Investors in Xeros saw it fall approximately 40% last week, despite news that it has won its most significant licence deal to date with the huge Chinese company Donlim. 

The main reason for the fall was a separate Trading Update warning of increased losses and reduced revenues for the current financial year and FY2025, putting back breakeven on a monthly basis to late 2025. House broker Cavendish stated: “Net cash was £4.0m on 30 August, with FY24 cash expected at £2.9m. The Board expects to have sufficient cash resource to see the company through until it achieves net monthly cash breakeven during the latter part of FY25. On lower near-term forecasts, we reduce our Target Price from 18p to 16p, although the longer- term market opportunity and the environmental benefits of its technology remain significant.”

The main reason behind this disappointing update was short term delays to the launch of its Indian partner IFB’s 9kg washing machine. Still, having spoken at length with CEO Neil Austin, I’m convinced that the share price fall to 0.7p is an over-reaction. My reasoning is fairly straightforward and outlined below: 

1) The quality of the licence deal with Donlim, opens up a huge global market in filtration for Xeros, which includes China. Donlim (owner of the Murphy Richards brand) is listed on the Shanghai Stock Exchange and trades in 120 countries with annual revenues of over £1.5bn. It will be manufacturing its external washing machine filter (XF3), as well as the internal one (XF1). My understanding is that for each internal device sold Xeros will receive between £2-3 licence fee and slightly more for the external device. Mass production of the XF3 external filter is set to begin in Q2 FY2025.

In addition the RNS states that ‘the strategic partnership further enables Donlim and Xeros to collaborate on the future development of innovative filtration and water saving products. For instance, given the fact that microplastic pollution is ubiquitous in the very air we breathe and water we drink everything from hoovers/fans to coffee makers could potentially use Xeros’ filtration expertise. 

2)  The delay to French legislation for microfibre filtration in washing machines, (which was supposed to come into effect in January 2025) is unlikely to stop it from happening within the next couple of years. Indeed, public concern and evidence of the dangers posed by such pollution is steadily growing and some with the EU are working to legislate standards to reduce microplastic pollution. Here in the UK environmental groups, such as the Marine Conservation Society are also pushing for such legislation. Before sceptics shout ‘Balls!’ – read this  article in The Guardian, which painfully brings home the need to reduce microplastic pollution in the environment.

3) The delay to the IFB launch of its 9kg machine with Xeros technology, doesn’t involve its water saving Xorbs technology and is merely a technical fix to avoid consumers overloading their machines. I expect it will be sorted out by the end of Q1 2025 given the ability of Indian companies such as IFB to quickly innovate. I’d also expect the new head of IFB’s consumer division to want to prove their worth by making this happen as soon as possible. 

4) Lastly, Neil Austin has proven he can make deals happen. He has said there are other significant license deals he progressing. Specifically, he mentioned “We are working with a major SE Asian washing machine brand, a major North American washing machine brand and a major European washing machine brand to effectively get them to license the Care technology.” While trials are ongoing I see no reason to doubt his ability to make close at least one or more of them in the next 6-8 months.

Cash position

Clearly, there are concerns over its cash position. It is expected to have £2.9m by year end and some fear it may need to raise again before the end of FY 2025. Currently, it is priced to go bust but I don’t think this is likely.

Of course, investors must be aware of the possible downside if deals/sales don’t pick up. Cash is set to be tight towards the end of 2025 and further funding could be needed. However, the company is aware of the constraints and has several levers at its disposal. Cost cutting is one option, it may also be possible to obtain an advance on license deal revenues. Other companies I follow have done this to avoid dilution, most notably Seeing Machines.

It’s certainly important to monitor the cash situation but I’m confident that further license deals currently under negotiation, revenues from sales from Yilmak, not to mention the launch of the IFB 9kg machine will raise revenues and increase the share price significantly over the next year.

I personally don’t view this as a get rich quick investment but more as a medium term one that could multi-bag on a 2-3 year time horizon. However, over the following months I will be monitoring it to ensure that my investment thesis remains intact.

As an investor it’s difficult to get in at the cheapest point and this is a high risk investment. However, I bought more on the 5th September (before speaking to Neil Austin) as I believed the deal with Donlim would prove to be hugely significant, while the delays are only temporary. Moreover, the backing of significant institutional investors who are in this for the long term gives me confidence that if the business continues to strengthen the revenues will rise, breakeven will be achieved and the price  has to rise significantly.

Interestingly, it seems other canny investors are also viewing the fall as an opportunity. On September 5th  William Black of Armstrong Investments increased his holding to just under 7.3%.

The writer holds stock in Xeros and Seeing Machines.