Positive stevia newsflow

Evolva Holding 7 June 2016 Update

Evolva Holding

Positive stevia newsflow

Stevia update

Food & beverages

 

7 June 2016

Price

CHF0.88

Market cap

CHF350m

Net cash (CHFm) at 31 December 2015

83.2

Shares in issue

397.8m

Free float

76%

Code

EVE

Primary exchange

SIX Swiss Ex

Secondary exchange

OTC US

Share price performance

%

1m

3m

12m

Abs

33.3

(5.4)

(45.7)

Rel (local)

26.3

(7.5)

(39.5)

52-week high/low

CHF1.6

CHF0.6

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

H116 results

18 August 2016

Analysts

Sara Welford

+44 (0) 20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

Evolva Holding is a research client of Edison Investment Research Limited

Evolva has received two important pieces of good news: first, on 26 May it was granted a pivotal patent for the commercial production of fermentation-derived steviol glycosides, which is key to the expansion of stevia and demonstrated that Evolva is ahead of the competition. Second, on 1 June it was issued with a US FDA GRAS no objection letter for EverSweet. This news should serve as a reminder that EverSweet remains a key part of the Evolva investment case.

Year end

Revenue (CHFm)

PBT* (CHFm)

EPS* (c)

DPS (c)

P/E (x)

Yield (%)

12/15

13.4

(32.1)

(8.0)

0.0

N/A

N/A

12/16e

12.8

(34.7)

(8.7)

0.0

N/A

N/A

12/17e

20.8

(34.9)

(8.8)

0.0

N/A

N/A

12/18e

35.2

(28.2)

(7.1)

0.0

N/A

N/A

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

Ahead of the competition

On 26 May Evolva announced it had been granted a European patent which is key to the commercial expansion of stevia sweeteners. The news allayed fears in the market that Evolva was lagging its competitors in terms of technology and the protection of its stevia intellectual property (IP), and in fact demonstrated that it is ahead of the competition. Separately, we note that on 1 June US Customs and Border Protection (CBP) issued a detention order on stevia produced by PureCircle in China based on information that forced labour is involved. This has been disputed by PureCircle, which is working to have its shipments released. While we cannot attempt to comment on whether or not forced labour is involved, this highlights the issue that the current methods of stevia production (directly from the stevia leaf) rely on complex supply chains which are hard to trace. Evolva’s fermentation method will simplify the supply chain and improve transparency, which should be of significant interest to the food and beverage manufacturers.

US FDA no objection letter

On 1 June the US Food and Drug Administration (FDA) issued a GRAS (generally recognized as safe) no objection letter for EverSweet, thus qualifying it for use in food and beverages. Obtaining GRAS status means that EverSweet can be treated as a normal food substance and does not require further tests to demonstrate its safety. Once Cargill and Evolva have addressed the current issues with production costs, which have not yet reached a competitive level, we believe there will be no further barriers to launch. We still forecast launch in 2018.

Valuation: Fair value of CHF1.14/share

Our fair value remains CHF1.14. Evolva is well capitalised with a cash position of CHF83.2m at end 2015. We forecast the company 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 previously issued capex guidance of c CHF30m is still valid, we expect Evolva will need to raise more cash by 2018.

Valuation

We value Evolva on a 25-year DCF basis. Our fair value is CHF1.14 (unchanged), or 40% potential upside. We are not revising our valuation at present, but note that the recent positive newsflow is certainly supportive of the investment case. 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 illustrate a summary of our DCF valuation in Exhibit 1.

We do not expect any major catalysts in the short term, although clearly the recent stevia news is helpful and positive. We believe Evolva will continue to work on its current product suite and will continue to seek collaborations with new partners. 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 40% of our valuation (after adjusting for tax and capex). The taste of EverSweet compared to existing stevia formulations continues to be a highly attractive proposition in our view, as Evolva’s product lacks the trademark bitter aftertaste, which hinders the use of traditional stevia at higher concentrations. However, the delay to the launch does increase the risk of a competing product being launched in the interim, although we are not aware of any imminent launches.

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 (Center for Disease Control), 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.

Evolva is well funded following the CHF57m capital raising in September 2015. We forecast the company 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 or early 2018, and the previously issued capex guidance of c CHF30m is still valid, our forecasts indicate that Evolva will need to raise more cash by 2018, so further rounds of capital raising remain a potential risk. The guidance issued at the time of the last capital raising was that capital expenditure of c CHF30m was required to convert and retrofit the existing Cargill fermentation facility in Blair, Nebraska. With the FY15 results, management confirmed that a contract-manufacturing route might be considered nearer the launch, but this would significantly reduce margins, and hence conversion of the facility in Blair, Nebraska remains the more likely option. We therefore believe a further round of capital raising is likely nearer the time of the EverSweet launch in 2018.

Exhibit 1: Summary of DCF valuation

Product

Value (CHFm)

Value per share (CHF)

Notes

Stevia royalties

284.2

0.71

Launch date: 2018; peak sales: $600m; likelihood of success 80%; operating margin: 40%; profit share: 45%.

Saffron royalties

21.4

0.05

Launch date: 2018; peak sales: $100m; likelihood of success 60%; royalty: 10%.

Resveratrol

94.8

0.24

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

Vanilla royalties

35.5

0.09

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

Nootkatone

59.9

0.15

Launched; peak sales: $100m; likelihood of success 75%*; margin: 40%.

Valencene

26.7

0.07

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

Santalol

68.2

0.17

Launch date: 2017; peak sales: $50m; likelihood of success 60%; margin: 40%.

Legacy products

33.4

0.08

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

L'Oreal/Takasago revenues

119.1

0.30

Launch date: 2019-21; number of products: 5; peak sales: $150m per product; likelihood of success: 50%; royalty: 8%.

Other alliance royalties

32.5

0.08

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

19.8

0.05

Only includes revenues from existing collaborations and grants.

R&D and admin

-267.3

-0.67

 

Tax

-124.1

-0.31

Capex

-33.0

-0.08

Includes investment of $30m for commercialisation of stevia with Cargill.

Net cash

83.2

0.21

Net cash at FY15

Total

454.3

1.14

 

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.

Exhibit 2: Financial summary

CHF'000s

2014

2015

2016e

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

10,744

13,364

12,772

20,835

35,210

Cost of Sales

0

0

(1,411)

(5,167)

(12,069)

Gross Profit

10,744

13,364

11,361

15,668

23,141

EBITDA

 

 

(19,405)

(30,305)

(33,808)

(30,852)

(24,635)

Operating Profit (before GW and except.)

(20,872)

(31,947)

(34,989)

(32,139)

(26,023)

Intangible Amortisation

(2,284)

(3,779)

(3,779)

(3,779)

(3,779)

Exceptionals

0

0

0

0

0

Operating Profit

(23,156)

(35,726)

(38,768)

(35,918)

(29,803)

Net Interest

(357)

(129)

333

(2,714)

(2,852)

Other financial income

57

0

0

0

647

Profit Before Tax (norm)

 

 

(21,172)

(32,076)

(34,656)

(34,852)

(28,229)

Profit Before Tax (FRS 3)

 

 

(23,456)

(35,855)

(38,435)

(38,632)

(32,008)

Tax

1,613

4,067

0

0

0

Profit After Tax (norm)

(19,069)

(28,113)

(34,656)

(34,852)

(28,229)

Profit After Tax (FRS 3)

(21,843)

(31,788)

(38,435)

(38,632)

(32,008)

Average Number of Shares Outstanding (m)

291.9

353.0

397.9

397.9

397.9

EPS - normalised (c)

 

 

(6.4)

(8.0)

(8.7)

(8.8)

(7.1)

EPS - FRS 3 (c)

 

 

(7.3)

(9.0)

(9.7)

(9.7)

(8.0)

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

140,437

142,387

149,317

Intangible Assets

136,111

131,940

128,161

124,381

120,602

Tangible Assets

10,484

8,431

9,190

9,920

10,629

Other fixed assets

3,147

3,086

3,086

8,086

18,086

Current Assets

 

 

62,870

88,780

76,469

38,735

2,626

Stocks

313

2,217

1,547

2,831

3,968

Debtors

1,510

2,785

2,799

3,425

5,788

Cash

60,713

83,228

71,573

31,929

(7,680)

Other current assets

334

550

550

550

550

Current Liabilities

 

 

(13,460)

(7,385)

(7,700)

(7,759)

(7,798)

Creditors

(2,408)

(1,182)

(1,497)

(1,557)

(1,596)

Short term borrowings

(3,522)

0

0

0

0

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)

(40,468)

(39,499)

(38,530)

Long term borrowings

0

0

(20,000)

(20,000)

(20,000)

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

168,738

133,864

105,614

CASH FLOW

Operating Cash Flow

 

 

(19,437)

(31,353)

(29,080)

(28,945)

(23,691)

Net Interest

(361)

(376)

333

(2,714)

(2,852)

Tax

0

0

0

0

0

Capex

(1,201)

(1,865)

(1,939)

(2,017)

(2,097)

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)

(10,969)

Net Cash Flow

31,582

25,666

(31,655)

(39,644)

(39,609)

Opening net debt/(cash)

 

 

(25,633)

(57,191)

(83,188)

(51,533)

(11,889)

HP finance leases initiated

0

0

0

0

0

Other

(25)

331

0

0

0

Closing net debt/(cash)

 

 

(57,191)

(83,188)

(51,533)

(11,889)

27,720

Source: Edison Investment Research, company data

 

 

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New Zealand

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

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

 

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