Evolva |
Nootkatone EPA registration complete |
EPA registration |
Food & beverages |
11 August 2020 |
Share price performance
Business description
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Analysts
Evolva is a research client of Edison Investment Research Limited |
Evolva’s branded nootkatone has now been registered with the US Environmental Protection Agency (EPA) for use in insecticides and insect repellents. This follows the announcement on 1 July of a 15-day public review period, hence registration was expected shortly after the review had concluded. Evolva is now in discussion with a growing number of pest control companies to plan commercial next steps. It is also investing in the development and registration of its own formulations.
Year end |
Revenue (CHFm) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/18 |
8.9 |
(25.4) |
(3.0) |
0.0 |
N/A |
N/A |
12/19 |
11.5 |
(15.6) |
(2.0) |
0.0 |
N/A |
N/A |
12/20e |
10.7 |
(13.2) |
(1.6) |
0.0 |
N/A |
N/A |
12/21e |
18.8 |
(8.1) |
(1.0) |
0.0 |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
EPA registration: Finally complete
Nootkatone is already used as a fragrance ingredient. Evolva identified a potential use in pest control, in particular as an active ingredient against ticks and mosquitoes. Evolva collaborated with the US Centers for Disease Control and Prevention and the US Biomedical Advanced Research and Development Authority and received funds from them. EPA approval has taken around two years, which is longer than was initially expected but it has finally been granted.
Pest control is a major new market
The advantage of using nootkatone in pest control is that it is a safe and familiar ingredient. Nootkatone is extracted from the bark of Alaskan Yellow Cedar trees and grapefruit skin and has a fresh scent. Obtaining nootkatone from nature is very expensive and not sustainable. Evolva can produce a 98% pure nature-identical nootkatone by combining its yeast fermentation process with a proprietary conversion technique. The pest control market is significantly larger than nootkatone’s use in fragrance. Our assumption remains of CHF150m of peak sales for the product, with the peak achieved in 2026. We believe the use of nootkatone is likely to be beyond the US market: given the prevalence of vector-borne diseases in Asia, we expect the other markets to adopt nootkatone early could be those that follow the US approval decision and would not require separate registration.
Valuation: Fair value of CHF0.41/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. Our fair value remains unchanged at CHF0.41/share. As a reminder, nootkatone contributes c 50% of our fair value for Evolva, with most of this coming from its use in pest control.
Valuation
We detail our valuation in Exhibit 1. All our assumptions are unchanged. Our current forecasts assume the company remains cash positive until it breaks even on a cash basis in FY23 (we forecast net cash of CHF8m at end FY22). If the cash burn were to accelerate beyond our forecasts, the headroom of CHF8m is rather limited and the recent announcement regarding the issuance of convertible notes should help to bridge the gap at a reasonable cost.
EPA registration of Nootkashield (the brand name for Evolva’s nootkatone) as an active ingredient may result in increased costs as Evolva invests in the development and registration of its own formulations. Evolva – and also any companies developing their own products using Nootkashield – will be required to submit a registration package to the EPA for review, with data regarding safety, efficacy and a characterisation of the product. Products are not expected to be commercially available until 2022. Any increased costs borne by Evolva may result in its cash burn accelerating beyond our forecasts, but any cash gap could be bridged via the convertible notes, as discussed above. In addition, we expect Nootkatshield’s applications to stretch beyond the US market. Vector-borne diseases are prevalent in many regions globally, and we expect early adopters of Nootkashield could be those markets that follow US protocols without requiring a separate registration and approval.
Exhibit 1: Summary of DCF valuation
Product |
Value |
Value/share (CHF) |
Notes |
Stevia (royalty stream) |
83.7 |
0.10 |
Launched; peak sales: $600m; royalty stream: 5% |
Resveratrol |
21.9 |
0.03 |
Launched; peak sales: $140m; margin: 30% |
Nootkatone |
164.2 |
0.20 |
Launched; peak sales: $150m; margin: 40% |
Valencene |
13.9 |
0.02 |
Launched; peak sales: $10m; margin: 40% |
R&D partnerships |
19.3 |
0.02 |
Assume revenue continues to fall |
Capex |
-2.5 |
0.00 |
Includes contribution to Cargill for commercialisation of EverSweet |
Net cash |
39.9 |
0.05 |
Reported net cash at end FY19 |
Total |
340.5 |
0.41 |
Using FY20 average number of shares throughout |
Source: Edison Investment Research. Note: WACC = 12.5%.
Exhibit 2: Financial summary
CHF'000s |
2017 |
2018 |
2019 |
2020e |
2021e |
2022e |
|||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|||
PROFIT & LOSS |
|||||||||
Revenue |
|
|
6,817 |
8,933 |
11,543 |
10,671 |
18,836 |
29,614 |
|
Cost of Sales |
(4,698) |
(6,816) |
(6,305) |
(3,577) |
(6,615) |
(11,770) |
|||
Gross Profit |
2,119 |
2,117 |
5,238 |
7,093 |
12,221 |
17,843 |
|||
EBITDA |
|
|
(37,629) |
(23,350) |
(12,333) |
(12,104) |
(6,985) |
(1,653) |
|
Operating Profit (before GW and except.) |
(39,804) |
(24,827) |
(14,120) |
(13,330) |
(8,222) |
(2,684) |
|||
Intangible Amortisation |
(5,126) |
(5,909) |
(6,060) |
(6,060) |
(6,060) |
(6,060) |
|||
Exceptionals |
0 |
0 |
0 |
0 |
0 |
0 |
|||
Operating Profit |
(44,929) |
(30,736) |
(20,181) |
(19,391) |
(14,282) |
(8,745) |
|||
Net Interest |
(596) |
(622) |
(1,486) |
160 |
96 |
53 |
|||
Other financial income |
(482) |
40 |
0 |
0 |
0 |
0 |
|||
Profit Before Tax (norm) |
|
|
(40,882) |
(25,409) |
(15,606) |
(13,171) |
(8,125) |
(2,631) |
|
Profit Before Tax (FRS 3) |
|
|
(46,007) |
(31,318) |
(21,667) |
(19,231) |
(14,186) |
(8,692) |
|
Tax |
7,023 |
2,104 |
(25) |
0 |
0 |
0 |
|||
Profit After Tax (norm) |
(33,881) |
(23,305) |
(15,632) |
(13,171) |
(8,125) |
(2,631) |
|||
Profit After Tax (FRS 3) |
(38,984) |
(29,214) |
(21,692) |
(19,231) |
(14,186) |
(8,692) |
|||
Average Number of Shares Outstanding (m) |
482.1 |
770.6 |
770.4 |
810.0 |
823.2 |
823.2 |
|||
EPS - normalised (c) |
|
|
(7.0) |
(3.0) |
(2.0) |
(1.6) |
(1.0) |
(0.3) |
|
EPS - FRS 3 (c) |
|
|
(8.1) |
(3.8) |
(2.8) |
(2.4) |
(1.7) |
(1.1) |
|
Dividend per share (c) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|||
Gross Margin (%) |
31.1 |
23.7 |
45.4 |
66.5 |
64.9 |
60.3 |
|||
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 |
|
|
132,125 |
145,825 |
143,333 |
137,824 |
129,569 |
120,968 |
|
Intangible Assets |
124,487 |
138,838 |
133,939 |
127,878 |
121,818 |
115,757 |
|||
Tangible Assets |
5,208 |
4,769 |
7,211 |
6,186 |
5,157 |
4,343 |
|||
Other fixed assets |
2,430 |
2,218 |
2,184 |
3,760 |
2,594 |
868 |
|||
Current Assets |
|
|
107,697 |
67,192 |
48,745 |
33,813 |
28,960 |
31,226 |
|
Stocks |
8,009 |
4,040 |
5,392 |
6,402 |
11,302 |
17,768 |
|||
Debtors |
1,831 |
1,941 |
1,480 |
1,387 |
2,449 |
3,850 |
|||
Cash |
97,185 |
60,380 |
39,920 |
24,070 |
13,256 |
7,654 |
|||
Other current assets |
673 |
830 |
1,954 |
1,954 |
1,954 |
1,954 |
|||
Current Liabilities |
|
|
(12,261) |
(14,705) |
(12,295) |
(11,036) |
(12,439) |
(14,819) |
|
Creditors |
(1,933) |
(743) |
(2,912) |
(1,652) |
(3,055) |
(5,436) |
|||
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
0 |
|||
Finance lease obligations |
(781) |
(782) |
(1,289) |
(1,289) |
(1,289) |
(1,289) |
|||
Other current liabilities |
(9,546) |
(13,180) |
(8,095) |
(8,095) |
(8,095) |
(8,095) |
|||
Long Term Liabilities |
|
|
(6,840) |
(4,150) |
(7,221) |
(6,137) |
(5,053) |
(3,969) |
|
Long term borrowings |
0 |
0 |
0 |
0 |
0 |
0 |
|||
Finance lease obligations |
(2,400) |
(2,394) |
(4,840) |
(3,756) |
(2,673) |
(1,589) |
|||
Other long term liabilities |
(4,440) |
(1,756) |
(2,381) |
(2,381) |
(2,381) |
(2,381) |
|||
Net Assets |
|
|
220,721 |
194,162 |
172,562 |
154,464 |
141,037 |
133,405 |
|
CASH FLOW |
|||||||||
Operating Cash Flow |
|
|
(35,224) |
(23,247) |
(13,631) |
(14,672) |
(9,618) |
(4,354) |
|
Net Interest |
(379) |
(360) |
(583) |
160 |
96 |
53 |
|||
Capex |
(582) |
(364) |
(193) |
(201) |
(209) |
(217) |
|||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
0 |
0 |
|||
Financing |
86,457 |
(209) |
164 |
0 |
0 |
0 |
|||
Dividends |
0 |
0 |
0 |
0 |
0 |
0 |
|||
Other cash flow |
(658) |
(12,595) |
(6,224) |
(1,084) |
(1,084) |
(1,084) |
|||
Net Cash Flow |
49,614 |
(36,775) |
(20,467) |
(15,797) |
(10,814) |
(5,601) |
|||
Opening net debt/(cash) |
|
|
(47,516) |
(97,184) |
(60,381) |
(39,867) |
(24,070) |
(13,256) |
|
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
|||
Other |
54 |
(29) |
(47) |
0 |
0 |
0 |
|||
Closing net debt/(cash) |
|
|
(97,184) |
(60,381) |
(39,867) |
(24,070) |
(13,256) |
(7,654) |
Source: Company data, Edison Investment Research
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