The company in question is Biome Technologies.
There is a certain irony in my investment here since I've essentially bought into their Biodegradable plastics story and yet that is the division that is losing money presently. The exciting part though is it looks likely that's about to change with a medium and long term view. More later.
Why have bought a loss maker then? Isn't this just another overvalued "story" stock? Why do I think it's cheap?
Well in short, the company boasts two divisions. Alongside the Bioplastics division sits the Stanelco RF Technologies Division which designs, manufactures and supplies fibre optic furnaces largely to customers in Asia. This division is currently highly profitable, and in the 6 months ending in June produced an operating profit of £1.3m. Now take a moment to consider that operating profit in the context that the whole company is valued at just over £12m. That is stupidly cheap!
Let's temper it though with the fact that the Bioplastics division is still loss making, and in fact made an operating loss of £0.3m on revenues that had fallen £0.3m from £1.2m in 2017 to £0.9m in 2018.
So why does the Bioplastics division excite me so much?
I shouldn't need to mention the backdrop at all since conventional plastics are making a great job of slowly but surely causing massive damage to our planet, and thank goodness that the world is gradually waking up to this huge problem. So this is an ethical investment, but also it appears that Biome are in a sweet spot to provide an environmentally friendly alternative.
Whilst loss making at this stage, the interims suggest that the tide may be turning for this division. They had this to say in the interims:-
"It was noted in the July 2018 trading update that two projects in particular are advancing encouragingly through the development phase and, if successful, could lead to substantial revenues in 2019 and 2020. These projects are both with new customers. One of them has now completed its technical development phase in the USA and commercial production is expected in 2019. The second project, being developed in continental Europe, has passed an important milestone in recent weeks and work continues to support an aggressive launch timetable with the customer with commercial revenues being anticipated in 2019. Additionally, in recent weeks an initial six-month feasibility study, supported by an international consumer goods company, has been completed and discussions are underway regarding a product launch in 2020."
and
"Positive interest remains in the UK, with the Government looking to progress innovative material solutions to the problem of single use plastics in the medium term. This may provide an opportunity to accelerate our work in industrial biotechnology solutions and Biome is engaged with a number of parties in this area."
As far as I'm aware, the interims were the first time in the company's history where they produced an operating profit (£200,000). Put that alongside a strong balance sheet which boasts £2.3m in cash and zero debt then Biome still looks exceedingly cheap.
Of course there is no guarantee that the Bioplastics division will ultimately deliver since no company is risk free, and there are always potential banana skins, but there is a great margin of safety here with the RF Technologies Division which on it's own is arguably worth far more that the £12m that the whole company is valued at presently. In the interims the company said:-
"Strong demand for fibre optic furnaces continues into the second half of this year. The design and manufacturing teams have responded very well to the rapid and significant upturn in activity. The manufacturing footprint was expanded during the period providing increased production capacity."
Whilst I always sound a note of caution with any investment, this is certainly one of the most promising minnows that I've ever bought into. In summary, Biome is profitable, cash generative, strong balance sheet and with the potential for huge short, medium and long term growth.
As ever this is just my rationale and reasons for holding shares in the company, and is not intended as investment advice.
N.B. Just be aware of the illiquidity of dealing in Biome shares. I invest for the long term.
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