Evolva |
Transformation continues |
FY19 results |
Food & beverages |
23 March 2020 |
Share price performance
Business description
Next events
Analysts
Evolva is a research client of Edison Investment Research Limited |
Evolva’s FY19 results were above our expectations in terms of sales and EBITDA. Cash flow was also far better than expected as the company has materially reduced its cash burn. Nootkatone is on track for EPA registration and a new product, EVE-X157/Z4, is due to be launched later this year, for the Flavours and Fragrances and Health Ingredients segments. Management has reiterated its commitment to reach cash break-even by FY23 (previous guidance was FY21/23) and is evaluating options to finance future growth until cash break-even, including a capital increase. We have cut our sales and profit forecasts to reflect the guidance that the FY19 growth trajectory will be replicated in FY20 and our fair value is now CHF0.42/share.
Year end |
Revenue (CHFm) |
PBT* |
EPS* |
DPS |
P/E |
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 |
10.9 |
(13.1) |
(1.6) |
0.0 |
N/A |
N/A |
12/21e |
19.3 |
(7.8) |
(1.0) |
0.0 |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
FY19 results
Total revenues of CHF11.6m were above our forecast of CHF10.9m, with product revenues (CHF5.5m) somewhat lower than expected, and R&D revenues (CHF6.1m) significantly higher. EBITDA loss was also better at CHF12.3m (forecast CHF15.1m loss), so the net loss was also better than expected. Net cash of CHF39.9m at end FY19 was higher than our forecast of CHF32.1m. Guidance has been refined, with cash break-even expected in FY23. We cut our product revenue estimates in line with guidance for the FY19 trajectory (+60% growth) to be maintained in FY20.
COVID-19 likely to soften demand
It is still early days, but the effect of the coronavirus in China was to temporarily soften demand for some of Evolva’s Flavours & Fragrances products. We expect this scenario is likely to be replicated as the pandemic spreads globally, although it is still too early to determine what the exact impact will be. We have moved our peak sales forecasts for all of Evolva’s products out by a year to reflect the temporary disruption.
Valuation: Fair value CHF0.42/share
We have updated our model to reflect current FX. We continue to value Evolva on a DCF basis with a 25-year model, assuming cash break-even in FY23 (we previously assumed FY22), in line with management guidance. As discussed, we have delayed our assumptions for each product’s peak sales by a year. We have also updated our model to reflect the higher than expected net cash at end FY19. Overall, our fair value decreases slightly to CHF0.42/share (from CHF0.51/share previously).
Valuation
We detail our valuation in Exhibit 1. Our fair value decreases to CHF0.42/share as we have delayed our peak product sales by a year for each product. We have also cut our FY20 revenue estimates in light of guidance that product revenues will continue on the same trajectory as FY19 (ie +60%). The company’s guidance that FY20 R&D revenue will fall remains unchanged, as the US BARDA (Biomedical Advanced Research and Development Authority) contract comes to an end.
We now assume cash break-even will occur in FY23 (previously FY22), again in line with management guidance. We note management comments that to finance future growth until cash break-even, the company is currently evaluating multiple options including a capital increase. Management has stated that minimising dilution to existing shareholders is one of its aims. Our current forecasts assume the company remains cash-positive until it breaks even on a cash basis in FY23 (we forecast net cash of CHF8m at end FY23). If the cash burn were to accelerate beyond our forecasts, the headroom of CHF8m is rather limited. With the current uncertainty prevailing in the markets, it is difficult to predict the best option for further financing, but at the current share price, every CHF10m of equity raised via a share placing or rights issue would cause 7.5% dilution, before taking into account any discount required to complete the fundraising.
Exhibit 1: Summary of DCF valuation
Product |
Value |
Value/share (CHF) |
Notes |
Stevia (royalty stream) |
86.2 |
0.10 |
Launched; peak sales: $600m; royalty stream: 5% |
Resveratrol |
22.5 |
0.03 |
Launched; peak sales: $140m; likelihood of success 80%; margin: 30% |
Nootkatone |
168.9 |
0.21 |
Launched; peak sales: $150m; likelihood of success 75%*; margin: 40% |
Valencene |
14.3 |
0.02 |
Launched; peak sales: $10m; likelihood of success 90%; margin: 40% |
R&D partnerships |
19.9 |
0.02 |
Assume revenue continues to fall |
Capex |
(2.5) |
0.00 |
Includes contribution to Cargill for commercialisation of EverSweet |
Net cash |
39.9 |
0.05 |
Reported net cash at end FY19 |
Total |
349.2 |
0.42 |
Using FY20 average number of shares throughout |
Source: Edison Investment Research. Note: WACC = 12.5%. *There is no development risk associated with nootkatone, but we have applied a risk adjustment due to uncertainty about the use of the product as an insect repellent.
We use a 25-year DCF valuation with a fade. Each product has varying peak sales, margins, ramp-up assumptions and probabilities of success, as detailed above. In each case, we reduce the R&D and operating expenditure after launch to reflect the lower level of investment required once the product is established on the market. We start to fade stevia in 2031 (year 11) and the other products in 2035 (year 15), and we also assume they become commoditised and their operating margins fall to single digits, which is the level of commoditised food ingredients. Stevia remains a key product, at c 25% of our valuation, after adjusting for tax and capex, but note that we see greater value overall in nootkatone. Registration of the latter with the US EPA for use in pest control is expected over the next six months or so. As stated in the past, this should open up a much larger market for the use of nootkatone, both in the US and also internationally (more detail on Evolva’s products and market sizes is available in this note).
Our valuation purely reflects the products on which Evolva has chosen to concentrate, and we ascribe zero value to all other alliances/collaborations and other projects. We recognise that the latter do retain some residual value, but for the sake of conservatism we err on the side of caution. We also ascribe no value to the new product announced with the FY19 results (EVE-X157/Z4), which is set for launch later this year, but still remains unknown to the market.
Board and management changes
In November Evolva announced that Beat In-Albon would be proposed as a new board member at the next AGM and would take over as chairman from Gerard Hoetmer, who would remain as a member of the board. Mr In-Albon is a Lonza veteran. In addition, it announced that the board had decided to reduce its composition from five members to four. Three existing board members would not be seeking re-election, and hence a search would begin for a fourth board member.
In January Evolva announced that Richard Ridinger (former CEO of Lonza and highly regarded) and Stephan Schindler (CFO of Bachem, previously at DSM and also well respected) will be joining the board. The new additions to the board will bring international B2B experience to Evolva. The company also announced that Gerard Hoetmer and Thomas Videbaek would not be seeking re-election after all, and hence the search for a fourth member remains ongoing.
The announcement also included some changes at the executive management level. Scott Fabro, COO, will leave Evolva in June, after two years with the company, and the business units will report directly to CEO Oliver Walker. André Pennartz was appointed CFO effective immediately (in January). The key change here was that the main functions within Evolva will be centred around the Basel area, rather than being split across different geographies (Scott Fabro, for example, is based in the US).
The company is undergoing major change as it transitions from an R&D-focused entity into an early-stage commercial company, and hence the board is changing to reflect this. As a reminder, during Q419 Cargill announced it had started up commercial-scale production of EverSweet, thus marking a milestone for Evolva in its transition.
Exhibit 2: Financial summary
CHF000s |
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 |
10,891 |
19,319 |
30,427 |
Cost of Sales |
(4,698) |
(6,816) |
(6,305) |
(3,681) |
(6,807) |
(12,111) |
||
Gross Profit |
2,119 |
2,117 |
5,292 |
7,210 |
12,512 |
18,316 |
||
EBITDA |
|
|
(37,629) |
(23,350) |
(12,280) |
(11,988) |
(6,693) |
(1,180) |
Operating Profit (before GW and except.) |
(39,804) |
(24,827) |
(39,804) |
(24,827) |
(14,067) |
(13,214) |
||
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) |
(19,274) |
(13,991) |
(8,272) |
||
Net Interest |
(596) |
(622) |
(1,486) |
160 |
97 |
54 |
||
Other financial income |
(482) |
40 |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
(40,882) |
(25,409) |
(15,553) |
(13,054) |
(7,834) |
(2,158) |
Profit Before Tax (FRS 3) |
|
|
(46,007) |
(31,318) |
(21,614) |
(19,115) |
(13,894) |
(8,218) |
Tax |
7,023 |
2,104 |
(25) |
0 |
0 |
0 |
||
Profit After Tax (norm) |
(33,881) |
(23,305) |
(15,578) |
(13,054) |
(7,834) |
(2,158) |
||
Profit After Tax (FRS 3) |
(38,984) |
(29,214) |
(21,639) |
(19,115) |
(13,894) |
(8,218) |
||
Average Number of Shares Outstanding (m) |
482.1 |
770.6 |
482.1 |
770.6 |
770.4 |
810.0 |
||
EPS - normalised (c) |
|
|
(7.0) |
(3.0) |
(2.0) |
(1.6) |
(1.0) |
(0.3) |
EPS - FRS 3 (c) |
|
|
(8.1) |
(3.8) |
(2.8) |
(2.4) |
(1.7) |
(1.0) |
Dividend per share (c) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Gross Margin (%) |
31.1 |
23.7 |
45.6 |
66.2 |
64.8 |
60.2 |
||
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 |
137,824 |
129,569 |
120,968 |
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 |
3,760 |
2,594 |
868 |
||
Current Assets |
|
|
107,697 |
67,192 |
48,745 |
34,030 |
29,544 |
32,406 |
Stocks |
8,009 |
4,040 |
5,392 |
6,534 |
11,591 |
18,256 |
||
Debtors |
1,831 |
1,941 |
1,480 |
1,416 |
2,511 |
3,955 |
||
Cash |
97,185 |
60,380 |
39,920 |
24,126 |
13,488 |
8,241 |
||
Other current assets |
673 |
830 |
1,954 |
1,954 |
1,954 |
1,954 |
||
Current Liabilities |
|
|
(12,261) |
(14,705) |
(12,295) |
(11,084) |
(12,527) |
(14,977) |
Creditors |
(1,933) |
(743) |
(2,912) |
(1,700) |
(3,143) |
(5,593) |
||
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) |
(3,969) |
Long term borrowings |
0 |
0 |
0 |
0 |
0 |
0 |
||
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 |
154,634 |
141,533 |
134,428 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
(35,224) |
(23,247) |
(13,577) |
(14,669) |
(9,443) |
(4,001) |
Net Interest |
(379) |
(360) |
(583) |
160 |
97 |
54 |
||
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) |
(1,084) |
(1,084) |
(1,084) |
||
Net Cash Flow |
49,614 |
(36,775) |
(20,413) |
(15,793) |
(10,639) |
(5,247) |
||
Opening net debt/(cash) |
|
|
(47,516) |
(97,184) |
(60,381) |
(39,920) |
(24,127) |
(13,488) |
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) |
(24,127) |
(13,488) |
(8,241) |
Source: Edison Investment Research, company data
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