Market: AIM Wood is everywhere - window frames, roofs, beams, floors, musical instruments, decking, indoor furniture, outdoor furniture - the list goes on and on. The timber industry is the second largest in the world (after agriculture) and has an estimated value of ?100 billion per annum. Timber is an incredible material: durable, strong, light, pleasing to the eye, completely renewable and, if managed correctly, can supply global needs indefinitely.
No product is perfect, and wood in its natural state contains ?free hydroxyls? - molecules which absorb and release water depending on changes in the environment - causing the wood to expand and contract with changes in temperature and humidity making wood vulnerable to rotting. This movement also stresses any coating on the surface of the wood as it is repeatedly stretched and shrunk.
Different species of wood contract and expand as different rates according to circumstances. Generally speaking, hardwood species are more resistant to rot, more durable and more stable and are in demand where these qualities count - this is not good news for tropical forests, which consist mostly of hardwood species! But the global timber industry is also cost sensitive, and while hardwoods are in high demand, they grow more slowly and are thus more expensive than softwoods. This has encouraged the timber industry to develop a range of chemical processes to increase the durability and stability of faster growing soft wood species such as pine ? a species which grows in abundance in the northern and southern hemisphere. Unfortunately, the processes normally used to treat softwood to make it durable simply don?t stand up to an environmental scrutiny in today?s world ? and we won?t even talk about plastic substitutes like UPVC!
Accsys Technologies claims to have developed a ?new? wood species using its own unique patented process, which changes the chemical structure of wood. This new species goes by the brand name ?Accoya? - the potential for Accoya is mind-boggling.
Accoya is a form of acetylated softwood, which is not a new phenomenon, but the ability to produce it in commercial quantities at economic prices is new. (This is about as technical as we are going to get ? remember ?free hydroxyls? - bad, ?acetyl?- good.) The acetylating process substitutes acetyl molecules for active hydrogen atoms in the free hydroxyls molecules, thus reducing the number of free hydroxyl molecules in the wood. The process also introduces additional acetyl molecules - which occur naturally in wood anyway. This keeps the cell wall moisture content low, which means that the wood becomes unattractive to micro-organisms and stabilises because it no longer takes up water. This increases the durability, dimensional and colour stability of the wood ? essentially giving a board of cheapo softwood the performance characteristics of a board of pricey hardwood. Because the process of acetylating wood has been studied since the 1920s the properties of acetylated soft wood are well researched and well understood. So Accsys Technologies is able to promote Accoya on the back of decades of experimental research!
The breakthrough that Accsys has brought to the market is to do with the scale and economics of acetylating wood. The company has found a cost effective way to make pickled wood using acetic anhydride, on a large scale, and knows how to use up the liquid waste from the pickling process to make more acetic anhydride, on site as they go along ?a patent, and useful, wood pickling process, with a closed processing materials loop ?and there is no competition in sight!
Because the acetylating process penetrates the wood all the way through, changing the nature of the wood, this provides the basis for Accsys Technologies claiming to have created a new species of wood. Typically pine carries 2 per cent acetyl, oak 4 per cent, and Accoya carries 20 per cent acetyl ? and a board of Accoya could well have started out as a board of ordinary pine.
Titan Wood, Accsys?s 100% owned Accoya development and production subsidiary, sources its softwood from the 400 or so species of pine that are widely available from sustainable sources. In fact, Accoya is specified as being derived from sustainable wood sources ? and because it is modified softwood it, by definition, does not involve any endangered hard wood tropical species. The production of Accoya apparently creates no environmentally negative by-products, and Accoya contains no undesirable chemical compounds, has a much longer life than unmodified softwood, and is recyclable. This sounds like an environmentalist?s dream come true!
Shares in Accsys Technologies reflect the optimism surrounding the company?s products. Since listing in October 2005 the share price has nearly quadrupled ? giving the company a rather heady market capitalisation. However, Executive Chairman Willy Paterson-Brown is the personification of ?a man on a mission?, and his mission will not be complete until Accoya is a globally successful wood species. What the company?s market capitalisation will be if is that goal reached ? the mind boggles.
The milestones to date for Accoya are impressive to say the least. Acetylated wood is a proven technology covering many soft wood species and the group has built a plant in the Netherlands which already has a full order book for 2007. The company has just signed a strategic relationship with Celanese ? a US$5 billion chemicals behemoth that will distribute acetyls to Accsys licensees anywhere on the planet. If that isn?t a big enough sign of approval in the commerciality of the technology - try this - Celanese subscribed to around 8.1 million shares and now owns 5.5% of Accsys?s issued capital. Celanese also has an option to increase its stake, at the prevailing market price, to 29.9% within three years.
This puts Accsys in a very strong position. The technology is proven, the patents are secured, the commercial arguments are robust and the exclusive distribution agreement with Celanese enables the company to supply licensees anywhere in the globe. So what about those licensees then? Willy is supremely confident that investors won?t have to wait too long before the ink is drying on licensing deals. Accsys is working on a model of a one off up front fee to acquire a licence based on the size of the operation planned plus an ongoing production royalty based on cubic metres of wood produced. As the time span from signing a license to first production is likely to be 12-24 months, the upfront one off fees will be a vital part of revenues for Accsys for the April 2007-March 2008 financial year.
House Broker, Collins Stewart, has the onerous task of calculating just how much revenue Accsys could generate over the next few years, and they originally forecast that Accoya would sell for ?700-1100 per cubic metre. Willy told Proactive that the price is now likely to more in the region of ?1000-1500 per cubic meter, and Accsys will be targeting an upfront licensing fee of ?200 per cubic metre of planned production capacity and production royalties of ?22 per cubic metre.
It is not often that a company comes to market with a developed product with the commerciality of Accoya, and with the hurdles to success substantially de risked. Despite the meteroic share price performance to date, their could still be plenty of upside potential in the share price.
A unique investment opportunity.
Links
Titan Wood ? Accsys?s 100% owned subsidiary responsible for developing and taking Accoya to market here
Presentation by Titan Wood at Forest Products Society, Wood Protection Conference, New Orleans 2006 here
BSW Timber, exclusive supplier of Accoya in UK and Ireland here
Celanese here
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