Secos has been having a few issues recently, closing down plastic film production to concentrate on environmentally friendly film, excess stocks of resin, COVID, etc.

Share price down to $0.045.

However I noticed that Belgravia Strategic Equities have increased their position in Secos from 9.6% to 10.7%.

Belgravia Group, run from Melbourne by Geoff Lord, does many things including sports for children, but is starting Belgravia Investments. I wonder what the connection is.

This is why reusable plastic bags don't work.

The Company’s March 2022 Appendix 4C follows.

https://www.asx.com.au/asxpdf/20220427/pdf/458bxpb4jhpkfs.pdf

OUTLOOK

The company is on track to deliver strong growth over the coming quarters however some uncertainty regarding shipping timing and costs remain challenges for the Company.

The Company expects to report a net loss for the full year due to lower margins than the prior year driven by raw material input increases, freight and logistic cost increases, expenses associated with the multiple Covid-19 disruptions, and flooding at the Company’s Malaysian port.

SECOS has been successful in passing through price increases to customers as contracts permit, while still achieving increased sales. The price rises in the quarter were however not sufficient to fully offset rapidly rising raw materials and freight and logistic costs.

The Company supplies packaging materials that are a critical component of many of its customers own supply chain requirements, and the Company expects to be able to pass on further price increases in the near term. Cost pressures will remain a challenge in the short to medium term, however the Company has begun to see initial signs of lower freight and input costs flowing through which are expected to assist with margin improvement in the fourth quarter and coming year.

The Board expects margins to normalize as these input and freight costs reduce and as the continuing growth in bioplastic sales increases capacity utilisation at the new Malaysian plant, reducing the unit cost impact of fixed manufacturing costs. The Company’s outlook and growth will be underpinned by:

• Expanding available biopolymer production in Malaysia which has capacity to produce over 480 million compostable bags plus 3,600 tonnes of compostable resin per annum.

• Increased penetration of the Company’s MyEco retail products, with an emphasis on waste diversion, courier bags and food applications, which is already yielding positive results with the expansion to 970 Woolworths stores.

• Development of new products and resin grades, with particular emphasis on new, high value laminate structures for food packaging applications,

• Supplying sustainable film to evolving hygiene and packaging markets utilizing available capacity in the Company’s Malaysian cast-film manufacturing plant.

• Developing smarter and more effective ways to manage Covid-19 related supply chain disruptions while also maintaining a safe workplace for staff, suppliers, and customers. SECOS has mitigated this uncertainty by increasing stocks and using less congested ports to land goods and transit them to customers. SECOS is establishing warehouse options to provide supply back-up for North and Latin Americas, offering more predictable delivery outcomes at a lower overall delivered cost.

The Company continues to experience a rapidly expanding sales pipeline due to increasing demand for SECOS bioplastic products and technology. The strong demand for certified compostable alternatives continues to be driven by the worldwide shift to environmentally acceptable packaging, legislative and regulatory changes, consumer buying behaviors and knowledge, and the expansion of composting infrastructure and technology.

SECOS has significantly increased their retail network in the US.

Following on from their announcement on November 2021 about their initial entry into the US market via US Veteran Canteen Services’ retail chain, SECOS has announced US United Natural Food Inc as a wholesale distributor of its MyEcoPet products to USA retailers. UNFI will stock three MyEcoPet products initially via 12 of their 58 Countrywide distribution centres.

The Veteran Affairs’ Veteran Canteen Services retail chain represented 97 stores throughout the US. The United Natural Food represents an opportunity of about 6,000 stores across the US (12/58 x 30,000 UNFI conventional grocery stores). This is clearly a step up in exposure.

Following on from a significantly increased manufacturing capacity largely via the newly built biopolymer manufacturing plant in Malaysia, the strengthing of supply chains and the establishment of a new Global Biopolymer Research and Development Centre, SECOS is well positioned for growth.

Scoring relatively high on the pre 4C fluff scale I think the important information was:

SES quarterly revenue up 3.9% over same quarter last year at $8.2 million (excuse is supply chain disruptions bumping sales to next quarter, who knows? could be true)

Good growth last 12 months in Biopolymer sales across all lines.

Negative $2.6 million cash flow in last 6 months with ~7Mil left.

Some supply chain disruption ongoing --> building inventory to help offset

Negative cashflow combination of ongoing Capex and new R&D initiatives + inventory build

Flagged significant uptick in sales expected next six months due to increased capacity now online.

Thoughts:

Tracking along nicely with the thesis, doing what they said they would do (winning new business in the bio segments) . Happy that they keep running down the cash balance if it is being invested like it is currently.

Report can be found here

SECOS continues to grow sales with $7M cash and no debt.

Their newly established Biopolymer plant in Malaysia is now operational.

SECOS continues to expand its product distribution via major retailers and has invested in digital assets to support retail sales development.

SECOS Group Financial and Operational highlights below from their 4C below.

SECOS Group Quarterly Activities and Appendix 4C – December 2021

Financial Highlights

• $8.2 million cash receipts for December 2021 quarter, up 24.8% from the same quarter last year.

• Biopolymer sales grew 51% in the twelve months to 31 December 2021 compared to the prior twelve months ending 31 December 2020.

• $8.2 million sales revenue for December 2021 quarter, up 17.1% on the prior quarter and up 3.9% from the same quarter last year despite over $0.8 million of sales shifted to the third quarter of the fiscal year due to significant freight delays as a result of Covid-19 and major flooding in Malaysia.

• Net operating cash outflow of $1.7 million largely to support working capital for growth with investment in inventories increasing to $8.1 million as of 31 December 2021. SECOS’ strong inventory position will support sales growth in the second half and provide SECOS customers a more reliable supply chain as a counter measure against the disruption being experienced due to Covid-19.

• Capital investment in capacity expansion increased 200% in H1FY22 to $1.2 million compared to the prior corresponding period and new capacity is now online to support expanded growth in sales in the second half.

• The Balance Sheet remains strong with $7.1 million in cash and no debt.

 Operational Highlights

• SECOS’ newly established Malaysian biopolymer plant is now operating with first shipments commencing in Q2FY22. Total installed capacity will be capable of supplying an extra 480 mil. compostable bags and 3600mt of bioresin or approximately $25 million in additional sales revenue per annum. The plant’s footprint has the capacity for a further 20% expansion in capacity of bio resin per annum as required to meet further sales demand. 

$7.0 million sales revenue (up 23%) from last year; (7.9 in receipts)

Net operating cash outflow of $0.9 mil

$0.7 million invested in plant expansion and new Research and Development Centre;

Covid-19 disruptions continued throughout the first quarter, however growth expectations for the second half (as previously communicated) remain on track;

Expansion of the new Malaysian biopolymer plant continuing to plan with 50% of new film lines installed;

$9.6 million in cash and no debt.

Few delays and disruptions related to covid having some impact.

Essentially all the bio-compostable product lines are growing exponentially I expect that this will continue due to strong demand being unlikely to subside. Trying not to overthink this one as I think there is a good chance it looks optically expensive but growth exceeds expectations.

Report here.

Record quarterly cash receipts of $8.9 million, up 24% on previous quarter

Net operating cash outflow was $0.9 million

Achieved record quarterly sales of $8.8 million with full year sales exceeding $30 million (unaudited) – year on year growth of 45%

Growth in compostable product sales continues with a 14.5% increase quarter on quarter and a 120% increase over the prior corresponding quarter

SECOS expects to report a significant improvement in its full year profit compared to FY20.

The company continues to invest in building new manufacturing capacity in Malaysia having completed the doubling of China compostable bag capacity in January 2021

The Balance Sheet remains strong with $11.3 million in cash and no debt

With a current annualized sales run rate of over $35 million (based on the June 21 quarter results of $8.8m) the Directors and Management expect the trend to continue into FY22

Thoughts: I actually think that SES's revenue next year has a good chance of being higher than the annulised figure due to new product capacity coming online. Cashflow may remain negative to even as they invest for growth something I agree with given the rate of growth that they are seeing. Remains hard to value but happy to ride the sector tailwinds unless things get too crazy.

Woolworths increases SECOS’ certified compostable bin liners from initial 88 stores to 203 stores

The initial rollout to 88 Eco Stores has performed above expectations resulting in SECOS being awarded an additional 115 stores within Woolworths’ retail network

Further validation that this is a product and solution that people want. I remain very optimistic about Secos' future.

Full announcment here.

Highlights

•  Another strong sales result of $7.5 million in the March 2021 quarter up 33% YoY with Biopolymer sales up 75% in the same period. Sales were 5.5% lower than December quarter reflecting the annual Lunar New Year plant shut down in China, a 13% decline in traditional film sales due to equipment repairs and global shipping delays
•  Cash receipts for the quarter were $7.1 million, up 8.5% from previous quarter and 12.2% from the corresponding prior year period
•  Net operating cash outflow of $1.6 million for the quarter reflecting a $2.0 million investment in working capital to support increasing sales volumes
•  Capex investment continues with additional extrusion and bagging capacity established during the quarter in China and commencement of significant expansion in Malaysia to support increased demand
•  The Balance Sheet remains strong with $12.5 million in cash and no debt

Disc: I hold

SECOS is continuing to see strong growth in demand across its range of bio-based compostable products, driven by the global trend of consumers, regulators and brands to replace single use plastics.

Recent increases in demand include an increase in the minimum annual offtake under its contract with Jewett-Cameron (ASX announcement 10 August 2020) for compostable pet waste bags for the US market by 30% to 5 million AUD p.a. Together with additional volumes from other existing and new customers is anticipated to be over 6.5 million AUD p.a. for compostable products.

To accommodate growing demand, SECOS has committed to an expansion of its biopolymer resin product production in Malaysia by 200% from 1800 to 5400 tonnes p.a. This increase in capacity follows the expansion of its Nanjing, China facility in December 2020 which increased output by over 100% to 2040 tonnes p.a.

They have flagged $2mil for this expansion.

Thoughts: 

Continuing strong demand supports the thesis. I expect they will be able to sell everything they produce at a decent margin.

Consumers want this solution. They want the ease of use of plastic but don't want to pollute with plastic. 

Financial Highlights

•  Positive EBITDA $576K and NPAT $66K
•  Revenue up 30.5% vs PCP
•  Biopolymer sales up 129% vs PCP
•  Gross profit margin 18.2% vs 14.2% PCP
•  Strong balance sheet: $14.3m cash with no debt

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02344062-3A561828?access_token=83ff96335c2d45a094df02a206a39ff4

DISC: I hold

SES is a developer and manufacturer of sustainable packaging materials, supplying patented compostable and biodegradable resins and packaging products to domestic and international customers. SES also manufactures a range of traditional plastic film, which are used in medical applications (e.g. medical gowns) and the hygiene market (nappy liners/femcare products). They are looking to divest away from the traditional business and grow the sustainable packaging business rapidly.

The plan is that as the transition to compostable bioplastics accelerates the company’s revenue with grow quickly accompanied by increasing margin on this revenue as bioplastics are able to be sold at a higher margin. This should happen over the next 3-5 years but I imagine that we will be using more and more bioplastics over the next ten years. Margin expansion on top of rapid sales growth is generally a great combination to be invested in.

In 2020 the company is basically breakeven currently with $21 million in revenue and $17 million cash (thanks to a recent $15mil capital raising). No debt.

They are looking to go through a cashflow inflection point sometime in the next 12 months.

Investing with a tailwind is very forgiving if you enter at the right price because even if you are wrong the rising tide can still lift your boat limiting the downside risk.

Key to this thesis is the rapid growth of the sustainable product lines and ongoing margin expansion it will be key to monitor these as while the transition to sustainable packaging is happening there is likely to be lots of competition.

Financial Highlights

• December quarterly sales of $7.9m were up by 50.1% vs the corresponding December 2019 quarter, and increased 34.2% vs the preceding September 2020 quarter,

• Biopolymer sales were up 71.1% from the September 2020 quarter and now represent over 73.3% of total sales,

• Driven by record biopolymer sales, SECOS expects to report a maiden profit for the first half for FY21,

• SECOS reported a net operating cash outflow of $1.4 million in December 2020 quarter after investing over $2.6 million in new working capital to support increasing sales volumes,

• The Balance Sheet remains strong with $14.3 million in cash and no debt,

• Capex investment continues with additional extrusion and bagging lines in China and Malaysia to support increased demand.

Disc : I hold on Strawman and TRW