Wider Still and Wider - Environmental Recycling (ENRT)
6/1/2010
(119264)
Wider Still and Wider
Step by faltering step, Environmental Recycling Technologies (ENRT) is getting closer to building a lucrative global licensing business. There is still a long way to go, but a revised deal with 2K Manufacturing underlines the real possibilities for rolling out the revolutionary Power Impression Moulding (PIM) process around the world.
The boys at 2K have signed a new deal which extends their existing European Union rights and secures them worldwide rights to make flat sheets from mixed waste plastics using the PIM process. As part of the deal, 2K have given up their rights to a general construction licence.
Instead of paying ENRT a minimum £2m over five years, they will pay ENRT a total of £2m over the next three years. That will come in instalments. It includes £320,000 already paid for the earlier licences, and there will be an immediate cash instalment. The rest will be in two chunks related to minimum royalties.
There appears to be some confusion in comments on the deal. There is only one £2m total payment, not two.
Clearly the new agreement goes some way towards easing short-term cash problems at ENRT, and ought to ensure sufficient revenue over the next couple of years to cover reduced overheads. There is positive cash flow from other licensing deals, but as yet it remains relatively modest.
There is a £5m standby facility in the background. That expires in September, though past indications have been that the lender is inclined to support the company. There were borrowings of £3.1m at the interim, plus a troublesome claim by a former executive.
Finances are not good, but the company ought now to be assured of survival. And the progress of 2K suggests the future ought to be much brighter.
My report on Monday, January 4 (Good News) suggested that 2K have virtually completed the proofing process, and are close to placing orders for the full tooling which will lead to the start of volume production of the Ecosheet brand board in late March/early April. Obviously actually achieving volume production is a major feat, and long-suffering ENRT shareholders will heave a massive sigh of relief when it actually happens.
It looks, however, as if 2K are going to make it, and make it big. There is nothing to suggest previous indications that ENRT will earn a royalty of around 100p a sheet have changed. The original plan was for the first production line at Luton to make around 360,000 boards a year. The factory is big enough to produce 750,000 a year. Suggestions that it might do so by the end of 2010 might have been pushed back a little, but the 2K team still believe that it will not be possible to keep pace with demand. So, sooner or later, Luton alone could be generating substantial royalties for ENRT.
And 2K’s ambitions and expectations appear to be growing. There has been non-stop interest in Ecosheet from virtually all of the major construction industry companies. As a replacement for plywood it appears to have a host of advantages, never mind how well it solves the problem of disposing of mixed plastic waste.
So far, the 2K team have demonstrated great strategic skills, and though full production will be behind the earlier optimistic estimates, getting Luton to this point so quickly has been impressive. 2K are not taking worldwide rights to Ecosheet for nothing. There are clearly plans for much faster and broader expansion in mind.
The press release suggests 2K have looked at the business model and want to take full advantage of the worldwide value of the Ecosheet brand. ENRT Roger Baynham says he is delighted with the development of the Ecosheet portfolio and fully supports 2K’s decision to roll out that brand and associated products on a worldwide basis.
Omer Kutluoglu of 2K is quoted on a decision to accelerate international rollout. And the comments on the royalty payments refer to production by 2K and their sub-licensees.
It looks, then, as if 2K might be close to winning support of some powerful friends to speed growth. In setting up the Luton production facility, 2K have devised new ways of ensuring efficient volume production. These will be valuable to potential new partners – and new partners could bring the extra cash to build more production plants.
Talking about sub-licensees raises a range of possibilities, all ultimately generating royalties for ENRT. We could hear more in the next month or so.
It is worth remarking, too, that ENRT will now be able to re-market PIM for general construction products. Could that open the way to more interest from North America?
All of this suggests that the vast potential for PIM which excited investors years ago still exists, and might even be enhanced by the greater emphasis these days on recycling.
ENRT’s finances are still in a tangle, and it will take a couple of years, at best, before they are put straight by trading performance.
At some stage, however, it should become clear to all that medium term revenue prospects are quite startling. The danger is that they could attract a predatory bid before the share price recovers to a decent level. Brave gamblers will want to get there first.
I have a holding in ENRT.
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