Carbonxt (ASX CG1) specialises in providing oxidising, non-brominated activated carbons which are used to eliminate mercury by using carbon pellets to remove contaminants from a wide variety of gas streams mainly used with coal, & cement plants.
These are non-corrosive and maintain maximum efficiency; this eliminates the gradual deterioration caused by the highly brominated carbons without sacrificing effectiveness. The carbon can only be used once, creating reoccurring revenue.
Ultimately Carbonxt helps eliminate mercury and other toxic pollution from coal, & cement plants. Carbonxt’s manufacturing plant is based in the United States – Georgia, due to their main business being located in the US.
Carbonxt is not short of highly qualified management with the ex-managing director of Stockland Matthew Quinn as chairman, and ex-Babcock head of energy Warren Murphy as Managing Director. To add to the confidence, one of the largest shareholders is Lang Walker. Lang is one of Australia’s richest persons and comes with vast experience in investing.
What makes Carbonxt shares special?
During 2013, 128 signatories signed the UN Minamata Convention on Mercury. It concluded that there would be a compulsory reduction of mercury, with the main polluter being coal plants. Some countries that have ratified the convention into law are The United States, Germany, and Japan.
Australia is a signatory, but still needs to ratify it into law, a “ratification of the Convention would legally bind Australia to the Convention’s obligations, a detailed assessment process will be conducted, with the preparation of a National Interest Analysis and a Regulatory Impact Statement. Ratification will then be considered by the Joint Standing Committee on Treaties before a final decision as to whether Australia will ratify the Convention is made by the Australian Government.”
The ratification is a question of health and safety for Australia’s eco-system, and air quality. Australia is known for having some of the strictest environmental protection laws in the world. The ratification would continue the trajectory of providing an environment that is safe for its people and wildlife.
The cost to coal and cement plants would be minimal as it is a cheap alternative than scrapping all plants and going to renewables for coal in the short-to-mid-term. Carbonxt’s products can align with stricter environmental law and still provide Australia with cheap energy.
There is little to no substitute for the non-brominated activated carbon for reducing mercury produced by coal and cement plants. Carbonxt will have a monopolistic position in this field.
Carbonxt provides many products to specialise for different industries:
|Coal-Fired Power Plants||Cement Plants||Potable Water||VOC & Hydrogen Sulphide (H2S) Removal||Waste to energy: Industrial Boilers and Incinerators|
|MATS-PAC PLUS||CEM-PAC PLUS||CXT-BB600||CXT-ACP80|
These products ultimately remove contaminants from a wide variety of gas streams. The water product produced is developed for the removal of taste and odour compounds, in addition to other common drinking water contaminants.
Strong Forecast Fundamentals
|YE 30 JUN||FY18A||FY19E||FY20E||FY21E|
|EPS GROWTH (%)||(20.4%)||124.8%||227.5%||82.1%|
What impacted Carbonxt shares performance in FY18
The impact to their performance was due to a variety of factors, starting with a change in delivery date for a customer, which was exacerbated by production issues at CG1’s Arden Hills faculty. They also experienced further delays in commissioning of the Black Birch Manufacturing plant. These issues have been resolved.
In their September 18’ Quarterly update stated “the company continues to work through previously reported production equipment issues typically associated with new plant operations and is pleased to report that these issues are now largely resolved. This learning experience will become more valuable as the company continues to evaluate new plant opportunities.”
To add to the quarterly update, Carbonxt shares recorded a $4.3m September Quarter, which was over 180% the comparable quarter in FY18. Revenue is tracking to be slightly ahead of the prospectus forecast of $8.2 M, and with a significant increase in revenue to be realised in 2H19. The growth trajectory is expected to continue into FY20 once new AC Pellet facility is fully operational.
Carbonxt is well funded and has overcome its delays and in our opinion is trading at a low price. We project CG1’s sales cash flow will ramp up which should translate to strong upside in the Carbonxt share price.
Ratification of the UN Minamata Convention a strong upside for Carbonxt shares
To add to this, the gradual ratification of the UN Minamata Convention (128 signatories), puts Carbonxt shares in a very cosy spot for being one of the only companies capable of having a monopoly in the reduction of Mercury for coal and cement plants. Due to it being a legal requirement that companies admitting Mercury must reduce their emission, Carbonxt can supply this demand pressure.
The projected Carbonxt shares EPS growth to 124.8% FY19, 227.5% FY20 is substantial due to the increasing traction of the reduction of mercury in the US. They are one of the only companies in the US that provide non-brominated carbon to coal & cement plants, surpassing its competitor’s brominated carbon which is an inferior product due to its corrosiveness. Supported by the ratification of the reduction of mercury emissions, places a vast demand for Carbonxt’s products.
Carbonxt shares have strong upside providing a unique product
Overall CG1 was affected by its issues during FY18 but has now surpassed these problems. It now faces extreme demand pressures and is one of the only companies that offers non-brominated carbon for the reduction of Mercury. Supported by the gradual ratification of the UN convention places CG1 in a great position with a lot of potential upside.
This article was researched and co-written by Jean-Marie Klumper – Associate Adviser at MF & Co. Asset Management
Henry Fung is a Partner Managing Director and co-founder of MF & Co. Asset Management. He is a highly experienced equities, derivatives and financial markets professional with over 12 years of experience. Henry specialises in building trading algorithms & systems, quantitative & qualitative analytics across macroeconomic, fundamental and technical disciplines and currently runs the MFAM VPAC AU/US models portfolios. The management Partners and Adviser team have decades of experience between them, with experience from major Investment Banks and Brokers. Their Advisers are highly experienced, having dealt with some of the wealthiest clients in Australia.