Stocks in Focus: Symphony Environmental Technologies

The tide is beginning to turn for plastic technologies firm Symphony Environmental, writes Derren Nathan of Hybridan.

Earlier this year, Symphony Environmental Technologies Plc (LON:SYM) celebrated its 25-year anniversary. Symphony is a market leader in specialised-plastic technologies and its long-established d2w additive, ensures that plastic in the open environment biodegrades at a significantly faster rate than ordinary plastic. Given the scourge of plastic in our oceans, it is astonishing that use of this simple and cost-effective product is not more widespread. While plastic is often touted as the ‘enemy’, a blanket ban is not the answer. Plastics provide a range of economic and health benefits, as recently reinforced by the Covid-19 pandemic, and we believe that the narrative needs to change from banning plastics to managing the plastic problem. Symphony’s extensive range of ‘smart’ masterbatches, including its d2p antimicrobial, anti-insect and anti-rodent technologies are well-placed to become an increasingly important part of the solution.

Whilst d2w currently helps to improve the environmental credentials of an estimated 200,000 tons of plastic per annum, this is just a fraction of global plastics production that could benefit from its addition and is no more than 1% of the potential total addressable market. We believe that adoption has been slower than it could have been due to powerful lobby groups in the compostable-plastics industries. Symphony also has a range of compostable products, to meet customer demand, but d2w remains its flagship, biodegradable brand.

Recycling is by no means a panacea due to capacity, toxicity and energy-intensity issues. Compostable plastics require industrial facilities and have a large carbon footprint due to the agricultural feedstock required to produce them. Evidence is emerging that compostable plastics significantly lower the quality of compost produced in industrial facilities. Oxo-biodegradable additives are in our opinion the only viable option for accelerating the decomposition of plastic in the open environment. Furthermore, the onset of the coronavirus global pandemic has made authorities have a serious rethink with regard to bans on single-use plastics. Indeed, certain areas such as San Francisco, have chosen to ban reusable bags altogether, to protect both customers and supermarket employees from spreading the virus.

Symphony’s ecological credentials continue to be recognised amongst key opinion leaders, having been awarded ecolabels in countries such as Singapore and Brazil. During 2019, Symphony was also granted the London Stock Exchange Green Economy Classification and Mark. Symphony  has enjoyed some considerable success overseas with d2w and its other ranges, with the Americas the largest revenue -generating region, at over £3m per annum, followed closely by the Middle East and Africa at about £2.5m  and then Asia at around £1.24m.

In the Americas, Latin America has been the dominant contributor so far, but we see ever- increasing opportunities in the US as well, which we will elaborate on later. In 2019, the world’s largest bakery company, Grupo Bimbo, publicly announced an expansion of its d2w biodegradable packaging programme (originally launched in 2008), and for the first time its packaging showed the d2w registered trademark. Its d2w biodegradable packaging expansion process is ongoing.

In the Middle East, there are mandatory requirements for the use of oxo-biodegradable additives in Saudi Arabia, the United Arab Emirates, Bahrain and Jordan. In 2019, the three-stage regulation for making plastic packaging in Saudi Arabia oxo-biodegradable continued to be enforced, but phases two and three for additional products have been delayed from the original published timetable, with no date made public yet. The first stage, which is significant in itself, and includes carrier bags and refuse sacks, is ongoing. Since the start of 2020, some products have been brought forward from later stages to this first stage. In addition, enforcement activity has recently increased to ensure better compliance with stage one.

As well as an important market commercially, Asia is the source of an important strategic investor in Symphony. Last year, a £1.93m equity subscription was taken up by Vincel Investment Holdings. Vincel is owned by Mrs Shruti Lohia, daughter of Mr S P Lohia. Mr Lohia is the chairman of Indorama Corporation in Singapore. Indorama is the largest producer of polyester products in the world, with plants in five continents and it is one of the biggest producers of polyester feedstocks. In addition to polyester, Indorama Ventures also manufactures intermediates, performance materials made from fibres such as polypropylene, nylon and viscose, and aramids (a class of heat-resistant and strong synthetic fibres). Indorama is one of the largest producers of synthetic disposable gloves in the world − an area of increasing focus for Symphony, following the introduction of its d2p antimicrobial range.

We see the investment by Vincel, which was completed at a premium in excess of 50% to the prevailing share price on the day of the announcement, as an extremely strong vote of confidence in the company’s future prospects, In addition, 10m warrants were issued to Vincel, in two equal tranches exercisable at prices of 20p and 25p, and with respective expirations of 25 July 2020 and 25 July 2021.

In Europe and the UK, regulatory developments have been less favourable to Symphony. The EU has taken an opposing stance, that we believe does not reflect the scientific evidence. The EU Single Plastics Directive seeks to ban several single-use plastics by 2021. However, the European Chemicals Agency last year withdrew its intention to restrict oxo-degradable plastic under REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) regulations.

It should be clear, however, that the term oxo-degradable can be very misleading, in that it essentially describes ordinary plastics, which abiotically degrade (without the help of microorganisms) by oxidation in the open environment and create microplastics, but do not become biodegradable except over a very long period of time. Oxo-biodegradable plastic does however exist, and oxo-biodegradation is defined by CEN (Comité Européen de Normalisation) as “degradation resulting from oxidative and cell-mediated phenomena, either simultaneously or successively”. This means that the plastic degrades by oxidation until its molecular weight is low enough to be accessible to bacteria and fungi, which then recycle it back into nature. These plastics are tested according to ASTM (American Society for Testing and Materials) D6954.

Further scientific weight was added to the case for faster adoption of d2w-type masterbatches with the publication in August 2019 of a new scientific study into oxo-biodegradable plastics by Queen Mary University London. The main findings were that:

• Oxo-biodegradable plastic demonstrated up to 90 times more biodegradation than conventional plastic, when aged for the same period;
• The degraded material was biodegraded by bacteria found in soil and marine environments;
• Molecular-weight reduction is a critical factor in the rate and extent of biodegradation, showing that biodegradability increases as molecular weight reduces;
• The use of a pro-degradant catalyst such as that in a d2w masterbatch, caused a rapid reduction of molecular weight; and
• The plastic samples tested for biodegradation were abiotically degraded under both real- life and laboratory conditions.

We believe that a more holistic approach needs to be taken to plastic waste, recognising the significant benefits to society, the economy and the environment.

We should ask ourselves why plastic has become the material of choice in food packaging and realise that there is a considerable economic and environmental downside in removing or replacing plastic in this process. Plastic plays a vital role in reducing food waste; protecting food from damage, not just in transportation but also by multiple environmental factors; and by materially extending the shelf life of fresh food, ranging from up to three days for bananas, 10 days for  steak and as much as 14 days for cucumbers according to the British Plastics Federation.

Research by Zero Waste Scotland has found that the carbon footprint of food waste collected from Scottish households in 2016 alone was nearly three times that of plastic waste collected from people’s homes, at roughly 1.9 million tonnes of carbon dioxide equivalent (MtCO2e) compared to 0.73MtCO2e in 2016. While there is clearly a case for a more considered use of plastics, global plastic production continues to rise, up 3.2% according to le Journal de l’Environnement, and knee-jerk responses are not always the answer. Plastics have several properties that have made them the material of choice for many uses. For instance, they are lightweight, impervious to moisture, flexible, printable, strong/durable, recyclable, heat sealable and reusable

There has been an emergence of the use of paper bags in supermarkets of late. However, in 2011 a research paper produced by the Northern Ireland Assembly said it takes more than four times as much energy to manufacture a paper bag as it does to manufacture a plastic bag. Paper bags also weigh more and are bulkier than plastic; this means transportation requires more energy, adding to their carbon footprint. They are of course also not resistant to spillages.

Symphony and its directors are at the very heart of this debate and are vigorously campaigning for a greater prominence for oxo-biodegradable plastics as part of the solution. Last month, in an open letter addressed to environment secretary George Eustice, a group of trade associations and Greenpeace called on the government to implement a total ban on oxo-degradable plastics. Signatories included the Bio-based and Biodegradable Industries Association (BBIA), the Environmental Services Association (ESA) and Greenpeace, among others.

However, Symphony’s biodegradable d2w technology accelerates the natural process of oxidation until a product is no longer a plastic. Symphony’s chief executive Michael Laurier wrote to Mr Eustice on 4 June, with a line-by-line rebuttal of the claims made in the original letter.

Mr Laurier concludes his letter by saying: “The UK should ban the use of ordinary plastic for everyday plastic products, and legislate to upgrade ordinary plastic with oxo-bio technology, thereby retaining the benefits of plastic in terms of hygiene but minimising the environmental damage caused when ordinary plastics escape into the open environment.

“Other countries around the world have already taken this progressive approach to managing the balance between the safety of their population and the protection of their environment.”

Covid-19 has strengthened the global requirement for single-use plastics (think visors, medical equipment or even water bottles) which is ideal for Symphony’s d2w technology. Symphony is also making strong progress in further commercialising its d2p (design to protect) range which can help to curb the accumulation of harmful microbes in multiple-use plastics.

In February 2020, the U.S. Food & Drugs Administration (FDA) approved Symphony’s d2p antibacterial technology for use in certain polyethylene film for wrapping bread. Approval, which is not time-limited and is effective only for Symphony, was given under the Food Contact Notification procedure. Symphony has also commissioned a laboratory to conduct antiviral tests on its d2p technology and anticipates that subject to a satisfactory result, this will significantly accelerate interest in this technology. Symphony expects to further update the market shortly. The FDA approval is not only a commercial opportunity for the company in the US but also in many other areas that often see FDA approval as the gold standard for safety.

Demand for d2p products, although historically not a core revenue generator for the company, is very robust. In May this year, Symphony received new orders, to the value of more than £500,000, for d2p- treated gloves, along with increased enquiries for other d2p products. Beyond antimicrobial formulations, the range contains flame retardants, together with odour and ethylene adsorber masterbatches. Last year saw a major launch of d2p ’protector’ products in Bahrain including antimicrobial toothbrushes. Symphony has previously shown the flexibility of its technologies, which can also be used to protect larger infrastructure items such as water pipes and tanks, which are designed to be free from harmful bacteria and fungi, in partnership with Pakistan-listed firm Dadex Eternit.

The recent high demand for d2p products follows an already strong start to 2020, with Q1 2020 revenues increasing by 53% to £2.45m, suggesting a run rate that could deliver significant growth this year. However, with the overall economic impact of Covid-19 still unknown, Symphony is not providing forward-looking financial guidance currently. Legislation and regulation of the industry has not always gone in favour of the company, but we feel that the tide is beginning to turn and that both its d2p and d2w ranges have the potential to take the company to a multiple of its current size. Its asset-light model means that Symphony has the scalability to achieve this in relatively short order if the positive tailwinds continue.

Disclaimer: Symphony Environmental is a corporate client of Hybridan.