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I-Tech AB (STO:ITECH) - One Pager
"Massive Potential for Capital-Light Growth"
This one-pager was done in collaboration with Inbox Alpha.
100% of the research was done by Inbox Alpha, I just added couple of final touches.
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I-Tech AB (STO:ITECH) is a Swedish microcap that owns the IP to and sells a unique antifouling ingredient for marine hull paints. In maritime parlance, fouling occurs when small marine organisms attach themselves to the hull of a vessel, becoming pretty much permanently implanted on the surface. This may not sound like much of a problem, but it actually causes a serious drag on cargo ship speed and has the potential to transport alien species into an area where they can wreak havoc.
Given the IMO standards for the shipping industry – a requirement to reduce emissions by 40% by 2030 and 70% by 2050 – dealing with biofouling is actually a serious concern. Studies have found that fouling on just 10% of a typical cargo ship’s hull can result in 36% more power required to maintain the same speed.
To address this, I-Tech has developed an antifouling ingredient called Selektope. Selektope is created using the synthetic drug medetomidine in a marine context. Although medetomidine has historically been used for sedation of larger animals, a group of scientists at the University of Gothenburg in Sweden discovered that it caused barnacle larva to become hyperactive when they came in contact with it, rendering them unable to settle on a hull. When applied to marine coatings on a hull, Selektope can prevent fouling (especially hard fouling) without harming the organisms – the effect of Selektope eventually wears off.
This is important because the IMO has been looking for an antifouling ingredient that contains very little to no biocide content (ingredients that have a serious effect on or even harm/kill the organisms they come into contact with). Given Selektope’s low concentration requirement in paints, it delivers antifouling properties with 90% less biocide concentration.
This product has allowed I-Tech to grow from roughly SEK 1.5 million in revenue in 2017 to over SEK 86 million in revenue as of FY 2022. The company is far from vertically integrated, outsourcing manufacturing to specialized pharmaceutical manufacturers and selling to the largest paint manufacturers who actually create the paint product and sell it to ship yards/owners. This means that I-Tech captures a place in the value chain that requires very little capex requirements or overhead.
The company only has 12 total employees (9 full-time). Its margins have been increasing since inception (gross margins were around 55% in 2022 - compared to 35.9% a few years earlier - and EBITDA and FCF margins have been growing exponentially) given its high operating leverage. The lack of physical assets on I-Tech’s balance sheet precludes any need for serious capex exceeding SEK 1 million (even though D&A/Impairment exceeded SEK 8 million in 2022).
I-Tech sells to the 9 largest marine paint manufacturers in the world, who pretty much control the entire market. Chugoku Marine Paints (CMP) is by far its largest customer (68% of revenue as of Q2 2023), so the company has very high customer concentration. But it is in at least the R&D phase with all 9 companies, has ship new-build products with 6, and has dry docking products with 3 (the largest part of the market).
Today, I-Tech is really only serving 1% of the overall shipping market, so it has a ton of room to grow. Given that it’s the only company with a product like Selektope on the market and the regulatory barriers will likely prevent any similar competition, all I-Tech has to do is continue to create products with its large customers.
Despite the fact that it’s being used by all of the largest marine paint manufacturers in the world and despite the fact that I-Tech has been gaining approval from and liaising with regulators for 20 years, Selektope has recently taken a slight hit from regulators. In May of 2023, an expert advisory panel for the European Chemical Association (ECHA) issued a preliminary recommendation regarding medetomidine (the generic name for Selektope), stating that it should be classified as an endocrine disruptor in humans. Basically, this means that – if the ECHA follows through with this – Selektope could be banned in Europe.
This is the biggest risk facing I-Tech today, but it’s really not that big. First, only 5% or so of sales are made in the EU. This includes actual sales by the large European customers (Jotun, Hempel, etc.) to ship yards/owners. There are multiple steps left in the ECHA process, which could be completed in 2025 or later, and I-Tech is preparing to challenge it. But, even if the ban goes through, the majority of the industry has already moved to Asia anyways (over 90% of cargo ships are built there and most are dry docked there too). According to I-Tech’s CEO, a ban wouldn’t prevent vessels with Selektope from entering European waters or ports, just prevent the application of medetomidine there.
There’s a possibility that Asian regulators could follow suit, but it seems unlikely. China, Japan, and South Korea derive a lot of economic value from the ship building industry, and they have all approved Selektope (though the EU did too). Some – like South Korea – are even looking at mandates that will make ship owners more likely to use Selektope (given its low biocide concentration).
Overall, this is a risk, but I don’t think it’s any larger than the risk that some kind of new technology or product comes along and displaces Selektope. As it stands, the first half of 2023 has seen growth accelerate past that in 2022. This means that it looks like customers are continuing to increase their purchases of Selektope, despite the regulatory findings.
If Selektope sees significant adoption across just a fraction of the commercial shipping industry, the returns could be enormous. Right now, I-Tech is trading at 10-15x 2023’s FCF number, so it’s looking pretty dang cheap for the level of growth and potential you’re getting. Overall, I-Tech is growing very fast, has strong customer relations, has very little capex requirements, and has high operating leverage. The company has almost no debt, and is now generating significant cash flow. All-in-all, it looks like a great bet at this price.
If you enjoyed this, Inbox Alpha has a much deep dive into I-Tech AB on their website, click here to check it out (its 35 pages long!).
At the time of this publication, Inbox Alpha does not owns shares in I-Tech AB (STO:ITECH) but they are considering while I (YZ) don't.
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