Description

EcoSynthetix

EcoSynthetix Inc (“ECO”) is a approx. US$200mm EV company with a unique set of characteristics for a company of this size, making it attractive for both investors and consumers as a green/ESG pure-play: 

1. A proven, commercially viable, and in-market clean platform to replace hazardous materials in multiple billion-dollar end-markets in both homes and workplaces. A true ESG stock.
   
   

2. ECO’s platform has three distinct products/applications, providing for “multiple shots on goal”.
   
   

3. After years of R&D and testing phase and a global procurement process – the largest furniture manufacturer & retailer in the world, Ikea, is near the end of its process to commercially deploy ECO’s product.
   
   

4. Unlike ‘science experiment’ stocks – ECO does not burn cash as its products are already in-market. 

ECO’s Technology and Products

The company’s tech uses renewable and green feedstock in the form of corn, tapioca, and potatoes. From this feedstock, ECO extracts the starch, putting it through a proprietary extrusion process, adding chemistry to it, in order to create a biopolymer. 

This biopolymer allows ECO’s customers to reduce or eliminate hazardous materials such as urea formaldehyde and SB latex. 

ECO has three distinct product pillars:

1. Paper

2. Wood Composites

3. Personal Care

For a good overall summary of the company and its products and opportunities, I recommend watching this one hour interview of the CEO and CFO here performed by Paul Andreola: https://ecosynthetix.com/resources/improve-economics/jeff-macdonald-small-discoveries

I will provide a brief overview of each product below:

Paper 

ECO’s EcoSphere is a bio-latex that is in commercial use around the world and has been in-market since 2008. To date, the company has sold over 100 million pounds of EcoSphere. It replaces SB latex, a synthetic polymer, which is derived from petroleum. EcoSphere is the company’s oldest product and has been responsible for the bulk of revenue in the last few years. That said, the underlying fundamentals in paper are not very attractive (structural decline), and as such, the company is shifting focus to its two other pillars. 

ECO estimates that the market for SB latex is $4 billion per annum. 

Wood Composites

At the heart of all wood composites (oriented strand board, ECO’s DuraBind is used as part of a formulation to replace urea formaldehyde, which is used as a binding agent in wood composites such as particleboard, oriented strand board, and medium density fiberboard.  There is a good technical article on how Durabind works here: https://ecosynthetix.com/wp-content/uploads/2017/05/WBPIArticleApr_May17_Web1.pdf

Urea formaldehyde is recognized as a toxic chemical, which I will elaborate on further below. Replacing formaldehyde in wood products allows wood panel and furniture manufacturers to have a health & environmental benefit, which can be capitalized upon in marketing and pricing, given consumer sensitivity to these trends around the world today. Furthermore, regulators globally are increasingly lowering the amount of allowable formaldehyde emissions. Over time, it is expected that these emissions regulations could ultimately result in much of the industry being forced to adopt alternatives like ECO’s products, in place of formaldehyde. 

For context, ECO that urea formaldehyde is a $15 billion market in wood resins. 

Personal Care

This is the newest vertical for ECO and arguably just as exciting as DuraBind. ECO has attracted the attention of a blue-chip chemical company partner, speculated to be Dow Chemical, who has launched a new product line called “Maizecare”, utilizing what is believed to be ECO’s bio-polymer, in lieu of polyvinylpyrrolidone (in hair fixatives). Most consumer do not realize, but there are only a limited number of chemical companies who make the base product for hair gels, fixatives, skin creams, and so on in the personal care space. Most of the smaller niche players buy a white label product from a company like Dow, add some additional features to it (scents/fragrances, colour, etc.), and then spend the bulk of their time engaged in marketing. 

Here is Dow’s product page on Maizecare: https://www.dow.com/en-us/pdp.maizecare-style-polymer.497667z.html

 Dow Chemical’s CEO, Jim Fitterling, specifically highlighted the Maizecare product on his Q3 2020 conference call: https://www.fool.com/earnings/call-transcripts/2020/10/22/the-dow-chemical-company-dow-q3-2020-earnings-call/

While the details of the arrangement with Dow are unknown, given the strength, market position, and impact of Dow Chemical, any sort of commercial take-up could be financially meaningful for ECO. The polyvinylpyrrolidone market is estimated to be worth $350 million in hair fixatives. 

What’s the Deal with Formaldehyde? 

When I hear the word ‘formaldehyde’ I think of Damien Hirst and sharks. 

Unbeknownst to most, formaldehyde is present in many household products that surround us including in building materials, pressed wood products (particleboard, plywood, fiberboard), glues and adhesives, paper product coatings, and certain insulation materials.

Also unbeknownst to most, formaldehyde is a human carcinogen:

This has resulted in formaldehyde being considered a restricted substance. In fact, the EPA officially recommends that people use “exterior-grade” pressed-wood products to limit formaldehyde exposure in their homes. It also recommends that consumers ask about formaldehyde content in the products that they purchase. Who knew?

Source: https://www.cancer.gov/about-cancer/causes-prevention/risk/substances/formaldehyde/formaldehyde-fact-sheet

Regulators around the worldwide have consistently lowered the amount of acceptable emissions of formaldehyde in wood composites:

So why haven’t the building products / wood paneling suppliers completely shifted away from formaldehyde? It turns out that formaldehyde is low cost to produce and has technical attributes that make it difficult to replicate (strength, adhesion, heat resistance, etc.). A resin called pMDI has been the closest, but using solely pMDI instead of formaldehyde creates issues:

1. In medium density fiberboard – pMDI fouls up the production line. DuraBind helps to encapsulate the pMDI and carries it to where it is needed through emulsification.

2. In particleboard – formaldehyde acts as a binding agent to hold the ‘mat’ of particles together and a certain level of structural integrity is required in the production line to hold it together. pMDI has a negative impact on that integrity, which DuraBind can help to offset.   

This all sounds a bit science-y and difficult to prove/verify from the perspective of generalist investors from their computer screens. However, comfort can be had from two real industry players who have vetted ECO’s products. 

1. Swiss Krono is one of the largest wood paneling producers in the world. They recently launched a new product line called “BE.YOND”, which utilizes ECO’s DuraBind + pMDI to replace urea formaldehyde. This is a lot of information available on BE.YOND’s products, see below:

1. 
   

2. Promo video: https://www.youtube.com/watch?v=i40ZvOhNwEw

3. Factory tour (in French): https://www.youtube.com/watch?v=csWj1GWzWu4

2. Ikea is the largest furniture manufacturer and retailer in the world with over 40 billion Euros of sales per year. Ikea has been working with ECO for several years to trial DuraBind for commercial deployment. 

What Is Ikea Doing?

Ikea is the wood composite / furniture industry giant. Whatever direction they move in, the rest of the industry follows. 

Ikea has publicly stated that they wish to reduce their overall greenhouse gas emissions by an amount more than their current value chain emits by 2030. Further, they have specifically cited a “bio-based glue” for their wood-based products as being a “main identified movement” required to achieve this goal, as fossil-based glues represent 6% of the company’s climate footprint. 

In their journey to lower emissions, Ikea allegedly looked at over 150 bio-based glue formulations from around the world over several years, and ECO’s DuraBind is the last and only product still in trials. It goes without saying that any sort of commercial deployment by Ikea of a “No Added Formaldehyde” line would likely have strong commercial traction with consumers, and would be a game-changer for ECO. 

While true that the Ikea trial has gone on for longer than investors may have hoped for, the CEO (who is typically quite reserved), had the following to say on their Q1 2021 conference call:

“Momentum with our key strategic wood composites prospect is accelerating and they are highly engaged. Due to confidentiality, it's challenging to express the confidence we have in the stage that we have reached with them, but it speaks to the optimism with which I opened the call that we have never been as confident in the prospects of the business. Based on the work plan schedule, we expect that this account will become a more meaningful part of our business in 2021. The macro demand for wood panels is extremely robust, with building and construction activity high for backward -- retailers and manufacturers, producing more board within their internal operation puts them at a competitive advantage.”

ECO Is Not Burning Cash

It may be surprising to discover that ECO is not a burner of cash. Management has done an exemplary job of operating within their means, operating at approximate EBITDA and cash flow break-even level. Furthermore, ECO has US$42 million of cash on its balance sheet, equating to CAD$0.92 per share. 

Conclusion

EcoSynthetix has an Enterprise Value of just over US$215 million, with a patented technology that can be disruptive to multiple categories, who has been vetted by blue chip companies with the highest level of industry expertise and R&D know-how. If commercial deployment of ECO’s products in either wood composites of personal care scales up at all, I would expect that ECO would be viewed as an extremely attractive acquisition target.

Prescribing a target price on this type of company is difficult and I believe it would be an exercise in false precision, but if asked I would say that the stock could easily be worth $10 per share in an acquisition scenario.

Catalyst

Conclusion reached in Ikea trials

Commercialization of Swiss Krono relationship

Commercialization of personal care product line