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Research: Industrials
The proposed sale of the UK Municipal business is a major step in exiting significant liabilities and risk, along with focusing Renewi as a European specialist in recycling, generating higher-value recycled materials. With an associated growth agenda, the long-seen discount to peers should start to reduce as the cash generation reinvigorates the balance sheet.
Renewi |
UK Municipal exit offers an inflection point |
Results and disposal |
Industrial support services |
3 June 2024 |
Share price performance
Business description
Next events
Analyst
Renewi is a research client of Edison Investment Research Limited |
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The proposed sale of the UK Municipal business is a major step in exiting significant liabilities and risk, along with focusing Renewi as a European specialist in recycling, generating higher-value recycled materials. With an associated growth agenda, the long-seen discount to peers should start to reduce as the cash generation reinvigorates the balance sheet.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/23 |
1,704 |
105.2 |
89 |
0.0 |
8.3 |
N/A |
03/24 |
1,689 |
68.0 |
61 |
5.0 |
12.1 |
0.7 |
03/25e |
1,751 |
81.6 |
70 |
10 |
10.5 |
1.4 |
03/26e |
1,825 |
92.3 |
80 |
12.5 |
9.2 |
1.7 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items.
Sale of the UK Municipal business
Renewi’s UK Municipal business is a collection of public-private partnerships (PPPs) in the UK, operating waste treatment facilities for councils, and have proved a drag on the group (FY24 cash outflow €16m and provisions of €247m). The businesses are being sold to Biffa. While this will require funding of €146m, ex €7-8m fees, it will significantly improve future cash by €15–20m a year, reduce volatility and potential risk, assist group margin by c 0.5% and provide great focus for both investors and management. Management estimates the deal will leave net debt/EBITDA at c 2.9x, which will reduce by 0.4–0.5x pa. Completion is expected by the end of 2024.
FY24 results
A combination of weaker commercial waste markets, particularly in the Netherlands construction sector, and softer recyclate prices affected profits, despite improvements in Mineralz & Water from the turnaround at ATM and the early benefits of the Simplicity efficiency programme. Higher financing costs, driven by rising rates in Europe, had a further impact on PBT and EPS. Cash flow was robust, despite continued legacy costs, with core net debt marginally improved. The company reinstated the dividend, with a 5c final dividend.
Outlook and forecasts
Management expectations are unchanged, with a return to growth with benefits from the Simplify efficiency programme (€10m) and ATM turnaround (€5m) assisting margin expansion. Our numbers are adjusted for the disposal of the UK Municipals, in particular the full year interest cost for FY26. For FY25 we estimate underlying PBT of €81.6m (down 1.8%) and normalised EPS of 70c (down 1.7% and introduce FY26 estimates underlying PBT of €92.3m and normalised EPS of 80c.
Valuation: Upside from exiting the UK Municipals
Exiting the Municipal business removes significant onerous contract provisions from the balance sheet, which had proved to be a drag on our valuation. Our DCF valuation using a WACC of 10% and a terminal growth rate of 2%, moves to 849p/share, up from 766p (+10.8%). Our peer group valuation, assisted by ratings improvements in the sector, averages 845p, up from 578p (+46.1%).
Sale of the UK Municipal business
The UK Municipal business is a collection of PPPs in the UK operating waste treatment facilities for councils. These activities have proved challenging, leading to significant losses as highlighted by the increasing provisions and annual cash outflow.
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Exhibit 1: Year-end onerous contract provisions and write offs (€m) |
Exhibit 2: Cash outflow per year (€m) |
|
|
|
Source: Renewi |
Source: Renewi |
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Exhibit 1: Year-end onerous contract provisions and write offs (€m) |
|
|
Source: Renewi |
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Exhibit 2: Cash outflow per year (€m) |
|
|
Source: Renewi |
Hence management decided to exit these operations, culminating in an agreement to sell them to Biffa, another UK waste company. The financial terms will require Renewi to provide €146m of funding but will remove the associated net debt of €67m from Renewi’s balance sheet (reported as non-core debt as it is non-recourse) and eliminate future losses and cash consumption.
The cash outflow suggests a pro-forma net debt (excluding finance leases) of c €514m and net debt/EBITDA of 2.9x. The company has €705m of liquidity and has also arranged a bridging loan of €120m. Clearly this is putting additional leverage on the balance sheet ahead of management’s target of net debt/EBITDA of c 2.0x. Hence, management has stressed a focus on cash generation and believes that it can reduce leverage by 0.4–0.5x a year. The deal is expected to close by the end of 2024.
The benefits of the deal for Renewi include:
■
An improved and less volatile balance sheet. The net carrying value in the balance sheet is negative €89m, but removes a degree of volatility and risk from the onerous contracts, as highlighted by the increases in provisions seen in recent years.
■
Improved group margin and cash flow. The disposal is expected to increase group EBIT margin by 0.5%. More important is the removal of €15–20m of annual cash outflow.
■
Improved focus and less management distraction. The disposal improves the focus of the group as a specialist European recycling business, focused on generating higher value recyclates. It will also free up management bandwidth to focus on the growth agenda.
2024 results
Overall
A combination of softer commercial waste markets, particularly in the Netherlands construction sector, and softer recyclate prices affected profitability despite improvements in Mineralz & Water and the early benefits of the Simplicity efficiency programme. Higher financing costs, driven by rising rates in Europe, had a further impact on PBT and EPS. Cash flow was robust, despite continued legacy costs, with core net debt unchanged. The company reinstated the dividend with a 5c final dividend.
Exhibit 3: Summary underlying financials (€m)
FY23 |
FY24 |
Change y-o-y |
|
Sales |
1,704 |
1,689 |
-1% |
Underlying EBITDA |
256 |
232 |
-9% |
Underlying EBIT |
132 |
106 |
-20% |
Underlying PBT |
103 |
68 |
-34% |
EPS (c) |
89 |
61 |
-31% |
DPS (c) |
0 |
5 |
N/A |
Core net cash/(debt) |
(371) |
(368) |
-1% |
Source: Renewi
Commercial Waste
Commercial Waste’s top line was affected by lower volumes, in particular in the Netherlands due to the weak construction market, where Renewi participates in the treatment of demolition waste. Price increases were put through, albeit these were behind the inflationary levels. Increases were particularly seen in wages, with the delta largely offset through cost initiatives, including flexing SG&A and early benefits from the group’s Simplify programme. The key impact on profitability came from the reduction in recyclate prices, as can be seen in the 24% reduction in the outbound revenue.
Exhibit 4: Commercial waste key financials (€m)
FY23 |
FY24 |
Change |
||
Netherlands |
Sales |
932 |
912 |
-2% |
Operating margin |
8.3% |
5.8% |
||
Operating profit |
76.9 |
52.9 |
-31% |
|
Belgium |
Sales |
468 |
476 |
2% |
Operating margin |
11.2% |
9.6% |
||
Operating profit |
52.4 |
45.6 |
-13% |
|
Total division |
Inbound |
1,090 |
1,129 |
4% |
Outbound |
218 |
165 |
-24% |
|
On-site |
64 |
67 |
5% |
|
Other |
26 |
24 |
-9% |
|
Total turnover |
1,397 |
1,385 |
-1% |
|
Operating margin |
9.3% |
7.1% |
||
Operating profit |
129.3 |
98.5 |
-24% |
Source: Renewi
Positive operational progress was made through new contract wins with large industrial customers and the successful commissioning of an advanced sorting line in Ghent, serving the new VLAREMA 8 recycling requirement, and a hard plastics sorting line in Acht.
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Exhibit 5: Netherlands construction sector – demolition activity index |
Exhibit 6: Belgium construction sector – demolition activity index |
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|
|
Source: Centraal Bureau voor de Statistiek |
Source: Statbel |
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Exhibit 5: Netherlands construction sector – demolition activity index |
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Source: Centraal Bureau voor de Statistiek |
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Exhibit 6: Belgium construction sector – demolition activity index |
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Source: Statbel |
Mineralz & Water
Exhibit 7: Mineralz & Water key financials (€m)
FY23 |
FY24 |
Change y-o-y |
|
Sales |
190.9 |
181.6 |
-5% |
Operating margin |
0.3% |
5.3% |
|
Operating profit |
0.5 |
9.6 |
1820% |
Source: Renewi
While Mineralz & Water’s top line was stable, profitability improved significantly. Water performance was positive, but key has been the turnaround of ATM. The improved quality of the sand and filler, along with regulatory qualification, has driven better revenue and margin. Management is confident of further progress towards the target of returning to historical profitability, which will be assisted by additional volume given that the plant is operating at less than 50% capacity, and improved pricing as additional products gain regulatory approval. The inventory of thermally treated soil (TGG) has reduced by a further 100kt, albeit with 450kt remaining, although management is confident of significant progress on this front in the current year.
Specialities
Exhibit 8: Specialities key financials (€m)
FY23 |
FY24 |
Change y-o-y |
|
Sales |
160.2 |
175.2 |
9% |
Operating margin |
9.9% |
9.3% |
|
Operating profit |
15.9 |
16.3 |
3% |
Source: Renewi
In the Specialities division, Maltha glass recycling continued to perform well, with higher pricing offsetting a slight decline in volumes. Coolrec, electricals recycling, saw record volumes, up over 10%, although profitability was affected by the weaker plastic recyclate pricing. Perhaps most interesting is a new law in France requiring electric boilers to be recycled from January 2025, for which Coolrec is investing.
Cash flow
Exhibit 9: Summary cash flow (€m)
FY23 |
FY24 |
|
Adjusted free cash flow |
72.9 |
69.6 |
Deferred COVID taxes |
(19.7) |
(19.9) |
Offtake of ATM soil |
(1.2) |
(2.5) |
UK Municipal contracts |
(12.2) |
(15.8) |
Renewi 2.0 & other |
(4.1) |
(5.3) |
Other |
(10.4) |
(5.2) |
Free cash flow |
25.3 |
20.9 |
Growth capex |
(30.8) |
(22.0) |
Acquisitions/disposals |
(59.4) |
0.2 |
Total cash flow |
(64.9) |
(0.9) |
Core net cash/(debt) |
(370.6) |
(368.1) |
Finance leases |
(245.8) |
(247.9) |
PPP debt |
(69.3) |
|
Total net cash/(debt) |
(685.7) |
(616.0) |
Source: Renewi
Free cash flow was similar to the previous year. Improved working capital and lower net capex, assisted by disposals, were offset by higher financing charges due to higher rates across Europe and increased tax due to changes in payment requirements in the Netherlands.
Free cash continued to support legacy items, including deferred COVID taxes of €19.9m (the final €10m is due in the current year) and UK Municipals of €15.8m (which will not repeat post disposal). Free cash flow supported growth capex of €22.0m.
Core net debt reduced marginally, and overall debt (including finance leases and PPP debt) improved further due to the deconsolidation the UK Municipals moving to assets held for sale.
Outlook and forecast update
Management’s outlook is for a return to growth in the current year, with significant margin improvement. In terms of the top line, a levelling of recyclate prices and stabilisation of volumes in the construction sector should remove downside pressure, while additional investments, such as the new line at Acht, should provide volume growth. Management has pointed to €10m benefit from the Simplify programme and an additional €5m from the ATM turnaround, effectively underpinning our EBIT forecast progression from €105.5m in FY24 to €122.0m in FY25e.
Our new forecasts are unchanged on an underlying basis. The greatest impacts come from the sale of the UK Municipal business on the balance sheet for the end of FY25 and the increase in financing cost for FY26 (note we have assumed completion at the end of FY25, albeit management is aiming to complete by the end of calendar 2024).
Exhibit 10: Summary forecast changes
FY25e |
FY26e |
|||||
€m |
Old |
New |
Change |
New |
|
|
Revenues |
1,891 |
1,751 |
-7.4% |
1,825 |
||
EBITDA |
248 |
253 |
1.8% |
281 |
||
Normalised operating profit |
126 |
122 |
-3.5% |
146 |
||
Normalised operating profit margin |
6.7% |
7.0% |
0.3% |
8.0% |
||
Normalised PBT |
83 |
82 |
-1.8% |
92 |
||
Reported PBT |
77 |
76 |
-2.0% |
86 |
||
Normalised basic EPS (c) |
71 |
70 |
-1.7% |
80 |
||
Dividend per share (c) |
10 |
10 |
0.0% |
12.5 |
||
Closing core net debt/(cash) |
441 |
541 |
22.8% |
527 |
||
Source: Edison Investment Research
Valuation
DCF based valuation
Exhibit 11 provides a discounted cash flow (DCF) valuation relative to the weighted cost of capital (WACC) and longer-term growth rates. Our DCF valuation using a WACC of 10% and a terminal growth rate of 2% moves to 849p a share, up from 766p (+10.8%).
Exhibit 11: DCF valuation per share (p) sensitivity to WACC and terminal growth rate assumptions
Terminal growth rate |
||||||
0.0% |
1.0% |
2.0% |
3.0% |
4.0% |
||
WACC |
12.0% |
413 |
457 |
510 |
574 |
654 |
11.0% |
533 |
590 |
660 |
747 |
860 |
|
10.0% |
677 |
753 |
849 |
971 |
1,135 |
|
9.0% |
855 |
959 |
1,093 |
1,271 |
1,521 |
|
8.0% |
1,079 |
1,225 |
1,420 |
1,692 |
2,101 |
|
Source: Edison Investment Research
Peer based valuation
The following table is based on European peer group valuations, reflecting both the focus of Renewi’s earnings to Belgium/Netherlands and the lack of UK-listed comparable companies.
Exhibit 12: European peers
Market cap |
EV/EBIT (x) |
EV/EBITDA (x) |
P/E (x) |
||||
£m |
2024 |
2025 |
2024 |
2025 |
2024 |
2025 |
|
Befessa |
1,149 |
13.1 |
10.9 |
8.3 |
7.2 |
15.6 |
12.1 |
Cabka |
97 |
17.2 |
11.3 |
5.7 |
4.8 |
30.7 |
16.7 |
Groupe Pizzono |
253 |
14.3 |
13.7 |
5.5 |
5.3 |
19.1 |
18.2 |
Lassila & Tikanoja |
288 |
13.3 |
11.1 |
5.4 |
5 |
11.9 |
9.8 |
Mo-Bruk |
220 |
8.9 |
7 |
7.9 |
6.1 |
11.6 |
9.7 |
Seche |
680 |
12.9 |
11.6 |
5.9 |
5.4 |
14.1 |
11.5 |
Veolia |
18,589 |
11.3 |
10.3 |
5.8 |
5.5 |
15.2 |
13.9 |
Peer average |
13.1 |
11.1 |
5.8 |
5.4 |
15.2 |
12.1 |
|
Renewi |
8.1 |
6.8 |
3.9 |
3.5 |
10.7 |
9.6 |
|
Discount to peers |
38% |
39% |
33% |
35% |
30% |
21% |
|
Source: LSEG, 28 May 2024, Edison Investment Research
Our valuation includes the pension deficit of €13m as per the balance sheet and we continue to adjust for site restoration and aftercare provisions. Renewi forecasts have been calendarised in Exhibit 13 valuation.
Exhibit 13: Peer group-based valuation
EV/EBIT (x) |
EV/EBITDA (x) |
P/E (x) |
||||
2024 |
2025 |
2024 |
2025 |
2024 |
2025 |
|
Peer average rating (x) |
13.1 |
11.1 |
5.8 |
5.4 |
15.2 |
12.1 |
Edison Renewi forecasts* EBIT (€m), EBITDA (€m), EPS (c) |
118 |
140 |
248 |
274 |
69 |
78 |
Valuation (€m) |
1544 |
1553 |
1440 |
1478 |
||
Provisions (€m) |
(161) |
(161) |
(161) |
(161) |
||
Debt (€m) |
(518) |
(539) |
(518) |
(539) |
||
Pension deficit (€m) |
(13) |
(13) |
(13) |
(13) |
||
Market cap (€m) |
852 |
839 |
748 |
764 |
||
Number of shares (m) |
80.0 |
80.7 |
80.0 |
80.7 |
||
Value per share (€c) |
1065 |
1040 |
935 |
947 |
1,056 |
943 |
Exchange rate (€/£) |
1.15 |
1.15 |
1.15 |
1.15 |
1.15 |
1.15 |
Value per share (p) |
926 |
904 |
813 |
824 |
918 |
820 |
Provision adjustment (€m) |
(161) |
(161) |
||||
Value per share (p) |
926 |
904 |
813 |
824 |
757 |
659 |
Source: Edison Investment Research. Note: *Forecasts have been calendarised.
Exiting the Municipal business removes significant onerous contract provisions from the balance sheet, which, adjusted for, had proved to be a drag on our valuation. Our peer group valuation averages 845p, up from 578p (+46.1%), This is also highlighted in Exhibit 12 with the shares trading at an average discount of 33% to peers.
Exhibit 14: Financial summary
€m |
2022 |
2023 |
2024 |
2025e |
2026e |
|
Year to March (€m) |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|
INCOME STATEMENT |
||||||
Revenue |
1,869.2 |
1,703.9 |
1,689.2 |
1,750.9 |
1,825.4 |
|
Cost of Sales |
(1,512.5) |
(1,385.3) |
(1,351.2) |
(1,418.2) |
(1,478.6) |
|
Gross Profit |
356.7 |
318.6 |
338.0 |
332.7 |
346.8 |
|
EBITDA |
261.5 |
255.8 |
235.5 |
252.6 |
280.7 |
|
Operating profit (before amort. and excepts.) |
133.6 |
131.7 |
105.5 |
122.0 |
145.9 |
|
Amortisation of acquired intangibles |
(3.4) |
(5.0) |
(6.1) |
(6.0) |
(6.0) |
|
Exceptionals |
(6.2) |
14.8 |
(1.8) |
0.0 |
0.0 |
|
Reported operating profit |
124.0 |
141.5 |
97.6 |
116.0 |
139.9 |
|
Net Interest |
(28.8) |
(26.8) |
(38.0) |
(40.9) |
(54.1) |
|
Joint ventures & associates (post tax) |
0.5 |
0.3 |
0.5 |
0.5 |
0.5 |
|
Profit Before Tax (norm) |
105.3 |
105.2 |
68.0 |
81.6 |
92.3 |
|
Profit Before Tax (reported) |
95.7 |
115.0 |
60.1 |
75.6 |
86.3 |
|
Reported tax |
(20.3) |
(29.0) |
(14.9) |
(18.8) |
(21.4) |
|
Profit After Tax (norm) |
78.8 |
74.4 |
48.4 |
59.7 |
67.5 |
|
Profit After Tax (reported) |
75.4 |
86.0 |
45.2 |
56.8 |
64.8 |
|
Minority interests |
(0.9) |
(3.7) |
(3.2) |
(3.0) |
(3.0) |
|
Discontinued operations |
0.0 |
(19.4) |
(76.1) |
0.0 |
0.0 |
|
Net income (normalised) |
77.9 |
70.7 |
45.2 |
56.7 |
64.5 |
|
Av. Shares outstanding (m) |
79.7 |
80.3 |
80.0 |
80.7 |
81.0 |
|
EPS - normalised (c) |
98 |
89 |
61 |
70 |
80 |
|
EPS - normalised fully diluted (c) |
98 |
89 |
61 |
70 |
79 |
|
EPS - basic reported (c) |
93 |
79 |
(43) |
67 |
76 |
|
Dividend (c) |
0.0 |
0.0 |
5.0 |
10.0 |
12.5 |
|
EBITDA Margin (%) |
14.0 |
15.0 |
13.9 |
14.4 |
15.4 |
|
Normalised Operating Margin |
7.1 |
7.7 |
6.2 |
7.0 |
8.0 |
|
BALANCE SHEET |
||||||
Fixed Assets |
1,566 |
1,686 |
1,562 |
1,567 |
1,568 |
|
Intangible Assets |
593 |
636 |
634 |
628 |
623 |
|
Tangible and Right-of-use Assets |
767 |
871 |
873 |
883 |
889 |
|
Investments & other |
206 |
179 |
56 |
56 |
56 |
|
Current Assets |
386 |
399 |
494 |
485 |
502 |
|
Stocks |
23 |
25 |
23 |
24 |
25 |
|
Debtors |
269 |
290 |
246 |
255 |
271 |
|
Cash & cash equivalents |
64 |
63 |
79 |
60 |
60 |
|
Other |
31 |
22 |
146 |
146 |
146 |
|
Current Liabilities |
(733) |
(665) |
(637) |
(626) |
(642) |
|
Creditors |
(528) |
(522) |
(474) |
(484) |
(500) |
|
Tax and social security |
(24) |
(31) |
(21) |
(21) |
(21) |
|
Short term borrowings |
(149) |
(67) |
(121) |
(100) |
(100) |
|
Other |
(31) |
(46) |
(22) |
(22) |
(22) |
|
Long Term Liabilities |
(881) |
(1,073) |
(1,106) |
(1,257) |
(1,238) |
|
Long term borrowings |
(519) |
(682) |
(574) |
(749) |
(735) |
|
Other long term liabilities |
(362) |
(391) |
(531) |
(508) |
(503) |
|
Net Assets |
338 |
347 |
314 |
169 |
189 |
|
Minority interests |
(7) |
(10) |
(13) |
(13) |
(13) |
|
Shareholders' equity |
331 |
337 |
301 |
156 |
176 |
|
CASH FLOW |
||||||
Operating Cash Flow |
261.5 |
255.8 |
235.5 |
252.6 |
280.7 |
|
Working capital |
(59.9) |
(23.8) |
4.8 |
(0.3) |
(0.8) |
|
Exceptional & other |
(17.1) |
(23.6) |
(35.3) |
(35.3) |
(17.3) |
|
Tax |
(7.6) |
(21.2) |
(36.3) |
(21.9) |
(24.8) |
|
Net operating cash flow |
176.9 |
187.2 |
168.7 |
195.1 |
237.8 |
|
Capex |
(77.3) |
(118.1) |
(79.2) |
(105.0) |
(105.0) |
|
Acquisitions/disposals |
(3.2) |
(60.7) |
0.2 |
0.0 |
0.0 |
|
Net interest |
(17.2) |
(21.3) |
(31.4) |
(41.2) |
(54.4) |
|
Equity financing |
(1.6) |
(4.7) |
(1.0) |
0.0 |
0.0 |
|
Dividends |
0.0 |
0.0 |
0.0 |
(6.5) |
(9.0) |
|
Net Cash Flow |
77.6 |
(17.6) |
57.3 |
42.4 |
69.4 |
|
Opening net debt/(cash) |
343.7 |
303.1 |
370.7 |
368.2 |
541.1 |
|
FX |
7.6 |
(0.2) |
(1.7) |
0.0 |
0.0 |
|
Other non-cash movements |
(44.6) |
(49.8) |
(53.1) |
(215.3) |
(55.3) |
|
Closing net debt/(cash) |
303.1 |
370.7 |
368.2 |
541.1 |
527.0 |
|
Finance Leases (FRS16) |
221.9 |
245.8 |
247.9 |
247.9 |
247.9 |
|
PPP non-recourse |
79.1 |
69.3 |
0.0 |
0.0 |
0.0 |
|
Closing net debt/(cash) |
604.1 |
685.8 |
616.1 |
789.0 |
774.9 |
Source: Renewi accounts, Edison Investment Research
|
|
Research: Healthcare
IRLAB Therapeutics is swiftly progressing with the Phase I trial for IRL757, with the first participant recently dosed following regulatory approval earlier this month. IRL757 is being developed for the treatment of apathy, a common symptom in neurological conditions such as Parkinson’s disease (PD) and Alzheimer’s disease (AD), but with limited treatment options. The Phase I study will include two parts – with single and multiple ascending doses – which IRLAB plans to complete within CY24. The clinical programme has been de-risked in terms of funding to proof-of-concept (PoC) with backing from the MJFF and MSRD. We update our valuation to reflect the potential contribution from IRL757 (with a conservative peak penetration of 5% and a probability of success of 7.5%). We also note IRLAB has drawn down the remaining SEK25m from the SEK50m debt facility, which we were already reflecting in our model. With these updates, our valuation rises to SEK4.56bn or SEK87.9/share, from SEK4.25bn or SEK81.9/share previously.