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Addressing the bottlenecks

Evolva 3 March 2021 Update
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Evolva

Addressing the bottlenecks

FY20 results

Food & beverages

3 March 2021

Price

CHF0.219

Market cap

CHF180m

Gross cash (CHFm) at 31 Dec 2020

19.67

Shares in issue

821.8m

Free float

100%

Code

EVE

Primary exchange

SIX Swiss Exchange

Secondary exchange

OTC US

Share price performance

%

1m

3m

12m

Abs

(6.8)

4.3

(8.2)

Rel (local)

(6.9)

0.6

(15.5)

52-week high/low

CHF0.307

CHF0.15

Business description

Evolva is a Swiss biotech company focused on the research, development and commercialisation of ingredients based on nature. The company has leading businesses in Flavours and Fragrances, Health Ingredients and Health Protection.

Next events

AGM

8 April 2021

H121 results

26 August 2021

Analysts

Sara Welford

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5700

Evolva is a research client of Edison Investment Research Limited

Evolva’s order intake in FY20 was over CHF10m for the first time, with market share gains across business segments and continued strong momentum in Health Ingredients. Due to an order backlog of CHF3.6m, however, reported sales were CHF7.5m vs our forecast of CHF9.8m. There were delays in manufacturing owing to ongoing issues with Evolva’s contract manufacturers (CMOs) and, to compound this, demand in Flavours & Fragrances (F&F) continues to be subdued. FY21 reported EBITDA and operating cash flow are now expected to be in line with FY20 levels, with current guidance assuming there will be pandemic-related effects on the business for most of the year. Importantly, however, the guidance to break-even at the cash level by FY23 remains unchanged.

Year end

Revenue (CHFm)

PBT*
(CHFm)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/19

11.6

(15.6)

(2.0)

0.0

N/A

N/A

12/20

7.5

(23.4)

(2.9)

0.0

N/A

N/A

12/21e

14.3

(17.0)

(2.1)

0.0

N/A

N/A

12/22e

27.4

(4.5)

(0.5)

0.0

N/A

N/A

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

CMO bottlenecks continue to cause delays

While the planned updates of the CMO network have been completed, scaling up the manufacturing of resveratrol at new CMOs was delayed by the pandemic, with procurement of new equipment and staff training particular hurdles. This led to an order backlog of CHF3.6m. The bottlenecks are being addressed and are unlikely to recur on the same scale for other products, as many problems were caused specifically by the pandemic, but extraordinary costs of CHF6.1m are expected in FY21 as further investment is required to ease the bottlenecks.

Further funding required, CFO leaving

With CHF19.7m in gross cash at end FY20 and CHF14m of further open financing lines (through a convertible loan agreement), it is highly likely that Evolva will need further financing as it scales up some products and builds inventories to support its launches. Management is evaluating a range of options, with a view to minimising the dilution to existing stakeholders. The sudden departure of André Pennartz for personal reasons inevitably comes as a surprise, but CEO Oliver Walker is also taking on the CFO role ad interim, already having experience of the dual role.

Valuation: Fair value of CHF0.32/share

We continue to value Evolva on a DCF basis with a 25-year model, assuming cash break-even in FY23, in line with management guidance. The pandemic has affected Evolva’s business, with F&F demand remaining subdued and also causing CMO bottlenecks. Our fair value decreases to CHF0.32/share (from CHF0.38 previously) as we reduce our near-term EBTIDA and operating cash flow assumptions in line with new guidance. As a reminder, nootkatone contributes c 50% of our fair value for Evolva, with most of this coming from its use in pest control.

FY20 results and forecasts

Evolva reported sales of CHF7.5m, below our forecast of CHF9.8m. As discussed above, this was caused by a CHF3.6m order backlog, hence order intake was above our forecast. Reported EBITDA loss was CHF16.7m vs our forecast of CHF15.8, although in underlying terms (excluding CHF2.6m of extraordinary costs related to the manufacturing delays and bottlenecks), the EBITDA loss was CHF14.1m.

Turning to guidance, for FY21 reported EBITDA and operating cash flow are expected to be around 2020 levels owing to the delays and costs in scaling up manufacturing. We therefore reduce our estimates at both the revenue and earnings levels to reflect the new guidance, as we previously assumed a c CHF5m improvement in both figures.

Our forecasts implicitly assume any further financing needs are met through the issuance of debt (or convertible notes), as we do not forecast any equity dilution at this stage.

Valuation

We detail our valuation in Exhibit 1. As discussed above, we trim our sales and EBITDA forecasts in the F&F segment owing to subdued demand caused by the ongoing pandemic. We also reduce our operating cash flow forecasts as we expect greater investment by Evolva in its CMO network and also inventory build to support its new launches. Our fair value therefore decreases to CHF0.32/share (from CHF0.38/share previously), as the reductions in our forecasts are partly offset by rolling forward our DCF by a year to now commence in FY21. We continue to exclude the new product – L-arabinose (previously known as EVE-X157/Z4) – from our model: while we now know what the product is (a reducing sugar) and its fields of application (it is used as a flavour ingredient, and has potential as a prebiotic and as an ingredient to support healthy blood sugar), very little detail has been provided at this stage regarding the size of the addressable market. We recognise that it could provide some upside to our current forecasts: management currently expects commercial-scale recurring manufacturing to occur from FY22 for F&F applications and from FY23 in the Health Ingredients space.

We assume that cash and profit break-even for Evolva will occur in FY23, in line with management guidance. Given the increase in cash burn at the operating cash flow level vs our previous estimates, we now forecast that the company will exhaust its cash reserves during FY21. We hence expect overall net debt of CHF13.6m at end FY21, including the balance of convertible loan notes issued during FY20. As a reminder, in June and December 2020, Evolva entered into an agreement with Nice & Green for the issue and subscription of up to CHF24m of convertible loan notes. During 2020, CHF10m of convertible loan notes were issued, and CHF6m of these have been converted to equity through the issue of 27.9m shares. The remaining CHF14m of the facility is still available. Our current forecasts do not imply any further raises from the convertible facility, but instead assume the funding requirements are met through debt issuance. We now assume overall cash burn to be c CHF23m in FY21 (vs total cash burn of c CHF20m in FY19 and c CHF30m in FY20), before receding in FY22 as the EBITDA loss reduces significantly.

Exhibit 1: Summary of DCF valuation

Product

Value
(CHFm)

Value/share (CHF)

Notes

Stevia (royalty stream)

88.9

0.11

Launched; peak sales: $600m; royalty stream: 5%

Resveratrol

24.9

0.03

Launched; peak sales: $140m; margin: 30%

Nootkatone

177.3

0.22

Launched; peak sales: $150m; margin: 40%

Valencene

15.0

0.02

Launched; peak sales: $10m; margin: 40%

R&D partnerships

6.4

0.01

Assume revenue continues to fall

Capex

-21.3

-0.03

Includes contribution to Cargill for commercialisation of EverSweet

Net cash

9.7

0.01

Reported net cash at end FY20

Funding gap requirement

-37.2

-0.05

Total

263.6

0.32

Based on last reported number of shares (822m)

Source: Edison Investment Research. Note: WACC = 12.5%.


Exhibit 2: Financial summary

CHF'000s

2018

2019

2020

2021e

2022e

2023e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

8,933

11,596

7,541

14,306

27,449

53,111

Cost of Sales

(6,816)

(6,305)

(9,783)

(14,348)

(15,065)

(27,439)

Gross Profit

2,117

5,292

(2,242)

(42)

12,384

25,672

EBITDA

 

 

(23,350)

(12,280)

(16,733)

(15,134)

(2,538)

10,878

Operating Profit (before GW and except.)

(24,827)

(14,067)

(18,397)

(17,131)

(4,364)

(16,517)

Intangible Amortisation

(5,909)

(6,060)

(6,508)

(6,508)

(6,508)

(6,508)

Exceptionals

0

0

0

0

0

0

Operating Profit

(30,736)

(20,128)

(24,905)

(23,024)

(10,406)

3,018

Net Interest

(622)

(1,486)

(4,978)

(521)

(614)

(670)

Other financial income

40

0

0

0

0

0

Profit Before Tax (norm)

 

 

(25,409)

(15,553)

(23,375)

(17,038)

(4,513)

8,855

Profit Before Tax (FRS 3)

 

 

(31,318)

(21,614)

(29,882)

(23,546)

(11,020)

2,348

Tax

2,104

(25)

18

0

0

0

Profit After Tax (norm)

(23,305)

(15,578)

(23,357)

(17,038)

(4,513)

8,855

Profit After Tax (FRS 3)

(29,214)

(21,639)

(29,864)

(23,546)

(11,020)

2,348

Average Number of Shares Outstanding (m)

770.6

770.4

809.3

821.8

821.8

821.8

EPS - normalised (c)

 

 

(3.0)

(2.0)

(2.9)

(2.1)

(0.5)

1.1

EPS - FRS 3 (c)

 

 

(3.8)

(2.8)

(3.7)

(2.9)

(1.3)

0.3

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

23.7

45.6

-29.7

-0.3

45.1

48.3

EBITDA Margin (%)

N/A

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

N/A

BALANCE SHEET

Fixed Assets

 

 

145,825

143,333

133,316

126,564

120,019

113,533

Intangible Assets

138,838

133,939

123,894

117,387

110,879

104,372

Tangible Assets

4,769

7,211

6,914

6,803

6,765

6,787

Other fixed assets

2,218

2,184

2,508

2,375

2,375

2,375

Current Assets

 

 

67,192

48,745

33,577

21,033

30,433

38,550

Stocks

4,040

5,392

9,125

15,737

23,332

29,211

Debtors

1,941

1,480

2,347

2,861

4,666

6,904

Cash

60,380

39,920

19,669

0

0

0

Other current assets

830

1,954

2,435

2,435

2,435

2,435

Current Liabilities

 

 

(14,705)

(12,295)

(15,139)

(16,132)

(16,288)

(18,980)

Creditors

(743)

(2,912)

(2,128)

(3,122)

(3,278)

(5,970)

Short term borrowings

0

0

(4,000)

(4,000)

(4,000)

(4,000)

Finance lease obligations

(782)

(1,289)

(1,059)

(1,059)

(1,059)

(1,059)

Other current liabilities

(13,180)

(8,095)

(7,952)

(7,952)

(7,952)

(7,952)

Long Term Liabilities

 

 

(4,150)

(7,221)

(6,662)

(9,065)

(21,930)

(17,668)

Long term borrowings

0

0

0

(3,581)

(17,492)

(14,276)

Finance lease obligations

(2,394)

(4,840)

(4,179)

(3,133)

(2,087)

(1,042)

Other long-term liabilities

(1,756)

(2,381)

(2,484)

(2,351)

(2,351)

(2,351)

Net Assets

 

 

194,162

172,562

145,092

122,400

112,234

115,436

CASH FLOW

Operating Cash Flow

 

 

(23,247)

(13,577)

(22,317)

(20,412)

(10,928)

6,307

Net Interest

(360)

(583)

(1,046)

(521)

(614)

(670)

Capex

(364)

(193)

(1,223)

(1,272)

(1,322)

(1,375)

Acquisitions/disposals

0

0

0

0

0

0

Financing

(209)

164

0

0

0

0

Dividends

0

0

0

0

0

0

Other cash flow

(12,595)

(6,224)

(5,521)

(1,046)

(1,046)

(1,046)

Net Cash Flow

(36,775)

(20,413)

(30,106)

(23,251)

(13,910)

3,216

Opening net debt/(cash)

 

 

(97,184)

(60,381)

(39,920)

(9,670)

13,581

27,491

HP finance leases initiated

0

0

0

0

0

0

Other

(29)

(47)

(144)

0

0

(0)

Closing net debt/(cash)

 

 

(60,381)

(39,920)

(9,670)

13,581

27,491

24,275

Source: Edison Investment Research, company data


General disclaimer and copyright

This report has been commissioned by Evolva and prepared and issued by Edison, in consideration of a fee payable by Evolva. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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1185 Avenue of the Americas

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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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Evolva and prepared and issued by Edison, in consideration of a fee payable by Evolva. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, 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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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