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Resilience in a challenging environment

Evolva 28 August 2020 Update
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Evolva

Resilience in a challenging environment

H120 results

Food & beverages

28 August 2020

Price

CHF0.25

Market cap

CHF208m

Net cash (CHFm) at 30 June 2020

25.3

Shares in issue

822m

Free float

100%

Code

EVE

Primary exchange

SIX Swiss Ex

Secondary exchange

OTC US

Share price performance

%

1m

3m

12m

Abs

(6.3)

10.7

29.7

Rel (local)

(6.0)

5.1

24.0

52-week high/low

CHF0.31

CHF0.15

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 Flavours and Fragrances, Health Ingredients and Health Protection.

Next events

FY20 results

25 February 2021

AGM

8 April 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

Evolva’s H120 results demonstrate excellent progress in its transformation from an R&D-driven enterprise towards a commercial company with a product-based revenue model. It recently received US EPA registration for nootkatone, and H120 witnessed a record order intake. COVID-19 caused delays at its contract manufacturers and hence only part of these record orders could be realised in H1, though much of these should be shipped in H2. EBITDA was also adversely affected by lower sales in Flavours & Fragrances (F&F) due to the pandemic. The company is seeing early signs of recovery and reiterates its commitment to cash break-even by FY23.

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

11.6

(15.6)

(2.0)

0.0

N/A

N/A

12/20e

10.0

(15.5)

(1.9)

0.0

N/A

N/A

12/21e

17.3

(10.0)

(1.2)

0.0

N/A

N/A

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

Strong growth despite COVID-19 effects

Product-related revenue increased 27% to CHF3.8m during H120. As expected, the COVID-19 pandemic predominantly affected the F&F business with softened demand. In addition, contract manufacturers were unable to deliver orders worth c CHF2.4m, but management expects to be able to make up for these delays during H2. Moreover, Evolva plans to launch a new product – currently known as EVE-X157/Z4 – in the F&F and Health Ingredients space before the end of the year.

Increased sales guidance, higher cash burn

Evolva’s FY20 guidance is now for product-related revenue to double over the prior year. This is above previous guidance, which was for product-related revenue growth to be consistent with last year (+59%). EBITDA guidance is slightly lower due to the extra costs associated with the pandemic, and new guidance is for cash burn to be above the 2019 level (previously expected to be in line). The commitment to achieve cash break-even by 2023 is reiterated. We increase our FY20 product sales forecasts, reduce our R&D revenue forecasts and reduce our EBITDA forecasts to reflect updated guidance. We also increase our cash outflow for FY20–22 in light of increasing inventory levels ahead of product launches, and now forecast the company to exhaust its cash reserves during FY22.

Valuation: Fair value of CHF0.38/share

We continue to value Evolva on a DCF basis with a 25-year model, assuming cash break-even in FY23. Our fair value reduces to CHF0.38/share (from CHF0.41/share previously) due to lower EBITDA and increased cash outflow in FY20–22, and adverse FX movements. The lower EBITDA is caused predominantly by higher costs as a result of COVID-19, which we expect will persist until FY22, and in FY20 also by lower F&F sales due to the pandemic, although overall product sales guidance has increased. As a reminder, nootkatone contributes c 50% of our fair value for Evolva, with most of this coming from its use in pest control.

H120 results

Total revenue was down 38% in the period, to CHF4.0m. Product-related revenue was up 27% to CHF3.8m and R&D revenue was down 94% to CHF0.2m, as expected, following the completion of the US Biomedical Advanced Research and Development Authority (BARDA) contract. Operating costs were down by 3% despite an extraordinary expense of CHF0.7m relating to an increased provision for an R&D collaboration with the US Defense Threat Reduction Agency (DTRA) dating back to 2008–11. Excluding the extraordinary expense, operating costs were down 9%, reflecting lower regulatory costs (as the Environmental Protection Agency (EPA) registration process was largely complete), further streamlining of the business, and tight operational expense management. The EBITDA loss for the period widened to CHF8.3m due to a number of factors: significantly lower R&D revenues, delays at contract manufacturers due to the pandemic and lower F&F sales also caused by the pandemic. Net cash at end H120 was CHF25.3m vs CHF39.9m at end FY19.

We increase our FY20 product sales forecasts and reduce our EBITDA forecasts to reflect updated guidance. Our R&D revenue forecasts are now lower and hence the fall in total revenue. We also increase our cash outflow for FY20–22 due to increasing inventory levels ahead of product launches, and now forecast the company to exhaust its cash reserves during FY22. We illustrate a summary of our forecast changes in Exhibit 1.

Exhibit 1: Forecast changes to key metrics FY20–22

CHFm

2020e

2021e

2022e

Old

New

Old

New

Old

New

Product revenue

7.6

9.7

16.7

17.1

28.1

27.1

R&D revenue

3.1

0.3

2.1

0.2

1.5

0.2

Total revenue

10.7

10.0

18.8

17.3

29.6

27.2

Gross profit

7.1

4.8

12.2

10.3

17.8

15.9

Operating profit

-19.4

-21.7

-14.3

-16.2

-8.7

-10.7

Net debt/(cash) at end of year

-24.1

-18.9

-13.3

-6.3

-7.7

0.5

Source: Edison Investment Research

Valuation

We detail our valuation in Exhibit 2. Our fair value decreases from CHF0.41/share to CHF0.38/share due to the reduction in EBITDA for FY20-22 and increased cash burn in the nearer term and FX movements. We have increased our FY20 product sales figures in line with guidance and have cut our R&D sales figures to better reflect the end of the US BARDA contract. We continue to exclude the new product – EVE-X157/Z4 – from our model as very little detail has been provided due to competitive reasons. We recognise it would provide some upside to our current forecasts. We continue to assume that cash and profit break-even for the company will occur in FY23, in line with management guidance. We now forecast the company to exhaust its cash reserves during FY22 and hence expect net debt of around CHF0.5m at end FY22 (versus our previous estimate of net cash of CHF7.7m by this period). We note the recent announcement regarding the issuance of convertible notes should help to finance the debt at a reasonable cost.

Exhibit 2: Summary of DCF valuation

Product

Value
(CHFm)

Value/share (CHF)

Notes

Stevia (royalty stream)

80.6

0.10

Launched; peak sales: $600m; royalty stream: 5%

Resveratrol

21.4

0.03

Launched; peak sales: $140m; margin: 30%

Nootkatone

158.1

0.19

Launched; peak sales: $150m; margin: 40%

Valencene

13.4

0.02

Launched; peak sales: $10m; margin: 40%

R&D partnerships

1.9

0.00

Assume revenue continues to decline

Capex

(6.0)

(0.01)

Includes contribution to Cargill for commercialisation of EverSweet

Net cash

39.8

0.05

Reported net cash at end FY19

Total

309.3

0.38

Based on last reported number of shares (822m)

Source: Edison Investment Research. Note: WACC = 12.5%.

Exhibit 3: 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

11,596

9,972

17,306

27,222

Cost of Sales

(4,698)

(6,816)

(6,305)

(5,204)

(6,983)

(11,336)

Gross Profit

2,119

2,117

5,292

4,768

10,323

15,887

EBITDA

 

 

(37,629)

(23,350)

(12,280)

(14,430)

(8,883)

(3,610)

Operating Profit (before GW and except.)

(39,804)

(24,827)

(14,188)

(15,656)

(14,067)

(15,656)

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)

(20,128)

(21,716)

(16,180)

(10,702)

Net Interest

(596)

(622)

(1,486)

160

89

39

Other financial income

(482)

40

0

0

0

0

Profit Before Tax (norm)

 

 

(40,882)

(25,409)

(15,553)

(15,496)

(10,030)

(4,602)

Profit Before Tax (FRS 3)

 

 

(46,007)

(31,318)

(21,614)

(21,556)

(16,091)

(10,662)

Tax

7,023

2,104

(25)

0

0

0

Profit After Tax (norm)

(33,881)

(23,305)

(15,578)

(15,496)

(10,030)

(4,602)

Profit After Tax (FRS 3)

(38,984)

(29,214)

(21,639)

(21,556)

(16,091)

(10,662)

Average Number of Shares Outstanding (m)

482.1

770.6

770.4

809.3

770.4

809.3

EPS - normalised (c)

 

 

(7.0)

(3.0)

(2.0)

(1.9)

(1.2)

(0.6)

EPS - FRS 3 (c)

 

 

(8.1)

(3.8)

(2.8)

(2.7)

(2.0)

(1.3)

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

31.1

23.7

45.6

47.8

59.6

58.4

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

141,377

135,865

130,567

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

7,314

8,890

10,467

Current Assets

 

 

107,697

67,192

48,745

28,792

19,137

16,381

Stocks

8,009

4,040

5,392

6,482

8,653

10,889

Debtors

1,831

1,941

1,480

1,496

2,250

3,539

Cash

97,185

60,380

39,920

18,861

6,281

0

Other current assets

673

830

1,954

1,954

1,954

1,954

Current Liabilities

 

 

(12,261)

(14,705)

(12,295)

(11,787)

(12,609)

(14,619)

Creditors

(1,933)

(743)

(2,912)

(2,403)

(3,225)

(5,235)

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)

(4,465)

Long term borrowings

0

0

0

0

0

(496)

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

152,245

137,341

127,864

CASH FLOW

Operating Cash Flow

 

 

(35,224)

(23,247)

(13,577)

(16,435)

(11,377)

(5,515)

Net Interest

(379)

(360)

(583)

160

89

39

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)

(4,584)

(1,084)

(1,084)

Net Cash Flow

49,614

(36,775)

(20,413)

(21,059)

(12,580)

(6,777)

Opening net debt/(cash)

 

 

(47,516)

(97,184)

(60,381)

(39,920)

(18,861)

(6,281)

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)

(39,920)

(18,861)

(6,281)

496

Source: Edison Investment Research, company data


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

1185 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

1185 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

1185 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

1185 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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