Excerpt from Maedel's Mini-Cap Analyst, April 29,1998
Reprinted by Napier International Technologies with the permission of Maedel's Mini-Cap Analyst
Maedel's fax subscribers were treated to a phenomenal reward in the last few weeks following our initial recommendation by fax of Napier International Technologies (Toronto Stock Exchange: $2.50) at $0.82. Fortunately, Napier's trading after our recommendation allowed all our fax subscribers to get in below $1.00. Less than nine trading days later, it peaked at $3.15, a 284% gain.
On the surface it would seem that this stock has moved so far so fast that it couldn't possibly go higher in the short term. The reality is, however, that the story is unfolding to be much more than we anticipated when we wrote about it three weeks ago. Clearly, based on past evidence and sales today, Napier is overvalued. In this article, however, you will see that what the company is working on is of huge magnitude, with a dramatic potential impact on its fortunes even in the near term. Since we recommended the stock, Napier has announced a patent covering its chemical, an intended acquisition and the emerging prospect of licensing its products to one of the largest paint companies in the world. Not only has the stock move left us gasping for breath, the business potential that we continue to learn about is also doing the same thing.
For those of you who feel compelled by Napier's prospects, but have yet to get in, keep in mind the following: the stock is way ahead of the company. There is, however, significant market development activity and multiple prospects of deals with multinational companies with tremendous marketing and distribution capabilities. There is very little barring such deals from being able to start generating revenue in a relatively short timeframe. We would recommend buying half at current prices and waiting for a pullback to a conservative $1.90 to buy the second 50%. If the stock walks away, it walks away.
The recap
Napier's SV series of chemical formulations are biodegradable, nontoxic, nonhazardous strippers of paints and other coatings. If the word "magic" was ever usable in the context of a product like this, it certainly seems to apply here. We have seen a video and firsthand demonstrations of the product at work. Its performance is exceptional. Now, validating its uniqueness, the inventor of the Napier product, Sergio Vitomir, has been awarded a US patent covering the formulation and process for manufacturing the product. The patent is assigned to Napier and the company is now seeking international patent protection.
It's not that other products can't strip paint effectively. One of the key issues, however, is the manner in which stripping is accomplished. Paint is intended to provide a protective coating for underlying surfaces; it is not intended to come off easily. Most of the stripping agents used today are acidbased. They dissolve the layers of paint down to the metal or other substrate. The worst burn immediately through skin, are difficult to breathe, are being recognized as carcinogenic and present expensive disposal problems (besides being toxic chemicals in themselves, they also release the metals out of the dissolving paint).
The SV products take a different approach. Rather than dissolving through layers of paint, the chemical softens the paint and penetrates through the pores to the substrate. On metal the chemical reacts and creates oxygen which literally lifts the paint of the surface. On other surfaces, the chemical doesn't lift so much as just soften the paint, which can then be readily wiped off. There is no acid and no dissolving involved.
No one has suggested that Napier's SV products will necessarily outperform a product such as the toxic methylene chloride in terms of speed.
But its products are proving to be equally effective in removing paint cleanly. When you look at the whole picture, there is comparison.
Take, for example, the market in which Napier is most advanced in terms of market development and sales: civil aviation. Acids such as methylene chloride have been the standard for stripping paint from aircraft during the usual five to seven year strip-andrepaint cycle. OSHA (Occupational Safety & Health Association) has implemented new rules stating that the allowable presence of methylene chloride in the air will be reduced from 500 parts per million (ppm) to 25 ppm effective April, 1998. In August, methylene chloride can only be used in a facility that provides fresh air respiration ("space suits") to workers, and workers can still only be exposed for a limited period of time. Only very small quantities of methylene chloride will be allowed to be used per plane. The compliance costs and paperwork alone will be onerous. While OSHA has been trying to eliminate methylene chloride for years, it appears that enforcement will now become more stringent. With a new product like Napier's available, the need for leniency should rapidly diminish.
The aviation refurbishers we spoke with noted that Napier's product costs more upfront and takes longer than methylene chloride. It requires significantly less volume, however, and waste disposal costs are significantly reduced (significant volume of toxic chemical cocktail at US $800 per drum vs. a far lower volume of paint solids at $200 per drum). Against the fact that workers prefer working with it (they don't have to worry about breathing it or slipping and falling in it) and there is no requirement for special air filtering and respiration equipment or reporting (estimated to cost $5,000 - $6,000 peryear in incremental costs per employee), the time factor isn't a significant issue. Napier's product was described as an exciting, promising product with the potential to revolutionize the aviation refurbishing business.
Some of the refurbishers we spoke with have already adopted the SV product 100%. This bodes well in an industry that for the last two years has been looking for an acceptable new solution. While there are other environmentally friendly strippers, none match the efficacy of Napier's products. The comments of Bob Taranto, an airframe and powerplant mechanic with US Air who is also the safety representative for the union, summed it up: "The product is amazing. It is absolutely next generation and is definitely at the forefront. We can keep the whole workforce on the floor and doing all kinds of work on the plane at the same time. Napier's product could become a dominant chemical in the market."
Market development
Napier's marketing and sales team is still very small, consisting of about five key individuals who are involved in grass roots demos, selling marketing activities and licensing deals. We've spoken to almost all of them. Needless to say, they are running to keep the many exciting projects moving ahead. The latest status is:
Civil aviation: Napier will likely approach 60 drums ordered in April (at US $962 per drum that equals about $60,000), up from 40 drums in recent months. So far Napier's sales staff have been targeting not the biggest but least bureaucratic targets, the owneroperated smaller refurbishers. Many of them are no less concerned about the environmental issues than a big shop might be, but they make decisions faster. While their volumes are lower, some have already gone 100% to Napier's product. Napier is now targeting the "big boys" who handle primarily large commercial aircraft. Itis thesebusinesses which offer the prospect of large, recurring purchases in this market. We would expect at least two to three months for real orders from the big shops to start kicking in. Total market opportunity in the US: at least $50 million annually.
Military aviation: Napier is salivating over this opportunity. No chemical has ever met the stringent requirements set by the US military for stripping agents regarding safety for the plane and personnel. This challenge is heightened because of the high usage of plastic or composite materials in military planes. For example, the Stealth bomber is built substantially from composite materials (in another example of military-commercial market technology transfer foreshadowing the future for Napier's products, most people in aviation believe that within a couple of decades all commercial aircraft will also be constructed from composite materials). These materials are much more sensitive to damage by harsh chemicals than even today's highperformance aircraft metals. Napier has been working on an alkaline-based formulation that in testing has already been shown to meet military specifications. Final refinements are expected to be completed within months.
US Navy: Napier was granted a golden opportunity to test strip on a landing craft and submarine. While the stripping wentwell, Napier was actually using the less "aggressive" formulation that it uses for the aviation market (a milder formulation is required to avoid the dangers of hydrogen embrifflement, which can weaken the aluminum and high strength steel products used on planes; in the marine industry, different steels are used which are not at risk of hydrogen embrittlement, therefore a more powerful formulation is usable.) The new formulation to be further tested on a landing craft and submarine will be shipped in the next week or two. The prospect for the Navy: the trade-off of disposing of thousands of tons of sand contaminated with paint resulting from the current stripping method, sandblasting (for comparison, a Canadian nonmilitary example is that it costs $38 per tonne to buy the sand and $600 - $900 per tonne to dispose of it), for an environmentally friendly chemical stripping agent. Someone a the Navy apparently commented the for every 99 barrels of sand and pain mix today there would be, using Napier's product, just one barrel of solid paint waste. This was not based on ar actual measurement, but reflects tht magnitude of the problem. The prospect for Napier: the opportunity to win directly or likely in conjunction with contractors recurring, sizeable contracts for stripping both the outside and inside of Navy vessels.
Commercial marine: The original focus of Napier's chemical stripper was marine applications. The question posed was, "could there be a way to improve on the very dirty, difficult job of removing the antifouling paint from the hull of a pleasure boat every three to five years"? The clear answer is yes. In Napier's testbed for this development, Canoe Cove Marina, British Columbia's largest repair facility for pleasure craft, Napier is now operating a hull-stripping business on contract. The marina is virtually adopting Napier's approach 100%. The approach applies the SV chemical stripper plus a unique vacuuming process refined by Napier for removing the paint residue. The system is working well. The prospect for marinas: no fear of toxic, hazardous chemicals impacting personnel, the environment or the sensitive, important gelcoat of the hull. No toxic dust floating around in the air. The prospect for Napier: there are an estimated 20,000 repair and refurbishing facilities in the US; according to US Coast Guard figures there are 11.8 million registered pleasure boats in the US and 16.7 M total in use. Take the 11.8 M boats. Apply an average length of 20 feet (conservative because most small boats are NOT registered). Apply a conservative estimate of two gallons of stripper per boat. Use a price of Cdn $20 per gallon wholesale (less than is currently being charged). Assume that stripping occurs only every three years, because anti-fouling paint is often painted over top of existing layers. The annual US market potential for antifouling paint removal (i.e. excluding the top side of a boat): $150 million. This is our own back-of-a-napkin calculation, not one presented by the company. Don't attach too much weight to the numbers. But recognize the gist: Ws market is far beyond tens of millions in value. The reality today: the distribution system, marketing and selling for Ws market are not in place and likely won't be in full swing until 1999. The ideal would be distribution directly to marinas and through retail hardware outlets via an established distributor of marine coating products. This is hardly an unrealistic thought.
Other industrial/commercial: Bridges, merchant marine (big ships), pulp & paper mills and other industrial plants, other equipment-these are all markets with the need for and unique challenges of stripping and replacing coatings. Ever think about how difficult it is to remove graffiti, especially from the very sensitive Plexiglas in bus stops? Napier has a solution. Ever think about how one might more easily clean and remove paint from brick buildings? Napier's SV is showing potential as such a product.
Think about the huge aboveground storage tanks for petroleum products. There are apparently 925,000 of these tanks worldwide. Refurbishment of these tanks has in the past involved sandblasting. With the Napier/Aquasol products, there would be a wash/strip/wash process that would involve many tens of barrels of chemicals. Using just 10 barrels per tank (at US $962 per barrel) results in a market potential measured in billions of dollars. The company was willing in a previous press release to suggest only that this market could be valued at $100 million annually.
In another unique example, a supposedly bulletproof reflective coating developed by 3M especially for street signs was thought to be invincible by any stripping agent. When it was time to refurbish these signs, they had to be ground down. One of Napier's formulations lifts the coating easily and cost effectively, just as with any other coating on metal.
Retail: Few of us would have to furrow our eyebrows and ask with respect to WD 4(), "What is it?" Like oil itself, there is such a Wing as a widely usable, somewhat "magical" solution that is an essential in any workshop. What about a nontoxic paint and coating stripper applicable to a range of substrates, including metals, wood, cement end plastics? Something that can remove paint, varnish, stain, certain adhesives, felt pen and crayon? Right now we have in our hands a sample of Napier's SV chemical in a foam formulation contained in an aerosol can. This product is currently over 55 days into a 90 day test which apparently provides equivalency to about five years of shelf life (it's always good to know that the content isn't going to eat through the can). The product is being assessed by a major consumer product packager with worldwide distribution. The result of a successful test can reasonably be expected to be a marketing and distribution contract of major proportions.
I liked the product so much, I bought the company Amazingly enough, in virtually its own backyard Napier has come across another environmentally friendly solution which perfectly complements its own chemical. Developed by Aquasol International, the chemical is used to wash metal surfaces prior to the application of paint. The purpose is to remove chlorides (salts), sulphates and hydrocarbons (oil) that can reside on metals and consequently compromise the strength and longevity of coatings placed over top. Coating failure is of concern particularly in industrial applications. While there are such solutions out there today, they are applied independently for specific purposes. None of them provide the combination of no toxicity, biodegradability, cost effectiveness and ability to be an all-in-one solution. More important, one of the largest chemical, specialty materials and paint companies in the world, Imperial Chemicals International (ICI), has taken a keen interest in Aquasol's chemical: to the extent that they have already sown up a private labellingagreement.
Aquasol's solution is also used to separate chlorides and hydrocarbons from solids such as soil and sand. Examples of applications are oil spills, drilling muds and salt water spills/ floods, where remediated sands can subsequently be disposed of easily. Brandt Wadeco, the division of a large solids control company, Tubescope Vetco, has a license to create and sell a large-scale, continuous closed-loop system for this remediation process. Revenues from this business are not expected to begin until probably 1999.
Napier's response to finding this new product? Buy the company. In an agreement in principle announced April 21st, Napier has agreed to acquire Aquasol for 5,934,597 shares (all of which will be free trading). Aquasol's product provides roughly the same price (US $962 per drum) and gross margin (exceeding 70%) as Napier's SV products. In many industrial applications, the application of Aquasol's solution will at least match and could be three times as much volume as the SV stripping product.
For a company like ICI, which currently does not have its own cleansing and stripping products, these two products together representnotonly two new potential revenue sources, but an avenue for providing improved surface preparation prior to the application of its coatings. While blanket warranties may be difficult, the potential benefit in extending coating life and further enhancing its image as a quality provider of paints is obvious. As Ron Graham, a technical representative at ICI who has 20 years of coatings experience, noted, these products are "phenomenal" and "open up so many new doors."
From Napier's perspective, the ICI deal is an exciting one. UK-based ICI had international sales in 1997 of roughly US $18 billion. Coatings (paints) alone amounted to about $3.7 billion, comprising about 7% of the worldwide market share. ICI has sales in 170 countries and includes among its distribution network and product lines names that are well-recognized in North America, such as Glidden, Color Your World and Dulux. ICI has over 1,000 stores in North America, UK, France, Australia and New Zealand.
Aquasol and Napier are currently only dealing with ICI DEVOE, ICI'S industrial coatings group within the paint division. This in itself offers tremendous potential. ICI DEVOE directly bids on large industrial coating projects besides supplying through channels to contractors. It is difficult, however, not to see serious revenue opportunities when contemplating the myriad of products, applications and markets encompassed by ICI and the apparent significance that Napier/ Aquasol's products can have for them.
What to do?
Napier's prospects are among the most exciting we've seen in a long time. Now that the tough R & D is behind them, with viable commercial products in hand, scaling up production and getting the product into the market is relatively simple. There are logical distribution channels and prospective partners. Overhead needs to grow, but not anywhere near the pace that sales could. This company can potentially drop 50% to the bottom line before taxes. That figure is virtually unheard of in any business.
In our fax we said that the company could generate Cdn $8 million in its next fiscal year staffing in July. We think this is likely extremely conservative, but given thelimited sales to date and the difficulty in assessing the rate of penetration into the multitude of markets and how soon key partnerships will produce results, upside figures on sales are difficult to produce. Multiples of the $8 million are readily conceivable.
Today Napier announced a financing of Cdn $4.5 million at $2.25, amounting to 2 million new shares plus 2 million warrants exercisable for one year. While the company initially indicated it didn't think it would need additional capital, with the price where it was and so many opportunities, management decided to take the prudent step of strengthening its working capital position. This brings Napier's shares outstanding to 24 million and fully diluted to 34.9 million. At $2.50, Napier's fully diluted post-financing market cap is $87.3 million. Using the figures we used in our fax bulletin of $8 million in sales and 30% net income ($2.4 million) results in a P/E of 36.3. This is twice a generally accepted fair P/E. Napier's potential growth, however, could make today's "fair" calculations look laughable indeed. Buy half at current prices and see if a pullback allows a buv at $1.90.
Maedel's Mini-Cap Analyst is an investment newsletter specializing in selecting for its subscribers mini-cap stocks with Outstanding reward/risk ratios. It tablets resource, technology and industrial companies with the potentialfor extraordinary static price appreciation potential. The satisfactory surpass 100%. The exaptimal have exceeded 1,000% and2,000%. Editor Neil Maedel, an ex-trader and 20-year veteran of the mini-cap market, lives and wows in Switzerland. He has been writing investment newsletters since 1988. For more infpormation on Maedel's Mini-Cap Analyst phone (604) 669-8270, fax (604) 683-5610 or e-mail sales@maedels.com. Maedel's Mini-Cap Analyst is published monthly by Pro Trader Finanz (Switzerland), established in 1993. This newsletter is for information purposes only. It is neither an offer to buy nor an offerto sell any of the securities mentioned. The indignation contained herein is from sources beleived reliable but we do not guarantee its accuracy. Please assume that the writers and employees may and often do buy and sell the securities contained herein, and that its parent, Pro Trader Finanz AG, its associates and employees do on occasion arrange for a fee financing and, for a fee, offer financial advice to companies whose securities are featured or otherwise mentioned herein. Copies of this document may not be made in whole or in part without the express written permission of Maedel's Mini-Cap Analyst.
Subsequent to the above article, Maedel's recommended May 31, 1998 that their subscribers sell 30% of their positions to lock in profits. They also noted that "we do not doubt this company is headed for higher prices in the long run".
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