Quadrise Fuels International: Value Appreciating Via Commercialization

Quadrise (QFI.L) is the emerging supplier of multi-phase superfine atomised residue (MSAR), a low-cost alternative to heavy fuel oil for the shipping, refining and power generation industries. It continues to make progress in key projects in Saudi Arabia, Asia and Latin America and with major shipping line Mærsk. Commercialisation of any one of these would result in substantial profits for Quadrise. Material progress towards this has the potential to trigger upwards movement in the share price towards our indicative value of 16.8p/share.

MSAR: A cost-effective alternative to heavy fuel oil
Over 600Mt of heavy fuel oil (HFO) are produced globally each year. Typically refineries mix heavy oil residues with valuable middle distillates to produce HFO. Quadrise’s process uses water and specialist chemicals from AkzoNobel to produce MSAR, an HFO substitute. Refineries and oil-based economies can thus derive much higher value from the middle distillates, potentially enabling oil-producers to reduce distillate imports and their refineries to offer MSAR at a discount to HFO. MSAR is attractive to marine fleet operators, for whom fuel is up to 75% of costs. In addition, MSAR produces significantly lower NOx emissions and no black soot on combustion.

Progress made on key projects
Following feedback from the earlier seaborne trials of MSAR with Mærsk, the world's largest shipping line, an upgraded marine formulation is now ready for further trials and potentially commercial deployment. Quadrise has recently signed a Memorandum of Agreement with Rafid, its Saudi Arabian partner. This follows approval by Saudi Aramco of MSAR for trial across selected refineries. This gives greater scope for MSAR production and utilisation than was initially envisaged. Discussions with partners in Latin America and Asia are also progressing.

Valuation: Appreciation in value through commercialisation
Our valuation is based on potential cash flows from the key projects taken over 15 years and applying a blended discount factor of 15% to reflect country and execution risk across these projects. To these we add the (anticipated lower) value of the Canadian assets. We have adjusted our FY12 pre-tax losses from £1.6m to £1.8m and now look for £2.3m pre-tax losses in FY13, rather than a break-even position, which we now expect to be reached during FY14. We therefore revise our indicative value from £84m (11.6p/share) to £121m (16.8p/share). We see potential for an uplift in share price towards our indicative value as each of the key projects makes material progress towards reaching the commercialisation phase.

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