A cloudier picture

Evolva 16 January 2017 Update

Evolva

A cloudier picture

Stevia update

Food & beverages

16 January 2017

Price

CHF0.55

Market cap

CHF219m

Net cash (CHFm) at end Dec 2016e

47.1

Shares in issue

397.9m

Free float

76%

Code

EVE

Primary exchange

SIX Swiss Ex

Secondary exchange

OTC US

Share price performance

%

1m

3m

12m

Abs

37.5

3.8

(47.6)

Rel (local)

32.8

(1.8)

(47.9)

52-week high/low

CHF1.0

CHF0.4

Business description

Evolva is a Swiss high-tech fermentation company. It has a proprietary yeast technology platform, which it uses to create and manufacture high-value speciality molecules for nutritional and consumer products.

Next events

FY16 results

30 March 2017

Analysts

Sara Welford

+44 (0) 20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

Evolva is a research client of Edison Investment Research Limited

The much-awaited stevia update has confirmed that EverSweet is still on track to be launched in 2018, and there is a new production plan. That said, talks with Cargill are ongoing and the option to enter into a JV has not yet been exercised, so the risk remains this may not occur. Moreover, FY16 revenues are now expected to be c 30% lower than previous guidance due to a milestone not being reached and customer conversion continuing to take longer than expected. We have adjusted our model to reflect these changes and our new fair value is CHF0.87/share (previously CHF1.10).

Year end

Revenue (CHFm)

PBT*
(CHFm)

EPS*
(CHF)

DPS
(CHF)

P/E
(x)

Yield
(%)

12/15

13.4

(32.1)

(8.0)

0.0

N/A

N/A

12/16e

9.2

(37.9)

(9.5)

0.0

N/A

N/A

12/17e

14.6

(36.7)

(9.2)

0.0

N/A

N/A

12/18e

23.7

(33.0)

(8.3)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Production update – agreement not yet reached

As part of its discussions with Cargill, Evolva has considered various production routes for EverSweet. The contract manufacturing route was ruled out early on due to the higher costs involved, and the more likely option was a retrofit of the existing Cargill facility in Blair, Nebraska. In September 2015 Evolva guided towards a cost of CHF30m, but now the retrofit is likely to be much more limited. We forecast a cost of CHF10m. The smaller retrofit should ensure EverSweet retains its first-mover advantage ahead of DSM’s launch of a stevia sweetener in late 2018. The move to a new Evolva/Cargill facility would be accelerated under this scenario. Both the retrofit and the new facility are subject to Evolva exercising its option to enter into a JV with Cargill. Talks have been ongoing for over a year now, and the risk remains that the two parties cannot reach an agreement that Evolva deems to be value-creating for its shareholders.

FY16 revenue lower than previously expected

The stevia program that was optimising the yeast strain failed to reach a milestone based on yield, which was expected towards the end of 2016. Management, however, feels good progress has been made and is confident that a launch-ready strain will be achieved during 2017. In addition, product sales increased at a lower rate than projected as customer conversion continues to take longer than expected.

Valuation: Fair value of CHF0.87/share

Our new fair value is CHF0.87/share (previously CHF1.10/share), which reflects a cut in our revenue forecasts, a reduction in our stevia probability risk adjustment, an updated FX rate and a rolled forward DCF. Evolva is well-capitalised with a cash position of c CHF47m at end FY16. We forecast it will have enough cash through to the end of FY17. However, if the option to enter into a JV with Cargill is exercised in 2017 and the accelerated move to a new stevia manufacturing facility goes ahead, Evolva will need to raise more cash and re-evaluate its balance sheet, most likely during FY17 or early FY18.

Valuation

We value Evolva on a 25-year DCF basis. Our fair value is CHF0.87 (previously CHF1.10), which offers c 60% upside from current levels. We have reduced our FY16 revenue forecasts, in line with management guidance for revenues of CHF9-10m for the year. We have assumed half of the cut is due to the technical milestone not being achieved and the remainder is due to lower sales of launched products.

We have rolled forward our DCF to start in FY17. We assume all product cash flows stop after 25 years and start to fade beyond 15 years; we also assume a WACC of 12.5% given we deem Evolva to be higher-than-average risk in relation to the consumer space. We have updated our estimates to reflect current FX rates and we note the weakening of the Swiss franc vs the US dollar provides a boost to our forecasts. We illustrate a summary of our updated DCF valuation in Exhibit 1.

Exhibit 1: Summary of DCF valuation

Product

Value (CHFm)

Value per share (CHF)

Notes

Stevia royalties

221.0

0.56

Launch date: 2018; peak sales: $600m; likelihood of success 70%; operating margin: 40%; profit share: 45%.

Saffron royalties

12.8

0.03

Launch date: 2018; peak sales: $50m; likelihood of success 60%; royalty: 10%.

Resveratrol

92.3

0.23

Launched; peak sales: $200m; likelihood of success 100%; margin: 40%.

Vanilla royalties

14.8

0.04

Launched; peak sales: $35m; likelihood of success 100%; royalty: 5%.

Nootkatone

123.8

0.31

Launched; peak sales: $150m; likelihood of success 75%*; margin: 40%.

Valencene

29.7

0.07

Launched; peak sales: $10m; likelihood of success 100%; margin: 40%.

Santalol

13.9

0.03

Launch date: 2018; peak sales: $10m; likelihood of success 60%; margin: 40%.

Legacy products

36.9

0.09

EV-077 for diabetic nephropathy, EV-035 antibiotic indications

L’Oréal/Takasago revenues

106.4

0.27

Launch date: 2020-22; number of products: 5; peak sales: $150m per product; likelihood of success: 50%; royalty: 8%.

Other consumer royalties

36.7

0.09

Royalties from alliances with Ajinomoto, BASF and Roquette; launch date: 2016-18; number of products: 3; peak sales: $150m per product; likelihood of success: 60%; royalty: 2%.

Other revenues

4.3

0.01

Only includes revenues from existing collaborations and grants.

R&D and Admin

(266.2)

(0.67)

 

Tax

(104.0)

(0.26)

Capex

(21.8)

(0.05)

Includes investment of $10m for commercialisation of stevia with Cargill.

Net cash

47.1

0.12

Net cash at end FY16e

Total

346.7

0.87

 

Source: Edison Investment Research. Note: WACC = 12.5%. *There is no developmental risk associated with Nootkatone, but we have applied a risk adjustment due to uncertainty about the use of the product as an insect repellent.

Stevia: Talks with Cargill ongoing

We believe Evolva will continue to work on its current product suite and will seek collaborations with new partners, as per management guidance. Evolva’s prospects are mostly tied to the success of its stevia sweetener, EverSweet, although it is not fully dependent on it. Stevia accounts for c 35% of our valuation (after adjusting for tax and capex).

Compared to existing stevia formulations, the taste of EverSweet continues to be a highly attractive proposition in our view, as Evolva’s product lacks the trademark bitter aftertaste that hinders the use of traditional stevia at higher concentrations. However, the risk remains that a competing product may be launched before EverSweet. The only competing fermented stevia that we are aware of is being developed by DSM, and it is due to be commercially available by the end of 2018. Evolva has never issued revenue guidance on stevia, other than stating it believes the addressable market is $4bn. We assume EverSweet can only reach a peak market share of 15% of the addressable market, or $600m peak sales, and that it is launched mid-2018.

We have adjusted our probability of success for stevia from 80% to 70%. This aims to capture the uncertainty around the ongoing talks with Cargill, and the lack of progress so far in terms of Evolva exercising its option to enter into a 45% JV with Cargill. We have also adjusted our capex forecasts to reflect the updated guidance regarding the much smaller – and hence cheaper – retrofit of the Cargill Blair, Nebraska facility. Our capex forecast for the project is now CHF10m spent over FY17-18, down from our previous estimate of CHF30m over FY17-19.

Nootkatone: Gaining momentum

We note that although stevia accounts for a significant proportion of our valuation, Evolva also has other products. Nootkatone, which is being developed in collaboration with the US CDC (Centers for Disease Control and Prevention), has gained momentum and is now often mentioned as having potential for fighting off the Zika virus. It could also be effective against mosquitoes that transmit chikungunya, dengue and West Nile viruses, as well as repelling and killing the yellow fever mosquito and the black-legged tick, which transmits Lyme disease.

Resveratrol: Wide application range

Resveratrol is another significant product for Evolva. It is a substance that has been shown to have multiple health benefits, improving memory and brain connectivity, but also has applications in advanced materials, dietary supplements, bone health, women’s health, oral care and animal nutrition. Within Evolva’s product suite, resveratrol has the widest range of applications.

Other products

We have delayed the peak sales year of several of Evolva’s products that are the result of collaborations as we believe management is likely to focus resources and time on the stevia launch, and hence other projects may experience some delays compared to our previous forecasts.

Exhibit 2: Financial summary

CHF000s

2014

2015

2016e

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

10,744

13,364

9,188

14,550

23,669

Cost of Sales

0

0

(842)

(3,427)

(7,971)

Gross Profit

10,744

13,364

8,345

11,123

15,698

EBITDA

 

 

(19,405)

(30,305)

(37,073)

(35,628)

(32,300)

Operating Profit (before GW and except.)

(20,872)

(31,947)

(38,004)

(36,684)

(38,254)

Intangible Amortisation

(2,284)

(3,779)

(3,779)

(3,779)

(3,779)

Exceptionals

0

0

0

0

0

Operating Profit

(23,156)

(35,726)

(42,033)

(40,712)

(37,502)

Net Interest

(357)

(129)

333

188

44

Other financial income

57

0

0

0

684

Profit Before Tax (norm)

 

 

(21,172)

(32,076)

(37,921)

(36,745)

(32,995)

Profit Before Tax (FRS 3)

 

 

(23,456)

(35,855)

(41,700)

(40,524)

(36,774)

Tax

1,613

4,067

0

0

0

Profit After Tax (norm)

(19,069)

(28,113)

(37,921)

(36,745)

(32,995)

Profit After Tax (FRS 3)

(21,843)

(31,788)

(41,700)

(40,524)

(36,774)

Average Number of Shares Outstanding (m)

291.9

353.0

397.9

397.9

397.9

EPS - normalised (c)

 

 

(6.4)

(8.0)

(9.5)

(9.2)

(8.3)

EPS - FRS 3 (c)

 

 

(7.3)

(9.0)

(10.5)

(10.2)

(9.2)

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

N/A

N/A

N/A

N/A

N/A

EBITDA Margin (%)

N/A

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

149,742

143,457

140,567

142,635

144,671

Intangible Assets

136,111

131,940

128,161

124,381

120,602

Tangible Assets

10,484

8,431

9,320

10,168

10,983

Other fixed assets

3,147

3,086

3,086

8,086

13,086

Current Assets

 

 

62,870

88,780

50,573

10,830

7,062

Stocks

313

2,217

923

1,878

2,621

Debtors

1,510

2,785

2,014

2,392

3,891

Cash

60,713

83,228

47,086

6,010

0

Other current assets

334

550

550

550

550

Current Liabilities

 

 

(13,460)

(7,385)

(7,700)

(7,759)

(40,012)

Creditors

(2,408)

(1,182)

(1,497)

(1,557)

(1,596)

Short term borrowings

(3,522)

0

0

0

(32,214)

Finance lease obligations

(354)

(969)

(969)

(969)

(969)

Other current liabilities

(7,176)

(5,234)

(5,234)

(5,234)

(5,234)

Long Term Liabilities

 

 

(24,158)

(21,437)

(20,468)

(19,499)

(18,530)

Long term borrowings

0

0

0

0

0

Finance lease obligations

(3,904)

(4,134)

(3,165)

(2,196)

(1,228)

Other long term liabilities

(20,254)

(17,303)

(17,303)

(17,303)

(17,303)

Net Assets

 

 

174,994

203,416

162,973

126,207

93,190

CASH FLOW

Operating Cash Flow

 

 

(19,437)

(31,353)

(33,436)

(33,144)

(30,061)

Net Interest

(361)

(376)

333

188

44

Tax

0

0

0

0

0

Capex

(1,201)

(1,865)

(2,070)

(2,152)

(2,239)

Acquisitions/disposals

418

3,278

0

0

0

Financing

56,776

59,956

0

0

0

Dividends

0

0

0

0

0

Other cash flow

(4,614)

(3,975)

(969)

(5,969)

(5,969)

Net Cash Flow

31,582

25,666

(36,141)

(41,077)

(38,224)

Opening net debt/(cash)

 

 

(25,633)

(57,191)

(83,188)

(47,047)

(5,970)

HP finance leases initiated

0

0

0

0

0

Other

(25)

331

0

0

0

Closing net debt/(cash)

 

 

(57,191)

(83,188)

(47,047)

(5,970)

32,254

Source: Edison Investment Research, Evolva data. Note: Other cash flow estimates 2017/18 include potential CHF10m cost of Cargill EverSweet plant retrofit.

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Evolva and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Evolva and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

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