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Small cap has foot in many doors but has yet to seal any major deals
Thursday 17 Nov 2016 Author: Daniel Coatsworth

Carmarthenshire-based Haydale Graphene Industries (HAYD:AIM) looks to be on the cusp of commercialising its ideas. It has developed a way of adding graphene to various materials to improve their properties, such as strength or conductivity.

Graphene consists of very thin layers of carbon. It is lightweight yet considered to be 200 times stronger than steel; and it conducts heat and electricity.

The small cap business has a patented process whereby it uses low temperature plasma in a drum to change the chemical structure of materials to enable the addition of graphene.

In effect it is creating a ‘hook’ between the graphene and the host material. This enables Haydale to add graphene to resins used to manufacture composite materials including water or sewage pipes to make them much stronger.HAYDALE GRAPHENE INDS - Comparison Line Chart (Rebased to first)

Needs to seal the deal

Haydale is working with $4bn Araldite maker Huntsman (HUN:NYSE), adding graphene to the latter’s high-end epoxy resin to show that its system works. There’s been positive comment from Hunstman about the collaboration but no big formal contract as yet for large scale orders.

Ray Gibbs, chief executive of Haydale, is confident a deal will soon be signed which could potentially create a recurring revenue stream for the small cap. It could be a big prize as Huntsman is a major resin supplier to the tooling market.

Gibbs believes Haydale will be asked to supply a masterbatch of graphene-enhanced resin. Huntsman would then be responsible for the sales and marketing. ‘We believe they want to focus on the automotive industry for the enhanced resin, but they won’t tell us until a licence deal is signed,’ he says.

Working capital hurdle

Gibbs suggests the contract – assuming one is awarded – would involve Haydale buying resin from Huntsman, adding its magic and then selling the enhanced resin back to the chemicals group.

That implies Haydale would need to find a chunk of cash to act as working capital to fund the purchase of the raw material.

Chief executive Ray Gibbs openly admits in an interview with Shares that Haydale could do with finding a strategic investor. He says it is difficult for Haydale to obtain debt funding while it is a loss-making business.

Graphene buckyball model , 3d illustration

Strong investor interest

News on 11 October 2016 that a £500,000 open offer at 160p was three times oversubscribed would suggest investors are eager for a slice of Haydale – at least when the price is tempting.

The open offer was priced at a 15% discount to the market price on the day before the announcement. The offer was part of a £2.6m fundraise to support the acquisition of ACM which gives Haydale a foot in the door for the US market.

Loss-making for near term

Haydale generated £1.9m income in the financial year ending June 2016. It incurred £5.9m administrative expenses in the period, so it made a £4m operating loss.

Costs are expected to exceed sales for at least the next two years, according to analyst assumptions.

Investors must appreciate loss-making companies such as Haydale need to spend money in order to make money down the line. After all, a key reason why smaller companies allow the public to buy shares in their business is to access capital markets to aid their development.

Haydale is forecast by broker Cantor Fitzgerald to make a maiden profit in the year to June 2018 and to really start making money in the following year.

The recent US acquisition provides a welcome boost to earnings with a $2m annual sales contract lasting three years for the supply of silicon carbide nanomaterials.

Robust pipeline

Haydale has a two-year research project with sewage pipe manufacturing giant Amiantit which began in May 2016. The Middle Eastern company uses a significant amount of resin and could benefit from adding graphene.

‘They want to improve the fracture toughness of a pipe,’ says Gibbs. ‘Pipes are laid in the ground and sometimes contractors throw rubble on them which can cause cracking. We know our resin mix can strengthen their pipes.’

Similar to the Huntsman scenario, Gibbs says a formal contract with Amiantit would potentially create a need for working capital to buy resin before selling the enhanced version back to the client.

Flying high

The AIM-quoted company has received a small amount of funding from an aerospace association. It is looking at ways to replace copper mesh in aeroplanes with a different mesh that can withstand lightning strikes and is more lightweight. UK-listed aerospace and defence groups Cobham (COB) and BAE Systems (BA.) are also involved in the project.

Wind turbines could be another industry in which Haydale gets involved, judging by comments from the CEO. (DC)

While many people think graphene has been over-hyped, there is no denying that Haydale is involved with some heavyweight corporations. It would be great to see some proper contracts but it is clear that investors will have to remain patient. We think the shares are worth buying at 186.5p, albeit recognising the risks over pace of revenue generation and potential future financial constraints.

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