Calix Limited (ASX: CXL) 07.05.21

By Thomas Galanti.

Environmental, social and governance (ESG) investing was the big winner in 2020. Performing amongst the best during the intense first quarter volatility – with 94% of sustainable indices outperforming their non-ESG counterpart – and also in terms of capital inflow, up 50% over the year to US$1.70tn globally. Europe accounts for ~70% of the market, with the U.S. and Asia both lagging greatly. With the election of Biden, governments globally changing their tone on climate change and corporations feeling the social pressures to adapt, the ESG boom is still likely in its infancy. Australia’s ESG market attracted a very modest ~US$1bn inflow during the first 3-months of the year, accounting for ~US$20bn or 1% of capital allocated towards global sustainable funds. Given the thematic’s lack of maturity in Australia, investors looking for diverse exposure to this space might consider Calix Limited.

Calix is a leader in the development and research of industrial solutions addressing global sustainability challenges. The core technology under development should create environmentally friendly solutions for advanced batteries, crop production, aquaculture, wastewater, and carbon reduction. Calix develops its technology thorough a global network of research and development collaborations, including governments, universities, research institutions, and corporations.

Sewer & Wastewater

The global wastewater network is expected to total 9.9 million km by 2020. Governments are seeking sustainable water treatment solutions to protect existing and new infrastructure. Calix offers additives for odour control, alkalinity and bio-treatment, as well as sewer infrastructure protective coating. This vertical is currently driving revenue, “boot-strapping” its other key development programs, with total sales revenue (water treatment + aquaculture sales) up 151% in the first half of FY21 pcp to $9.3m. The sewer and wastewater treatment market is valued at $61.8bn globally, with management’s focus on commercialising this vertical and expanding further into the U.S. and European markets.

CO2 Mitigation

The lime and cement industry account for 8% of global CO2 emissions, of which 2/3 comes directly from processing the limestone to lime. The current process releases the CO2 trapped in limestone, with no industrial solution available for producers. Calix’s solution to the problem is where much of their future value will be generated and what truly makes the story exciting to ESG investors. Management believes the total addressable market for Calix’s solutions for lime and cement is estimated to be $10.8bn, of which Calix is currently at the forefront. With the world adopting strict CO2reduction targets, such as the EU’s Emission Trading Scheme (ETS), targeting an 80% reduction in emissions by 2050, companies will be forced into adopting sustainable technology or face increasing economic costs associated with rising permit prices. In 2021 alone, the cost of pollution in Europe has risen over 50%, with prices now exceeding €50 per metric ton, up from under €10 in 2018. In order for the EU to meet their goal, at least 60% of Europe’s cement plant capacity will require some form of carbon capture by 2050.

Calix’s LEILAC (Low Emissions Intensity Lime and Cement) project/technology will lead the initiative, with already developed key industry partnerships. HeidelbergCement nominated their Hanover site in Germany for the construction of Calix’s Demonstration scale CO2 capture facility, evidence of the industry’s enthusiasm to adopt the carbon capture technology. This technology platform is their patented kiln, called the ‘Calix Flash Calciner’ or CFC, who’s development has been supported by over $100m of capex to date. It should be noted, that whilst many of the projects require significant capital, Calix remain ‘capex light’ through funding agreements with partners.

Biotech (aquaculture & agriculture)

Aquaculture is the fastest growing protein source globally, with this comes many environmental challenges. Intensive farming leads to disease, yield loss and environmental degradation. In order to facilitate the growing industry, Calix is developing non-toxic, water conditioning additives aiming to lift yields and help control disease vectors. Linked closely to issues persisting in the growing aquaculture industry, agriculture is experiencing similar expansion, with output needing to increase 50% by 2050 to meet demand. Crop protection is increasingly becoming a concern as the industry has continued to scale, with economic solutions needed to facilitate such growth. Management estimates the addressable market for these industries is likely in the order of $11.3bn.

Advanced Batteries

Advanced battery development has benefited greatly from tailwinds in the electric vehicle and consumer electronic markets, with all analysis pointing towards even greater growth into the 2020s. Finding sustainable battery production methods to facilitate further economies of scale is of interest to all parties in this space and that’s where they’re allocating their resources. $4.5m from their recent cap raise will go to expanding their test program and increase lab capabilities, with the intention of initiating commercial discussions with battery materials and battery assembly entities within 12-months.

Calix has been a top performer in 2021, currently trading just shy of its 52-week high on a $410m market cap. Its high valuation means management now has something to defend, as the company transitions away from its small-cap spec phase, into a more mature company. For the first half of FY21 the company reported revenues from sales of $9.21m and $7.1m in project and grant income, totalling $16.27m and generating an operating profit of $3.06m. Investors concerned about its high valuation in the short-term should redirect their focus to the future value of its patented technology – including value derived in selling IP to partners – and their impressive positioning in a combined estimated ~$100bn addressable market.

With $3.7m cash (H1FY21) in the bank and intentions to fast-track expansion of product-lines into different jurisdictions, it is likely Calix will require significant capital injection in the near future. Earlier this year, Calix raised $19m via a placement and share purchase plan (SPP), indicating that whilst the project and grant income has been substantial to date, and will likely persist given the importance of their R&D, additional capital is necessary.

Investors looking for exposure to the hot ESG space, with a huge addressable market and advanced proprietary technology, should add Calix to their watch-list and put in some work on their story. With their multi-market applications and leadership in CO2 capturing technology for the cement and lime industry, Calix is well-positioned to become the face of Australia’s ESG movement. For those interested in the story and looking for potential catalysts, keep an eye on the new U.S. administration’s climate policy and developments in Calix’s core technology kiln, the Calix Flash Calciner.

Disclaimer: This article should not be construed as investment advice and is for information purposes only. It does not take into account your investment objectives, particular needs or financial situation. Before making an investment in anything, do your own research and contact your investment advisor.


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