Opened: 08-Dec-2021
Closed: 08-Feb-2023
Shares Held at Open: 6,178,333
Shares Held at Close: 6,178,333
Reason Memo Closed:
What does AJX do?
Alexium International (ASX: AJX) has developed and is selling advanced performance chemicals for cooling and fire resistance.
AJX commercialises its advanced performance chemicals by partnering with and selling its technology to manufacturers in a specific market (bedding, textiles, military uniforms etc).
AJX partners with manufacturers that then on-sell products to end customers with AJX’s thermal management or fire resistant chemicals applied.
What is the macro theme?
IP-backed technology with the potential to enter the lucrative US defence market.
[Memo Assessment - 08-Feb-2023]: Grade = B
While AJX has heavily invested in developing a range of technologies, it is yet to convert these to meaningful commercial contracts.
Progress has been made in regards to entering the US defence market, with AJX responding to a request to adapt its flame retardant material to meet military specifications, leading to field testing which is now underway.
While we were most enthusiastic about AJX’s progress in the US defence market at the time of this memo, the company has rightfully focused on its core bedding market since, which it sees as the fastest path to achieve positive cash flows.
Why did we invest in AJX?
Coliton Capital investment in AJX
Colinton Capital Partners is a well known private equity firm that specialises in taking a “hands on” approach to its investments. Colinton seeks to grow the companies it invests in from $100M's market caps to multiple billion dollar companies. We hope Colinton Capital can help AJX take this journey.
[Memo Assessment - 08-Feb-2023]: Grade = B
Colinton Capital Partners remains the largest AJX shareholder, holding 12.27% of issued capital (as at June 30 2022). While Colinton’s Simon Moore remains on the AJX board, and Colinton has been supportive to the company by offering convertible note funding, we have yet to see AJX’s valuation consistently grow yet.
Established, revenue generating business
A stable revenue generating company to hedge against market volatility.
[Memo Assessment - 08-Feb-2023]: Grade = C
After a challenging 2022, revenues came in lower in Q2 2023 than a year earlier. This was attributed to continued weak US consumer confidence that carried over to the bedding markets. To date we haven't seen stable revenue from AJX but recognise that it could soon be achieved.
Adaptable technology, primed for growth
With a strong sales pipeline and a strategic decision to engage with new markets, we think that AJX is primed for growth.
[Memo Assessment - 08-Feb-2023]: Grade = C
AJX made a number of technological developments over the past year, however, it remains yet to turn these into sizable commercial contracts.
While we have seen some progress on increasing revenue and cutting costs, we are yet to see meaningful growth in revenue from AJX.
What do we expect AJX to deliver?
Objective #1: Cash-flow positive
AJX is currently earnings (EBITDA) positive. If AJX can fund its growth from revenue generating products, it will be less reliant on capital markets for funding.
[Memo Assessment - 08-Feb-2023]: Grade = D
At the time of this memo, AJX was EBITDA positive. Challenging market conditions saw that reverse through 2022.
AJX is yet to fund its growth from revenue generating products. We do like that it has invested heavily in developing and improving its product portfolio, setting it up to leverage into revenue growth.
Objective #2: New Markets: Cooling Technology
AJX’s cooling technology, Eclipsys™, is foundational for the next phase of AJX’s growth into new markets.
[Memo Assessment - 08-Feb-2023]: Grade = B
AJX now has a strategy in place to expand its reach in the bedding market, providing its cooling technology for top of bed products as well as new types of mattress markets.
After a challenging initial launch of Eclipsys™ into the body armour market in mid 2022 the product has been altered to provide a more sustainable material design and improved thermal performance. The actual tactical gear application method was also redesigned, which made customer adoption much simpler.
The new DelCool dehumidifier technology is also now ready to launch into new and existing markets. This remains on track to potentially have commercial impact in CY2023.
Objective #3: New Markets: Flame Resistance Technology
We want to see the existing IP leveraged and AJX launch into different market segments.
[Memo Assessment - 08-Feb-2023]: Grade = B
The US Military requested FR NyCo fabric with a lower final fabric weight, while achieving the required tear strength and fire-retardant properties.
AJX worked with a major nylon fabric supplier to source and validate the product performance at this lower fabric weight, which led to the new FR treated fabric meeting the key performance targets requested by the Military.
The result was the military fast-tracking the technical review and field testing of this new offering to expedite a viable full-scale option for military personnel.
Not all of the military's validation steps are complete yet, but feedback has been positive with the product now under review by two separate U.S. Military branches.
What could go wrong?
Sales risk
AJX sells directly to the manufacturer, not to the customer. This means that AJX will need to ensure that its manufacturing partners have a marketing strategy in place to commercialise products that use AJX’s technology. AJX’s could have the best product in the world, but if it is not marketed property it could hurt its top-line sales.
[Memo Assessment - 08-Feb-2023]: Grade = C
AJX’s manufacturing partners suffered through the worst mattress market in 15 years which carried over to reduced orders for AJX’s technologies and challenges when looking to expand its business to new markets.
Technology risk
Although AJX has IP for its unique chemicals, it’s possible a competitor or larger chemical company enters the market with a similar or better product.
[Memo Assessment - 08-Feb-2023]: Grade = B
While some of AJX’s technology do face competition when it comes to selling to manufacturers, many of its technologies are patented novel technologies for which there is no alternative.
Funding risk
Although AJX is EBITDA positive, it does have ~US$2.5M in borrowings to pay down. A market crash combined with slow sales could impact its ability to pay down this debt.
[Memo Assessment - 08-Feb-2023]: Grade = C
This risk remains, however, we like that AJX’s near term focus is on achieving a cash flow positive position which reduces its reliance on external funding.
What is our investment plan?
We have invested in AJX three separate times over the last 18 months and have built our long term position.
Our view is that the current share price doesn’t reflect the progressive value added to this business from quarter to quarter over the last year.
We plan to hold AJX as it demonstrates commercialisation traction across its six different market segments, something which we believe could see the share price re-rated at least 500% from our initial entry. At this point we will look to free carry and take some profit while maintaining a long term position for the next 2+ years.
[Memo Assessment - 08-Feb-2023]: Grade = C
We have built a long term position in AJX, investing on three separate occasions beginning with our initial Investment in March 2020 (almost three years ago).
In November 2021, we de-risked a portion of our holdings (~2.8M shares) at around 8.5c per share.
Our most recent Investment was in July 2022 for 3.33 million shares at 6c per share.
Whilst we are down on the majority of our Investment at the current share price, we plan to hold the majority of our AJX position as it demonstrates commercialisation traction across its various market segments.
We believe commercial success should see the share price significantly re-rate.
Disclosure: Disclosure: The authors of this memo and owners of Next Investors, S3 Consortium Pty Ltd, and associated entities, own 6,178,333 AJX shares at the time of publication. S3 Consortium Pty Ltd has been engaged by AJX to share our commentary and opinion on the progress of our investment in AJX over time.
Opened: 08-Feb-2023
Shares Held at Open: 6,178,333
What does AJX do?
AJX is a performance materials company.
AJX has developed and is selling advanced performance chemicals to deliver thermal regulation, dehumidification and flame-retardant solutions.
AJX commercialises these advanced performance chemicals by partnering with and selling its technology to manufacturers in specific markets (bedding, textiles, military uniforms, workwear, etc).
These manufacturers then on-sell products to end customers with AJX’s thermal management or fire resistant chemicals applied.
What is the macro theme?
The outlook for AJX’s key bedding markets is an upward growth trend following historic lows of 2022 driven by high US consumer price inflation and a contraction in activity in the housing market.
A recovery in the market should lift orders for AJX’s technologies while the company expands into adjacent and new markets.
Why did we invest in AJX?
Revenue generating business
AJX is already generating revenue from its current products - which is not so common for a small cap ASX listed company. We like to invest in companies with existing revenue, as it can make growing that revenue easier compared to starting from scratch.
Adaptable technologies, primed for growth in large commercial markets
With a strong sales pipeline and a strategic decision to prioritise sales into its key markets, we think that AJX is on the cusp of delivering cash flow positive results and accelerating revenues.
Colinton Capital investment in AJX
Colinton Capital Partners is a well known private equity firm that specialises in taking a “hands on” approach to its investments. Colinton seeks to grow the companies it invests in from $100M's market caps to multiple billion dollar companies. We hope Colinton Capital can help AJX take this journey. It is AJX’s largest shareholder, with a 12.27% holding as at June 30 2022.
What do we expect AJX to deliver?
Objective #1: Get cash flow positive
We want to see AJX cash flow positive every quarter.
To achieve this we want to see AJX leverage its position to saturate existing mattress and top-of-bed markets, diversify sales across all segments of the bedding markets in North America and abroad, and to enter new markets with existing and new technologies.
Leveraging its product portfolio, which has significantly expanded over the past 3 years, including internationally, is the key to AJX’s growth strategy.
While sales volumes are down year-over-year (as at 30 December 2022), AJX has retained its core customer base, which should lead to increased revenues as the market recovers from low consumer confidence that hurt its key markets.
Milestones
Milestone: achieve monthly sales circa $1M-$1.2M to achieve a cash flow positive position (this assumes cash burn does not drastically rise with increased sales).
Objective #2: Grow bedding market sales
AJX’s cooling technology, Eclipsys™, is foundational for the next phase of AJX’s growth into new markets.
Milestones
Expand market share in traditional mattress producers
Leverage existing IP to launch into different bedding market segments / sign supply agreement with a major foam mattress customer
Launch new dehumidification platform DelCool into bedding, tactical, and athletic markets.
Sign commercial agreement signed to expand to international markets
Objective #3: Progress commercialisation of flame retardant technologies for military uniforms
While less of a near term revenue driver than its bedding applications, AJX flame-retardant technology portfolio for US Military uniforms presents significant commercial opportunities in the future.
AJX will work across US Military branches, and foreign militaries to offer the newly validated FR NyCo for uniforms. This will be a two-pronged approach and while it’s a secondary focus area, the FR technology portfolio for military uniforms could prove to be one of the company’s greatest sources of revenue gain in future years.
While we don’t expect it to be a major contributor to revenue over the coming 12 months, we do want to see progress.
Milestones
Formalise a long term supply agreement with a US military branch
AJX to get government buyers to specify the FR material into their public bids, AND have the material approved for manufacturing by the ultimate uniform manufacturers
Objective #4: Progress commercialisation of cooling technologies for tactical gear
We want to see AJX take steps towards commercialisation of its thermal regulation solutions (Eclipsys™) application for body armour / tactical gear.
Milestones
Make inroads into new markets for this technology, such as athletic markets.
What could go wrong?
Sales risk
AJX sells directly to the manufacturer, not to the customer. This means that AJX will need to ensure that its manufacturing partners have a marketing strategy in place to commercialise products that use AJX’s technology. AJX’s could have the best product in the world, but if it is not marketed property it could hurt its top-line sales.
Technology risk
Although AJX has IP for its unique technologies, alternate products could be developed or commercialised if competitors or a larger chemical company enters AJX’s markets.
Funding risk
AJX is not yet cash flow positive and relies on external funding sources, most recently a convertible note and line of credit. Any ongoing pain in AJX’s target market, particularly the US bedding market, could impact its ability to pay down this debt or achieve a cash flow positive position.
Market risks
Changes to AJX’s target markets are a risk that it is working to mitigate through diversification of its product portfolio and expansion of its customer base.
Ongoing high U.S. inflation could impact consumer spending and decrease discretionary spending for items such as mattresses.
What is our investment plan?
We have built a long term position in AJX, investing on three separate occasions beginning with our initial Investment in March 2020 (almost three years ago).
Over a number of days In November 2021, we de-risked a portion of our holdings (total of ~2.8 million shares) at around 8.5c per share.
Our most recent Investment was in July 2022 for 3.33 million shares at 6c per share.
Whilst we are down on the majority of our Investment at the current share price, we plan to hold the majority of our AJX position as it demonstrates commercialisation traction across its various market segments.
We believe commercial success should see the share price significantly re-rate.
Disclosure: The authors of this memo and owners of Next Investors, S3 Consortium Pty Ltd, and associated entities, own 6,178,333 AJX shares at the time of publication. S3 Consortium Pty Ltd has been engaged by AJX to share our commentary and opinion on the progress of our investment in AJX over time.
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