Transformation evolving

Evolva 17 August 2017 Update
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Evolva

Transformation evolving

H117 results

Food & beverages

17 August 2017

Price

CHF0.43

Market cap

CHF186m

Net cash (CHFm) at 30 June 2017

33.8

Shares in issue

432.8m

Free float

76%

Code

EVE

Primary exchange

SIX Swiss Ex

Secondary exchange

OTC US

Share price performance

%

1m

3m

12m

Abs

(8.5)

(17.3)

(39.4)

Rel (local)

(8.5)

(16.5)

(44.9)

52-week high/low

CHF0.8

CHF0.4

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 events

FY17 results

March 2018

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

Evolva is transforming itself into a product-based company, and the new CEO is evaluating the organisational structure and operational strategy. R&D-based revenue is likely to fall due to the transformation. EverSweet remains on track for 2018 launch, nootkatone is on track for US regulatory approval in pest control in H218, and resveratrol revenues were up strongly. Our fair value falls to CHF0.69 as we cut our sales forecasts, but we continue to believe the current share price offers a good entry point.

Year end

Revenue (CHFm)

PBT*
(CHFm)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/16

9.5

(36.0)

(7.8)

0.0

N/A

N/A

12/17e

8.4

(30.4)

(7.2)

0.0

N/A

N/A

12/18e

12.1

(28.3)

(6.5)

0.0

N/A

N/A

12/19e

34.2

(18.5)

(4.1)

0.0

N/A

N/A

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

H117 results

Total revenues of CHF3.6m were below our forecast of CHF6.0m and consensus of CHF5.8m, with both product and R&D revenues lower than expected, although the net loss of CHF20.3m was broadly in line with consensus of CHF18.6m. Given the guidance for FY17 product revenues to at least triple vs the CHF1.1m reported in 2016, we have cut our sales assumptions for FY17 from CHF15.3m to CHF8.4m, and we also cut sales forecasts for FY18 and FY19.

Transformation continues

Over the past few years, Evolva has transformed itself from an R&D and technology platform with a number of products with potential, to an innovative ingredients company with a number of commercialised products. Having strategically partnered with Cargill for the production and commercialisation of EverSweet, Evolva is now exploring a commercial strategy to expand product sales, working with market-leading companies to bring products to market. This should lead to faster and greater results, with more details expected in Q3. The plan to build a standalone Evolva facility next to the retrofitted Cargill facility is being reviewed, given the new CEO’s intention to remain asset-light. We now expect the standalone facility not to proceed and for the company to seek more Cargill-style strategic partnerships.

Valuation: Fair value of CHF0.69 per share

Our fair value is CHF0.69/share (previously CHF0.81). We have updated our model to reflect updated guidance, and we have also rolled our DCF forward to start in 2018. We continue to value Evolva on a DCF basis with a 25-year model and a fade beyond year 15. The Standby Equity Distribution Agreement (SEDA) has increased the company’s financial flexibility, although management has indicated that it will be looking to secure additional project financing in 2017 relating to its Cargill agreement. We continue to believe that Evolva may eventually need to raise more cash and re-evaluate its balance sheet, most likely during FY18 and almost certainly after the result of its strategy and organisational review.

New CEO: transformation evolves

At the start of July, Evolva announced that its CEO and co-founder, Neil Goldsmith, was stepping down with immediate effect and would be succeeded by Simon Waddington, the COO. The board and Neil Goldsmith had agreed that Evolva’s near-term focus needed to be on growing the market for Evolva’s existing products and strengthening margins, which did not fit Neil Goldsmith’s entrepreneurial skill set. Simon Waddington was previously CEO of Abunda until its acquisition by Evolva in 2011, when he joined the Evolva management team. The board felt that his background and experience are more suited to the next phase of Evolva’s growth, as EverSweet nears full-scale production and launch. Simon was in venture capital for over a decade, where he gained experience across a range of subsectors comprising: life-science, advanced materials, medical, agricultural, nutrition and healthcare services. Prior to that, he was product development manager for Zeneca’s biopolymers business, which pioneered fermentation-based production of biodegradable polymers from renewable feedstocks.

Over the last 18 months or so, there has been a significant amount of change on Evolva’s board, with a new CEO, CFO and chairman. This marks Evolva’s transition from a pharmaceutical-oriented biotech start-up to a product-based specialty ingredients business for health, wellness and nutrition.

The strategy and organisational review that was announced with the H117 results suggests Simon Waddington is committed to the transformation of Evolva towards a more focused, product-based company. He highlighted his belief in “focused execution”, which leads us to believe that Evolva will increasingly concentrate on the three products that are already on the market, namely stevia, resveratrol and nootkatone. In April, Evolva announced it had reached an agreement with Cargill with regard to its stevia collaboration. This is still on track for launch during 2018, and involves a retrofit of an existing Cargill facility in Blair, Nebraska. Resveratrol and nootkatone are both on the market. Nootkatone remains on track for US regulatory approval in pest control in H218 and Evolva is also continuing to grow the product’s customer base in flavour & fragrances. Resveratrol was branded Veri-te in February 2017, and Evolva’s commercial pipeline has expanded. The key application is in dietary supplements, with a focus on products for healthy ageing. We await the results of the strategic review (expected in Q3) to learn the fate of the other products in development, such as valencene and saffron.

The CEO believes that Evolva has a unique proposition with its fermentation platform, but it should remain focused on its strengths. As Evolva moves towards commercialisation of its products, the danger is that it could encounter lengthy (and expensive) production delays. The ingredients sector is full of examples of scale-up and production issues, which are extremely common problems. He also believes the best route may be to partner strategically with companies (such as Cargill) that already have the manufacturing assets, capabilities and expertise. The strategy and organisational review instigated by Simon Waddington is already underway and should provide further detail as to how this will be implemented.

H117 results and changes to forecasts

Total H117 revenues of CHF3.6m were below our forecast of CHF6.0m and consensus of CHF5.8m, although the net loss of CHF20.3m was broadly in line with consensus of CHF18.6m. Given the guidance for FY17 product revenues to at least triple versus 2016, we have cut our sales assumptions for FY17 from CHF15.3m to CHF8.4m. We now forecast product sales of CHF3.0m vs CHF6.8m previously. We have also cut our forecast for R&D revenue, as the new CEO has suggested the focus is likely to move to product sales. We note guidance is now for H2 R&D revenues to be “slightly below” the H1 level. Given the cuts to our product sales forecast for FY17, we have also cut our forecasts for FY18 and FY19, by 48% and 42% respectively, as we assume slower uptake of the key products (stevia, resveratrol, nootkatone and also valencene), and lower R&D revenue as a result of the increased focus on products in the market, as indicated by management. We also cut our assumptions for R&D spend, given the greater focus on these key products.

In terms of cash flow, we have adjusted our forecasts to incorporate a cash outflow of CHF3.9m (split equally between 2017 and 2018) in relation to two contracts with the US Defense Threat Reduction Agency (DTRA) whereby Evolva may be responsible for some of the costs charged to the DTRA (a provision was taken in H117). We have also adjusted our cash flow to reflect our belief that the project to build a new Evolva facility in Blair, Nebraska, next to the retrofitted Cargill facility (detailed here) is no longer likely to go ahead. The final decision is expected in Q317 once the organisational and strategic review is complete. At this juncture we have not altered our peak sales assumptions for the key products, as we await the outcome of the strategic review.

Valuation

We detail our valuation in Exhibit 1 and our updated fair value is CHF0.69/share (from CHF0.81). We have updated our forecasts following the H1 results as discussed above, and we have rolled forward our DCF to start in 2018. Rolling forward the DCF has acted to significantly mitigate the impact on the cut in near-term forecasts on our valuation. Also helping to reduce the impact of the forecast cuts has been the reduction in expected R&D expenditure. We have also trimmed our forecasts for partnership revenues from Evolva’s various alliances, in light of CEO Simon Waddington’s comments about “focused execution”, and hence the potential for these alliances to become less important as a result of the strategic review.

For Evolva, we use a 25-year DCF valuation with a fade. We slightly reduce the R&D and capex in year 6 to reflect our assumption that there will be no new products in the pipeline. In year 11 we reduce these much further as we assume the company will be running on the existing products, and cash flows will then cease. The different products have varying peak sales and ramp-up assumptions as detailed for each above. In 2031 (year 13) we start to fade stevia and vanillin, and from 2035 we start to fade the other products. We assume the stevia and vanillin patents are the first to expire. Stevia remains the key product, at c 45% of our valuation (after adjusting for tax and capex).

We note that we use our estimate for FY18 number of shares for the purpose of our DCF valuation (previously FY17). We forecast an increase in shares through to FY19 as the SEDA is exercised. As discussed in our note, the SEDA is fully flexible and hence will be exercised as necessary, rather than according to a pre-agreed schedule. We note that during H117, Evolva drew CHF3.2m from the SEDA facility, resulting in 7m shares delivered to Yorkville. At the current share price, the total commitment would represent dilution of c10%. We assume the SEDA is drawn down in annual tranches of CHF10m for the purposes of our model. In addition, we continue to assume the additional c CHF30m of financing that Evolva will look to secure for the Blair, Nebraska EverSweet retrofit, is debt-based. Evolva is looking into various funding scenarios.

Exhibit 1: Summary of DCF valuation

Product

Value (CHFm)

Value per share (CHF)

Notes

Stevia royalties

219.1

0.51

Launch date: 2018; peak sales: $600m; likelihood of success 90%; operating margin: 30%; profit share: 30%.

Saffron royalties

13.8

0.03

Launch date: 2018; peak sales: $50m; likelihood of success 60%; royalty: 10%.

Resveratrol

78.5

0.18

Launched; peak sales: $200m; likelihood of success 100%; margin: 40%.

Vanilla royalties

8.9

0.02

Launched; peak sales: $30m; likelihood of success 100%; royalty: 4%.

Nootkatone

120.9

0.28

Launched; peak sales: $150m; likelihood of success 75%*; margin: 40%.

Valencene

28.7

0.07

Launched; peak sales: $10m; likelihood of success 100%; margin: 40%.

Santalol

15.0

0.03

Launch date: 2018; peak sales: $10m; likelihood of success 60%; margin: 40%.

Legacy products

35.6

0.08

EV-077 for diabetic nephropathy, EV-035 antibiotic indications

L’Oréal/Takasago revenues

51.7

0.12

Launch date: 2020-22; number of products: 5; peak sales: $150m per product; likelihood of success: 30%; royalty: 6%.

Other consumer royalties

32.0

0.07

Royalties from alliances with Ajinomoto, BASF and Roquette; launch date: 2016-18; number of products: 3; peak sales: $150m per product; likelihood of success: 50%; royalty: 2%.

Other revenues

0.9

0.00

Only includes revenues from existing collaborations and grants.

R&D and Admin

-202.2

-0.47

 

Tax

-90.7

-0.21

Capex

-41.5

-0.10

Includes investment of $60m for commercialisation of stevia with Cargill and new bioprocessing facility.

Net cash

27.1

0.06

Net cash at FY17

Total

297.8

0.69

Using FY18e number of shares throughout 

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.

We note that, according to our forecasts, the bulk of Evolva’s value is derived from the three products that are currently on the market: stevia, resveratrol and nootkatone. As discussed above, we have modified our forecasts to assume a slower uptake of the key products, but we have left peak sales assumptions unchanged. We have cut our forecast for R&D spend to reflect management’s comments regarding greater focus on products on the market.

Exhibit 2: Financial summary

CHF'000s

2015

2016

2017e

2018e

2019e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

13,364

9,530

8,407

12,144

34,207

Cost of Sales

0

(2,951)

(2,342)

(4,890)

(17,593)

Gross Profit

13,364

6,578

6,065

7,254

16,614

EBITDA

 

 

(30,305)

(34,011)

(29,275)

(27,678)

(17,863)

Operating Profit (before GW and except.)

(31,947)

(36,124)

(26,308)

(23,680)

(30,328)

Intangible Amortisation

(3,779)

(5,090)

(5,090)

(5,090)

(5,090)

Exceptionals

0

0

0

0

0

Operating Profit

(35,726)

(41,215)

(35,418)

(33,812)

(23,995)

Net Interest

(129)

497

(60)

(32)

(3,069)

Other financial income

0

(338)

0

435

3,482

Profit Before Tax (norm)

 

 

(32,076)

(35,965)

(30,388)

(28,318)

(18,491)

Profit Before Tax (FRS 3)

 

 

(35,855)

(41,055)

(35,478)

(33,408)

(23,582)

Tax

4,067

5,160

0

0

0

Profit After Tax (norm)

(28,113)

(30,926)

(30,388)

(28,318)

(18,491)

Profit After Tax (FRS 3)

(31,788)

(35,896)

(35,478)

(33,408)

(23,582)

Average Number of Shares Outstanding (m)

353.0

397.9

424.2

432.8

450.1

EPS - normalised (c)

 

 

(8.0)

(7.8)

(7.2)

(6.5)

(4.1)

EPS - FRS 3 (c)

 

 

(9.0)

(9.1)

(8.4)

(7.7)

(5.2)

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

 

 

143,457

141,356

143,243

170,134

163,348

Intangible Assets

131,940

130,256

125,165

120,075

114,985

Tangible Assets

8,431

7,522

7,454

7,435

7,460

Other fixed assets

3,086

3,578

10,624

42,624

40,903

Current Assets

 

 

88,780

56,880

41,298

2,816

11,498

Stocks

2,217

5,687

1,283

1,608

4,338

Debtors

2,785

2,139

1,382

1,996

5,623

Cash

83,228

47,517

37,095

(2,326)

0

Other current assets

550

1,537

1,537

1,537

1,537

Current Liabilities

 

 

(7,385)

(5,690)

(5,601)

(5,547)

(5,496)

Creditors

(1,182)

(1,174)

(1,086)

(1,032)

(980)

Short term borrowings

0

0

0

0

0

Finance lease obligations

(969)

(978)

(978)

(978)

(978)

Other current liabilities

(5,234)

(3,537)

(3,537)

(3,537)

(3,537)

Long Term Liabilities

 

 

(21,437)

(19,489)

(28,511)

(37,532)

(50,212)

Long term borrowings

0

0

(10,000)

(20,000)

(30,000)

Finance lease obligations

(4,134)

(3,564)

(2,586)

(1,607)

(629)

Other long term liabilities

(17,303)

(15,925)

(15,925)

(15,925)

(19,583)

Net Assets

 

 

203,416

173,057

150,429

129,870

119,138

CASH FLOW

Operating Cash Flow

 

 

(31,353)

(33,597)

(23,353)

(27,386)

(17,940)

Net Interest

(376)

(301)

(60)

(32)

(3,069)

Tax

0

0

0

0

0

Capex

(1,865)

(947)

(985)

(1,025)

(1,066)

Acquisitions/disposals

3,278

(210)

0

0

0

Financing

59,956

0

10,000

10,000

10,000

Dividends

0

0

0

0

0

Other cash flow

(3,975)

(677)

(5,978)

(30,978)

(5,978)

Net Cash Flow

25,666

(35,731)

(20,376)

(49,421)

(18,053)

Opening net debt/(cash)

 

 

(57,191)

(83,188)

(47,407)

(27,030)

22,390

HP finance leases initiated

0

0

0

0

0

Other

331

(50)

0

0

0

Closing net debt/(cash)

 

 

(83,188)

(47,407)

(27,030)

22,390

40,443

Source: Edison Investment Research, company data

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. 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 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Evolva 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.
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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. 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

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Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Evolva 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.
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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 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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