There was a lot of hype around the recent stock market flotation of HeiQ (HEIQ), with investors excited about its ability to make materials work better and kill Covid-19 from surfaces.

HeiQ. Price: 200p. Market cap: £251 million

It raised money by issuing shares at 112p and reversing into cash shell Auctus Growth in December 2020. A month later the stock had more than doubled in price to 240p but then took a big knock when a trading update wasn’t strong enough to drive big earnings upgrades. Investors’ expectations were arguably too high, and the shares were sold down.

Having settled around 160p following this incident, the shares have started to perk up again as investors focus more on the long-term investment opportunity. Helping to win back the market’s favour has been an important contract win and its first acquisition as a listed business.

It has bought a 51% stake in an industrial biotechnology business called Chrisal, strengthening existing capabilities and creating opportunities to enter new markets including water purification and probiotic personal care.

RAPID ANTIVIRAL FABRIC PROTECTION

Ahead of its float investors were excited about the company’s award-winning antimicrobial textile technology, HeiQ Viroblock, effective at killing bacteria and viruses, including Covid-19 and influenza within five minutes.

Viruses have been shown to survive on textiles for days and can increase disease transmission, fuelling huge interest in Viroblock’s protection properties from a diverse range of industries.

Chief executive Carlo Centonze told Shares the company has received over 500 enquiries from global brands interested in licensing the brand and trademarks. Around 150 major brands including Burberry (BRBY) now use Viroblock.

On 11 February 2021 HeiQ became the first textile company to convert an industrial antiviral treatment into a functional detergent after winning a contract with Girbau, a global leader in professional laundry solutions.

The deal will see HeiQ bring enhanced antimicrobial and antibacterial protection to garments used in the healthcare and hospitality sectors.

WHAT DOES HEIQ DO?

The company develops and markets products that increase the functionality of technical, medical and consumer textiles. The core textiles chemicals market is worth around $25 billion a year and is expected to grow at mid-single digit percentage rates.

Growth is being driven by consumers looking for more functionality in their clothing such as antiviral, warming, cooling properties or odour control. HeiQ has developed a portfolio of technologies to deliver these benefits.

In addition to consumer apparel needs, the market is experiencing increased demand for home furnishing and technical textiles in industries spanning automotive, construction, healthcare and agriculture.

The antimicrobial textiles market is worth around $10.5 billion and expected to grow around 10% a year over the next five years according to a report by Global Market Insights.

The healthcare market dominates this segment, accounting for 45% of total consumption in products  ranging from bedsheets to gowns, masks and curtains. The key driver is the requirement to prevent the spread of healthcare-acquired infections.

HEIQ HAS A UNIQUE BUSINESS MODEL

Despite its relatively small size HeiQ is involved in a broad array of activities ranging from pure research, commercial development, manufacturing and marketing.

The key characteristic of HeiQ’s operations is its unique partnership model adopted across all parts of the business, providing greater reach and effectiveness.

Since inception in 2005 the company has created 200 technologies and received 17 awards including the Swiss Technology Award for Viroblock in 2020.

HeiQ has stitched together an international research network by partnering with researchers at universities and institutes. It sponsors around 40 PhD students who work on HeiQ projects and directly employs 13 chemists.

HeiQ’s technologies are secured by nine patent families and the company has filed 182 trademarks.

MANUFACTURING AND MARKETING

HeiQ operates four production facilities, based in Switzerland, Australia and the US with a total capacity equivalent to $280 million sales. In addition, the company can call upon a further $220 million worth of capacity through its partner network.

Importantly, the firm has developed the knowhow and engineering expertise to scale up production from laboratory samples to full commercial    mass quantities.

What differentiates HeiQ’s offering from the competition is the level of marketing support it gives brand partners. The marketing tools help partners convert product innovation into a premium price.

HeiQ’s own research has discovered consumer willingness to pay a premium for specific functionalities. For instance, consumers are willing to pay more than a 150% premium for odour resistant apparel compared with the 15% premium currently charged. By analysing the barriers to achieving a higher price, HeiQ assists brands in sharpening their proposition.

THE HEIQ VIROBLOCK OPPORTUNITY

Viroblock has proven rapid antiviral properties when applied to fabric, destroying them in two to five minutes. The claim can currently be made in parts of the EU, most of Asia and Australia.

The active product is registered and compliant with regulators in the US and Europe allowing Viroblock-treated textiles to be sold in these regions.

HeiQ requires specific clearance from the US Food and Drug Administration for medical products using Viroblock to make antiviral claims.

The firm has also tested the antibacterial properties of Viroblock which showed greater than 99.5% effectiveness when applied to polyester against bacteria within 20 minutes.

Viroblock revenues come from textile treatments sold directly to fabric manufacturers, from selling pre-treated material from which products can be produced and consumer-ready products (face masks).

In addition, the company sells royalty and trademark licences.

Brand partners

HeiQ has partnered with 200 brands and focuses on blue-chip brands which offer the greatest revenue opportunities as well as the potential to enhance the HeiQ name.

The selection of brand partners includes:

Sports & outdoor: Speedo, Patagonia, Burton, The North Face, Adidas.

Intimate and hosiery: Triumph, Hanes, large Japanese apparel retailer.

Fashion and athleisure: Burberry, GAP,
Marks & Spencer, Inditex.

Home fashion: Serta Simmons, large Swedish home furnishings retailer

Footwear: New Balance, Vans, Geox.

Workwear: Dickies, Duluth, Marks.

ADDITIONAL GROWTH OPPORTUNITIES

In addition to the growth potential for Viroblock, HeiQ is developing a revolutionary graphene-based highly porous membrane called GrapheneX in collaboration with the IBM/ETN nanotechnology centre. Graphene is a very fine layer of carbon and one of the strongest materials in the world.

Management stress the binary nature of this project, but it has significant growth potential. For example, applying the technology to desalinisation plants could provide a 10-fold increase in salt extraction.

The $850 million-to-$1 billion market for water repellent fibres is expected to be a good growth market for the company and it is launching three new products in the current quarter. HeiQ’s products are eco-friendly and PFC (perfluorocarbons) free.

More stringent rules come into force across the EU from September 2021 banning the use of PFC, potentially impacting the market leaders Dupont and 3M which don’t have competitive PFC-free products on the market.

FINANCIAL FORECASTS

While the Cenkos base case scenario assumes Viroblock revenues will fall back this year from 2020 levels, despite more customers being signed up every month, this could prove too conservative.

It’s important to stress that beating or missing forecasts over the next couple of years is far less important than where earnings will go over the next decade.

Shares says: The positive fundamentals underpinning HeiQ’s business have the potential to deliver better than average shareholder value. Buy.

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