Cap-XX (CPX.L) introduction and notes

Cap-xx (CPX.L) is a stock I hold (disclaimer) and would like to cover in a lot more detail than time currently allows.

In brief, the company designs and manufactures supercapacitors. Capacitors store electricity, but unlike batteries don't achieve this by way of a chemical reaction; the electric charge is stored in "plates" within the capacitor.

The lack of a chemical reaction brings several benefits, not least of which incredibly rapid charge cycles and enhanced lifespan over rechargeable batteries. Capacitors are intrinsically safer than conventional Li-ion batteries (ie low fire risk), provide far superior power output (peak power) and can be designed to operate in high temperature environments which would destroy a lithium ion battery.

Capacitors themselves have been around for 250 years - literally - and today are used in nearly all modern electronic devices. It would be highly unusual to find a circuit any more complex than a basic torch that didn't contain a capacitor.


The value proposition: making a capacitor "super"

Supercapacitors (or ultracapacitors - the terms are interchangeable) basically do the same job as capacitors - store electricity - but in a much smaller package.  The amount of electrical energy that can be stored is an order of magnitude larger than a conventional capacitor design of the same physical size.

This ability to store a large amount of electricity in a small package is an enabler in several areas of electrical design, allowing:

• Supercapacitors to replace rechargeable batteries, especially where heat or other factors play a part (e.g. car dashboard/dashcams) and/or lifespan (e.g. embedded battery backup for data cache in servers).
• Rapid charging - minutes or even seconds (depending on power constraints). This might be particularly useful for game controllers, where a game could be paused for a matter of 2 minutes to recharge a controller
• Make devices smaller - e.g. "wearable" electronics - where a traditional capacitor would be too large
• Maintenance free wireless remote sensors and smart meters, which use remote power or energy harvesting stored in an internal supercapacitor.  
• Enable new techniques such as motion charging for smaller devices such as smart watches

The overall market outlook for supercapacitor growth is strong, with reports indicating the global market will quadruple in 7 years from $568m dollars in 2015 to $2.2bn in 2022.

The Journey

Over the last half decade Cap-xx has commercialised the fruits of its ongoing R&D operation. R&D costs themselves are heavily subsidised by way of an annual rebate amounting to 45% of qualifying costs from the Australian government. This amounted to AU$1.5m received in 2016.

The company has a long-standing agreement with Japanese component giant Murata ($10.8 bn revenue - FY15, $32bn mcap) and has seen licensing revenue from this agreement grow year-on-year.

Cap-xx also manufactures components themselves.

In the pipeline: automotive "power module" and TruckStart. These are larger supercapacitor modules aimed at automotive use, both for electric vehicles and traditional combustion engine vehicles for regenerative braking, power boost, engine stop/start and cold start applications.

Revenue growth to date has been solid, but not exponential, leaving the market underwhelmed at times. Automotive applications have taken a while to commercialise.

The last 12 months could prove company-making

Almost exactly a year ago, Cap-xx announced a significant new deal with US component manufacturer AVX Corporation ($1.3bn revenue). The deal was worth £1m up front, with ongoing license fees and royalties.

AVX corporation described the technology licensed from Cap-xx as "best in class" for peak-power handling, and has since launched 2 ranges of capacitors amounting to just under 40 devices. 

Very soon after the AVX deal was announced, Cap-xx announced it had widened its agreement with Murata to license battery technology. Murata then released the UMAL, a novel supercapacitor/battery hybrid.  

Murata subsequently announced it would buy the substantial battery operations of Sony and make a strategic investment in battery technology for a range of end uses, including automotive and smart phones.

Both Murata and Cap-xx have hinted that the UMAL range could be expanded. 

In the annual results it was announced that the company had made a "first design win" for its Thinline range - a new "credit-card sized" application that would start manufacture in 2017.

Towards the end of the year the company won a prestigious industry award from the Society of Automotive Engineers (Australia) for its as-yet unreleased automotive PowerModule.  It then announced significant cost savings in the manufacturing process for PowerModule, indicating the long process of bringing this technology to the market was progressing with a commercial focus.

Early in 2017 we learned that Murata had launched the "world's thinnest" supercapacitor under Cap-xx license - just 0.4mm.

A surprise placing at 9p, close to a multi-year high and 80% premium to the share price just a month prior, piqued interest. The money would be used to accelerate a number of projects, according to the RNS

To top a very busy 12 months, the company announced it had launched a Cap-xx branded range of cylindrical supercapacitors.

After a period of sustained deals and launches it was disappointing to see revenue drop off in the interims. However, the dip seems to be contained to a very specific manufacturing problem and the company still forecasts meeting the FY numbers published by its broker, Allenby, reaffirmed soon after the company results in an updated note.

The future

Despite the blip in the iterims and current dip in the share price, its worth reminding ourselves that institutional investors saw fit to take part in a 9p placing raising £2.43m just 2 months ago, and nothing has changed in the fundamentals. In all likelihood those subscribers would have been aware of the temporary manufacturing problems at the time they invested, ie. they invested on the basis of what's around the corner. 

I expect 2017 to continue to cement to the company's position as a global leader in supercapacitor design with:

• Murata likely to expand the hybrid battery range beyond the existing UMAL size
• AVX likely to launch a new range termed "prizmcap" that is currently being mentioned in marketing literature
• Automotive PowerModule to be finally unveiled this year - potentially
• Details to be released of the projects being accelerated with the additional funds raised

In summary, the company achieved a great deal in the last 12 months. The revenue growth from multiple product launches by its 2 licensors together with its own-brand range in recent months will take a while to reflect in the results, but I don't expect the pace of growth to slow. I expect further launches this year that will continue to drive revenue in future years.

It's also worth noting that R&D spending was never trimmed back, meaning the company continues to invest in research that should support revenue in years to come.