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Orège’s FY18 results showed a significant revenue pick-up (six times restated 2017 revenues), with EBITDA and net income marginally ahead of our forecasts. The ytd ramp-up in orders implies that Orège is on track to reach our FY19 forecast of €6.3m revenues (2.8x FY18 revenues). The current share price is close to our bear case, which skews risk significantly to the upside in our view. Key share price catalysts are the continued ramp-up in orders and successful completion of the capital increase required by the end of 2019.
Written by
Orège |
On track to reach our FY19 growth forecast |
FY18 results update |
General industrials |
15 April 2019 |
Share price performance
Business description
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Orège is a research client of Edison Investment Research Limited |
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Orège’s FY18 results showed a significant revenue pick-up (six times restated 2017 revenues), with EBITDA and net income marginally ahead of our forecasts. The ytd ramp-up in orders implies that Orège is on track to reach our FY19 forecast of €6.3m revenues (2.8x FY18 revenues). The current share price is close to our bear case, which skews risk significantly to the upside in our view. Key share price catalysts are the continued ramp-up in orders and successful completion of the capital increase required by the end of 2019.
Year end |
Revenue |
EBITDA |
EBIT |
Net income |
EV/sales |
12/17** |
0.7 |
(10.1) |
(11.4) |
(13.5) |
97.3 |
12/18 |
2.3 |
(7.7) |
(8.5) |
(10.9) |
35.3 |
12/19e |
6.3 |
(5.9) |
(6.7) |
(9.8) |
12.7 |
12/20e |
11.0 |
(3.8) |
(4.6) |
(8.5) |
7.3 |
Note: *Net income is normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **FY17 results have been restated by the company and will be updated once the full accounts are made available.
FY18 results confirm pick-up in orders
In FY18 Orège experienced a strong pick-up in orders, which led to revenue almost six times higher than 2017 (restated), albeit from a low base. Orège reported FY18 EBITDA and net income marginally better than our expectations, with revenue 13% lower than our expectations more than offset by lower operating expenses. Orège made progress on its order book as it stated that at the date of the FY18 results announcement (10 April), the overall value of the order book was €2.5m (vs €2.3m revenues in FY18) and several further contracts are expected to be signed in H119. Assuming the trend of commercial development continues, we believe Orège is well placed to achieve our unchanged FY19 revenue forecast of €6.3m, which implies 178% y-o-y growth.
Long-term growth opportunity
Orège’s proprietary and patented SLG technology reduces sludge treatment costs for utilities by up to 80%, with a strong investment case for its clients (payback periods of less than three years) and large environmental sustainability advantages. We estimate a €439m annual addressable market size for SLG technology (current applications only) in North America, the UK, Germany and France. Growth potential in Asia and Southern Europe could add to this estimate. We forecast revenues increasing from €6.3m in FY19 to our estimated base case revenue potential of €57m in FY23 (bear-bull range of €22–93m). We expect strong margin improvement, leading to positive EBITDA in FY21 and cash flow in FY22.
Valuation: Current share price close to our bear case
Due to the early stage of commercial deployment, we believe investors should assess a range of potential growth outcomes and valuations. Following the recent decline, the current share price is closer to our bear case (€1.64/share), which skews risk significantly to the upside in our view (base case €3.84/share, bull case €9.31/share). Key share price catalysts are the continued ramp-up in orders and completion of the capital increase required by the end of 2019.
On track to reach our FY19 growth forecast
Orège’s FY18 results showed a significant revenue pick-up (six times restated 2017 revenues). EBITDA and net income were marginally ahead of our forecasts as lower revenues were more than compensated by lower operating expenses. We believe the ytd ramp-up in orders puts Orège on track to reach our FY19 forecast of €6.3m revenues (2.8x FY18 revenues). The recent share price decline means the risks to valuation are significantly skewed to the upside, in our view.
FY18 results confirm pick-up
In FY18 Orège experienced a strong pick-up in orders, which led to revenue almost six times higher than 2017 (restated), albeit from a low base. Orège reported FY18 EBITDA and net income marginally better than our expectations, with revenue lower than our expectations more than offset by lower operating expenses. Highlights of the FY18 results are as follows:
■
Revenues of €2.26m, an almost sixfold increase on restated 2017 revenues of €0.39m. Revenues were 13% below our forecast of €2.59m.
■
The EBITDA loss was €7.7m, >20% smaller than 2017 and 2% better than our forecast of €7.9m. This was driven by lower operating expenses than we previously expected, more than offsetting the lower revenues.
■
Net loss was €10.9m, 20% smaller than 2017 and 3% better than our expectations.
■
Net debt of €44.4m was broadly in line with our forecast (€44.0m).
FY19 ramp-up in orders in line with our forecasts
We continue to believe that a significant ramp-up in orders is one of the key catalysts for the re-rating of the stock. Orège made progress over the last few months as it stated that at the date of the FY18 results announcement (10 April), the overall value of the order book was €2.5m (vs €2.3m revenues in FY18) and several further contracts are expected to be signed in H119. Assuming this trend of commercial development continues, we believe Orège is well placed to achieve our maintained FY19 revenue forecast of €6.3m, which implies 178% y-o-y growth. The order book was boosted by a contract in January 2019 for a six-year lease agreement for three SLG solutions with the City of Orlando, US, for over $1.3m (we estimate a revenue contribution of around $1m for FY19).
Long-term growth: Innovation in environmental sustainability
Orège operates in the global wastewater equipment market ($9.5bn per year market size with 5–6% annual growth, according to Global Water Intelligence). It has developed a proprietary and patented technology (solid, liquid, gas – SLG) that reduces sludge treatment costs for utilities by up to 80%, with a strong investment case for its clients (payback periods of less than three years). In addition to large economic savings, SLG brings important environmental sustainability advantages to the sludge treatment process (lower energy use and lower volumes transported, improved sludge quality, etc). Over the last few years, Orège has developed several successful references for various applications and geographies and is now ready to achieve its full commercial potential, particularly in the UK and North America. Client feedback on the technology strongly supports its effectiveness.
We derived our forecasts for Orège’s top line by applying a range of penetration rate assumptions to the estimated size of the core market opportunities for the flagship product SLG in the key countries for Orège: the UK, North America, Germany and France. Our estimates are based on a forecast of a €439m annual addressable market size for SLG technology (current applications only) in North America, the UK, Germany and France (we provided detailed calculations in our initiation note, Innovation in environmental sustainability, published on 17 October 2018). These estimates do not include significant growth opportunities in Asia (especially following the signing of a partnership for distribution and integration of SLG solutions in Japan with ITCMT, a subsidiary of the Japanese ITOCHU Corporation) and in Southern Europe, which we understand Orège is also targeting.
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Exhibit 1: Estimated annual addressable market for SLG (equipment + services, €000s) |
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|
Source: Edison Investment Research |
We forecast revenues increasing from €6.3m in FY19 to our estimated base case revenue potential of €57m in FY23 (in our initiation note, we identified a bear-bull range of €22–93m revenues). We expect high operational leverage to drive a strong margin improvement, leading to positive EBITDA in FY21 and cash flow in FY22.
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Exhibit 2: Scenario analysis: bull-bear-base case revenues and earnings |
|
|
Source: Edison Investment Research |
We expect FY19 to confirm revenue growth trend
We continue to expect a significant revenue ramp-up and have made only small changes to our FY19/20 forecasts, with revenues broadly unchanged and marginally smaller EBITDA and net income losses, reflecting lower operating expenses.
Exhibit 3: Forecast changes
€000s |
FY18 |
FY19e |
FY20e |
|
Revenues |
New |
2,260 |
6,281 |
11,007 |
Old |
2,588 |
6,291 |
11,042 |
|
% change |
(13%) |
0% |
0% |
|
EBITDA |
New |
(7,749) |
(5,943) |
(3,802) |
Old |
(7,888) |
(6,086) |
(3,940) |
|
% change |
(2%) |
(2%) |
(3%) |
|
EBIT |
New |
(8,537) |
(6,743) |
(4,602) |
Old |
(8,888) |
(6,886) |
(4,740) |
|
% change |
(4%) |
(2%) |
(3%) |
|
Net income |
New |
(10,915) |
(9,849) |
(8,477) |
Old |
(11,212) |
(9,966) |
(8,574) |
|
% change |
(3%) |
(1%) |
(1%) |
|
Net debt |
New |
44,382 |
55,350 |
65,219 |
Old |
43,999 |
54,784 |
64,160 |
|
% change |
1% |
1% |
2% |
Source: Orège data, Edison Investment Research. Note: FY18 new = actual.
Importantly, as Orège’s net equity fell below half of its called-up share capital in 2017, there is a requirement for it to proceed with a capital increase by the end of FY19. We believe clarity on the financial structure is the other important catalyst for the stock. Until then, investors have visibility on the short-term sustainability of the activities, as majority shareholder Eren (69% stake) has provided a €7m credit line to cover the financing needs in FY19.
Imugene presented positive clinical Phase Ib data for its HER-Vaxx B-cell vaccine at American Association for Cancer Research (AACR) conference earlier this month. Vaccination successfully broke immune tolerance and stimulated production of HER2-specific antibodies in a dose-dependent fashion; the antibodies inhibited a key component of HER2 signalling. Imugene has initiated a randomised Phase II study of HER-Vaxx in gastric cancer with interim results expected in 2020. It is on track to initiate a Phase I study of KEY-Vaxx, a B-cell vaccine that aims to induce production of antibodies that block PD-1 signalling, in Q419. We increase our valuation to A$159m or 4.4 cents per share.