Cher lecteur,
Are you travelling to the Foam Expo this year? It’s the home of foam and it’s in Michigan this June. If you have a fear of missing out, then fear not because it then arrives to Stuttgart in December.
5,900 people attended last year and were searching for:
Zotefoams unsurprisingly makes foams.
Zotefoams is a Paul Scott Share of the Year. Up 66.1% YTD. It’s PS’ 4th best performer as covered in my recent article Great Scott! But are you too late to enjoy the foam party? Or can you expect further expansion from the Zotefoam.
Let’s find out reader….
Continuing with the Foam Expo let’s explore the uses of foam. It’s used across numerous industries.
The short version is foam is a form of plastic extrusion where you heat it, (and uniquely Zotefoams) saturate it with nitrogen using autoclaves, then pressurise it, depressurise it, cool it, expand it by heating it a final time. Simple?
The long version is covered in this 1 hour video:
These are the brands and verticals served by Zotefoams:
My first concern (I’ve watched too many Dragon Dens) was the extent these products are patented and protected.
ZTF say they have a “robust framework of patents” but this is supplemented by know how. Know how is stuff you don’t patent because if you did your competitors would know how you did something. A patent discloses the method.
About £19m has been spent on intangibles - mainly R&D (39p a share), and half of that has already been expensed so intangibles have £9.4m net book value. You then get £2.19/share of “stuff” factories, machinery, debtors… so from an assets perspective you need to decide whether the £2.72/share premium to assets is worth the investment.
Taking a historic perspective the business generated £8m a year net profit average. That’s about 16p/share per year. Of that about 7p is dividends so about a 1.3% yield. On a 17.3X P/E we get to the £2.72 premium (if we strip out the book value of assets and do a multiple just on the premium). It’s a P/E of 33 if we aren’t that generous.
So can the business outperform going forwards? The consensus earnings shows as £11.3m 2024 and £14m 2025. P/E of 2025 gets us to a future P/E of 18.5…. that’s starting to get a bit more interesting, but makes it fairly valued.
But let’s examine what the brokers say at Research Tree. Only one broker, Singer, give their soliloquay. In their latest research they believe it has a 13% share price upside, and 2025 earnings are £15.5m so P/E 17 (so their forecast is above whoever else is in the consensus forecast at Stocko). Revenue will grow around 7% in 2025 and 2026 they believe.
6% or 7% revenue growth?! 10% upside to target price? I’m in danger here of going from FOMO to no no. So the question turns to are Singers wrong? Have they missed something?
Reknown investor Richard Crow is a ZTF advocate. I found a youtube video he advocated just yesterday. “The real gamechanger ‘ere is the milk car’ons….” he shares. Ah, hah. Thanks Rebel, so let’s focus on those. The milk cartons turns out to be produced using ReZorce® mono-material barrier packaging.
ReZorce - Solving the Problem
Remove one and you either end up with squished or squishy food (or drink).
“Mono” means it’s not plastic and cardboard stuck together, you can’t easily recycle those. In fact next time you buy a meal deal examine your sandwich. If you use your patience and ninja skills you can remove a layer of plastic (like clingfilm) from the cardboard and if (it’s a big if) the cardboard isn’t soiled you can recycle that. The problem is apart from die-hard enthusiasts, no one does, or they bung it in and contaminate the cardboard meaning it can’t be reused.
So why use a clingfilm and cardboard? Well keeping food fresh involves maintaining an effective barrier. But protecting the food too. Cardboard provides the robust protection, while clingfilm is an impermeable barrier. Remove one and you either end up with squished or squishy food (or drink).
So what if you have the world’s most sustainable beverage carton? Typically, say ZTF, 70% of a Liquified Paperboard (LPB) carton is virgin fibre and never used again in a carton – which contrasts with a ReZorce carton, which can contain up to 100% recycled material.
Every year, 300 billion packages are consumed globally, the vast majority of which are sent to landfill or for incineration. Landfill is £94.25 a tonne and rising.
Legislation has driven strict targets are now in place to drive post-consumer waste collection, recycling and reuse of materials back into primary packages. Brand owners must deliver 30% recycled content in the EU from next year.
As a mono-material structure, ReZorce is easy and cost-effective to fully recycle. When it comes to rapidly scaling any innovation, we understand that simplicity is key and have designed the ReZorce solution to be compatible with existing infrastructure, allowing rapid deployment for brand owners and beverage packers. This will accelerate the rate of market adoption and reduce switching costs.
ZTF has partnered with leading commercial waste management service provider Biffa and after extensive tests demonstrated that ReZorce cartons can be deposited in the standard plastics waste stream and will be correctly sorted for recycling.
Focusing back on Singer, their earlier broker notes states “only 25p of our valuation is ReZorce” and “blue sky is a 900p valuation” and “75% of beverage carton packs are incinerated or sent to land fill” and 93% are not recycled. So 93%-75% = 18% which goes where?…They leave that to your imagination, reader! (If we are playing a game of Pointless, waterways, rivers and streams might be the missing 18%?)
The benefits are not just its circularity….. a study by Imperial College London we are told by ZTF, comparing LPB to ReZorce the study found ReZorce uses 51% less water, has a 53% lower carbon footprint and c.50% lower energy consumption. Wow. Winner winner chicken dinner (served in a ReZorce box of course)
So what value is ReZorce? In 2023 ReZorce (part of MEL) was virtually zero.
Polyolefin has seen the most expansion but is lower margin “bread and butter” business.
HPP (High Performance Products) generates the bulk of profits but appears to be slow growth.
MEL lost money in 2023 and 2022 but closer examination shows those losses are investments into intangibles….. Into ReZorce.
Valuation (ex ReZorce)
Considering just the Polyolefin and HPP divisions improves operating profit to £22.9m in 2023. Minus £5.9m overheads get you to £17m net profit.
£17m on a £257m market cap puts this at a reasonable P/E of 15.
So given the MEL losses are R&D - and in a sense temporary - this puts ReZorce in the price for free.
Valuation of ReZorce
Watching presentations about ZTF and reading commentary, clearly there’s a lot of excitement about ReZorce. By ZTF, and by its investors.
ZTF explain in 2023 “the focus at MEL continues to be the ReZorce opportunity. Very good strategic progress has been made, with advancements in the technology accelerated by the Group’s 2022 acquisition of complementary know-how and assets in Denmark and the benefits of a joint development agreement with a world-leading packer of beverages showing immediate results.
The net book value of investments made in ReZorce as at 31 December 2023 amounted to £6.8m (31 December 2022: £4.7m).”
Yeah, but what about 2024?
“we expect 2024 to be a decisive year for ReZorce, with in-store trials planned at a major European retailer. In anticipation of success, we are preparing a roadmap to deliver scaled-up operational capacity linked to the significant commercial interest in ReZorce carton products. We simultaneously seek to engage with financial and strategic partners, recognising the limitations of Zotefoams’ size and experience in this multi-billion pound industry. Our business model remains flexible.”
Very exciting.
But as I search for the likely value of the market it would displace I then found something which made my heart sink.
Is Multi Material Doomed? Will Mono-Material sweep all before it?
=Unclear.
Elopak, listed in Norway sells over EUR1bn of liquid carton packaging, 14 bn units, so they sell those at an average 6.3p revenue per carton, and 0.4p per carton net profit (from continuing operations)
It claims 30% of milk cartons it sells are already fully renewable. (which covers the Brand Owners legal requirements)
Imperial College claimed ReZorce uses half the resources of current technology - but Elopak is heading towards half the resources too. Did it consider Elopak when it validated the research?
The research claiming half the water, half the energy, half the CO2. Half compared to what? Did they consider Elopak in its 2024 guise? Let’s find that research to be reassured.
Oh.
Should it concern investors that the Imperial College research is not available at Zotefoams web site?
Nor is it available on Imperial’s web site.
Elopak is a serious competitor and not the only one. Its presence makes a big difference to the potential disruptive value of ReZorce.
Summing it up….
I can see why ZTF at circa £3 a share was a great idea for 2024.
At £5.30 if I were investing in ZTF, I’d want to see the research. I’d certainly want to understand why ReZorce can win out against Elopak’s Pure Pak. If they hold equal credentials around their circularity and resource use, wood is more ESG friendly than foam - which is derived from plastics - which are derived from fossil fuels.
Instead of a wide open goal, it seems the competitive landscape could be quite different. Investors should consider there’s a 1bn revenue giant in Elopak who has plenty of market traction in Europe, and is expanding to the US. There may be others like Elopak - I don’t claim to have done an exhaustive competitor analysis. Elopak make 14bn of the 300bn packages - so how do the makers of the other 286bn packages stack up? The name TetraPak just popped into my head - and having checked they have significant investment in circularity too.
Advocates for ZTF might say ah hah but why can’t ZTF licence its technology to Tetrapak or Elopak? Persuading a paper-based producer (who likely own forests and sources of paper) to move to plastic (foam)? Good luck with that. How many large plastic packaging players are there and who would use ZTF’s technology? I don’t know. Certainly there’s one - because ZTF mention this. But no one else seems to have considered this either. If you want to invest, you probably should know, shouldn’t you?
Also while a few consumers will pay premium prices for eco-packaging (assuming they don’t mind it’s made from fossil fuels) most won’t. So how do the economics of ReZorce compare to LPB? I’d want some comfort about its cost-effectiveness vs LPB too. Recycling and compliance costs of course are part of that equation, but LPB appear to have an answer and can profitably do so - at scale - at a 6.3p cost per package. That’s the benchmark.
Zotefoams Risk Management section on Page 45 of their annual report admit ReZorce still faces challenges.
“In the price for free” and licencing the technology claiming just a little slice on hundreds of billions of cartons like some modern Monsieur Thenardier does sound a compelling narrative….
Here, a little 'dip'
There, a little 'touch'
Most of them are goners
So they won't miss much!
Conclusion
I conclude, unfortunately, in the absence of clarity around the true disruptiveness of the technology and the competitive positioning and pricing of its ReZorce technology, ZTF is a highly speculative investment at this price. Although it’s fair to say if ReZorce doesn’t work out, you would hold a fairly valued investment with some growth potential. This is echoed by Singer who see ZTF fair value at 575p (plus 25p for ReZorce).
But if ReZorce doesn’t get traction, I suspect shareholders wouldn’t see it that way. They would harrumph, and the share price would fall from its current 530p.
Regards,
The Oak Bloke.
Disclaimers:
This is not advice
Micro cap and Nano cap holdings might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip".
Great research on ZTF and the competition, and all valid.
The only only thing I think you might not have fully appreciated is that Refresco are already producing cartons using ReZorce as a manufacturing trail. ZTF won't need to make the product, they can license the production. So it could mean much larger volumes on much higher margins.
Refresco, is 'the world's largest independent beverage solutions provider for leading retailers and A-brands with production in Europe, North America and Australia' they say.
All the best
Richard
Nice one 👍