This article has been written by an expert contributor Tom Wegner from Marcus Today
Calix (CXL) is a business focused on creating new materials and processes to solve global challenges. It is on the more speculative end of the investment spectrum. CXL’s technologies are being used to develop environmentally friendly solutions for advanced batteries, crop protection, aquaculture, wastewater, and carbon reduction.
If you had to guess what its mission statement was from the list of segments above, you’d likely say something to the effect of – trying to create a cleaner and greener world. They put it a little more succinctly and offer some humour at Elon Musk’s expense – Mars is for quitters.
Calix is swimming in grants and handouts
It was recently awarded a $20m modern manufacturing initiative grant with Pilbara Minerals (PLS), $30m in government funding to develop carbon reduction project with Boral (BLD) and an $11m grant with Adbri (ABC) but it’s not just the local government that has noticed the potential.
Calix is the leader of the LEILAC (Low Emissions Intensity Lime and Cement) project which has been funded by the European union and aims to dramatically reduce CO2 emissions from Europe’s cement and lime industries.
The cement and lime industries are the biggest global industrial emitters of CO2. ~60% of CO2 emissions from cement and lime manufacturing are released directly and unavoidably from the processing of the raw materials – not from the combustion of fossil fuel. What calix has done is remake a kiln or furnace which enables pure CO2 to be captured from that manufacturing process. A new way to “heat stuff up” as they describe with impressive environmental outcomes.
Half year results back in February were well received despite the ‘transitioning’ revenue profile and an operating loss. COVID headwinds were cited. What pleased the market was a strengthening balance sheet with the business investing heavily in its capability to make the most of commercial opportunities.
Main observations
- The stock box does a good job of untangling the picture and financial health of the business. At first glance, it is obvious Calix is in relative infancy.
- Fluctuating revenue growth is a bit of a concern, although it can be explained according to management. They aren’t receiving an R&D tax incentive as income anymore as total turnover will likely exceed $20m. COVID headwinds also dampened sales in the half.
- A negative PE means it doesn’t make any profit and that isn’t expected to change in the near future. The company is valued heavily on its future earning potential.
- No dividend but that is expected.
What are the risks?
The risks relate to the maturity of the business. It has a market cap of more than $1.14bn with revenue of slightly more than $20m expected this financial year. You are paying a lot of money for a company with no earnings and effectively paying $46.7 for every dollar of revenue the company generates. Not cheap.
The share price is announcement driven and sensitive to stock market and macroeconomic gyrations. Higher interest rates erode the value of future earnings which unfortunately for CXL, is how it is typically valued. Stocks with a more speculative investment profile and earnings weighted to future periods typically struggle in a low growth and higher interest rate environments.
A question to ask yourself before investing would be – Are you prepared for your initial investment to be worth less at some point in the near future? If the answer is no. this may not be the company for you.
What are the tailwinds?
There are several long-term macro (slow burn) drivers that are offering significant tailwinds for the business:
- 66% of global GDP that is currently under net-zero commitments.
- Huge inflows into ESG related ETFs. ESG exchange-traded funds more than doubled in size in 2020 according to Bloomberg.
- A multi trillion-dollar capital investment required to reach net-zero emissions by 2030.
- Top economies, and cement companies are committing to net zero CO2 by 2050.
- More than 2 billion tonnes of CO2 are directly produced from the conversion of limestone to lime for cement making each year, so the addressable market is significant. The business is aiming to negotiate a royalty style business model where each tonne of CO2 extracted via its technology is priced. When Henry spoke to the CEO Phill Hodgson, the range of 50c to $2 per tonne was mentioned to give you an idea of the potential size of revenues.
- Recent Deloitte survey found industrial manufacturers are targeting 45% overall electrification by 2035.
What are its main segments?
Conclusion
Calix is a bottom draw stock. That is a good thing. The premise of a bottom draw stock is that you’d be happy to leave it, put it in a bottom draw and not look at it for a couple of years. Given the earnings profile and relative infancy of the company it will likely be a bumpy road for the share price, which is why looking at your trading screen daily will not help. The solace is in the technology, commitments to decarbonise global industries and commitments from local and overseas governments to support a net zero future. Management has skin in the game and are experienced. The share price is looking OK. The balance sheet is strong with $26.3m in cash reserves and $8m in grant receivables due this financial year. Other fundamentals leave something to be desired but not unexpected. If you have an appetite for environmental solutions Calix is one to have a good think about. Speculative BUY.
More about the author – Tom Wegner. Tom has been working at Marcus Today Stock Market Newsletter since 2016. He graduated from Monash University and is the author of the much-loved BUY HOLD SELL section of the newsletter. Tom has a natural curiosity in financial markets and is passionate about helping his peers become better investors. You can sign up for a free trial here.
Prior to making an investment decision, retail investors should seek advice from their financial adviser. This document is intended as general information only.