Biome Technologies eco-makeover puts it on the fast-track to profitability

One of the more successful campaigns run by the Daily Mail focused on the ecological time-bomb created by the millions of plastic bags given away each year with our shopping.

The paper raised a legitimate issue and one that was quickly seized upon by Sir Stuart Rose, the media savvy former boss of Marks & Spencer. 

Soon other retailers were falling into line with a nationwide initiative aimed at minimising the use of these difficult-to-dispose-of carrier bags. 

The Mail crusade demonstrates the power of the press. But it is also an illustration of something far subtler.

It shows Britain these days is becoming more eco-savvy, although our rather piecemeal approach pales in comparison to the efforts of continental Europe and even nations such as India and Brazil. 

However the tide is turning and it is against this backdrop that Biome Technologies (LON:BIOM) is now flourishing.

Investors may remember Biome as Stanelco, which in the mid-noughties garnered a substantial and fervent private investor following.

Followers were impressed by the firm’s radio frequency sealing technology Greenseal and ground-breaking packaging tie-up with Asda, which promised much but delivered nothing.  

The Stanelco name, which dates back to 1940 and is short for the Standard Electrical Company, still exists. 

These days the Biome division produces advanced radio frequency equipment and builds state-of-the-art furnaces used in the manufacture of fibre optic cables, and is profitable.

However the real potential of the business is contained in the Biome bioplastics business. 

And it is testament to the hard work of chief executive Paul Mines and his team that investors and analysts are now talking about the potential of bioplastics, rather than past failures.

This is reflected in Biome’s financial performance. Revenues, which were £13.4 million in 2009, will hit £25 million next year, according to City broker Daniel Stewart. By then the company should also be fully profitable.

“What you are seeing is the result of two-and-a-half years of hard slog,” Mines told Proactive Investors.  

The company owns a half share in Germany’s Biotec, and the two have jointly developed biodegradable resins from sustainable, natural sources that can be fashioned into to all manner of items from (bio)plastic bags and coffee cup lids to disposable razors. Biotec is also Biome’s manufacturing arm.

This heightened eco-awareness has prompted a step change in activity, according to Paul Law, managing director of the bioplastics division.

And demand is also being driven by legislative changes that focus on how we now dispose of our household waste. 

So, more recycling and composting increases the need for biodegradable bags, or greener packaging. 

It is top-down legislation, with EU-wide edicts being passed down, but local authorities also taking their own slant on waste recycling.

And as the Daily Mail example reveals, even the conservative, middle classes, normally pre-occupied by matters immigration or the value of their homes, now half an eye on the future of the planet.  

“There is a change that has not taken place in 25 years in this industry,” says Law. 

“What we are seeing is a drive from the end consumer. 

“The general public is a lot more interested in the future of the planet than they were in the past. 

“So, the government and the local councils are having to make the legislative changes.”

If the plastic bag is public “enemy number one” here in the UK, then around the world are different seemingly irrational pre-occupations.

In India, for instance, the focus is on tobacco packaging, but increasingly the race to become green and clean is also being driven by the brand owners.  

According to Mines, the big brand names that we see on our supermarket shelves are “just just putting their toes in the water”, with the mid- market companies taking the lead.

A case in point is American Safety Razor, a virtual unknown across here but the number two in the US in disposable razors.

It launched a biodegradable shaver which has attracted the attention of ASR’s rivals, who are now believed to be considering their own versions.

When the multi-nationals get involved, watch out says Law. “The big brand owners all have sustainability targets because they are recognising that if affects shareholder value.

“There is a long way to go. And there are more and more people who check up how these materials are going to be disposed of.”  

The UK has been slow to adopt, so the majority of Biome’s materials are shipped to mainland Europe. 

“But growth is coming in from Asia, particularly India, Brazil and to a lesser extent North America,” reveals chief executive Mines.  

“In the US demand is being driven by federal purchasing legislation. We have got products well suited to all these markets.”

In Biotec the company has manufacturing facilities that are “very well invested” to meet the additional calls on its capacity, he adds. 

It means the company has plenty of scope to grow without further capital expenditure being required. 

“When we came to the market last year to raise funds, this was the case, the scenario we put forward,” the Biome boss explained. 

“As we grow and accelerate, this will drop to the bottom line.”

And the company has been forced to deal with some “pretty rampaging raw material prices” with the price of starch, one of its base materials, doubling in 12 months.

“We have reasonable pricing power,” says Mines of the company’s ability to pass on these raw material costs. “There is another round of price increases going into the market from July.”  

Away from the operations, patent litigation brought by rival Novamont continues to rumble on in spite of a judgement last year in Biotec’s favour.

The fact that Biome hasn’t made a provision to cover the potential threat of an adverse judgement probably tells you all you need to know about the latest round of legal action. 

And in fact it’s the numbers that interest investors, and in particular the point at which Biome becomes a fully profitable entity.

Daniel Stewart says this will happen next year, while Edison sees Biome still recording a modest loss. 

Based on the recent quarterly results, the latest batch of broker forecasts look a little conservative, particularly if the top line continues grow at its current pace.

Revenues for the three months ended March 31 more than doubled to £5.6 million with sales from the biolplastics business up 96 per cent and Stanelco’s turnover ahead an impressive 179 per cent.

Leaping that hurdle into profitability should see a step change in the company’s valuation, according to Toby Thorrington, of City research firm Edison. 

“At current levels, core bioplastics operations are valued at barely one times sales,” he points out. 

“Until the profit model is established in investors’ eyes, the market will understandably be reluctant to reflect undoubted growth potential into a commensurate rating. 

“As operating losses continue to decline and general bioplastics adoption increases, it would be reasonable to expect the price to anticipate a more growth-oriented valuation.” 

Broker Daniel Stewart, meanwhile, reckons the shares are worth approximately double their current value, and has a price target of 0.41 pence a share.

“Biome Technologies is clearly in a phase of explosive revenue growth,” concludes analyst Richard Nolan.