Symphony Environmental “now appears well placed to generate improved returns over the medium-term” says Zeus Capital

Symphony Environmental plc (LON:SYM) has provided a pre-close update for the full year. Results missed our estimates mainly due to one-off factors outside of the Group’s control. Hence, sales were c.£2.2m lower than we predicted. Consequently, the Group will report a small operating loss (c.£800k) vs. our previously estimated £170k profit. SYM expect to book c.£1.8m of delayed 2021a sales in 2022e. In contrast to short-term challenges, good strategic and commercial progress was made with both d2p and d2w products, and with new strategic partners in China and India. Management state for the first time that they now have pipeline opportunities equivalent to over $40m (c.£30m) of recurring annual revenues. But timing on delivery is always somewhat uncertain and acknowledging that SYM is in a build-out phase with several commercial opportunities, we now take a more cautious view of profitability in 2022e and 2023e. That said, given the potential for better returns over the medium-term, our DCF based valuation of 35p is unchanged.

Trading update for 2021a – Revenue is expected to be c.£9.8m (2020a: £9.8m) with an operating loss of c.£800k (2020a: c.£390k loss). By product type, Symphony Environmental reported a 5% increase in d2w oxo-biodegradeable masterbatch sales and a 29% increase in d2p protective technology products. However, finished good sales, particularly of PPE/gloves were lower. A total of c.£1.8m d2p masterbatch and PPE/glove revenues, originally expected to be recognised in 2021a has been delayed to 2022e. As previously reported, the Group made significant investments in R&D and distribution during the year. SYM should report a small net debt position.

Business developments and Zeus estimates – Despite near-term headwinds, SYM has made strong strategic and commercial progress. The new business pipeline of d2p technologies and PPE/gloves reportedly totals over 100 projects. Management estimate, if successfully commercialised, these could generate over $40m (c.£30m) of recurring annual revenues. Notably, the Group’s new d2p glove product has a kill rate of 99.99% of coronavirus within 10 minutes; management believe this is market leading. SYM expects regulatory approvals for this product in the EU and the USA in Q2 2022e. On d2p products and USA FDA & Canadian approved bread-packaging technology, following successful initial trials, small commercial product sales have started in Latin America with a large bakery. Separately, bread packaging products made with d2p have now been produced for evaluation by customers in Canada, USA, Middle East, Pakistan, and South Africa. On Meditech China, in August 2021, SYM entered into agreements to expand sales in the Far East and globally. Management is pleased with progress and alongside Meditech, are upgrading current EU CE certification and US FDA registrations. On d2w masterbatch, sales increased across Latin America, the Middle East, and some parts of Asia during 2021a, partly due to the positive impact from advisory and advocacy work as well as increased enforcement of legislation by the relevant authorities. In India, as announced on 23 October, SYM formed a distribution JV with Indorama. Agreement has also been reached for product-development and manufacturing with an Indian manufacturing group, Bihani. SYM is optimistic that these new relationships will provide good revenue opportunities in this large market for d2w and d2p products during 2022e.

Zeus Capital estimates – The Group has an expanding pipeline but is also continuing to build the platform to support higher growth. Moreover, timing of sales for new products can be somewhat uncertain. We now assume Symphony Environmental will report earnings at about break-even for 2022e before a significant ramp-up in 2023e. To conclude, 2021a has been a positive but transitional year, with some challenges. SYM now appears well placed to generate improved returns over the medium-term.

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