Ellomay Capital — Reaping the benefits of 2017 investments

Ellomay Capital — Reaping the benefits of 2017 investments

Ellomay Capital’s renewable assets portfolio delivered significant growth at the operating level over the course of 2017, with revenue, EBITDA and EBIT up 17%, 10% and 25% respectively (versus 2016). For 2018, we expect the company to reap the benefits of investments made in 2017, with the recently acquired Israeli solar PV assets and the commissioning of two new Dutch waste-to-energy (WTE) plants driving 91% y-o-y EBITDA growth and a positive net income contribution after two years of losses. Several new projects under development could generate additional medium-term growth, in particular the financial close of Talasol, a large solar PV plant project in Spain (potentially by Q318).

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Ellomay Capital

Reaping the benefits of 2017 investments

FY17 results

Alternative energy

16 April 2018

Price*

US$8.38

Market cap

US$90m

€/US$1.23

*Priced at 12 April 2018

Net debt (€m) at end December 2017

80.3

Shares in issue

10.7m

Free float

31%

Code

ELLO

Primary exchange

NYSE

Secondary exchange

TASE

Share price performance

%

1m

3m

12m

Abs

(9.3)

(5.6)

2.9

Rel (local)

(5.2)

(1.2)

(9.4)

52-week high/low

US$10.6

US$7.7

Business description

Ellomay Capital is a renewable power and energy infrastructure owner, operator and developer. Its core asset portfolio includes solar PV plants in Italy (22.6MW), Spain (7.9MW) and Israel (9MW). Ellomay owns a stake in a gas-fired plant in Israel and is building biogas plants in the Netherlands.

Next events

H118 results

September 2018

Analysts

Dario Carradori

+44 (0)20 3077 5700

Graeme Moyse

+44 (0)20 3077 5700

Ellomay Capital’s renewable assets portfolio delivered significant growth at the operating level over the course of 2017, with revenue, EBITDA and EBIT up 17%, 10% and 25% respectively (versus 2016). For 2018, we expect the company to reap the benefits of investments made in 2017, with the recently acquired Israeli solar PV assets and the commissioning of two new Dutch waste-to-energy (WTE) plants driving 91% y-o-y EBITDA growth and a positive net income contribution after two years of losses. Several new projects under development could generate additional medium-term growth, in particular the financial close of Talasol, a large solar PV plant project in Spain (potentially by Q318).

Year end

Revenue
(€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

11.6

(0.1)

(0.02)

0.00

N/A

N/A

12/17

13.6

(6.3)

(0.57)

0.00

N/A

N/A

12/18e

22.4

4.5

0.32

0.11

21.3

1.6

12/19e

23.3

5.4

0.39

0.13

17.5

1.9

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

Strong growth in operating results in FY17

Ellomay Capital posted +10%/+25% y-o-y EBITDA/EBIT growth, driven by higher power prices and output in Italian and Spanish solar PV activities, an initial contribution of a waste-to-energy project in the Netherlands, and the acquisition of solar PV activities in Israel (Q417). At the bottom line, the net loss of €6.6m (pre-minority) was mainly the result of one-offs (the effect of €/$ movements on derivatives and marketable securities, and expenses resulting from exchange rate differences).

Reaping the benefits of FY17 investments

For FY18, we expect Ellomay Capital to reap the benefits resulting from the 2017 acquisition (Israeli solar PV) and the new projects (Dutch WTE plants). Although FY17 net debt includes the costs of these new projects (net debt more than doubled to €80.4m in the year), the contribution to FY17 results was negligible. We have made limited changes to our forecasts (FY18-FY20e EBITDA is down -3%-4%, net income moved between -5% and +3%) post the FY results and we have recreated our financial model to change the presentation currency to euro (from US dollar), to align with the company’s change.

Valuation: US$11.4/share, stock is currently trading below book value

Our unchanged DCF-based valuation of US$11.4/share implies c 40% potential upside vs the current share price. We note the stock is trading below book value (0.8x FY18e) so appears to be discounting little ability to create value from existing and future development projects. We believe delivery of earnings growth from new projects would provide an opportunity to crystallise the upside potential.

FY17 results show strong revenue and EBIT growth

Ellomay Capital announced that it has changed the presentation currency to euro from US dollar as most of its operations are euro-denominated. Management believes that the change will help to minimise fluctuations in its financials due to movements in the €/$ exchange rate. Key highlights of the 2017 results were:

Revenues of €13.6m, +17% y-o-y, driven by higher power prices and output in Italy and Spain solar PV operations (following an abnormally low output year in 2016 due to unfavourable weather conditions), as well as the initial contribution of a waste-to-energy project in the Netherlands (from November 2017). Solar PV assets, which were acquired in Israel, contributed from October 2017.

EBITDA of €7.5m, +10% y-o-y and operating profit of €3.0m, +25% y-o-y, both driven by higher revenues, despite an increase in project developments costs.

Net loss of €6.6m (vs a loss of €0.6m in FY16), mostly the result of the €3.2m negative effect of the re-evaluation of €/$ forward transactions and marketable securities and a further €3.6m negative impact due to expenses related to exchange rate differences (both one-off components).

Net financial debt was €80.4m vs €32.4m one year earlier, driven by the acquisition of the Israel solar PV asset (c €20m) and the consolidation of debt associated with the Dutch WTE plants (c €12m).

For FY18, the company expects €21.9m cash flow from the sale of electricity and gas (broadly in line with guidance announced in November 2017, now translated into euros) and total net cash flow from projects (including an equity-accounted stake in gas plant Dorad) of €11.8m. The latter is more than 10% higher vs previous guidance (issued in November 2017) to reflect the better than expected cash flow contribution from Dorad in 2018.

Recent acquisition and new projects drive FY18 growth

We expect FY18 to be a key year for project delivery and our forecasts point to very strong profit growth (EBITDA company definition, including associates, up 91% y-o-y), mainly driven by new projects and the contribution of a recent acquisition. While FY17 net debt includes the debt associated with the recent acquisition of solar PV plant in Israel and the debt related to the financing of two WTE plants in the Netherlands, the contribution of these assets to FY17 profits was limited. In more detail:

We continue to forecast a large pick-up in revenue (+64% y-o-y) entirely driven by the commissioning of two new biogas projects in the Netherlands (the first plant started operations in November 2017, while the second one will be commissioned in Q218 according Ellomay) and full contribution from the recently acquired solar PV assets in Israel (consolidated from October 2017).

Exhibit 1: Updated revenue estimates – we expect a strong pick-up in growth in 2018

€000

2015

2016

2017

2018e

2019e

2020e

Italy

9,567

8,919

10,143

9,911

9,797

9,653

Spain

2,879

2,713

3,007

2,790

2,790

2,790

Israel PV

0

0

183

3,680

3,717

3,754

Dutch WTE

0

0

303

6,017

6,949

6,949

Total

12,446

11,632

13,636

22,398

23,253

23,146

% y-o-y change

-7%

17%

64%

4%

0%

Source: Company data, Edison Investment Research

We forecast EBITDA to grow 91% y-o-y and EBIT by 179% y-o-y driven by revenue growth and despite an increase in costs associated with new projects.

We expect revenue and EBITDA growth to translate into a positive net income from 2018 as we expect the Dutch WTE projects and the recent acquisition in Israel to be accretive at the net income level. We forecast net income of €2.7m, €3.3m and €3.2m in FY18e, FY19e and FY20e respectively vs net losses in FY16-17. The positive net income should allow Ellomay to declare a dividend starting from FY18e (we assume c 33% payout ratio in line with company guidance).

Net financial debt decreases to €70.6m in FY18 vs €80.4m in FY17 as a result of cash flow generation and as we assume no further acquisitions. Thanks to strong EBITDA growth, we forecast net debt/EBITDA will reduce to 5.7x/4.7x in FY18/19.

Progress on medium-term project Talasol

Beyond FY18, Ellomay has a pipeline of two large projects, which represent significant profit growth opportunities in the medium term and an upside to our forecasts:

Talasol, a 300MW solar PV plant project in Talaván, Spain; and

Manara Cliff, a 156MW Israeli pumped-storage plant project.

Exhibit 2: Key pipeline projects are a solar PV plant in Spain and a hydro plant in Israel

Location

Asset

Expected commissioning

Expected capex

Generation

Expected revenue

Talaván, Spain

Talasol: 300MW solar PV in Spain

2020

€200m

490-565GWh/ year

€20-25m/year

Manara Cliff, Israel

156MW pumped-storage hydro plant

NA

NA

NA

NA

Source: Company data

Ellomay announced progress on the Talasol project in January 2018. Ellomay signed a binding term sheet for a power financial hedge (PPA) in relation to the sale of electricity by the plant in Spain, which we believe represents significant positive progress ahead of the financial closure, which is expected in Q318. The power produced by the Talasol project will be sold on the open market. The PPA will prevent project revenues to experience excessive fluctuations: if the market price goes below a certain price, the hedging provider will pay Talasol the difference between the market price and the underpinned price, and if the market price is above the price, Talasol will pay the hedging provider the difference between the market price and the underpinned price.

While our forecasts assume neither further acquisitions nor new projects, it is likely that Ellomay is evaluating several assets and projects which could drive the growth in the medium term, compatibly with the company’s current leverage (we forecast FY19e net debt/EBITDA of 4.7x, before any further projects). We note that Standard & Poors Maalot downgraded the rating of the company and its Series A and Series B Nonconvertible Debentures from "ilA-" with a "Negative" outlook to "ilBBB+" (which corresponds to “B” on an S&P global scale), although the outlook is now "Stable". The downgrade was justified on the basis of the level of estimated FFO to adjusted debt ratio (9-12% in the upcoming years). Maalot said Ellomay Capital’s level of liquidity was appropriate.

Moderate changes to forecasts post FY17 results

We have reduced our FY18-FY20 EBITDA forecasts by 3-4% reflecting higher project development costs (still declining vs 2017 but from a higher level). We have made moderate changes to FY18-FY20e net income forecasts (between +3% and -5%) reflecting lower EBITDA, higher D&A and lower financial expenses and minorities.

Exhibit 3: We have made moderate changes to forecasts

€000s

2017

2018e

2019e

2020e

EBITDA

New

7,477

14,317

14,900

14,833

Old*

8,830

14,739

15,507

15,507

change

(15%)

(3%)

(4%)

(4%)

EBIT

New

2,959

8,259

8,634

8,566

Old*

4,494

8,835

9,521

9,521

change

(34%)

(7%)

(9%)

(10%)

Net income (adjusted for minorities)

New

(6,115)

2,724

3,281

3,198

Old*

(2,902)

2,871

3,193

3,255

change

111%

(5%)

3%

(2%)

Source: Company data, Edison Investment Research. Note: *US$ forecast translated into at a rate of /US$1.23.

Key risks are regulatory, operating and currency

We believe the key risks that Ellomay Capital faces are:

Regulatory risks: while we do not expect any political intervention, tariffs for Ellomay Capital’s solar PV assets are heavily regulated and, as a result, the company faces the risk of regulatory changes eg Italian and Spanish solar tariffs were cut in 2013/14.

Operating risks: weather conditions may drive higher or lower output than expected (eg 2016 was an unfavourable year for solar PV production) and higher/lower power prices in Italy and Spain can drive higher/lower profits for the company.

Currency risks: Currency risks are now lower than in the past as the presentation currency (euro) is now aligned with the operating currency of most of Ellomay Capital’s assets. For euro investors however, we estimate that 16% of FY18e revenues are expressed in Israeli shekel, in addition to the entire equity income (we estimate c €2m P&L contribution in FY18e).

Valuation: Our fair value is $11.4/share

Our valuation is unchanged at $11.4/share based on a DCF of Ellomay’s operating assets. We use an average WACC of c 5% and assume an asset life of 20 years for Italian and Israeli solar PV plants, 25 years for Spanish solar PV and 12 years for Dutch WTE plants. The valuation implies an EV of €169m and equity value of €99m, implying €9.2/share or $11.4/share (based on an assumed €/US$ rate of 1.23).

We note the stock is trading below book value (0.8x FY18e) and therefore appears to be discounting little ability to create value from existing and future development projects. We believe delivery on new projects (both the ones launched at the end of 2017 and the upcoming Dutch WTE project in 2018) would provide an opportunity to crystallise the upside potential.

Exhibit 4: Financial summary

Year-end: December, €000s

 

 

2015

2016

2017

2018e

2019e

2020e

INCOME STATEMENT

 

 

 

 

 

 

 

 

Total revenues

 

 

12,446

11,632

13,636

22,398

23,253

23,146

Cost of sales

 

 

(2,571)

(2,082)

(2,549)

(3,592)

(3,804)

(3,804)

Gross profit

 

 

9,875

9,550

11,087

18,807

19,450

19,342

SG&A (expenses)

 

 

(126)

(657)

(889)

(2,390)

(2,649)

(2,609)

R&D costs

 

 

0

0

0

0

0

0

Other income/(expense)

 

 

(1,026)

(2,111)

(2,721)

(2,100)

(1,900)

(1,900)

Depreciation and amortisation

 

 

(4,428)

(4,411)

(4,518)

(6,058)

(6,267)

(6,267)

Reported EBIT

 

 

4,295

2,371

2,959

8,259

8,634

8,566

Finance income/(expense)

 

 

(1,116)

(3,070)

(6,072)

(3,754)

(3,207)

(3,278)

Other income/(expense)

 

 

3,192

636

(3,156)

0

0

0

Reported PBT

 

 

6,371

(63)

(6,269)

4,505

5,426

5,289

Income tax expense (includes exceptionals)

 

 

1,739

(569)

(372)

(1,081)

(1,302)

(1,269)

Reported net income (before minority interest)

 

 

8,110

(632)

(6,641)

3,424

4,124

4,019

Basic average number of shares, m

 

 

10,716

10,668

10,676

10,676

10,676

10,676

Basic EPS (€)

 

 

0.78

(0.02)

(0.57)

0.32

0.39

0.38

DPS (€)

 

 

0.20

0.00

0.00

0.11

0.13

0.13

Adjusted EBITDA

 

 

8,723

6,782

7,477

14,317

14,900

14,833

Adjusted EBIT

 

 

4,295

2,371

2,959

8,259

8,634

8,566

Adjusted PBT

 

 

6,371

(63)

(6,269)

4,505

5,426

5,289

Adjusted EPS

 

 

0.96

(0.02)

(0.70)

0.39

0.48

0.46

Adjusted diluted EPS (€)

 

 

0.78

(0.02)

(0.57)

0.32

0.39

0.38

BALANCE SHEET

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

72,564

73,274

78,837

72,779

66,512

60,245

Goodwill

 

 

0

0

0

0

0

0

Intangible assets

 

 

0

0

5,505

5,505

5,505

5,505

Other non-current assets

 

 

39,074

37,096

67,517

66,667

66,817

66,967

Total non-current assets

 

 

111,638

110,370

151,859

144,951

138,834

132,717

Cash and equivalents

 

 

17,194

22,486

23,962

33,706

33,296

32,952

Inventories

 

 

0

0

0

0

0

0

Trade and other receivables

 

 

7,552

9,487

10,645

12,485

12,962

12,902

Other current assets

 

 

10,930

6,121

11,622

11,622

11,622

11,622

Total current assets

 

 

35,676

38,094

46,229

57,813

57,880

57,476

Non-current loans and borrowings

 

 

44,210

46,007

95,078

95,078

85,078

75,078

Other non-current liabilities

 

 

7,387

7,528

14,227

14,227

14,227

14,227

Total non-current liabilities

 

 

51,597

53,535

109,305

109,305

99,305

89,305

Trade and other payables

 

 

3,753

4,720

3,536

4,088

4,200

4,200

Current loans and borrowings

 

 

5,522

5,838

7,747

7,747

7,747

7,747

Other current liabilities

 

 

0

0

0

0

0

0

Total current liabilities

 

 

9,275

10,558

11,283

11,835

11,947

11,947

Equity attributable to company

 

 

86,686

85,072

78,641

82,065

85,059

87,718

Non-controlling interest

 

 

(244)

(701)

(1,141)

(441)

402

1,224

CASH FLOW STATEMENT

 

 

 

 

 

 

 

 

EBIT

 

 

4,295

2,371

2,959

8,259

8,634

8,566

Depreciation and amortisation

 

 

4,428

4,411

4,518

6,058

6,267

6,267

Share based payments

 

 

0

0

0

0

0

0

Other adjustments

 

 

(2,195)

3,274

(1,119)

701

843

822

Movements in working capital

 

 

984

76

(857)

(1,288)

(364)

60

Interest paid / received

 

 

(2,619)

(2,761)

(3,154)

(3,754)

(3,207)

(3,278)

Income taxes paid

 

 

(218)

(54)

(42)

(1,081)

(1,302)

(1,269)

Cash from operations (CFO)

 

 

4,675

7,317

2,305

8,894

10,869

11,168

Capex

 

 

0

(710)

(8,000)

(150)

(150)

(150)

Acquisitions & disposals net

 

 

(687)

(231)

(22,207)

0

0

0

Other investing activities

 

 

(3,453)

1,520

2,864

1,000

0

0

Cash used in investing activities (CFIA)

 

 

(4,140)

579

(27,343)

850

(150)

(150)

Net proceeds from issue of shares

 

 

(236)

(11)

(14)

0

0

0

Movements in debt

 

 

4,809

(317)

29,684

0

(10,000)

(10,000)

Dividends paid

 

 

0

(2,123)

0

0

(1,130)

(1,361)

Other financing activities

 

 

(775)

0

0

0

0

0

Cash from financing activities (CFF)

 

 

3,798

(2,451)

29,670

0

(11,130)

(11,361)

Currency translation differences and other

 

 

(111)

(153)

(3,156)

0

0

0

Increase/(decrease) in cash and equivalents

 

 

4,222

5,292

1,476

9,744

(411)

(343)

Cash and equivalents at end of period

 

 

17,194

22,486

23,962

33,706

33,296

32,952

Net (debt) cash

 

 

(30,092)

(32,375)

(80,391)

(70,647)

(61,057)

(51,401)

Movement in net (debt) cash over period

 

 

(30,092)

(2,283)

(48,016)

9,744

9,589

9,657

Source: Company data, Edison Investment Research

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Tel Aviv +44 (0)20 3734 1007
Medinat Hayehudim 60

Herzilya Pituach, 46766

Israel

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

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Tel Aviv +44 (0)20 3734 1007
Medinat Hayehudim 60

Herzilya Pituach, 46766

Israel

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EDISON INVESTMENT RESEARCH DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Tel Aviv +44 (0)20 3734 1007
Medinat Hayehudim 60

Herzilya Pituach, 46766

Israel

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

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Tel Aviv +44 (0)20 3734 1007
Medinat Hayehudim 60

Herzilya Pituach, 46766

Israel

Probiodrug — Emerging details of PQ912 late-stage development

The highlight of Probiodrug’s FY17 results presentation was the rather detailed introduction of the Phase IIb development programme for the lead asset PQ912, a small molecule inhibitor of glutaminyl cyclase (QC) for Alzheimer’s disease (AD) patients. Two Phase IIb trials (in Europe and the US) are designed to gather the amount of data that, if sufficiently positive, could allow for accelerated or conditional regulatory approval. The first Phase IIb study in Europe is expected to start by end 2018 and Probiodrug is exploring all options for funding sources. After several modest changes to our model, our updated valuation is slightly higher at €513m, €62.4/sh.

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