Eco Investor August 2016

Initial Public Offering

Good IPO for Plastics Recycler

What to do with mountains of waste plastics has long been a key environmental question. One answer has been turning them into harder-wearing and longer-lasting substitutes for timber products and that is the solution being commercialized by Range International, which debuted on the ASX on 22 July after raising a not insignificant $50 million.

The IPO attracted significant interest from institutional and retail investors and was heavily oversubscribed, said the underwriter and lead manager, Morgans.

Range International produces an affordable, durable and sustainable pallet made entirely from recycled waste plastic. The current standard materials for pallets are timber or virgin plastics; so the new pallet saves waste plastic from going to landfill or into the environment, reduces global deforestation of timber, and reduces the use of petrochemicals by bypassing virgin plastics. The pallets themselves are also recyclable into new pallets.

Other advantages are their strength and durability as they can be used 20 to 50 times before repairs are needed compared to one to five times for wood. They have uniform dimensions, improved safety through no raised nails and no wood splinters, they do not absorb moisture, are resistant to fungi, insects and wood beetles, do not require heat treatment or fumigation, can easily accommodate tracking devices, and save storage space as when nested they need only a third of the space of wooden pallets.

Re>Pal pallets on top of each other at right and nested inside each other at left.

Range International was founded in 2002 and makes its Re>Pal pallet using a ThermoFusion technology developed by company founder and executive director, Matthew Darby. The Re>Pal has been over 10 years in development. It is made using 100 per cent recycled mixed waste plastic and at a price that is competitive with wooden pallets. A key to the technology's competitive cost is that Mr Darby has developed a way to make the plastic pallets without the need to sort or separate the glass, paper and metal in waste plastics.

Mr Darby said "Around the world, too many trees are being cut down and too much plastic waste is going into landfill or ending up in our oceans. We are determined to change that. The pallet industry's timber consumption and the world's growing volumes of plastic waste present both a significant threat to our environment and a tremendous opportunity. This business is founded on the principle of ‘let's change the way we look at our environment and apply sound commercial practices'. This is what Range is and it is what we hope to succeeded in doing, not just from an environmental perspective but also as a commercial operation."

There is no doubt there is a large commercial opportunity if it can succeed. Independent Market Report says the global market for new pallets in 2017 is expected to be over 5 billion units worth US$51 billion. The majority of the new pallets will be used once on a one-way export job and will have an average life of less than one year. It says 93 per cent of new pallets will be made of timber, much of it US and Spanish hardwood.

Executive chairman Stewart Hall said the IPO is about transitioning Range from a company focused on product development and customer trials to commercial scale production. The company has two production lines at its factory in Bali, Indonesia. The additional funds from the IPO will be used to scale up with a new manufacturing facility to be established in East Java. This will give access to a major trading port and proximity to many potential customers and suppliers of waste plastic.

The IPO funds are budgeted to purchase 14 additional production lines, of which the first production line is planned to be operating in the first quarter of 2017 and eight are expected to be operational by the end of 2017, he said.

At full capacity each production line can produce pallets with a current market value of about US$3 million. With the intention that 10 production lines will be running at or near full capacity by the end of 2017, the potential revenue is about US$30 million. With all 14 at work, the revenue would be US$42 million.

The company's biggest operating expenses will be labour, power, and waste plastic. The prospectus says the costs of power and labour in Indonesia are relatively low compared with developed economies; and that in 2014 there were 311 million tonnes of plastic produced and only 14 per cent of plastic packaging was recycled, so again price is unlikely to be an issue.

Further out Mr Hall wants to expand internationally and look at manufacturing in other parts of South East Asia and the Middle East.

So far Range has sold only on a small scale to over 100 customers in Asia, Australia and New Zealand and in a variety of industries that include exporters of packaged goods, construction companies and food and beverage companies.

The company believes that following its IPO it has enough working capital to carry out its objectives. The prospectus says it may consider raising more capital such as debt or additional equity if it gets strong customer demand and wants to accelerate its growth.

Range now has about $9 million in working capital. With the $50 million raised, it currently has cash of $57 million. But $33.5 million is allocated to buy the 14 production lines. Installation and facility costs will take another $9.5 million. IPO costs of $4.7 million leave only $2.1 million of the $50 million free for operating costs and additional working capital.

Range is just emerging from its pre-revenue stage and is an early pre-profit business. It made a loss of $3.4 million in 2014 and a loss of $7.8 million in 2015. So it will need to crank up revenue. So far, this has been modest - $240,000 in 2014 and $462,000 in 2015. Given its capital needs and lack of current profitability, Range will not be in a position to pay a dividend for some time.

The offer price for the shares was $1 and the shares commenced trading at $1.35. Post IPO there are 150 million shares on issue. The IPO shareholders hold 33 per cent of the equity. The directors including Messrs Darby and Hall hold about 19 per cent and are under voluntary escrow for two years.

Range International has set itself a very useful environmental goal of commercializing waste plastics and while it is in a big sector, the international pallet market is also highly competitive. It says the pallet manufacturing industry has low barriers to entry and is fragmented with thousands of companies around the world making pallets. On the positive side, well known companies such as Loscam and Brambles which owns Chep are not manufacturers but pallet renters and so are potential clients.

Range's team seems prepared with the sort of experience it will need. For example, the managing director, Lars Amstrup, was previously president of CHEP Asia; the Head of Global Strategy, Ken Brandt, spent 10 years with Bramble's CHEP Pallets Division; Head of Sales, Marketing/ PR, Russell Twine, spent 15 years with CHEP Pallets; and non-executive director Mark Daniel was most recently president of China Merchants Loscam International.

No doubt they are keen to show what they can do. Shareholders have a good ring side seat to what has the potential to turn into some big action if their team performs well. And for environmental investors, that would mean a lot of pallets to help reduce those mountains of plastic. (ASX: RAN)





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