Nootkatone green light nears

Evolva 3 July 2020 Update
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Evolva

Nootkatone green light nears

EPA update

Food & beverages

3 July 2020

Price

CHF0.28

Market cap

CHF229m

Net cash (CHFm) at 31 December 2019

39.9

Shares in issue

823m

Free float

100%

Code

EVE

Primary exchange

SIX Swiss Ex

Secondary exchange

OTC US

Share price performance

%

1m

3m

12m

Abs

21.3

61.6

46.5

Rel (local)

18.5

47.1

44.1

52-week high/low

CHF0.30

CHF0.14

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 Flavors and Fragrances, Health Ingredients and Health.

Next events

H120 results

26 August 2020

FY20 results

February 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

A 15-day public review period for nootkatone has started in the US. All studies submitted to the US Environment Protection Agency (EPA) have been accepted and the review period allows the general public to share their comments with the agency. We believe the public notice period is largely a formality and expect the EPA to complete the registration of nootkatone shortly thereafter. Nootkatone use will then be allowed in pest control. Following the delay to the approval process announced in March 2019, this comes as good news for the financial trajectory of the business.

Year end

Revenue (CHFm)

PBT*
(CHFm)

EPS*
(c)

DPS
(c)

P/E
(x)

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 review

Nootkatone is already used as a fragrance ingredient. Evolva, however, identified a potential use in pest control, in particular as an active ingredient against ticks and mosquitoes. Evolva collaborated with the Centers for Disease Control and Prevention and the Biomedical Advanced Research and Development Authority and received funds from them. In March 2019, the EPA identified an issue with one of the studies submitted and requested more information. Evolva submitted all further information by September 2019 and the approval process seems to be almost complete.

Pest control opens a significant 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.

Valuation: Fair value CHF0.41/share

We have updated our model to reflect current FX. 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. Overall, our fair value decreases slightly to CHF0.41/share (from CHF0.42/share previously) given the small movement in FX rates. As a reminder, nootkatone contributes c 50% of our fair value for Evolva, with most of this coming from use in pest control.

Valuation

We detail our valuation in Exhibit 1. Our fair value decreases to CHF0.41/share as we have updated our model for movements in FX rates. All our other assumptions are unchanged, including that cash break even will occur in FY23.

We note Evolva’s recent announcement on the issuance of convertible notes up to a maximum of CHF12m over 12 months to Nice & Green, a Swiss corporate financing company. The principal amount of each note issuance is either repayable in cash or by way of conversion into Evolva ordinary shares and the repayment method is at Evolva’s discretion. The conversion price will be 95% of the lowest daily VWAP during the six trading days preceding the conversion. The financing facility will be used to finance investments in connection with Evolva’s expansion and can be drawn in tranches. It creates financial flexibility for Evolva at a reasonable cost.

As a reminder, at the FY19 results in March management commented that to finance future growth until cash break-even, the company was evaluating multiple options including a capital increase. Management had stated that minimising dilution to existing shareholders was one of its aims. The announcement regarding the convertible notes should provide enough financial flexibility. 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 convertible notes should help to bridge the gap.

Exhibit 1: Summary of DCF valuation

Product

Value
(CHFm)

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: Evolva, Edison Investment Research


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 2020 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

1,185 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

1,185 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 2020 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

1,185 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

1,185 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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