PowerHouse Energy Group (PHE); reports ongoing commercialisation of DMG® process

Technology milestone achieved

Carbios 9 December 2015 Update

Carbios

Technology milestone achieved

Operational update

Alternative energy

9 December 2015

Price

€12.1

Market cap

€45m

Net cash (€m) at 30 June 2015

9.6

Shares in issue

3.75m

Free float

20%

Code

ALCRB

Primary exchange

Alternext Paris

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.2

7.9

(13.3)

Rel (local)

8.2

2.7

(20.1)

52-week high/low

€13.9

€11.0

Business description

Carbios develops enzyme-based processes for biodegradation and bioproduction of plastics, with a long-term aim of displacing current recycling and production practices.

Next event

FY15 results

March 2016

Analyst

Roger Johnston

+44 (0)20 3077 5722

Carbios is a research client of Edison Investment Research Limited

For Carbios, the most recent achievement of successful depolymerisation of PET material into original monomers is an important step towards scaling up its plastic recycling and sustainable plastics production technology. PET is the most advanced of the company's processes and a very important future end-market. This business represents 53% of our €23-37 per share valuation range. Our forecast and valuation remain unchanged, as it is in line with our expectations on stepwise progress.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/13

0.9

(3.1)

(57.8)

0.0

N/A

N/A

12/14

0.7

(3.3)

(59.4)

0.0

N/A

N/A

12/15e

0.5

(3.6)

(72.5)

0.0

N/A

N/A

12/16e

0.4

(4.0)

(87.7)

0.0

N/A

N/A

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

Success in PET technology

Carbios has achieved important success with the first time full depolymerisation of commercial PET (polyethylene terephthalate) material. The company has depolymerised 100% of sample PET material and regenerated original monomers that display characteristics and quality identical to those obtained by fossil energy base processes.

PET is a key future revenue driver

The global PET market is forecast to grow by 4-5% pa over the next five to 10 years and represents one of the most important applications for plastics. Bottling and packaging are key growth drivers. We forecast that Carbios will achieve PET-related revenues of €66m by 2025 on the basis of our assumed 6% global market share. We expect the company to conclude first licensing deals in 2016-17.

Valuation: Important contributor to DCF value

Our financial forecast and valuation remain unchanged, as the company’s achievement is line with the stepwise progress we expect the company to make towards industrialisation. It does not alter our expectations on the timing of grant revenues or licence deals at this stage. We value Carbios using a DCF methodology with risk-adjusted cash flows for its most advanced processes. PET represents 53% of our segment-based DCF valuation of €23-37 per share. We believe the current share price only reflects PET as the most advanced process and none of the other potential end-market opportunities, which is natural as they are not as far advanced. However, progress on PET will lead to very swift advance on the other processes as they are adaptations of the PET-based process. Such adaptations can lead to step changes for the string of other applications very quickly, as it is PET that will generate the prime learning effects. As the company progresses further with its PET process, we also expect cash flows to de-risk, which should contribute to closing the value gap between the share price and our fair value range.

A step closer to an important end-market

Milestone towards scaling up PET process

Carbios develops potentially disruptive technology for plastics’ end of life, with the end goal of fully destructible plastics. It has delivered an important milestone in its technology development, in achieving full depolymerisation of PET the first time. The process, which has rendered the material into its original monomers, terephthalic acid (TPA) and ethylene glycol (EG), was achieved for commercial PET material. The monomers regenerated by Carbios displayed identical characteristics and quality to those obtained by fossil energy-based processes, which is key to the competitiveness of the process. Such monomers can subsequently be used to produce new plastics, creating a circular plastics economy. The company has therefore delivered proof that its process can be used to produce virgin PET on the basis of the monomers obtained. Furthermore, it has shown that there is no loss of value in the recycled material. It is important that this was selective depolymerisation, which facilitates isolating the process to a specific product. That is also important for future IP protection, as well as the development of a specific range of processes that can be out-licensed.

PET is a key end-market

This is an important step as PET is one of the most important future end-markets for Carbios. PET is one of the most important raw materials in the plastic economy as it is used for plastic bottles and packaging as the prime applications. The global PET market is forecast to grow by 4-5% pa, to reach a volume of 26Mt by 2020 (source: SRI).

We forecast revenues of €66m from PET technology licensing by 2025. This is based on our assumed market share and royalty rates applied to the global recycling market, as well as adding upfront payments that the company is likely to receive on signing licensing deals. This is by far the single most important revenue contributor as it accounts for 38% of our forecast group revenues in 2025. Our financial forecast remains unchanged, as this step is in line with our expectations.

Exhibit 1: Market and revenue forecast for PET

PET

2015e

2016e

2017e

2018e

2019e

2020e

2025e

2030e

Global market (Mt)

16

17

18

19

20

21

26

34

y/y change (%)

2.5

4.5

4.5

4.5

5.0

5.0

5.0

5.0

Global recycling market (€m)

16,400

17,224

18,179

19,187

20,388

21,664

29,349

39,759

PET Market share (%)

0

0

0

2

2

3

6

8

Carbios PET royalty rate (%)

2.5

2.5

2.5

2.5

2.5

2.5

3.0

5.0

PET royalty and upfront revenues (€m)

0.0

0.03

0.12

8.2

11.8

19.4

66.2

186.1

Source: SRI and Edison Investment Research

The next steps should be conducive to the company developing PET recycling at pilot stage and to adapting the process to other plastics.

Exhibit 2: Financial summary

Year end 31 December

€'000s

2013

2014

2015e

2016e

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

900

664

508

410

Cost of Sales

(3,164)

(2,912)

(2,766)

(2,822)

Gross Profit

(2,264)

(2,248)

(2,258)

(2,412)

EBITDA

 

 

(3,077)

(3,283)

(3,488)

(3,895)

Operating Profit (before amort. and except.)

 

 

(3,116)

(3,364)

(3,577)

(3,995)

Intangible Amortisation

0

0

0

0

Exceptionals

9

16

0

0

Other

0

0

0

0

Operating Profit

(3,107)

(3,348)

(3,577)

(3,995)

Net Interest

(14)

48

0

2

Profit Before Tax (norm)

 

 

(3,130)

(3,316)

(3,576)

(3,993)

Profit Before Tax (FRS 3)

 

 

(3,121)

(3,300)

(3,576)

(3,993)

Tax

961

1,090

857

705

Profit After Tax (norm)

(2,169)

(2,226)

(2,720)

(3,288)

Profit After Tax (FRS 3)

(2,160)

(2,210)

(2,720)

(3,288)

Average Number of Shares Outstanding (m)

3.8

3.8

3.8

3.8

EPS - normalised fully diluted (c)

 

 

(57.8)

(59.4)

(72.5)

(87.7)

EPS - (IFRS) (€)

 

 

N/A

(0.6)

(0.7)

(0.9)

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

N/A

N/A

N/A

N/A

EBITDA Margin (%)

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

243

1,048

1,362

1,665

Intangible Assets

72

130

130

130

Tangible Assets

14

740

1,054

1,357

Investments

157

178

178

178

Current Assets

 

 

16,113

12,684

9,784

6,222

Stocks

0

20

61

116

Debtors

1,401

1,402

1,590

1,678

Cash

14,598

11,099

7,970

4,265

Other

114

163

163

163

Current Liabilities

 

 

(1,110)

(196)

(330)

(359)

Creditors

(1,110)

(196)

(330)

(359)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(680)

(474)

(474)

(474)

Long term borrowings

(457)

(152)

(152)

(152)

Other long term liabilities

(223)

(322)

(322)

(322)

Net Assets

 

 

14,566

13,062

10,342

7,054

CASH FLOW

Operating Cash Flow

 

 

(1,532)

(3,128)

(2,726)

(3,305)

Net Interest

(14)

48

0

2

Tax

0

0

0

0

Capex

(187)

(867)

(403)

(403)

Acquisitions/disposals

0

0

0

0

Financing

13,500

546

0

0

Dividends

0

0

0

0

Net Cash Flow

11,767

(3,401)

(3,129)

(3,705)

Opening net debt/(cash)

 

 

(2,374)

(14,141)

(10,947)

(7,818)

HP finance leases initiated

0

0

0

0

Other

0

207

0

0

Closing net debt/(cash)

 

 

(14,141)

(10,947)

(7,818)

(4,113)

Source: Carbios, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2015 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Carbios and 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2015. “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

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

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

Share this with friends and colleagues