NEW COVERAGE - TOP IDEAS: A renewable chemical company, EcoSynthetix
Inc. (TSX: ECO), has commercial revenues and big opportunities in the green
space. With US$44 million in cash and no debt they become one of Investorfile’s
Top Ideas as a Small Cap Value stock pick.
The Investorfile blog has been
monitoring the business developments of EcoSynthetix Inc. for the past several
years. It is now that we feel that the Company’s shares are at an inflection
point by trading at a price that provides good entry value for a stock in the green
space and, at the same time, big opportunity for growth-oriented small cap
investors who seek to accumulate an ownership position. With that said, EcoSynthetix
has been appointed to the Investorfile list of Top Ideas as a Small Cap Value
Based in Burlington, Ontario,
EcoSynthetix Inc. (TSX: ECO – C$1.70) is a
renewable chemicals company specializing in bio-based materials that are used
as inputs in a wide range of "green” end products. They offer a range of
sustainable engineered biopolymers, commercial-ready
products that are cost-competitive and exhibit similar performance
characteristics compared to the non-renewable products
they replace. This allows their customers to provide greener
alternatives for their products by reducing their use of harmful materials,
such as formaldehyde and styrene-based chemicals.
A polymer is a substance that has a molecular structure consisting mainly of a large
number of similar units bonded together. Polymers are used in
almost every area of modern living and are commonly found in a large variety of
consumer and industrial products. Grocery bags, soda and water bottles, textile
fibres, phones, computers, food packaging, auto parts, furniture, personal care
products and toys all contain polymers, to name a few.
EcoSynthetix has developed green
technology platforms that produce biopolymer
products manufactured from naturally derived feedstocks. The feedstocks are
mixed with other ingredients and are subjected to the Company’s proprietary
continuous extrusion process that ultimately produces cross linked biopolymer
particles. Its final process results in biopolymer particles in the form of a
dry powder that is then shipped to customers. The Company has been awarded
multiple patents for its formulas, manufacturing process and final products.
Currently EcoSynthetix has two
commercial flagship products which are legally registered as EcoSphere
biolatex and DuraBind biopolymers.
The Company’s EcoSphere product
is in commercial use around the world in the paper and paperboard
packaging industries.It is used as a green alternative additive to
petroleum-based Styrene Butadiene (SB) latex binders, which the Company says
are used to allow colourful graphics to "stick" to glossy paper
used in magazines, books and packaging like cereal boxes. EcoSynthetix says that EcoSphere biolate binders enable paper mills
to avoid reliance on traditional synthetic binders while offering competitive
performance and pricing.
DuraBind biopolymers produced
by EcoSynthetix is a binder system used in the production of wood composite
panels. Wood composite panels are commonly used as a material to build
furniture and flooring. DuraBind is a sustainable no-added-formaldehyde (NAF) solution
for use in the global wood binder market. By using DuraBind, the Company has
said its customers have been able to significantly reduce the use of
highly regulated chemicals, such as formaldehyde, in their adhesive resin
Until recently, all products that
are made from wood-based materials and textiles can contain formaldehyde from
the adhesive (glue) which is used for production of products made of
particleboard, textiles and different resins. But now Scientific and medical
institutes, test labs and industry agree that high levels of formaldehyde
emissions from materials used in products can lead to negative health effects.
The pace of change is accelerating
for the use of NAF binding solutions to decrease the climate footprint in the
production of wood composite panels, especially those used in home furniture
products and surfaces. Insomuch, the major laminate flooring and wood materials manufacturer, the Swiss
Krono Group, has recently launched a new line of environmentally friendly
particle boards using EcoSynthetix’s DuraBind as
the bio-based adhesive to respond to growing consumer demand to use green-based
materials in its products.
recently the major home furniture retailer IKEA has publicly stated its
commitment to continuously work to lower formaldehyde emissions from materials
used in the home furnishing products it sells. IKEA has said it is putting a
great deal of effort and resources into lowering formaldehyde emissions, targeting
the adhesive used in producing wood-based products. EcoSynthetix’s Management
has acknowledged that IKEA has recently performed an extensive evaluation of
the Company’s DuraBind product. This may turn out to be major
business catalyst for EcoSynthetix should IKEA endorse the use of DuraBind as the
NAF adhesive for their wood furnishing products.
A third major segment emerging with
commercial potential for Ecosynthetrix's green solutions is the personal care
market. The Company’s biopolymers can act as
the fixative agent in hair gel formulations and is a drop-in replacement for
polyvinylpyrrolidone (PVP), which is a petroleum-based product currently, used
in most hair fixative formulations. As such, hair products that use EcoSynthetix
biopolymers can be marketed as a green
consumer demand for green ingredients is driving change, in 2019 EcoSynthetix
signed an exclusive marketing and development agreement with a major (unamed)
personal care product company to launch an all-natural line of hair products.
It is expected that the products developed under this agreement using the
Company’s biopolymer solution will
available on store shelves in 2021.
the past several years EcoSynthetix has begun to demonstrate commercial success
by establishing the clear sustainability benefits from the green products
derived using its biopolymer platform. As such, it is strategically engaged
with paper and paperboard packaging, wood
composites and personal care industry players who are committed to producing
We acknowledge that EcoSynthetix reported revenues of US$18.4
million in 2019, which was down 20% from the prior year. The Company has said
that the lower revenues can be attributed to the headwinds in the paper
and paperboard packaging industries, the primary markets for the EcoSphere biolatex product. Despite the headwinds, the Company has been improving bottom line financial results.
EcoSynthetix reported (for the first time) positive cash-flow from operations,
over US$700 thousand for the year in 2019. The Company’s Management says this
is the direct result of strict financial discipline with targeted investments
in high-growth green space markets for its products. After adjusting for
non-cash manufacturing depreciation, the Company earned gross margins as a
percentage on sales in the 25% range with the majority of customers coming from
paper and paperboard packaging in 2019.
EcoSynthetix has one of the strongest balance sheets we have
ever seen for small company. From its annual audited statement as of December
31, 2019, the Company reported over US$52 million in Shareholder Equity, of
which US$43.7 million was held in cash or near cash short-term investments.
Needless to say, EcoSynthetix has no debt either. The Company reports all of its
financial results in US
At Investorfile, we have concluded that, despite the recent
stock market fall due to the outbreak of the COVID-19 virus, EcoSynthetix is a
compelling investment story in the "green space,” which has high growth
potential. Obviously the Company’s huge cash position has influence on our
recommendation to buy this stock. The cash provides instant growth capital and,
at the same time, significant downside protection should the recent slow down
in world economy persist over a longer period of time.
While we must acknowledge the economic
headwinds for EcoSynthetix’s
customers in paper and paperboard packaging industry will most likely persist
into 2020, we foresee strong revenue growth for the Company beginning sometime
in 2021, particularly from new sales derived from the wood composite and
personal care markets. We expect the
customer wins from these markets could double EcoSynthetix’s revenues to a annual run rate
of about US$38 million prior to exiting 2021. Because we forecast the Company
will generate near positive cash flow from operations in 2020, the expected
growth in revenues could have a very positive impact on EcoSynthetix’s profitability going forward. In
addition, given its cash holdings, we anticipate no dilution from stock
issuance, which will drive per share earnings growth going forward.
Today EcoSynthetix’s stock can be purchased for about C$1.70
per share on the TSX Exchange. This stock price equates to current market
capitalization of approximately C$98 million. If you exclude its cash holding, EcoSynthetix’s business today is
valued at about C$36 million, which is less than 1.5 times 2019 annual sales on
a currency-adjusted basis (US$1 = C$1.42). For a company operating in the high
growth green space with positive cash flow, this is an inexpensive valuation.
With that notion, we recommend that
value-wise small cap investors should begin accumulating the shares of EcoSynthetix from its current trading levels up to a
share price of C$2.20. At C$2.20 the Company still has a cash-adjusted market capitalization
valuation which is still less than 1.5 times annual sales, assuming the revenue
run rate hits US$38 million (as we forecast).
2022, we also anticipate that EcoSynthetix will be able to earn adjusted EBITDA
margins at 15% of revenues. This is based on the higher sales volumes coupled
with ability to earn much higher gross margin on sales to the personal care
market. As such, we estimate that a small cap investor who begins to accumulate
a stock position in EcoSynthetix at an average cost base of about C$1.95, is only
paying an Enterprise Value (EV) less cash to EBITDA multiple less than seven
times based on our above forecast. This valuation is still very reasonable.
believes that green space companies like EcoSynthetix have the potential to
trade at very high valuation levels should they demonstrate growth. That said the
stock of EcoSynthetix has the realistic potential to reach trading levels two
or three times higher than our accumulation target price in the not-too-distant
Currently Canaccord Genuity provides
active research coverage on EcoSynthetix Inc.
They have set a 12-month target price for the stock at C$2.70.
note, EcoSynthetix has been repurchasing its own shares in the open market for
cancellation. All share repurchases are within the parameters of a TSX approved
stock buyback program details of which are disclosed in a recent Company news release.
today, EcoSynthetix Inc. has approximately 57.7 million shares outstanding.
Author Ownership Disclosure: TSX: ECO - Yes
This article is for informational purposes only. This article is based on the
author's independent analysis and judgment and does not guarantee the
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Investorfile.com is not engaged in an investor relations agreement with EcoSynthetix Inc. nor has it received any
compensation from EcoSynthetix Inc. for
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The author of this article has acquired and may trade shares of EcoSynthetix Inc. through open market
transactions and for investment purposes only.