Stevia delayed

Evolva 6 April 2016 Update

Evolva

Stevia delayed

FY results

Food & beverages

6 April 2016

Price

CHF0.72

Market cap

CHF286m

Net cash (CHFm) at 31 December

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

(22.6)

(33.9)

(53.4)

Rel (local)

(19.5)

(25.1)

(44.6)

52-week high/low

CHF1.7

CHF0.7

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 event

AGM

May 2016

Analysts

Sara Welford

+44 (0) 20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

Evolva is a research client of Edison Investment Research Limited

The key headline that the launch of the stevia EverSweet product has been delayed is disappointing, but the investment case still stands. A short-term catalyst has been removed and the delay has implications for the valuation, but the long-term business case is unchanged. The changes in our assumptions lead to a reduction in fair value from CHF1.87/share to CHF1.14/share.

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.

Stevia delay

Evolva and Cargill have been scaling up the stevia process ahead of launch, which was scheduled for 2016. During this, it has become apparent that the current yeast strain is unsatisfactory, and hence production yields are lower than expected, which translates into higher-than-expected COGS. In addition, primary indications of interest from customers have been at initial pricing levels that are c 20% below Evolva’s expectations. To address the COGS issues, Evolva and Cargill are delaying the launch. Evolva remains committed to its indication that it will exercise its option to enter into a 45% JV agreement with Cargill; however, it is now unlikely to do so until the production issues have been resolved. While no timeframe has been given, Evolva is working hard to keep the delay to a minimum. We estimate this will be around 18 months, so we now assume launch in 2018.

Saffron to be partnered, resveratrol has bottlenecks

Evolva also announced that, in line with its revised company focus, it will be seeking a partner for its saffron product. This is likely to delay launch and we now assume this will occur in 2018 (vs 2016 previously). The production constraints for resveratrol severely affected sales in H215 and although these are being addressed, they are expected to continue to hamper sales in H116.

Valuation: Fair value of CHF1.14/share

Our new fair value is CHF1.14, versus our prior fair value of CHF1.87. We have reduced our forecasts to reflect the delay in the stevia launch, the delay to saffron while Evolva seeks a partner and the production issues with resveratrol. We note FY15 results were in line with expectations and company guidance. 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, 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 or 60% upside. 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 no longer expect any major catalysts in the short term. 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.

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.

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.

Forecast changes

We assume the stevia delay is c 18 months, hence we now forecast launch in 2018. We have also reduced our probability of success for stevia from 90% to 80% to reflect the uncertainty introduced by the extra delay. Moreover, we have reduced our peak sales forecast to $600m from $700m, again to reflect the additional risk of competing products being introduced in the interim period. Evolva announced that primary indications of interest from customers are at pricing levels that are c 20% below its and Cargill’s expectations. Although this is clearly disappointing, initial pricing is always substantially above the long-term level, and there are no indications that long-term pricing levels are affected. Indeed, the assumption has always been that Evolva’s stevia product needs to be priced at or below the sugar equivalent price, and this remains unchanged. For the sake of conservatism, however, we have reduced our peak margin assumption to 40%.

Evolva also announced that, in line with its revised company focus, it will be seeking to partner its saffron product. We previously assumed launch in 2016 and now we expect it will take two years to find a partner, hence delaying the launch to 2018, and with a royalty rate of 10%.

Lastly, the production issues for resveratrol discussed above have led us to slow our assumptions for the ramp up.

We show the impact of the above changes to forecasts on the key metrics in Exhibit 2.

Exhibit 2: Forecast changes

2016e

2017e

Old

New

Old

New

Revenue (CHFm)

14.7

12.8

23.3

20.8

Operating profit (CHFm)

(35.3)

(38.8)

(32.1)

(35.9)

Cash at end of year (CHFm)

36.0

51.5

1.1

11.9

Source: Edison Investment Research

FY15 results

FY results were largely in line with our forecasts and company guidance. Resveratrol sales were below forecast due to the production issues discussed above, but overall sales were broadly in line with our forecasts. The operating loss and pre-tax loss were slightly worse than we expected, but greater than expected tax income resulted in the net loss being in line with our forecast.

Exhibit 3: Financial summary

CHF000s

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, Evolva accounts

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