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Key Data
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EPIC
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SYM
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Share Price
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12p
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Spread
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11.5p - 12.5p
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Total no of Shares
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116.73 million
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Market Cap
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GBP14 million
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12 Month Range
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8.625p-12.5p
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Market
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AIM
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Website
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Sector
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Chemicals
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Contact
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Michael Laurier Chief
Executive 020 8207
5900
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On 6th September, AIM listed Symphony
Environmental Technologies, an environmental
plastics and waste-to-value group, released half
calendar year results that confirmed that the group
had reached sustainable profitability and cash
generation. From now onwards, operational gearing
will push profits and cash generation sharply
higher, something that is far from discounted in
the share price, which is on a price to earnings
multiple of just 7.1 times our 2011
forecast.
In the six months to June 30th,
revenues increased by 6% to GBP3.906 million
while the gross margin widened from 54.9% to
58.8% and that lifted gross profit to GBP2.296
million. The underlying operating profit
increased 22.9% to GBP0.591 million despite a
9.4% increase in recurring administrative
expenses to GBP1.625 million as a result of the
recruient of further technical support staff to
support the expanding distribution channel. Net
finance charges fell by 26.6% to GBP0.058 million
while there was a one-off charge of GBP0.115
million for the capital and operational
reorganisation that has positioned the company to
acquire treasury shares or pay dividends as and
when appropriate. Reported pre-tax profit
increased by 4.0% from GBP0.402 million to
GBP0.418 million and basic earnings per share
increased from 0.35p to 0.36p.
The group completed a restructuring that
simplified its structure on 30th June and the
full benefits will begin to emerge during the
second half. Additionally, we anticipate that
there will be continued strong double digit
topline growth as the company leverages off the
steady recovery in the global economy through its
expanding global distribution channel, an active
drive to deepen client penetration and a full
year from d2w - its flagship product
which when included in plastics make the end
product biodegradable Additionally, there should
be no let up in the numbers of countries
legislating in favour of biodegradable plastics
or consumer pressure upon service companies, such
as retailers and hotel groups as well as
packaging manufacturers to use biodegradable
plastics. All the while, the company's
operational leveraging should result in a higher
rate of profit and earnings per share growth.
Additionally, our model suggests that the group
should end the 2011 financial year with net cash
of GBP1.4 million, which raises the real prospect
of either a maiden dividend or possibly a share
buyback programme.
We have valued Symphony using an Enterprise
Value/EBITDA methodology, which we believe
conservatively values the growth potential.
Therefore, with the shares trading at 12p, the
2009 financial year enterprise Value was GBP14.86
million, which is 16.23 times reported 2009
EBITDA of GBP0.916 million. We estimate that by
the end of the 2011 financial year, the group
will be strongly cash generative, such that the
group will have net cash of GBP1.4 million, some
of which could be used for either a maiden
dividend payment or possibly a share buyback
programme. Therefore, if the shares were to trade
on a similar EV/EBITDA multiple, then, based on
our 2011 forecasts, the shares could trade at
30.4p and with the shares trading at 12p we
initiate coverage of the shares as a
buy.
Forecasts Table
Year to 31 December
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Sales (GBP000)
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Pre-tax profit (GBP000)
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Earnings Per Share (p)
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Price Earnings Ratio (x)
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Dividend (p)
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Yield (%)
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|
2008A
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5,355
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(398)
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0.32
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37.0
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0.0
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0.0
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2009A
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7,038
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638
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0.78
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15.4
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0.0
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0.0
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2010E
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8,200
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1,108
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1.05
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11.5
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0.0
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0.0
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2011E
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9,900
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1,978
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1.63
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7.1
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0.0
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0.0
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Source: Company and Growth Equities &
Company Research
*The SF t1ps Smaller Companies Growth Fund
owns shares in symphony. The Fund is managed by a
subsidiary of RSH the ultimate owner of
GE&CR. Symphony is also a client of
Bishopsgate Communications, another RSH
subsidiary.
Background
Symphony Environmental Technologies ('Symphony')
was founded in 1995 to procure and distribute
polythene bags, sheet, film and other related
products for the UK Local Authority, retail and
construction sectors. However, towards the end of
1995 the company was presented with an
opportunity to extend its traditional
polyethylene product range through the use of a
patented additive from EPI, a North American
company, into degradable polyethylene; branded as
SPI-Tek.
The company and EPI entered into an additive
supply agreement in1997 that was extended by a
further 15 years in 2000; the same year that the
company was listed on Ofex (now Plus Markets). In
November 2001, the company's shares were admitted
to AIM alongside an open offer for the shares.
In June 2003, the company terminated the
agreement with EPI in order to focus upon
marketing its own degradable additives
technology. However, in 2004, EPI filed a claim
against Symphony in the UK High Court on a number
of matters including the copying of their
technology. All EPI's claims were dismissed in
full by the High Court in December 2004 and by
the Court of Appeal in December 2005. This left
Symphony completely free to market and further
develop its own oxo-biodegradable products that
are marketed as d2w controlled-life
Plastic.
During 2007, the company undertook a major
reorganisation of its management structure that
established the operational flexibility for a
substantial expansion of the global distribution
network, which has been expanded from 7 in 2007
to 57 in 2010.
In 2008, the company established an ADR programme
in the US through Bank of New York. Also in April
of that year, a consortia lead by Symphony was
awarded a 3-year UK Government R&D grant for
a rubber tyre recovery project, RuPERT, with the
aim of early commercialization of w2v
technologies.
In 2009, the company launched d2p, a
silver based additive that embeds plastic
products with anti-microbial and fungicidal
properties and compliments the d2w
offering.
Business Overview
The company's operating (and capital) structure
was reorganized on 30 June 2010 so that the
holding company, Symphony Environmental
Technologies plc, has two operating divisions:
- Symphony Environmental; and
- Symphony Energy.
Symphony Environmental is a
world leader in the development and marketing of
degradable plastics and sells both finished
plastics products and pro-degradent additives
that can be used with existing polyethylene
plastics production configurations; this is a
major competitive advantage relative to other
biodegradable additives that do require the
manufacturer to either substantially modify their
production plant or processes, or install new
equipment. More recently, the company launched
d2p, an antimicrobial and fungicidal
additive that it intends piggybacking onto the
established distribution channels of
d2w, which should result in more rapid
customer uptake.
The company does not have its own manufacturing
capacity but sources its products under license
from specialist manufacturers around the world.
Its finished degradable products and additives
are sold globally either directly to customers
or, increasingly, through a growing network of
authorised Agents and Distributors. The company
actively supports its agents and distributors
through a technical support function that will
visit a customer's site assisting with any
production and technical issues.
Symphony Energy will market any
commercial outcomes from the three year Project
RuPERT consortium that is focused upon the rubber
market. The initial product, which may be
commercialized within the next 12-months, is
focused upon the physical deconstruction and
processing of automotive tyres and will be
marketed under the w2v brand.
Strategy for Growth
Symphony's products are focused on addressing the
growing global environmental problem of plastic
products, which is being driven by consumer
pressure and legislative changes. The potential
global market for degradable products has been
estimated by various organisations and
consultants at between US$1.5 billion - US$ 3.0
billion with competition restricted to three
areas:
- PLA/starch-based plastics;
- oxo/biodegradable plastics
(Symphony Environmental's additives); and
- Conventional plastics.
Symphony's business strategy is one of exploiting
it global reach through the 57 and growing
distributors together with organic development
through continuous product development to
maximise the revenue potential of its
established, branded d2w plastics
additive while further extending of its global
network of agents and distributors and deepening
the penetration of its customer base.
Accelerated growth within the core division of
Symphony Environmental will be stimulated by the
introduction of complimentary additives, such as
d2p, which will piggyback on the
established d2w channels.
Similarly, Symphony Energy may operate an organic
growth strategy for the market development of the
w2v branded products that focus upon
the rubber market segment, initially for the
globally growing waste tyre mountains.
Management
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Nirj Deva, DL, FRSA,MEP
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Nirj Deva is Chairman and a Member of the
European Parliament and a former MP in
the UK Parliament, He has held a number
of senior political appoinents and
advised the boards of a number of public
companies including International Leisure
Group, Air Europe Plc, Tricentrol Oil Co
Plc, EDS, Television South West, Thomas
Howell Group, John Laing Plc, and
Rothmans International Plc.
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Michael Stephen
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Mr. Stephen is Commercial Director and
Group Deputy Chairman and Chairman of the
Group subsidiary companies. Mr Stephen
qualified as a Solicitor with Distinction
in Company Law. He was later called to
the Bar, and practised from chambers in
London for many years, dealing with civil
cases in the High Court and Court of
Appeal. He was elected to Parliament in
1992 and was a member of the Trade and
Industry Select Committee and the
Environment Select Committee of the House
of Commons. He served in Government as
Parliamentary Private Secretary at the
Ministry of Agriculture. He held a
Harkness Fellowship in law at Stanford
and Harvard Universities in the USA, and
was Deputy Legal Adviser to the British
Ambassador to the United Nations.
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Michael Laurier
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Michael Laurier is Group Chief Executive
and began his career with his long
established family packaging business,
Brentwood Sack and Bag Co Limited. He
took over responsibility for sales and
production in the mid -1970s and changed
the emphasis of the company's business
from jute products to polythene
packaging, introducing the then
innovative high density and medium
density polythene bags into the UK market
in 1975. He was appointed Managing
Director of Brentapac UK Plc, which
formerly owned the Tuffy trademark, in
1985, with continuing responsibility for
national and international sales. He
co-founded Symphony Plastics in
1995.
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Ian Bristow, FCCA
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Ian Bristow is the Group Finance Director
and Company Secretary. Mr. Bristow was in
private practice for seven years,
qualifying as a certified accountant in
1992. In 1994, he joined Brentapac UK Plc
until it was sold in 1994. He went on to
co-found Symphony Plastics in 1995.
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Michael Stephens
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Michael Stephens is the Group's Technical
Director and began his career with
Excelsior Plastics Limited, a division of
Unigate, progressing over a period of ten
years to sales director. Leaving in 1981,
he worked for Sempol Products, Autobar
Group and ACP Plastics (a subsidiary of S
P Metal Group), all manufacturers of
packaging films. In 1988, Michael founded
Skymark Packaging International Limited,
serving the snack food, bakery, mail
wrap, paper disposable markets, which he
left in November 1997 to join Symphony.
Mr. Stephens is a member of the British
Standards Institute packaging committee
and a member of the European Standards
Committees for degradable agricultural
and packaging films.
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Nicolas Clavel
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Nicolas Clavel started his career in
international banking in the mid
seventies and his area of expertise has
been structured trade finance and equity
invesents with a particular focus on
Emerging Markets. He is Chief Invesent
Officer of Scipion Capital Ltd., (the
Invesent Manager of Scipion African
Opportunities Fund SPC). Mr. Clavel is
Swiss, and is based in London and Geneva.
He is fluent in English, French, Italian
and German.
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Source:
Company
Significant Shareholders
As of the 31 December 2009 the company had
116,484,577 1p Ordinary shares in issue and the
major shareholders, including those of the Board,
are as follows:
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Shareholder
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%
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Nirj Deva
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0.2
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Michael Laurier
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12.6
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Ian Bristow
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0.9
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Michael Stephen
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0.4
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Michael Stephens
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0.3
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Nicolas Clavel
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0.2
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Board
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14.8
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Hunter Hall
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16.4
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Gerrard Invesent Management
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4.6
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Brewin Dolphin Securities
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3.5
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Others
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60.7
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Total
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100.0
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Source: Company
Interim Results and
Forecasts
Symphony released interim results for the 6
months ended 30 June 2010 which confirmed that
the company had reached a point of sustainable
profitability and cash generation. Revenue
increased 6% from GBP3.685 million to GBP3.906
million while the gross margin widened 3.9
percentage points to 58.8% resulting in the gross
profit increasing from GBP2.024 million to
GBP2.296 million. Administrative expenses
increased 9.4% from GBP1.485 million to GBP1.625
million Operating profit increased 22.9% from
GBP0.481 million to GBP0.591 million despite a
9.4% increase in recurring administrative
expenses to GBP1.625 million for further
technical support staff to support the expanding
distribution channel. Net finance charges fell
26.6% to GBP0.058 million while there was a
one-off charge of GBP0.115 million for the
capital and operational reorganisation that has
positioned the company to acquire treasury shares
or pay dividends as and when appropriate.
Reported pre-tax profit increased 4.0% from
GBP0.402 million to GBP0.418 million and basic
earnings per share increased from 0.35p to 0.36p.
Table: Profit & Loss Account,
GBP000
6 months ended 30 June
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2010
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2009
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Change
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Revenue
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3,906
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3,685
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6.0%
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Cost of Sales
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(1,610)
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(1,661)
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(3.1%)
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Gross profit
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2,296
|
2,024
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13.4%
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Margin
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58.8%
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54.9%
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Distribution costs
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(80)
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(58)
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37.9%
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Administrative expenses
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(1,625)
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(1,485)
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9.4%
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Operating profit
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591
|
481
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22.9%
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Margin
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15.1%
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13.1%
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Net finance charges
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(58)
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(79)
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(26.6%)
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Exceptional charge
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(115)
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0
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n/a
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Pre-tax profit
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418
|
402
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4.0%
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Margin
|
|
|
|
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Taxation
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0
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0
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n/a
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Profit for period
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418
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402
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4.0%
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|
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|
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Earnings per share -
basic
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0.36p
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0.35p
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2.9%
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Source: Company
The second half should benefit from the growing
list of countries specifically legislating in
favour of biodegradable plastics, the
introduction of new applications for d2w across
the entire distribution channel, as well as from
agreements like last May's agreement with
Europe's third largest business hotel chain, NH
Hoteles Group; the chain is using d2w for all its
disposable plastic products (e.g., shampoo
bottles, pens, combs, etc.) across its entire
chain of 400 hotels.
For the following year we anticipate continued
strong double digit topline growth due to the
company leveraging off the steady recovery in
the global economy through the continued
expansion of the global distribution channel,
an active drive to deepen client penetration
and a full year from d2p. Additionally, there
will be no let up in the numbers of countries
legislating in favour of biodegradable
plastics, such as those offered by Symphony,
while consumer pressure should further
encourage service providers, such as NH Hoteles
Group, and packaging manufacturers to use
biodegradable plastics. We anticipate that the
gross margin should be sustainable at 55% - 60%
but in our model have assumed only 55% while
finance charges should contract sharply as the
group benefits from its earlier restructuring
and increasing cash generation due to a return
to modest capex demands; indeed our model
suggests that the group should end the year
with net cash of GBP1.4 million, which raises
the real prospect of either a maiden dividend
or possibly a share buyback programme.
Valuation
We have valued Symphony using an Enterprise
Value/EBITDA ('EV/EBITDA') methodology, which we
believe conservatively values the growth
potential. Therefore, with the shares trading at
12p, the 2009 financial year enterprise Value was
GBP14.86 million, which is 16.23 times reported
2009 EBITDA of GBP0.916 million. We estimate that
by the end of the 2011 financial year, the group
will be strongly cash generative, such that the
group will have net cash of GBP1.4 million, some
of which could be used for either a maiden
dividend payment or possibly a share buyback
programme. Therefore, if the shares were to trade
on a similar EV/EBITDA multiple, then, based on
our 2011 forecasts, the shares could trade at
30.4p and with the shares trading at 12p we
initiate coverage of the shares as a
buy.
Forecasts Table
Year to 31 December
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Sales (GBP000)
|
Pre-tax profit (GBP000)
|
Earnings Per Share (p)
|
Price Earnings Ratio (x)
|
Dividend (p)
|
Yield (%)
|
|
2008A
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5,355
|
(398)
|
0.32
|
37.0
|
0.0
|
0.0
|
|
2009A
|
7,038
|
638
|
0.78
|
15.4
|
0.0
|
0.0
|
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2010E
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8,200
|
1,108
|
1.05
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11.5
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0.0
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0.0
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2011E
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9,900
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1,978
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1.63
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7.1
|
0.0
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0.0
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Source: Company and Growth Equities &
Company Research
*The SF t1ps Smaller Companies Growth Fund
owns shares in symphony. The Fund is managed by a
subsidiary of RSH the ultimate owner of
GE&CR. Symphony is also a client of
Bishopsgate Communications, another RSH
subsidiary.
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