a cost of US$29 billion p.a. However one of the major issues globally is the reluctance of healthcare workers to use alcohol based hand sanitizers because of the detrimental effects to their hands such as chapping and dermatitis. Contact irritant dermatitis accounts for 15%-20% of all healthcare occupational diseases and incurs costs of more than US$1 billion p.a. The company’s hand sanitizing gel, Dem-e-San has benefits over competing products because its active ingredient is Citrofresh® and it contains organic emollients which condition the skin to prevent dryness and dermatitis. Other products use surgical grade alcohol and/or chlorhexidine. In the US$10 billion industrial cl CTF is targeting international food
anufacturing organisations. Citrofresh® San-e-Foam concentrate is a heavy duty foaming
m
biocidal alkaline cleaner that is a combination of metasilicate, modern biocidal amphoteric foam surfactants and Citrofresh® organic sanitiser. It is being used as a replacement for chlorine and caustic soda. When injected into the water flow of a foaming device it removes proteinaceous soils, oils, and fat encrusted soils. It is non-toxic, non-corrosive and biodegradable meaning no adverse health or environmental hazards, especially in food preparation areas.
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Human Health / Personal Hygiene
In July 2005 CTF announced that it was preparing to market a range of personal hygiene products, including baby care products, mouthwash, acne treatment, cold sore cream, tinea ointment, wound cleanser and wet towel wipes. The products are organically produced and offer advantages over chemically derived products. It will be some months before we expect any expansion in this area.
Recent independent virucidal testing suggests Citrofresh® exhibits significant virucidal activity against HIV (in-vitro). The company announced on the 27th September 2005 that it will develop a product that will target Men’s Health as a post coital application. The company is currently exploring opportunities in the HIV and STD market due to the withdrawal of Nonoxly-9 from the market due to concerns that it increases susceptibility to HIV and STDs.
A report issued in 2003 by the CDC stated “The immediate priority is to develop a microbicidal product that would provide protection against HIV.” Citrofresh is a broad spectrum biocide which meets the criteria outlined by the CDC. There are an estimated 250 million new cases of STDs occurring annually and the CDC and WHO acknowledge that the development of a HIV vaccine has been problematic. They accreted that in the medium term the only mechanism for controlling the spread of AIDS will be an effective biocide.
The Retroscreen report said that in-vivo (in the body) use of Citrofresh “could be further studied for possible uses as a nasal spray to prevent or treat infection of both Human Rhinovirus and Urbani SARS virus.” Pre-clinical trials continue in this area.
Animal Health
In the animal health sector CTF is targeting the disease control & bio-security market. In August 2005 the company received confirmation of the efficacy of Citrofresh® against the H5N2 strain of Avian Influenza with results from an in-vitro laboratory study completed by The Onderstepoort Veterinary Institute (OVI) of South Africa. Of major concern to governments and health authorities is the potential for Avian Influenza H5N1 to mutate into an infectious human strain. The H5N1 strain has already killed 64 people in four Asian countries since late 2003 and has led to the slaughter of millions of birds and poultry flocks world-wide. WHO believes a worldwide pandemic from a mutated H5N1 strain could kill between 7m to 100m people. We believe that the Retroscreen and OVI studies provide encouraging signs for the development of products in the disease control and bio-security sector. CTF is considering a range of partners to bring the products to market.
The company is assessing the efficacy of in-vivo (in the body) trials on chickens and ostriches that are infected with Avian influenza in South Africa with its Citrofresh® animal feed product. The trial is being undertaken by OVI.
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Accreditation & Regulatory Approvals
The International Federation of Organic Agriculture Movements (IFOAM) is the international umbrella organization for regulating organic agriculture. Country-specific standards are derived from the principles set out by IFOAM. In Australia, the National Association for Sustainable Agriculture Australia Limited (NASAA) is an IFOAM accredited certification body. NASAA also has accreditation with the Australian Quarantine and Inspection Service (AQIS). Citrofresh® is certified organic by NASAA and AQIS. These accreditations facilitate access to organic markets worldwide. The ingredients of Citrofresh® are listed as Generally Recognised as Safe (GRAS) by the US Food and Drug Administration USA (FDA), when used under Good Manufacturing Practice (GMP).
Citrofresh® is approved in the EU and Australia as a Hospital Grade Disinfectant and Derm-E-San is TGA Approved as a hand sanitiser for use on skin. In Australia, Citrofresh® is approved as a potable water treatment and the company is seeking approval from the Australian Pesticides and Veterinary Medicines Authority (APVMA) for use as an anti-fungal spray. The company has a number of approvals and accreditations in international markets including the EU, Japan, the USA and South Africa.
Operations & Finance
Mr. Narain has not lodged patents in relation to the Citrofresh® compound, preferring to keep the formulae and process a secret. CTF will leverage its first to market position and aim to establish itself as a brand leader. GDM Technologies assumes all sourcing, manufacturing and on-going research and development of Citrofresh® products. It supplies Citrofresh® products exclusively to CTF for a margin which then sells to customers and distributors. Mr. Narain is the Managing Director of both GDM Technologies and CTF. He will have performance shares issued to him as planned EBIT targets are achieved. We view the business dealings at arms length. With significant R&D completed, the major function of CTF is the appropriate approvals in each jurisdiction and the rolling out of its global distribution network through partnerships and alliances. The company is leveraging the use of distributors to minimise costs, especially the running of its own sales force. We consider this strategy prudent.
In September 2005 the company announced an expansion in South Africa by signing a three year, A$4.5m distribution agreement with its South African distributor. Under the terms of the agreement its partner will act as Master Distributor for all Citrofresh® products for the region. It is required to purchase minimum quantities equal to $1.0m in the first year, increasing to A$1.5m in the second year, and $2.0m in the third year. In October 2004 the company announced a A$5m order through its Chilean distributor for the South American market subject to regulatory approvals. The company is still awaiting regulatory approval.
CTF reported a $1.6m loss for FY2005. A number of one-off items impacted the result including approximately $0.5m in legacy costs due to issues associated with the previous entity (Plexus International) and the previous management. Gross margins were also impacted through a reversal of the initial order of A$830,000 placed into South America pending its regulatory approval. We estimate expenses are running at approximately
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A$125,000 per month excluding stock purchases and we believe new contracts will see the company in profitability in the near term. The company is debt free. We like the distribution model which is low cost and low risk though at the expense of some margin. The company does not have the skill base or capital to aggressively market all of its products in international markets. It is currently assessing distribution partners and alliances in several markets.
Risks
We see the key risks to CTF in being its ability to manage rapid growth while commercialising new product lines. Regulatory approvals may limit the pace of growth in international markets as has been the case in South America. We note however, the organic and non-toxic characteristics of its products giving rise to potential exemption from some regulatory approvals.
There is no guarantee that the Citrofresh® compound can’t be reverse engineered by third parties. To date however, no group has been able to do so due to masking agents in the compound. There is no guarantee that sufficient demand will exist for the company’s new products. The company does have a first mover advantage however and it is seeking to rapidly build brand equity to protect its position. There is also a risk in moving aggressively into the competitive fast moving consumer goods market. The company expects to leverage its success in industrial markets with a soft entry into the retail market. We consider this prudent.
Valuation
The company operates in four separate US$ billion dollar markets, however, it would be imprudent to speculate about market share at this early stage. We consider the company to be a world-leader in organic micro-biocide technology and organic technologies have advantages over currently used chemical technologies. The company has reached the stage where it is receiving independent verification of its compound’s capabilities which we see as the major driver towards commercialisation and profitability.
The majority of revenue is derived from South Africa and Australia. We expect revenue to grow over the next five years as South Africa and South America come on stream and as the company expands its distribution arrangements into new markets in Europe, Asia and the USA. While it is too early to provide an accurate discounted cash flow analysis we have confidence in the company achieving solid revenues within three years.
Capital Structure
CTF has 37.51m ordinary shares on issue and 34.51m May 2008 $0.25 options. The options are in the money. The company also has performance shares which will be issued if milestones are achieved per the following:
YearFY06FY07FY08EBIT Hurdle (A$m)5810Shares to be issued (m)12.51010Note: Mr. Narain receives approx 85% of these shares
We have included all performance shares in our valuation analysis. The fully diluted number of shares on issue if all performance shares are issued and options converted is 104.52m.
Directors
Mr. Ron Gajewski Chairman
Mr. Ravi Narain Managing Director & CEO
Mr. Andrew Michael Executive Director
Mr. Mathew Walker Independent Director
Largest Shareholders
Citrofresh Pty Ltd 2,800,000 7.5%
(Mr. Ravi Narain)
ANZ Nominees Limited 1,652,102 4.4%
Vienna Holdings Pty Ltd 1,387,120 3.7%
(Mr. Ron Gajewski)
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Disclaimer Appendix
This material was prepared by the Ocean Financial Group. It is provided for informational purposes only and does not constitute an offer to sell or a solicitation to buy any security or other financial instrument. While based on information believed to be reliable, no guarantee is given that it is accurate or complete. While we endeavour to update on a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so. The opinions, forecasts, assumptions, estimates, derived valuations and target price(s) contained in this material are as of the date indicated and are subject to change at any time without prior notice. The investments referred to may not be suitable for the specific investment objectives, financial situation or individual needs of recipients and should not be relied upon in substitution for the exercise of Independent judgement.
Ocean Financial Group or its officers, directors, employee benefit programmes or employees, including persons involved in the preparation or issuance of this material, may from time to time have long or short positions in securities, warrants, futures, options, derivatives or other financial instruments referred to in this material. Ocean Financial Group may at any time solicit or provide investment banking, commercial banking, credit, advisory or other services to the issuer of any security referred to herein. Accordingly, information may be available to Ocean Financial Group, which is not reflected in this material, and Ocean Financial Group may have acted upon or used the information prior to or immediately following its publication. Within the last three years, Ocean Financial Group may also have acted as manager or co manager for a public offering of securities of issuers referred to herein. The stated price of any securities mentioned herein is as of the date indicated and is not a representation that any transaction can be effected at this price. Neither Ocean Financial Group nor other persons shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. This material is for the use of intended recipients only and the contents may not be reproduced, redistributed, or copied in whole or in part for any purpose without Ocean Financial Group’s prior express consent
Material means all research Information contained in any form including but not limited to hard copy, electronic form, presentations, e mail, SMS or WAP.
Regulatory disclosures
Subject companies: CTF.AX
Mentioned companies: CTF.AX
Ocean Financial Group expects to receive, or intends to seek, compensation during the next three months for investment banking services from this company, its subsidiaries or affiliates: CTF.AX
The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and
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issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
For a discussion of the valuation methodologies used to derive our price targets and the risks that could impede their achievement, please refer to our latest published research on those stocks.
Should you require additional information please contact the relevant Ocean Financial Group’s research team or the author(s) of this report.
Ocean Financial Group Pty Ltd is a Corporate Authorised Representative of Falconer Bellomo & Co. Ltd (AFSL 244 315)es, read this research report: