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Versarien all set for a major commercial breakthrough

Just a few commercial wins could make a huge difference to Versarien's business
Versarien all set for a major commercial breakthrough
Tungsten carbide generates cash to support Versarien's cutting edge technology

--UPDATE, ADDS MANAGEMENT COMMENT--

Versarien (LON:VRS) generated £4.98mln from the sale of advanced materials in the twelve months to March 31, a 69% improvement on the previous year.

The results reflect a solid revenue generating business, albeit one that has yet to shine all the way down to the bottom-line.

Two of the group’s three key businesses stand-up by themselves; with the tungsten carbide business the notable success, earning £1.12mln from £4.6mln of the group’s overall £4.98mln revenue.

That the group reported a pre-tax loss of £866,000 for the year reflects the continued investment into the innovative copper foam business.

The accounts alone may, to the uninitiated, suggest the copper foam unit is the group’s wobbly wheel, but, according to chief executive Neil Ricketts it is the closest to delivering a major commercial breakthrough.

A tie-up with major American distribution group Mouser Electronics in April is described by Ricketts as “a huge coup” and it is a solid endorsement of the product’s commercial potential.

The product, a copper-based foam, is primed as a disruptive technology in the electronic components industry; specifically the heat transfer and cooling devices associated with processor chips (it is called a heat sink).

Rickett explains that Versarien’s material could displace the current standard which, made of ceramic, need to be larger.

In the consumer electronics sector, where the push toward miniaturisation remains a key industry maxim, this is Versarien’s selling point.

Securing commercial deals to get the copper foam product into the designs for the industry’s increasingly mobile consumer electrical products is the key commercial objective.

The route to market does, however, mean the commercial pipeline is somewhat binary and as Rickett explains it is not the sort of sector where a small company can build-up scale in increments.

Instead, the group’s business model can be transformed by just one or two commercial deals.

“It is not unusual for us to receive enquiries for up to five million pieces,” Ricketts told Proactive Investors.

“This is a very disruptive and very innovative manufacturing process and product, and our job now is to get it into as many places as possible.”

“A few commercial wins would make a hugely significant difference to this business.”

Similarly, Varserien’s 2-D Tech unit, which a spin-out from Manchester University, acquired last April, is another advanced material business that’s is expected to have a big future.

2-D Tech, which makes and sells ‘sample’ size and small batches of graphene, achieved breakeven for the financial year.

Whilst 2-D Tech's product remains a little earlier in the development and commercialisation cycle, Ricketts reckons it could ultimately be a larger and faster moving sector.

Like with copper foam, securing commercial ties will be the driver to scaling up.

“I’d hope to see a step-change in that [business] and having a commercial deal with a very large blue-chip organisation is probably the way forward,” Ricketts added.

“What we’re seeing with the graphene business is it is accelerating much quicker than the copper foam business did. There are far more and far bigger opportunities than we first anticipated when we purchased it last year.”

“I’m simply staggered by the amount of progress it has made in the last twelve months.”

While both copper foam and graphene represent possible catalysts for future growth, the more traditional tungsten carbide part of Versarien’s business is still growing.

The unit, Total Carbide, is built around a 60-year-old engineering company that was acquired by Versarien at the time of its AIM listing.

Acquired both for its manufacturing capabilities - which are applicable to the production of copper foam as well as tungsten carbide - and its existing revenue base the unit is the core of the business that can be discerned by today’s financial results.

Chris Leigh, Versarien’s chief financial officer, highlights an improving performance of the business which produces hard-wearing materials used in specialist engineering, particularly the oil and gas sector.

The unit has now generated around £1.6mln of earnings for Versarien since its acquisition, Leigh explains.

“It has made a significant contribution to supporting our technology businesses, and it throws off a considerable amount of cash for us,” he added.

Panmure Gordon analyst Sanjay Jha, in a note, said today’s financial results were in line with expectations.

Jha notes to potential challenges associated with the oil and gas sector currently, where low crude prices have pinched spending patterns. The analyst says his forecasts for the 2016 financial year have been affected but he still sees some 56% revenue growth for the group as a whole.

“Looking beyond FY2016, our forecasts imply a three-fold increase in sales by FY2018 to £15m even before the full potential of graphene is realised,” Jha said.

The analyst reckons the addressable market for graphene could grow to around US$200mln by 2019, before expanding to US$1.3bn by 2023.

He rates Versarien as a ‘buy’ with a 30p target, which is almost 50% higher than the current price of 22p per share.

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