Some shoppers may hate supermarket plastic bag bans — but the environmental trend could mean a windfall for two ASX small caps racing to keep up with demand for non-plastic plastics.

Secos Group (ASX:SES) and Leaf Resources (ASX:LER) specialise in biodegradable plastics.

One makes compostable resins that get turned into bags and other products, while the other is planning to produce renewable sugars that can be turned into almost any kind of plastic.

“The banning of plastic bags increases demand for bioplastics,” Secos boss Richard Tegoni told Stockhead.

“We don’t see it as a threat. The more that people ban plastic bags around the world the more demand we get for bioplastics, and that’s the trend we see globally.”

As Woolworths and Coles weather an uproar over their wish to stop providing plastic bags at all rather than go bio, the sector is humming.

The sector was worth $2.9 billion in 2017, according to Global Biodegradable Plastics Market Report 2018, by Wise Guy Reports, and that could rise to $3.8 billion by 2022.

A Woolworths spokesperson said the supermarket was trying to reduce the use of plastics across the business, while a Coles spokesperson told Stockhead they don’t want to use compostable bags partly because they don’t break down properly in a landfill.

“Biodegradable bags only break down in certain conditions such as industrial composting facilities, which are not widely accessible,” the spokesperson said.

“Biodegradable bags are also not suited to recycling and not typically able to be re-used.”

Mr Tegoni says it’s true they can contribute to methane emissions in landfill, but Secos bags are in fact recyclable and can be put in home composting bins.

Further, Secos already sells biodegradable rubbish bags to over 20 councils in Australia so a growing number of regions are set up to handle a surfeit of biodegradable bags, if the supermarkets choose to take that route.

“Everyone wants to talk about Woolies and Coles and single use bags but I’m concentrating on [bringing on more production] to supply people who are ready to buy it and want to buy it,” Mr Tegoni said.

“It’s not my job to change their business model, my job is to go where the market is.”

EuroSME is one Secos client that makes plastic bags, which counts Woolworths among its clientele.

The money go-round

Secos has just raised another $1.7 million from convertible notes to provide working capital for the start a new resin plant in Malaysia, which they turn on this month.

The company has raised $6.4 million from sophisticated investors and convertible notes since November, and sold its Malaysian land for $3.5 million, to pay for a rapid uptick in production capacity.

“We’ve been unable in the last six months to meet demand so we’ve been having to meet closely with customers to seek their cooperation, to give us more time to put on this capacity,” Mr Tegoni said.

All production from the new factory has been taken by existing customers.

They chose convertible notes because their share price is too low to raise money from the market, and the land cash could be used better than sitting in the ground.

Share price blues

Therein lies a problem for both Leaf and Secos: new investors are not interested.

Secos shares are back near 52-week lows at 8c, a trend they haven’t really shifted from since early 2016 aside from earlier this year when the whole market moved sharply upwards.

Meanwhile Leaf, which benefited from early excitement about their pre-commercial tech, has also slid to share price levels not seen since 2014, closing on Wednesday at 8c.

Partly it’s because both are lightly traded and partly because large chunks of the relatively low numbers of shares available are tied up by top 20 shareholders.

Leaf is yet to commercialise their technology — they only locked down the site for their trial plant in Malaysia in February — and Secos has been sailing close to the wind financially.

Secos burned $1.5 million in the last quarter and was down to its last $743,000.

Mr Tegoni promises this will be more than made up for by sales from the new Malaysian plant, due to start this month (it already has a plant in Nanjing, China, which is at capacity).

He expects to add another $6 million in sales to the $6 million they took in March from the China plant.

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