Beating a path to my door this week was a man who is ‘overwhelmingly excited’ about 2012.
Paul Clegg drove all the way from Winchester to my house near Oxford and then spent two hours bringing me right up to date with one of the stock market’s most intriguing penny shares, Accsys Technologies (AXS).
Thanks to its stock market listing in the Netherlands, as well as on AIM, this is a share that is eligible to hold in an ISA. But that’s not the only attraction of a story that for me has one great merit – its product.
Accsys has found a way of turning cheap, fast growing softwood into the sort of durable hard wood sought after by architects, builders and joiners alike. The application of acetic anhydride alters the properties of the wood without altering its chemical content. The end result is a product called Accoya that is hard wearing and easy to work with.
These are clearly desirable attributes of a product that also adds value, saves rain forests and has a global market. And yet Accsys’s shares have been a perennial disappointment.
Turning a good idea into a good business
The road from a good business idea to a successful commercial venture is full of pitfalls. Accsys has stumbled into several. Its biggest headache has been a venture with Diamond Wood, a company set up to distribute Accoya wood produced at Accsys’s factory in the Netherlands into Asia and ultimately build its own plant in Nanjing.
Clegg joined as chief executive in 2009. By then, Accsys had invested €10m in Diamond Wood and was confidently expecting (and in some cases taking financial credit) for future licensing and royalty income. So it was highly reliant upon this relationship.
Two years on and Diamond Wood is yet to build that Chinese factory. Its latest plan is to raise funds on the junior market of the Malaysian Stock Exchange. If all goes well, Diamond Wood could be funded to construct its factory at the end of the first quarter of 2012 – when it is also on the hook to pay its annual license fee to Accsys.
Accsys needs partners to grow
Whatever happens here – and any further prevarications on the part of Diamond Wood may finally snap this strained relationship – Clegg was at pains to point out Accsys today is about much more than this. He has high hopes for two other initiatives.
The first could soon see him sign a deal with a major, but as yet unidentified, multinational company to manufacture ACCOYA under license for several European countries. This deal has been awaiting evidence that acetylation can work equally well on the northern hemisphere’s Scots pine as it does on the southern hemisphere’s faster growing Radiata Pine, Accsys’s traditional softwood,. I understand that this has indeed been demonstrated and an outline deal could be signed soon.
The other great hope is for MDF, a favoured building material and one that can be made from any type of wood. So far MDF has been excluded from outdoor use because it absorbs moisture. This is a competitive, low-margin industry and producers around the world are under pressure to raise their game.
One solution is to acetylate the MDF, making it suitable for outdoor use. Accsys has been supplying acetylated wood to an Irish manufacturer, Medite, which has launched weatherproof MDF (called Tricoya) onto the market.
So that’s three things in Accsys’s favour here:
• It has reduced its reliance on Diamond Wood.
• Tricoya is now on the market.
• The superiority of Accoya over other building materials is widely accepted.
So how is the business doing?
This is one to watch in 2012
After a period of de-stocking in the autumn, sales to Germany are recovering strongly; a US customer who baulked at a price increase earlier in the year is now ordering again; and Accsys has commenced discussions with other potential licensees.
The future looks rosy and yet Accsys is valued at no more than the sum of its cash, net receivables and stocks of wood.
Challenges remain. Accsys needs to strike deals that are as watertight as its Accoya wood; it needs to make the transition from being a manufacturer to a licensee; it needs to match production capacity against growing demand; and it would like to achieve this without having to raise any more money – something that Clegg believes can be done.
That said, the prize is great. The market for Tricoya alone could eventually be worth over £2bn per year. Of that, Accsys could pocket 2% in royalty income.
No wonder Paul Clegg is looking forward eagerly to 2012. I’ll be watching the company closely to see how it progresses.
• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
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