Accsys Technologies — Additional capacity comes at additional costs

To expand capacity and set up a range of production facilities for its high-performance wood products Accoya and Tricoya to fulfil ongoing high market demand, Accsys has regularly tapped the market for new financing:

In its press release on 25 May 2022, the company stated that its cash headroom at 30 April 2022 was around €8m, which has been affected by several factors: 1) the changing economic environment leading to higher working capital (higher inventories) and higher volatility in acetyl prices; 2) additional costs related to the construction of the first Tricoya plant in Hull; and 3) additional costs and lower cash generation in Arnhem due to delays in the construction of the fourth reactor.

To finance the Hull plant, Accsys had also provided a loan of €17m to Tricoya UK, which has lowered its cash headroom for the time being. The lower than anticipated cash headroom was also a reason for the capital raise, which is further explained in detail below.

On 4 March 2022, Accsys provided guidance for the fourth reactor in Arnhem being operational in April after the test runs with its new wood stacker had already started. Following our plant visit in February and the company’s trading update in March, the company faced problems with the delivery of equipment, as well as challenges in the final installation and pipework tie-ins. This resulted in a second plant shutdown, which has delayed finalisation of construction of the fourth reactor by a few months until June 2022 and caused additional costs of €7m.

The pace of capacity expansion, with Arnhem and Hull combined doubling the company’s capacity to 120,000m3, also requires more working capital, for which the remaining €13m of the recent capital raise will be used.

A total of 13.8m new ordinary shares were issued, bringing the total number of shares outstanding to 206.6m (+7.2%). with the most recent list of shareholders holding a stake of at least 3% in the company shown in Exhibit 1.

Accsys has faced capacity constraints for the last few years, as it cannot finance and build capacity quickly enough to fulfil the high market demand for its products. Growing demand for sustainable businesses is creating robust demand for Accsys’s high-performance wood products, which provide a sustainable alternative to hardwoods and other materials. The market opportunity is significant, with Accsys having only a 2% share of the 2.6m m3 addressable market. The Arnhem facility produces Accoya and the Hull facility will soon produce Tricoya. Both are understood to be sold out. With strong demand and restricted capacity, the group has been able to push through price increases that have offset input price increases. Management again stated that the strategy to expand its total capacity to 200,000m3 by 2025 is on track, which we summarise in Exhibit 2.

The Accoya facility in Arnhem, the Netherlands, is currently Accsys’s only operating plant with capacity of 60,000m3 and, after the announced delay of a few months, the fourth reactor will be operational in June 2022, bringing total capacity to 80,000m3 (our estimate is that capacity could be a few thousand more m3 due to efficiency benefits). Based on the current price for Accoya of €2,000 per m3, total Accoya wood revenue could be €160m within the next two years as management anticipates a two-year ramp-up.

The new and much larger wood stacker, which is necessary to handle the higher volumes of wood, has been tested and fine-tuned (capacity is around 100,000m3). This stacker is much more modern, scanning all wood for quality (holes or cracks) beforehand and clearing it of dust, which is stored separately (to meet ESG standards).

During our site visit to Arnhem in February 2022, Accsys commented that it identified that its present site may have the potential to add two more reactors, but it hasn’t formally scoped this yet. In due course, this could add another €80m in revenues (at current price levels), albeit depending on successful financing but with more capacity coming on stream the company will be increasingly able to finance further expansion from its own resources.

In the absence of a Tricoya plant in the past few years but for the use of market seeding, Accsys has been selling finished Accoya to Medite and Finsa, which process the wood to fibres which are then compressed to Tricoya panels. Accsys expects the plant in Hull to be operational in July/August 2022, requiring additional capex of €9m in FY23. The plant will have initial capacity of 30,000 metric tonnes of wood chips, which is equivalent to 40,000m3 of wood panels. Accsys said it expects a ramp-up period of three years and to reach an EBITDA break-even level at 40% of capacity. The gross margin of this Tricoya plant could be 40%, compared to 30% for the Arnhem Accoya plant. The reasons for the difference in margin are the continuous process for Tricoya versus the batch process for Accoya and the sourcing of any kind of wood locally rather than particular wood from New Zealand.

At full capacity, the Hull plant can deliver €40m in revenues, with the investment decision for expansion to be made in summer 2024 (we estimate at costs of around €50m).

Together with its 60%/40% joint venture partner Eastman, Accsys USA is planning to build the first Accoya factory outside the Netherlands, with the Arnhem plant as a blueprint. All environmental and construction permits have been already secured, materials with long lead times were ordered in 2021, financing was finalised in early March 2022 and in April the ground was broken. The facility will be built at and connected to the existing Eastman site in Kingsport, Tennessee, with agreements in place for ‘closed-loop’ reuse and recycling of acetyls. According to Accsys, the initial capacity of the two reactors being build will be 43,000m3 (previously communicated 40,000m3), with room available for another six reactors bringing potential capacity at the Kingsport site to more than 170,000m3. Based on the current price of Accoya of €2,000 per m3, this would bring the initial revenue level of the plant to €86m (potentially more than €320m if the plant ended up with eight reactors at this site). At the time of the capital raise for the US project, in May 2021, Accsys expected to realise revenues of US$ 90m at full capacity in the third year of operation, with a potential gross margin of at least 35% and EBITDA margin of at least 25%.

According to Accsys, independent research has shown an achievable market in North America of at least 10 times the initial capacity of its Accoya plant in Kingsport: between 440,000m3 and 950,000m3 per year. As such, there seems ample market opportunity to gradually expand the capacity of the Kingsport plant to more than 160,000m3 in due course.

In January 2019, Accsys announced that it was exploring the opportunity for an integrated acetic anhydride and Tricoya production plant in Malaysia with partner Petronas Chemicals Group Berhad (PCG). The plant will use the acetic acid from PCG's existing joint venture in Malaysia. We assume that the first reactor will be the same size as the one in Hull, producing wood chips for about 40,000m3 of wood panels.

The timing of the second Tricoya plant will be dependent on the planning of the ramp-up of the Hull plant as this will be the blueprint. After several delays over the past two years, the commercial start of Hull is now expected in July/August 2022. After at least six months of testing and two years of construction, the second Tricoya plant could be operational in Q1 or Q225, with Accsys also having to decide whether the second plant will be built in Malaysia.

The initial budget for Hull was €68m, so we assume capex for Malaysia to be €70–80m, with potential annual revenues of €40m (at current price levels).

Based on the above, we believe Accsys is on track to expand its capacity to 200,000m3 by 2025. We also estimate that it may need another capital raise to fund the Malaysian Tricoya plant, although the company will also be increasing its own cash generation and ability to fund capex in the coming years. Currently, no details are known about the construction planning or financing. However, if we assume an equal two-way partnership (like Accoya USA with Eastman), the investment for Accsys will be more than €20m.

Ahead of the full set of FY22 results on 30 June 2022, Accsys provided a trading update on the headline developments in the last financial year.

According to the company, Accoya wood revenue increased by c 15% to €105m, following the 12% increase over the first 10 months of the year, reflecting 27% growth in the last two months of the year. The revenue increase was driven by price increases as volumes were 1.4% y-o-y lower at 59,649m3 due to capacity constraints and a temporary plant shutdown related to the construction of the fourth reactor in Arnhem. Since 2020, capacity has been restricted to 60,000m3 in Accoya in Arnhem. Accsys has raised its prices several times over the past year and these have offset the significant increases in raw material costs (mainly acetyls). It is planning another price increase in June 2022, to further offset higher acetyls prices (we estimate in the high single-digit range).

Accsys has not provided FY22 group revenues yet, but we estimate a level of €121m (+21%), as revenue from the by-product acetic acid this year is much higher compared to last year, driven by price increases in acetyls (in H1 these revenues increased from €2.7m to €6.9m).

Gross margin will be lower compared to last year due to mix effects and the impact of higher cost of raw materials. Management indicated that group EBITDA expectations are in line with company guidance of 4 March, although the delays in Arnhem led to lower EBITDA and cash generation between December 2021 and May 2022. Consensus for FY22 EBITDA is currently around €10.5m and we forecast €10.4m, unchanged from our last published FY22 estimate.

Net debt increased from €11m last year to €27m (excluding lease liability of c €6m) at the end of March 2022, or €55m when adjusted for committed investments in Q123 for the Accoya joint venture in the US. The recent capital raise was also intended to strengthen the company’s balance sheet. We estimate an improvement in net debt/EBITDA to 2.6x in FY23, down from c 3.0x in FY22.

Accsys traditionally does not provide guidance for the current financial year. To cope with current inflation levels, the company mentioned that it will raise prices again from June 2022 and it has already introduced an energy price premium from May 2022 (this to mitigate the effects of volatile gas prices, which affect the company’s acetyl raw material costs).

We have revised our estimates following the company’s trading update, the announced delay of two months in new capacity coming on stream in Arnhem and the capital raise of €19m. The company stated that production is back at full capacity after the second plant stop caused by the delay in construction of the fourth reactor. In this three-week period, Accsys also executed its annual maintenance stop of around two weeks, thus the net loss in working days in the current fiscal year for the three existing reactors is about one week.

We have slightly lowered our expected revenue growth rate for FY23 (to incorporate the delay in Arnhem), but due to the higher base in FY22 we raise our estimate to €156.7m (previously €151.3m). This includes the contribution from the ramp-up of volumes in Arnhem and in Hull. Gross margin should recover somewhat, driven by price increases and increased scale. Part of the volumes in Arnhem will be transferred to Hull, which will have a positive mix impact as Accsys will be able to produce more high-grade Accoya rather than the low-grade currently used to manufacture Tricoya panels. We estimate that half of the Accoya wood volume will be transferred to Hull this year, leaving 7,500m3 for FY24. However, we have lowered our forecasts for gross margin due to the lower base in FY22, the mix effect of higher acetic acid sales, the later than expected ramp-up in Arnhem and the impact of higher raw material costs. For the same reasons, we have lowered our EBITDA forecast. Driven by the estimated higher gross margin (despite higher acetyl costs) and operating leverage, we estimate EBITDA of €21.6m in FY23 (previously €27.6m), delivering a margin of almost 14%.

Accsys said that it expects capex of €57m in FY23, being largely the finalisation of the fourth reactor in Arnhem, the finalisation of the Hull plant and the committed €35m for the Accoya USA joint venture. FY24 will be the first year with a full contribution from the fourth reactor in Arnhem and the Hull plant, delivering an estimated 24% revenue growth to €194.5m and further EBITDA improvement to €35.1m (margin 18%).

For the valuation of Accsys we use a discounted cash flow (DCF) model as there are no other listed companies with a business profile close to that of Accsys. We note that Accsys is currently valued at EV/Sales of 2.4x and EV/EBITDA of 17.5x in FY23e.

Our updated model includes our estimates for the Arnhem plant with four reactors and the Hull plant ramping up in three years’ time, followed by an expansion of the same size (40,000m3). We have also used a DCF for a separate Accoya and Tricoya plant and add to our overall DCF a value for the Accoya plant in the US, which is expected to be operational in Q224 (but is not currently included in our running model). We also add a value for the planned Tricoya plant in Malaysia (or an alternative location) with a probability rate of only 50% as that project has yet to be committed. The investment decision will be taken after the Tricoya plant in Hull has been operational for at least six months (January/February 2023).

Our DCF model is based on the following assumptions:

Our DCF model suggests a fair value for Accsys of €1.95 per share. The sensitivity analyses in Exhibits 6 and 7 show the fair value outcome under different sales growth, EBITA margins and WACC scenarios.