The New Criterion: an intriguing tale of two tech stock valuations

Tim Boreham

As a developer of a concrete additive to make the building material tougher and lighter, the US-focused Eden should be benefiting from the Trump-inspired infrastructure spending push. But does its listed associate present better value?

Eden Innovations (EDE) 7.2c

Roads, bridges (and walls for that matter) require a poultice of the material and if something relatively cheap can make it better and cheaper then Eden’s prospects should be a no-brainer.

Instead, Eden’s share price is victim of the investor mentality of ascribing a higher value to pre-revenue tech stocks and then discounting them when first sales (inevitably modest) eventuate.

Eden shares peaked at 35c in February last year amid the early Trump hype, valuing the company at $400m.

The company’s now worth a tad over $100m.

“We were valued on our blue sky potential but as soon as we started getting sales (investors) said we have to value you on a PE (price-earnings) ratio,” chairman Greg Solomon says.

“There are many US-listed tech companies with $US200m ($260m) valuations, yet they are years away from first sales.”

He also admits that progress on developing its flagship product EdenCrete has been slower than expected.

EdenCrete is a liquid potion containing ultra-strong carbon nanotubes that bind to the cement as it hardens, making the concrete stronger and more durable.

The $US900 billion global cement sector is conservative and so it takes a long time to convert customer interest into initial (and then repeat) contracts.

But Eden is making progress, having won the support of the transport departments of eleven US states for EdenCrete to be used on public highway projects.

Eden is waiting on its first big order pertaining to a federally-funded highway: eleven lane miles in Georgia.

The order, we stress, isn’t in the bag. But given Georgian authorities have mandated the use of EdenCrete in its specifications to the tenderers, it’s more a matter of timing and the exact value of the order (expected to be around $US1m).

At a state level Georgia had 16 road repair projects scheduled as of the end of January. Of these, five are in the bag and are expected to use $US400,000 of EdenCrete.

Eden’s revenues are small but trending the right way: sales of $856,000 in the first (December) half, compared with $468,000 for the entire 2016-17 year.

Solomon says sales of new products such as EdenCrete follow a J-curve like pattern, in that they take a long time to eventuate but then take off in a non-linear way when the industry becomes comfortable.

Volume-wise, Eden produced 14,000 gallons during the half, compared with 7000 gallons for the whole of 2016-17.

Currently the EdenCrete fetches around $US25 per gallon but the industry’s preferred measure is how much it takes to lay a cubic yard of concrete.

One trial resulted in an average cost of $US12 per square foot for a concrete slab with EdenCrete, compared with $US22 sq foot for a slab with steel reinforcement.

Eden has been working on ways to cut costs and improve its product, including a version for pozzolanic (silicon based) cements that account for 35 per cent of all concrete sold (the rest is calcium-based Portland cement).

As is always the case commercialising technology costs money.

Eden’s loss steepened to $5.4m in the December half, from a $3m deficit previously. This resulted in Eden’s cash falling to $1.04m from just under $8m previously, although a placement last month bolstered this by $6.2m.

Eden expects a “significant revenue uptick” in 2018-19 and also expects being cash flow positive by the end of the period.

In the meantime, Eden is testing the nanotubes for use in plastics, exposing the company to an additional $US350bn global market.

Formerly Eden Energy, Eden Innovations originally developed a product called Optiblend, which works in diesel engines but replaces 70 percent of the dirty diesel with natural gas.

Eden has been selling Optiblend in the US and India for almost a decade, with modest cumulative revenue of $US4m.

Clearly the US and EdenCrete will drive Eden’s fortunes. While there’s nothing concrete by way of forecasts, the next 12 to 18 months are shaping up as a pivotal period.

Tasman Resources (TAS) 6.4c

The intriguing aspect of Eden’s ownership is that its largest shareholder is valued at much less than the sum of the parts.

Mind you, this arbitrage has persisted for some years.

Tasman owns 38 per cent of Eden, in part the legacy of Eden Energy spinning off from Tasman and listing in 2006.

This equates to 520 million Eden shares, currently valued at $41m. Tasman also holds 74m in-the-money Eden options worth $3.7m and exercisable in September this year.

Tasman itself is worth $26m –a 39 percent discount to the Eden assets.

The obvious starting point for any acquirer of Eden is to get hold of this stake. But as Greg and his brother Doug own 40 per cent of Tasman, any entreaty would have to be as friendly as a girl guide jamboree.

Solomon dubs the historical Eden-Tasman nexus as a “tightly held relationship that is likely to change.”

Scenarios include a dilution of Tasman’s Eden interest as Eden raises more funds, or a potential in-specie distribution of the Eden shares to Tasman holders.

In the meantime, Tasman is actively exploring its Lake Torrens tenements in South Australia, 30km away from BHP Billiton’s Olympic Dam project.

Tasman talks of multiple Carrapateena-sized discoveries in its iron oxide-copper-gold-uranium zone, a reference to OZ Minerals’ next big growth project nearby.

After a big miner recently walked away from joint venture discussions, Tasman is looking elsewhere for a partner.

Tim Boreham edits The New Criterion

Tim.boreham@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

ENDS


Tim Boreham

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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