Investment HighlightsAlexium International Group (AJX) is a...

Investment Highlights

Alexium International Group (AJX) is a chemicals Company which has researched and developed novel Fire Retardant (FR) and Phase Change Materials (PCM) chemistries for a wide range of applications and industries. The Company does most of its sales into the bedding industry, which should continue, and provides the backbone of the Companies operations. It also has large potential to commercialise FR for military uniforms and its novel Alexiflam NF product in the near-term. Both could be game changing for the Company. We believe the market should focus on the bedding segment, and that investors should view the military uniform and Alexiflam NF segments as free options which could be derisked over the next 24 months with positive newsflow expected. While the Company has experienced some false starts in the last 18 months, the current management have streamlined the operations and are pursuing core realistic and profitable opportunities, which may prove to be a catalyst in the near to medium term.

Bedding/Textile the core of the business: We believe the bedding segment can be a core earner for AJX and note that it is AJX’s only major revenue generating segment at the moment. AJX has had extremely impressive revenue growth, from a base of US$0.24m in FY14 to a high of US$18.1m in FY17. However, top line revenue growth was achieved at the expense of margins, with gross margins a low of 2.2% in FY17. After its refocus in FY18, it has generated revenue of US$11.9m. The lower revenue is due to AJX stripping out low margin revenue sources, which has been a success as it reported significantly increased FY18 gross margins of c.20%. AJX could significantly increase its margins to over 40% from this segment in the medium-term.

Largest upside available from FR for military uniforms: AJX has two large opportunities in the military uniform segment. A lower revenue (cUS$15m plus pa) but higher margin opportunity for replacing the incumbent FR provider for active combat units (FRACU) and a higher volume and revenue (cUS$70m plus pa) but lower margin opportunity to provide a level of FR protection to all uniforms in the military with a supply chain partner. If these opportunities were to be executed upon, we believe it would have significant positive impact to AJX’s earnings.

Regulation and consumer education key tail-winds in growing market: The global FR industry is expected to grow to be worth over $14.0bn by 2025. The global PCM is expected to grow by 12.1% CAGR to US$1.8bn by 2025. However, we believe that regulations may be a large disruptor for the market in the near-term and could result in a land grab by the larger chemical companies looking for an organophosphorus FR solution like that offered by AJX. It can also use its scientific research to create a brand for itself by demonstrating that its PCM product performs better than its peers and has greater effectiveness per dollar spent on PCM. This should position AJX well to gain market share in the medium term and even opens it up as a take-over target.

Capital position OK, but debt needs addressing: As at 30 September 2018, AJX reported US$8.9m in cash and had a debt position (including derivatives) of US$10.0m. Previously, over the December 2017 and March 2018 quarters, AJX conducted a Placement and Share Purchase Plan at $0.35/sh raising A$13.65m. The current debt facility is a US$10.0m facility with a 13.5% interest rate at a 36-month term. While the interest is lower than the 15% on the previous debt facility, it remains at an uncomfortably high level for an emerging company. Cashflow is hindered by the interest payments, which are currently c$1.2m per annum.

19 December 2018 Price A$ 0.10 RIC: AJX.AX BBG: AJX AU Shares o/s m 345.4 Free Float % 68.0 Market Cap. A$m 34.5 Net Debt (Cash) A$m 3.6 Net Debt/Equity % na 3mth Av. D. T’over A$m 0.043 52wk High/Low A$ 0.37/0.10 2yr adj. beta 1.01

Analyst: Jon Scholtz Phone: ( +61) 8 9225 2836 Email: [email protected] Disclosure: Patersons Securities currently receives fees for the services provided to the Company. 12 Month Share Price Performance Performance % 1mth 3mth 12mth Absolute (16.7) (25.9) (73.0) R