Applied Graphene Materials — Customer engagement intensifying

Applied Graphene Materials (AIM: AGM)

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Research: TMT

Applied Graphene Materials — Customer engagement intensifying

Applied Graphene Materials’ (AGM’s) FY21 results advise of a doubling in the number of ongoing customer engagements and cumulative number of products launched by customers during the year, demonstrating market adoption of the group’s dispersions of nanoplatelets is accelerating. Revenue growth for the whole year was not as fast (48%) because coronavirus-related travel restrictions prevented some customers from deploying their graphene-enhanced coatings on projects. Growth accelerated in H221 (67% vs 20% H121) as restrictions eased.

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Applied Graphene Materials

Customer engagement intensifying

Tech hardware & equipment

Spotlight - Update

13 October 2021

Price

25.0p

Market cap

£16m

Share price graph

Share details

Code

AGM

Listing

AIM, OTCQX

Shares in issue

64.3m

Net cash (£m) at end July 2021 excluding finance leases

6.3

Business description

Applied Graphene Materials develops graphene dispersions that are used by customers to enhance the properties of coatings, composites and functional materials. It also manufactures high-purity graphene nanoplatelets using readily available raw materials instead of graphite.

Bull

Understanding of dispersion technology enables AGM to support customers developing commercial applications.

Standardisation of some graphene dispersion products reduces length of sales cycle.

Expansion of distribution network accelerates the pace of introducing AGM’s dispersions.

Bear

Revenue development dependent on success of individual customer product launches.

Extensive testing required prior to customer acceptance.

COVID-19 pandemic prolonged sales cycles and dampened demand from end-users who cannot access sites to deploy coating products.

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

Applied Graphene Materials is a research client of Edison Investment Research Limited

Applied Graphene Materials’ (AGM’s) FY21 results advise of a doubling in the number of ongoing customer engagements and cumulative number of products launched by customers during the year, demonstrating market adoption of the group’s dispersions of nanoplatelets is accelerating. Revenue growth for the whole year was not as fast (48%) because coronavirus-related travel restrictions prevented some customers from deploying their graphene-enhanced coatings on projects. Growth accelerated in H221 (67% vs 20% H121) as restrictions eased.

Historical financials

Year end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

07/18

0.1

(4.0)

(4.2)

(7.5)

0.0

N/A

07/19

0.1

(4.6)

(4.8)

(7.9)

0.0

N/A

07/20

0.1

(3.1)

(3.5)

(6.1)

0.0

N/A

07/21

0.1

(3.2)

(3.6)

(6.3)

0.0

N/A

Source: Company accounts. Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Revenue growth accelerates during H221

Revenues grew by 48% year-on-year during FY21 to £0.1m, reflecting intensifying customer engagement. Growth accelerated in H221, as restrictions on travel related to the coronavirus pandemic eased. These restrictions had adversely affected AGM’s customers’ ability to test and deploy graphene-enhanced coatings. EBITDA losses were similar to the prior year at £3.1m. The results were broadly in line with the FY21 consensus estimates. AGM raised £5.5m (net) in January at 41p/share. Management estimates the funds raised have extended the cash runway beyond January 2023, enabling it to convert the opportunity pipeline into meaningful annual revenues during the period.

Pace of customer adoption accelerating

AGM’s customers have collectively launched 11 new products during FY21, primarily in the car care sector. A further three have been launched since end FY21 suggesting that the pace of adoption is accelerating. AGM is helping market adoption with the launch of eco-friendly graphene nanoplatelet dispersions that enable its customers to improve the sustainability of their product formulations. It has also expanded its distribution network to cover South Korea and Turkey and introduced an end-to-end research and development service to support businesses in harnessing the potential of graphene in their products.

Scenario analysis

The scenario analysis in our September note extends to annual revenues of £25m, which is a very small proportion of the total global protective coatings market (2019: US$146.2bn). This analysis shows that the pipeline at end FY21 (£3.7m on a probability weighted basis) is not sufficient to take AGM to cash break-even, which is reached at annual revenues of around £10m. We note that AGM will require additional capital investment of around £2m to support £10m annual revenues.

FY21 performance affected by lockdown restrictions

Revenues grew by 48% year-on-year in FY21, albeit from a low base, reflecting intensifying customer engagement. Growth would have been even stronger had it not been for the restrictions on travel related to the coronavirus pandemic. AGM was not directly affected by pandemic, with management deciding not to furlough staff so it could continue with its long-term test programmes. However, some of its customers were adversely affected. For example, the launch of Teal & Mackrill’s industrial epoxy primer was delayed, Blocksil was prevented from accessing some customer sites where it had planned to refurbish structures with graphene-enhanced paint and the programmes evaluating graphene-enhanced composite tooling and mass transit interiors with superior fire-performance were delayed because customers did not have the staff available to complete on-site activity. Significantly, revenues were much stronger in the second half (£81k vs £42k), as was year-on-year growth (67%) demonstrating the beneficial effect of the easing of coronavirus related restrictions.

Exhibit 1: FY21 and FY20 P&L summary

£000s

FY21

FY20

Notes

Sales revenue

123

83

Production orders of graphene and evaluation quantities of graphene to commercial partners

Cost of sales

(363)

(215)

Including some staff costs

Gross loss

(240)

(132)

Negative gross margin as very low levels of utilisation

Normalised operating expenses

(2,942)

(2,938)

Share-based payments

32

(14)

EBITDA

(3,150)

(3,084)

Exceptional items

0

(168)

Restructuring costs

Depreciation and amortisation

(409)

(446)

Reported operating loss

(3,559)

(3,698)

Finance costs (net)

(6)

33

Smaller average cash balances and low interest rates

Reported loss before tax

(3,565)

(3,665)

Tax

391

476

Accrued R&D tax credits. Lower as costs reduced.

Reported loss after tax

(3,174)

(3,189)

Adjusted EPS (p)

(5.6)

(6.1)

Source: AGM

EBITDA losses were similar to the prior year. Operating expenses (adjusted for exceptional items and share-based payments) were similar to prior years and the widening in gross loss associated with higher sales was offset by a favourable movement in share-based payments. The results were broadly in line with the FY21 consensus estimates of £0.2m revenues and a £3.2m EBITDA loss.

Cash runway extended beyond January 2023

Net cash (there was no debt and £0.1m IFRS 16 lease liabilities at end FY21) increased £2.6m during FY21 to £6.3m at the year end. Investment in tangible assets including the capital element of lease obligations was similar to the previous year at £0.2m. £0.2m was invested in intangibles related to patents as all R&D is expensed. Cash flow was flattered by a £0.1m decrease in working capital, primarily an increase in payables, which did not unwind entirely during H221. The FY21 year-end balance benefitted from £5.5m (net) raised during January through a placing, subscription and PrimaryBid offer at 41p/share. Management estimates the funds raised have extended the company’s cash runway beyond January 2023, enabling it to convert the opportunity pipeline into meaningful annual revenues during the period.

Commercial progress: Pipeline expansion

Exhibit 2: Pipeline development

Date

Agreement on scope of sampling and engagement

Initial testing and interpretation of results

Repeat testing for consistency and review of results

Final product trials, formulation and specification

Final commercial agreement

Launched

Total

End FY21

79

70

15

9

8

19

200

End FY20

19

57

18

12

3

8

117

End FY19

12

45

14

13

8

5

97

Source: Company data

An examination of AGM’s sales pipeline demonstrates the progress AGM is making in expanding its sales pipeline, with the total number of engagements in the pipeline and the cumulative number of launched products both doubling in FY21. This intensifying engagement is partly attributable to the establishment of a distribution network from April 2018 onwards that covers Canada, western Europe, Japan, South Africa, South Korea, Turkey and the US, as approximately 41% of engagements are now being handled by distributors. The pipeline at the end of FY21, including launched products, totalled £3.7m on a probability-weighted basis. This is similar to the £3.6m at end FY20, even though the number of engagements is double, because management is applying a more conservative approach to distributor engagements in their earlier stages given the extra steps involved in the route to a successful product launch with a customer through a distributor.

Significant developments since our September initiation note include:

Exfoliated graphene: AGM has extended its expertise in dispersing its own synthesised graphenes to exfoliated graphenes supplied by third parties, broadening the range of applications where its dispersions may be used.

New customer win in India: Stanvac is developing a coating for use on power lines that combines electrical conductivity with barrier protection. Stanvac is in the final stages of customer field trials, which AGM expects will lead to volume demand for graphene dispersions once completed.

Floor coatings: AGM is working with a leading floor coatings manufacturer on protective barrier floor coatings for concrete. AGM’s management anticipates strong uptake of this product once launched, which could be as early as CY Q122.

UK Environment Agency: AGM has developed a paint that it originally used in-house to test formulations for their ability to withstand corrosion in harsh environments. The UK Environment Agency is about to start field tests of this paint on coastal structures in the north-east of England, trialling AGM’s conventional and biofriendly formulations.

Scenario analysis

While management has not provided any guidance regarding revenue growth, we believe it is reasonable to assume the probability-weighted sales opportunity pipeline at end FY21 totalling £3.7m annual revenues should be converted in the next year or two. The scenario analysis presented in our September note extends to annual revenues of £25m, which is a very small proportion of the total global protective coatings market (US$146.2bn in 2019, according to Grand View Research). While higher revenues are possible, we are not presenting these at present because AGM has yet to achieve product approval with any of the larger players in the protective coatings market, which management notes are highly conservative, and the projects in the aerospace sector have not yet reached the commercial stage. The analysis shows the pipeline is not sufficient to take AGM to cash break even, which is reached at annual revenues of c £10m. We note AGM will require additional capital investment of c £2m to support £10m of revenues.

Exhibit 3: Financial summary

£k

2018

2019

2020

2021

31-July

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

77

50

83

123

Cost of Sales

(250)

(472)

(215)

(363)

Gross Profit

(173)

(422)

(132)

(240)

EBITDA

 

 

(3,984)

(4,559)

(3,084)

(3,150)

Normalised operating profit

 

 

(4,295)

(4,902)

(3,530)

(3,559)

Amortisation of acquired intangibles

0

0

0

0

Exceptionals

(307)

0

(168)

0

Share-based payments

0

0

0

0

Reported operating profit

(4,602)

(4,902)

(3,698)

(3,559)

Net Interest

57

67

33

(6)

Profit Before Tax (norm)

 

 

(4,238)

(4,835)

(3,497)

(3,565)

Profit Before Tax (reported)

 

 

(4,545)

(4,835)

(3,665)

(3,565)

Reported tax

1,046

908

476

391

Profit After Tax (norm)

(3,192)

(3,927)

(3,021)

(3,174)

Profit After Tax (reported)

(3,499)

(3,927)

(3,189)

(3,174)

Minority interests

0

0

0

0

Net income (normalised)

(3,192)

(3,927)

(3,021)

(3,174)

Net income (reported)

(3,499)

(3,927)

(3,189)

(3,174)

Basic average number of shares outstanding (m)

42.7

49.4

49.4

56.4

EPS - normalised (p)

 

 

(7.5)

(7.9)

(6.1)

(6.3)

EPS - normalised fully diluted (p)

 

 

(7.5)

(7.9)

(6.1)

(6.3)

EPS - basic reported (p)

 

 

(8.2)

(7.9)

(6.4)

(5.6)

Dividend (p)

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

(35.1)

66.0

48.2

Gross Margin (%)

N/A

N/A

N/A

N/A

EBITDA Margin (%)

N/A

N/A

N/A

N/A

Normalised Operating Margin

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

1,959

1,800

1,696

1,702

Intangible Assets

78

155

276

427

Tangible Assets

1,881

1,645

1,420

1,275

Investments & other

0

0

0

0

Current Assets

 

 

11,111

7,681

4,522

7,090

Stocks

56

52

74

93

Debtors

197

171

281

276

Cash & cash equivalents

10,443

6,135

3,685

6,308

Other

415

1,323

482

413

Current Liabilities

 

 

(949)

(993)

(929)

(1,097)

Creditors

(949)

(993)

(908)

(1,023)

Short term borrowings

0

0

0

0

Finance leases

0

0

(21)

(74)

Long Term Liabilities

 

 

0

0

(4)

0

Long term borrowings

0

0

0

0

Lease liabilities

0

0

(4)

0

Other long term liabilities

0

0

0

0

Net Assets

 

 

12,121

8,488

5,285

7,695

Minority interests

0

0

0

0

Shareholders' equity

 

 

12,121

8,488

5,285

7,695

CASH FLOW

Op Cash Flow before WC and tax

(3,984)

(4,559)

(3,084)

(3,150)

Working capital

(12)

68

(199)

99

Exceptional & other

44

376

(182)

32

Tax

631

0

1,316

461

Net operating cash flow

 

 

(3,321)

(4,115)

(2,149)

(2,558)

Capex

(319)

(193)

(342)

(218)

Acquisitions/disposals

0

0

0

0

Net interest

0

0

41

(6)

Equity financing

9,375

0

0

5,552

Dividends

0

0

0

0

Net Cash Flow

5,735

(4,308)

(2,450)

2,770

Opening net debt/(cash) - excluding lease liabilities

 

 

(4,708)

(10,443)

(6,135)

(3,685)

FX

0

0

0

0

Other non-cash movements

0

0

0

(147)

Closing net debt/(cash) -excluding lease liabilities

 

 

(10,443)

(6,135)

(3,685)

(6,308)

Source: Company accounts


General disclaimer and copyright

This report has been commissioned by Applied Graphene Materials and prepared and issued by Edison, in consideration of a fee payable by Applied Graphene Materials. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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General disclaimer and copyright

This report has been commissioned by Applied Graphene Materials and prepared and issued by Edison, in consideration of a fee payable by Applied Graphene Materials. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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