Sydney-headquartered Ecofibre (ASX: EOF) saw its shares surge 65 per cent this morning after announcing a $9 million annual supply deal for its subsidiary Hemp Black with global sports apparel brand Under Armour Inc.
Hemp Black has signed a Memorandum of Understanding (MoU) for an initial term of three years with the US-based group to provide specialty yarn made with the same manufacturing expertise that underpins other Hemp Black products such as its trademarked eco6 hemp biochar, involving negative emission technology aimed at replacing petroleum-based products.
However, Ecofibre's CEO Eric Wang has clarified that the specialty yarn Hemp Black will provide to Under Armour does not contain any hemp.
Hemp Black has also entered into an agreement with another US company, Cruz Foam, to manufacture a sustainable, biodegradable packaging material for its customers. The initial three-year agreement includes expectations for annual revenue of $3 million at full production.
Both announcements coincide with the release of Ecofibre's June quarter results, which showed a 46 per cent year-on-year lift in revenue for Hemp Black at $4.9 million, underpinned by yarns used for the turf and biomedical industries.
When Ecofibre listed on the Australian Stock Exchange in 2019, with financial support from Countplus founder Barry Lambert, the bulk of its sales came from its line of hemp-derived CBD oils Ananda Health with Hemp Black considered a longer-term development play.
The latter has since replaced the former as the leading sales division at Ecofibre. Ananda Health also saw strong year-on-year revenue growth of 45 per cent in the June quarter, but at $3.7 million this was still shy of the Hemp Black business.
Earlier this month, Ecofibre also announced the formation of a new entity called EOF BIO LLC for commercialise intellectual property co-developed by Ecofibre and the University of Newcastle, including treatments for such gynaecological disorders as ovarian cancer and endometriosis which are already patented.
Meanwhile, the group's Ananda Food business recorded lower sales in the quarter due to $1.3 million in sales credits issued to fibre seed customers for goods damaged in transit from Australia to the US.
The latest breakthroughs for Hemp Black stem directly from a strategic and operational review completed in February, which concluded Ecofibre needed to exit from unprofitable business lines such as Australian plant science, Hemp Black finished goods apparel and 3D knitting.
At the time, CEO Eric Wang said Hemp Black would focus on specialist manufacturing resources on four business lines; medical yarns, turf yarns, new performance yarn clients, and eco6 BioPallets.
The results of the review were expected to generate annualised operating cost reductions of $10 million in the second half of 2023, but the business also took a $12.2 million hit in one-off balance sheet impairments to reflect the restructuring.
In today's announcements, Wang express vindication about these decisions.
"When Ecofibre announced our strategic review earlier this year, we advised that one of the key opportunities for Hemp Black would be to secure new performance yarn clients," he said.
"The outstanding technical capabilities of the team enable us to work with tier-1 clients on large-scale opportunities."
The new contracts are expected to underpin profitability for Hemp Black in FY24.
At the time of publication, EOF shares are up 53 per cent at 26 cents per share (cps).
Correction: An earlier version of this story stated that the specialty yarn included hemp. Whilst in the initial announcement there was no mention of the yarn not including eco6 hemp biochar, Hemp Black's signature product, it has since been clarified that the yarn the company will supply does not include hemp.
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