Biome Technologies: on track to break even by next year

Daniel Stewart believes that biodegradable plastics specialist Biome Technologies (LON:BIOM) is “on track" to achieve breakeven at the operating profit level by 2012 after the firm this morning posted record first half revenues and produced a pre-tax profit for the first time.

Biome’s group revenues during the six months June 30 increased 55 per cent to £10.4 million (H1 2010: £6.7 million), with the operating loss reduced to £0.4 million (H1 2010: £1.2 million loss). A foreign exchange gain of £0.4 million meant that Biome ended up delivering a pre-tax profit of £0.1 million (H1 2010: £1.7 million loss).

The group’s cash position at the end of June was £3.6 million, compared with £4 million at the end of last year.

Daniel Stewart, the firm’s house broker, said: “We believe that the company’s stated goal of a breakeven EBITDA by 2012 is on track.” 

The broker also noted that the company’s cost cutting measures over the past few years, including 30 per cent salary cuts for directors and the shifting of staff working patterns, appear to be paying off. 

Biome develops and sells biodegradable natural polymers that replace and enhance products made conventionally from oil-based materials through its Bioplastics division. This includes two companies: Southampton-based Biome Bioplastics and Biotec.

Biome Bioplastics is responsible for the marketing and distribution of Biome’s bioplastic products, as well as research and development, while Biotec – a northern Germany-based business jointly owned by SPhere, one of Europe’s largest plastic bag producers – acts as the firm’s manufacturing unit.

Biome also owns Stanelco RF Technologies – a legacy business that designs, builds and services advanced radio frequency systems.

During the first half period, revenues at the Bioplastics division increased from £5.8 million to £8.6 million, reflecting a 131 per cent increase in sales at Biome Bioplastics to £3.6 million and a 19 per cent increase in Biotec’s third-party sales. As a result, the division delivered an operating profit of £0.1 million (H1 2010: £0.5 million).

Biome Bioplastics benefited from increased demand during the first half from both existing customers and “an encouraging variety of new customers seeking supply for their own product launches”, said the company.

Biome’s Stanelco division saw revenues increase 92 per cent to £1.9 million, while operating profit improved to £0.5 million from £0.2 million in H1 2010. Stanelco has benefited from robust sales in Asia and Europe, and it has seen a number of repeat orders from “substantive customers”.

Paul Mines, Biome’s chief executive said: “We are delighted to deliver our strongest half year of trading, with revenue up 55 per cent and a step change in growth for Biome Bioplastics.  It is especially pleasing that the revenue growth is being reflected in the bottom line and the Group’s operating loss has reduced to £0.4 million.”

Mines added that the firm was “very focused and excited about being at the forefront of both bringing the environmental benefits of bioplastics to a wider community and continuing to deliver value for shareholders through our improving financial performance”.

In a phone call with Proactive Investors later in the morning Mines said that the reason behind Biome’s increased sales was complicated, pointing to a number of contributory factors.  With around 80 per cent of the firm’s sales still in Europe legislation within the EU was playing its part, he said, along with growing consumer awareness of bioplastics. “But I think what has also helped has been oil price rises and oil price volatility,” he added. “Although we are more expensive than oil-based products that gap is closing.”

Another point made by Mines was that long-term customers of Biome were beginning to see consumer attitudes change and increasing their own requirement for bioplastic-based products. “So, it’s not just about landing new customers, it’s also about supporting and servicing existing customers,” he said, pointing out that the German Biotec facility lends the firm scalability.

Daniel Stewart expects the utilisation rate of the Biotec facility to rise to between 50 and 60 per cent by the end of this year. “Should demand significantly increase, and the utilisation rate approach 100 per cent, the company estimates that capacity could be increase 40 to 60 per cent with relatively little capital expenditure,” the broker said.

Biome also announced today that Declan Brown is to join the firm as group finance director from V.Ships Capital, where he was chief financial officer. He previously held senior financial positions at Philip Morris Limited and Sappi Fine Paper.

Daniel Stewart estimates Biome’s turnover to hit £20.4 million this year, increasing to £26.6 million in 2012. Its pre-tax profit forecast is for losses £1.1 million and £0.3 million in 2011 and 2012 respectively.

The broker has set a target price of 0.41 pence each for the shares, which were trading for 0.22 pence each by midday today.