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 stock pick.

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 formulations.

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.

Of note, 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 alternative.

Because 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.

Over 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 green products.

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 currency.

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).

By 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.

Investorfile 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 future.

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.

Of 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.

As of today, EcoSynthetix Inc. has approximately 57.7 million shares outstanding.

Company website: www.ecosynthetix.com

Author Ownership Disclosure: TSX: ECO - Yes

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This article is for informational purposes only. This article is based on the author's independent analysis and judgment and does not guarantee the information's accuracy or completeness. The information contained in this article is subject to change without notice, and the author assumes no responsibility to update the information contained in this article. The information contained within this article should not be construed as offering of investment advice. Those seeking direct investment advice, should consult a qualified, registered, investment professional. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock.

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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.