Alexium On The Flame Retardant Radar

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This story features ALEXIUM INTERNATIONAL GROUP LIMITED.
For more info SHARE ANALYSIS: AJX

-Unique formula, strong patent protection
-Global partners provide customer base
-Growth potential in new markets, geographies
 

By Eva Brocklehurst

More stringent fire safety regulations and the banning of toxic chemicals in traditional flame retardant treatments has put Alexium International ((AJX)) on the radar. The company is a US-based speciality chemicals business developing non-brominated solutions which can be applied to surfaces to make them flame retardant.

The stock is considered a strategic investment to leverage increased scrutiny in this industry and Moelis initiates coverage with a Buy rating and $1.20 target. The broker believes no other operator has a product which has minimal impact on the existing surface of the treated area, while regulatory changes will drive gains in market share.

Studies have revealed that brominated and halogenated products, used traditionally in such treatments, can be persistent and bio-accumulative, disrupting thyroid and oestrogen hormones and causing developmental defects. Recent studies have found that these chemicals are picked up through food and from direct indoor exposure through dust. Traces have also been found in breast milk.

Since 2003, twleve US states have banned certain types of these chemicals, with most of the remaining states expected to follow suit. The European Union and Australia also ban their use. The broker highlights an evolving issue in terms of companies using such treatments opening the door to future liability.

Most of Alexium's competitors still produce brominated and halogenated products and at a higher price point, as more chemical is used to achieve the same result. Hence, the company's product enjoys a cost advantage in several areas, centred on lower volumes of formula needed to achieve the result, application to a number of different surfaces and the ability to outlast traditional treatments.

Alexium has partnerships which the broker believes provide a large advantage, increasing access to global customers. In addition to its application chemicals, the company also specialises in developing additives which work with a textile's existing physical properties, to make them flame retardant while not detracting from the feel of the fabric.

The company partners with toll manufacturers to make the formulation In the quantity the customer requires. A commission finisher applies the solution to the fabric and final treated product is then supplied to the customer.

Moelis envisages upside risk to estimates, noting the sales pipeline is ten times the size of its list of current clients. The broker assumes Alexium converts one trial customer per year into a revenue generating customer. Currently the company carries no debt but the broker expects it to increase as commercialisation ramps up and working capital needs grow.

Moelis is of the view that the company's patented chemicals would be difficult to replicate without an infringement. The company has over 20 patents in nine countries. The current patents are for 20 years with none having less than 16 years to expiry. They cover all markets in which Alexium operates, or is seeking to enter.

The company plans to expand into Asia but is wary of China in terms of the risks to its intellectual property. Still, Alexium is targeting specific opportunities led by customer demand rather than product push and is yet to sustain an IP infringement in China.

Moelis believes a major avenue for growth will be new surfaces for application and also new geographies for distribution. On March 23 Alexium received its first purchase order in the floor covering market, from one of the world's top four carpet suppliers.

Alexium was established in 2009 when it acquired the technology from the US Air Force. The primary purpose of the technology was for chemical and biological warfare protection. The stock listed on ASX in 2010 and in 2011 developed a patented flame retardant chemical formulation which was environmentally friendly and not toxic as well as cost effective. The fabric also has a performance advantage in that it can be laundered.

Moelis notes reports that the global flame retardant market is worth US$7bn and expected to rise to US$10bn by 2019, with Alexium's products expected to have the highest rate of annual growth of 7.5% per annum over the next five years.

The major markets are North America and Europe, which account for over 46% of the world's flame retardant chemical consumption. Partners include iTextiles, the most established, which distributes the company's products in Europe and Asia. Allure distributes the products in Australasia.
 

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