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H117 results and update

Carbios 31 October 2017 Update
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Carbios

H117 results and update

Results update

Alternative energy

31 October 2017

Price

€8.93

Market cap

€38m

Net cash (€m) at 30 June 2017

4.7

Shares in issue

4.5m

Free float

49%

Code

ALCRB

Primary exchange

Alternext

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

14.9

18.1

(0.7)

Rel (local)

12.1

10.8

(18.1)

52-week high/low

€9.9

€6.2

Business description

Carbios develops enzyme-based processes for biodegradation and bioproduction of plastics, with a long-term aim of displacing current recycling and production practices.

Next events

2017 full results

March 2018

Analyst

Adrian Phillips

+44 (0)20 3077 5700

Carbios is a research client of Edison Investment Research Limited

The reduction in Carbios’s operating losses in the first half of 2017 is positive. It was driven by revenue from Carbiolice for part of the period and the fall in external costs from the scheduled conclusion of the Thanaplast programme. The announced five-year partnership with L’Oréal shows confidence in Carbios’s technology. We have adjusted our DCF valuation range per share to €20-32 to reflect the latest capital markets activity.

Year
end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/15

0.8

(4.0)

(81.3)

0.0

N/A

N/A

12/16

8.9

3.6

131.9

0.0

6.8

N/A

12/17e

1.2

(4.0)

(64.9)

0.0

N/A

N/A

12/18e

1.5

(3.2)

(53.5)

0.0

N/A

N/A

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

Transition under way

The first half of 2017 and the following couple of months have seen a number of important developments. To some extent, they mark a step forward into a new stage of development in the company from a pure scientific play to market ready IP. The moves embrace a new deputy CEO, the planned ending of the Thanaplast R&D programme, the first significant revenues from the Carbiolice joint venture and two major financing moves. There has been no change in the company’s strategic scientific and commercial roadmap, which it is pursuing from a strengthened financial position. The announcement of a five-year partnership with L’Oréal, while at a pre-pilot stage, marks an important milestone in the commercial exploitation of Carbios’s PET technology.

Shape of P&L shifts

There was a sharp fall in operating losses in the first half of 2017 (down 28% to €1.75m). Total revenue actually rose 14% to €0.63m because of the first time revenue for development work for Carbiolice. This more than compensated for the sharp fall in grant income as the Thanaplast programme came to an end. The end of Thanaplast was also reflected in the 53% drop in bought-in services to €0.88m reflecting the termination of research commissioned from outside. This is in part counterbalanced by the sharp drop in the research tax credit (CIR) shown under the tax charge. The surge in payroll costs is attributable to one-off severance costs in connection with management changes.

Valuation: Updated DCF of €20-32/share

A capital increase in July and other measures have raised €4.7m in fresh equity taking current liquid funds on our estimates to €7.5m. Management indicates that this will cover regular cash burn through to the end of H119. It should also provide financing for the pilot PET plant, which will mark the next key step in bringing Carbios’s IP into full commercial application. A final €1m subsidy payment under Thanaplast will further bolster the balance sheet, probably late this year. We have revised our projected DCF per share to reflect the new shares, now arriving at a valuation range of €20-32/share (from €23-37/share).

Shifting focus

The first half of 2017 and the following couple of months have witnessed a number of important developments for Carbios. To some extent, they mark a step forward into a new stage of development in the company. The moves embrace a change in top management, the scheduled ending of the Thanaplast research and development programme out of which the company arose, the first significant revenues from the Carbiolice joint venture and two major financing moves. To a greater or lesser extent these have affected the accounts just published.

There has been no change in the company’s strategic scientific and commercial roadmap, which it is pursuing from a strengthened financial position.

Thanaplast

Carbios came into being to execute the five-year Thanaplast programme partially funded by the French state via national investment bank BPI to develop enzymatic processes for the biodegradation and the biorecycling of plastic polymers. Thanaplast came to an end according to the original plan on 30 June 2017, having reached all the milestones set at its inception. This marks the end of Carbios’s original incarnation as the manager of a scientific research programme, which has anyway been declining in importance compared to its mission to scale up these technologies and license the processes developed under Thanaplast.

Grant income under Thanaplast was Carbios’s main source of revenue but this is now being replaced by other, more commercial sources. One more grant payment is due under Thanaplast for which all the relevant research has been completed, which we discuss under the financing heading.

Management and personnel

Martin Stephan was promoted to the post of deputy chief executive officer, having joined the company in February. He will help lead Carbios into the next phase of its development as a technology supplier to major companies in the chemical and fast-moving consumer goods (FMCG) industries. Mr Stephan graduated from the prestigious HEC business school in Paris and has spent his entire career with industrial chemical companies: Elf/Total’s chemicals business and DuPont.

In another break with the company’s first, essentially scientific phase, Emmanuel Maille, who was a director since its inception, is stepping down from active involvement in the business, although he remains a consultant. A scientist by training, Mr Maille had been the company’s second-ranked executive.

Carbios’s dedicated full-time CFO has also left and is joining a privately held company. Her accounting and treasury functions are being assumed by a colleague on the administrative side. This seems appropriate given the relatively small size of Carbios, which has less than 20 employees, and the fact that external spending on R&D will dwindle post-Thanaplast.

Two other recent hires give a flavour of the direction the business is now taking. The arrival of an in-house lawyer reflects the shift towards commercial licensing agreements with major companies as a business vector. Carbios has also taken on a specialist in public-sector financing to handle more diversified streams of such revenue post-Thanaplast.

TechnipFMC agreement and PET

In June Carbios signed an agreement with TechnipFMC, a major global energy and chemical engineering company. Technip will develop methods of integrating modules using Carbios technology to produce precursors for PET manufacture. Through its Zimmer subsidiary in Germany, TechnipFMC has extensive experience in engineering conventional PET manufacturing facilities. Under the contract TechnipFMC will help scale up Carbios’s process and ensure that it is competitive.

This is a key step in developing systems to permit the commercial and industrial exploitation of Carbios’s IP. In June Carbios successfully demonstrated the synthesization of PET oligomers (the key precursors) at pre-pilot stage, and in October it succeeded in the first production of virgin PET from these oligomers. The next step is to develop a pilot stage production plant, which should soon be under way. The issues here are essentially engineering rather than scientific, and as they are addressed Carbios’s position in marketing its technology will be all the stronger.

Carbios has also joined Petcore, the trade association for PET-related businesses in Europe.

Carbiolice

Carbios’s relationship with Carbiolice, in which it holds 61.3%, is starting to generate revenue. Under the contract signed in August last year and which came into effect in mid-February, Carbios is receiving payments for the research it conducts on Carbiolice’s behalf. These are treated as income because Carbiolice is only accounted for as an investment. The holding in Carbiolice does not fit into Carbios’s strategy as a developer and owner of IP, so it is more than possible that ownership will drop below the majority level.

Carbiolice has reinforced its commercial team and optimised the production rate, which is helping to stabilise its operating results. Its current revenue is being generated by products that pre-date Carbios’s investment, so do not generate product licence income for Carbios. Work continues successfully on developing the two types of precursor product that Carbiolice will market under licence from Carbios, in particular obtaining the necessary authorisations for their use in food-contact environments. Carbios will receive licence fees on revenue generated with these products, which is expected to begin in 2019.

Half year results

Exhibit 1: Half-year profit and loss

€000s

H116

H117

Change (%)

Carbiolice research services revenue

-

473

-

Other Carbiolice revenue

-

29

-

Other revenue

556

130

(76.6)

Total revenue

556

632

13.7

Bought-in services

(1,863)

(879)

(52.8)

Salaries

(681)

(913)

34.1

Social charges

(232)

(306)

31.9

Total payroll

(913)

(1,219)

33.5

Other

(211)

(285)

35.1

Total operating costs

(2,987)

(2,383)

(20.2)

Operating profit/(loss)

(2,431)

(1,751)

(28.0)

Net finance expense

41

33

(19.5)

Pre-tax profit/(loss)

(2,390)

(1,718)

(28.1)

Exceptionals

(6)

(6)

-

Taxation

860

371

(56.9)

Net profit/(loss)

(1,536)

(1,353)

(11.9)

Source: Carbios and Edison Investment Research calculations

There was a sharp fall in operating losses in the first half of 2017 driven by a number of factors. Total revenue actually rose because of the first time revenue for development work for Carbiolice even though this only came on stream partway through the period. This more than compensated for the sharp fall in grant income (which accounted for the bulk of revenue in the first half of 2016) as the Thanaplast programme came to an end. The end of Thanaplast was also reflected in the large drop in bought-in services, reflecting the termination of research commissioned from scientific institutes and independent scientists. This is in part counterbalanced by the sharp drop in the research tax credit (CIR) shown under the tax charge.

The surge in payroll costs is attributable to one-off severance costs in connection with the management changes discussed above. They are not representative of future levels.

Financing measures

In the course of the second quarter Carbios took advantage of the strong share price to issue new stock via the equity line financing arrangements with Kepler Cheuvreux worth a little less than €1m. Over the quarter the share price rose from around €6.5 to nearly €10. Together with smaller sums generated by the exercise of employee stock options, this brought in €1.12m in fresh equity funds.

More importantly, Carbios made an institutional share placement in July. This raised €3.6m in new equity at some €7.7 per share, which will largely be used to finance a pilot PET plant. Long-term shareholders also sold €0.6m worth of existing stock.

According to the management statement, Carbios is now funded through to the end of the first half of 2019. Net cash stood at €4.7m at end June 2017. We estimate that since then the proceeds of the capital increase, partly offset by current cash outflow, have taken net cash to a figure of €7.5m, which covers a current cash burn of approximately €0.25m per month together with the initial investments required by the PET pilot plant.

Five-year partnership with L’Oréal

The recent announcement of a five-year partnership with L’Oréal marks a key milestone in the commercial exploitation of Carbios’s PET technology. While at a pre-pilot stage, it is very positive in our view that such a major global company is willing to use the technology. The deal will give L’Oréal priority access to initial production of biorecycled PET. Little has been disclosed about the terms of the agreement, but the partnership will be open to potential users from other industries. As such, we see the only risk to Carbios in the potentially slower adoption of the technology by L’Oréal’s competitors in beauty products. Probably more important for investors than the immediate financial effect is the boost to sentiment from validation of the commercial future of Carbios’s IP.

Next milestones

The next development will be further commercial agreements with major FMCG companies for the use of Carbios’s PET technology for their packaging. Our model factors in revenue of €0.3m from this source in the second half of 2017, but this is greatly subject to the timing of specific contracts. Perhaps more important for investors than the immediate financial effect will be the boost to sentiment from validation of the commercial future of Carbios’s IP.

The final subsidy tranche of €1m under the Thanaplast programme is due to be paid, as all the relevant milestones have been reached, and we have assumed that this will be in 2017, but it might slip into 2018. €0.47m will be an outright grant and the remaining €0.56m will be repayable as and when Carbios reaches the trigger revenue benchmark.

The timing of the completion of the pilot PET plant is currently uncertain; management guides to completion in early 2019. This will mark another important step in the move to full-scale, commercially viable technology.

The company’s profile has been further lifted by its recent selection as one of two short-listed finalists for EuropaBio’s award for the most innovative EU biotech SME of 2017. The winner will be chosen in late November.

Forecasts and valuation

We have reduced our 2018 revenue forecast to €1.5m on the basis of a more cautious view of the timing of PET contract wins. This is offset by lower costs post-Thanaplast and we are keeping our profit forecasts unchanged, although per share data now reflects the increase in the number of shares, which has been increased by 17% compared to the end 2016 level, chiefly by the new share issues discussed above. We have also adjusted our DCF value per share range to €20-32 from €23-37 to reflect the capital markets activity this year.

Exhibit 2: Financial summary

Year end 31 December

€'000s

2013

2014

2015

2016

2017e

2018e

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

900

664

837

8,870

1,152

1,500

Cost of Sales

(3,164)

(2,912)

(3,145)

(2,980)

(2,831)

(2,324)

Gross Profit

(2,264)

(2,248)

(2,308)

5,890

(1,679)

(824)

EBITDA

 

 

(3,077)

(3,283)

(3,896)

3,761

(3,824)

(2,976)

Operating Profit (before amort. and except.)

 

 

(3,116)

(3,364)

(4,062)

3,538

(4,066)

(3,212)

Intangible Amortisation

0

0

0

0

0

0

Exceptionals

9

15

(23)

0

0

0

Other

0

0

0

0

0

0

Operating Profit

(3,107)

(3,349)

(4,085)

3,538

(4,066)

(3,212)

Net Interest

(0)

48

78

88

27

42

Profit Before Tax (norm)

 

 

(3,116)

(3,316)

(3,984)

3,626

(4,040)

(3,170)

Profit Before Tax (FRS 3)

 

 

(3,107)

(3,301)

(4,007)

3,626

(4,040)

(3,170)

Tax

961

1,091

936

1,321

1,342

768

Profit After Tax (norm)

(2,155)

(2,225)

(3,048)

4,947

(2,698)

(2,402)

Profit After Tax (FRS 3)

(2,146)

(2,210)

(3,071)

4,947

(2,698)

(2,402)

Average Number of Shares Outstanding (m)

3.8

3.8

3.8

3.8

4.2

4.5

EPS - normalised fully diluted (c)

 

 

(57.8)

(59.3)

(81.3)

131.9

(64.9)

(53.5)

EPS - (IFRS) (€)

 

 

(57.2)

(58.9)

(81.9)

131.9

(64.9)

(53.5)

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

N/A

N/A

N/A

N/A

N/A

N/A

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

 

 

243

1,048

1,665

11,270

11,458

12,318

Intangible Assets

72

130

231

371

601

796

Tangible Assets

14

740

1,258

1,211

1,169

1,834

Investments

157

178

176

9,688

9,688

9,688

Current Assets

 

 

16,113

12,684

10,377

6,162

9,007

5,986

Stocks

0

20

12

15

16

15

Debtors

1,401

1,402

1,224

1,945

1,782

1,813

Cash

14,598

11,099

9,011

3,987

6,994

3,943

Other

114

163

130

215

215

215

Current Liabilities

 

 

(1,110)

(196)

(337)

(494)

(415)

(366)

Creditors

(1,110)

(196)

(337)

(494)

(415)

(366)

Short term borrowings

0

0

0

0

0

0

Long Term Liabilities

 

 

(680)

(474)

(571)

(674)

(624)

(624)

Long term borrowings

(457)

(152)

(222)

(178)

(128)

(128)

Other long term liabilities

(223)

(322)

(349)

(496)

(496)

(496)

Net Assets

 

 

14,566

13,062

11,134

16,264

19,426

17,314

CASH FLOW

Operating Cash Flow

 

 

(1,532)

(3,546)

(2,595)

4,515

(2,369)

(2,244)

Net Interest

(0)

48

78

88

27

42

Tax

0

0

0

0

0

0

Capex

(187)

(867)

(786)

(329)

(200)

(900)

Acquisitions/disposals

0

0

0

(9,500)

0

0

Financing

13,500

1,171

1,145

129

5,550

0

Dividends

0

0

0

0

0

0

Net Cash Flow

11,781

(3,194)

(2,158)

(5,097)

3,007

(3,102)

Opening net debt/(cash)

 

 

(2,360)

(14,141)

(10,947)

(8,789)

(3,809)

(6,866)

HP finance leases initiated

0

0

0

0

0

0

Other

0

0

0

117

50

51

Closing net debt/(cash)

 

 

(14,141)

(10,947)

(8,789)

(3,809)

(6,866)

(3,815)

Source: Carbios accounts, Edison Investment Research. Note: *FY16 revenues include an €8m non-cash payment treated as licensing revenues as per management guidance; this non-cash payment has been adjusted in the operating cash flow accordingly.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. 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 Carbios 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.
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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. 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

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Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Carbios 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.
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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

295 Madison Avenue, 18th Floor

New York, NY10017

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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