The path from a great product idea to a commercial success is full of potholes, a fact many penny share investors fail to understand. No company provides a better illustration than Accsys Technologies (AXS), and judging by a recent research note by the broker Peel Hunt the end of the journey is still some way off.
I like companies with a simple business proposition. Accsys certainly offers this. Builders almost invariably use softwood, which is cheap but doesn’t last long. Hardwood holds up better but is expensive, takes decades rather than years to grow, and comes from precious rain forests.
So why not turn softwood into hardwood? The timber trade has two approaches to this: one is to compress the softwood under heavy weight; the alternative is to coat it with tar-like chemicals, providing a layer of protection against the weather. Neither is ideal, but, according to Peel Hunt, the majority of replacement sash windows fitted in London today are made from a new type of hardwood, made by Accsys.
They call it Accoya. It has a lot of the properties of expensive natural hardwoods, but at much lower cost. Wood contains chemical groups called free hydroxyls that absorb and release water, causing wood to swell and shrink… and eventually rot. By mixing the wood with a mix of chemicals free hydroxyls change into acetyl groups. This makes the wood much more stable and robust. Any child who has dipped a conker in vinegar has basically done the same thing!
A great product is only the beginning
This is a great idea. But convincing the market to buy Accoya has been tough, for reasons that will be familiar to many small companies. First of all it has to displace an existing product – softwood – that has been around for years and works fairly well. It has to convince the disparate industry of timber merchants, architects and builders, some of whom might not especially welcome the idea of selling a product that won’t need to be replaced. Then there is the problem of credibility. Will Accoya actually perform as well as claimed? Finally, will customers agree to pay a hefty premium upfront on the promise that replacement and maintenance costs in later years will be much lower?
Small companies in this position have two choices: they can build a factory, market the product, finance the inventory and sign up retailers, all of which takes time and costs money; or they can license the technology to others, which gets the product to market more quickly at the cost of control over the product.
Accsys closer to the promised land of profit
Accsys has decided upon a mixture of the two. From its factory in Arnhem it is able to supply the London sash window market and other early adopters; while it is also looking to sign up licensees. In the last two years it has made some significant progress. Output from the Arnhem plant has gradually increased, while Accsys appears to be on the verge of finalising some important deals.
The first of these is with Solvay-Rhodia. It has signed a fifteen year licensing agreement, giving it the rights to produce and sell Accoya in all European countries apart from the UK, Ireland and Benelux, which are retained by Accsys. We are now awaiting a firm timeline for the construction of the Solvay-Rhodia’s first factory.
Accsys’s other main relationship is with the petrochemical firm Ineos, one of the UK’s biggest private companies. Last year, Ineos took a 5.4 % stake in Accsys by subscribing for new shares priced at €0.17. It also signed a joint venture for the development of Tricoya, which is the MDF (chipboard) version of Accoya. The great attraction here is that MDF cannot currently be used for exterior applications, a problem solved by acetylation.
The first licensee for Tricoya is expected to be the Irish firm Medite. Once some modifications to the production process are ironed out, investors are hoping to hear firm plans for a new factory, which would take Accsys closer to the promised land of profit. According to Peelhunt’s calculations, an operating profit would be achieved if the Arnhem factory reached 75% utilisation (it is currently at 50%); and if licensees commit to building two more plants similar to that envisaged by Solvay-Rhodia (according to Peel Hunt, it is not difficult to envisage six to eight plants of Arnhem size for Europe alone). Accsys should get there in the end, but there is still plenty to do.