Solar Foods H1'24: All eyes turn to upcoming CMD

This report is a summary translation of the report “Katseet siirtyvät kohti pääomamarkkinapäivää” published on 9/27/2024 at 8:15 am EEST.

The H1 figures for Solar Foods were already largely known, but an insignificant change in the timing of earnings resulted in a clear difference compared to the company's previously communicated earnings estimate. The most important news was the Capital Markets Day on December 10, where we will seek visibility on major strategic directions. With the share price decline, we believe the company's risk/reward profile has become more balanced, although at the current stage of development, visibility into the business is chronically low for a listed company. With the price cut, we are raising our recommendation to Reduce (was Sell) and revising our price target to EUR 10.0 (was EUR 11.0). 

Solein commercialization took leaps forward during the first half of the year

Solein production at Solar Foods' new Factory 01 only started in April, so no significant revenue was generated during the period. With the production capacity of Factory 01 and the opening of the US market in the fall, the company is in a better position to forge new partnerships and advance the commercialization of Solein. As a result of the growth investments, the H1 net income decreased to -5.7 MEUR, from -4.0 MEUR in the comparison period. This was lower than the company's previously published net income estimate of -2.5 MEUR due to differences in the timing of grants and the share of capitalized costs. These factors are purely accounting and do not affect cash flow, and the net cash position of 3.3 MEUR at the end of the period was in line with the IPO estimate. During the reporting period, the company received grants totaling 9.3 MEUR, mainly related to the IPCEI subsidy from the European Commission.

Business forecasting is challenging, but the capital market will bring visibility to the company's targets

Solar Foods' H1 report did not bring any major surprises in terms of numbers, and as a result we left our forecasts largely unchanged. Due to its early stage of development, Solar Foods' value creation will be concentrated in the 2030s, and we forecast the company to be profitable at the EBIT level in 2030, with an industrial-scale plant generating sufficient sales to scale the cost structure. In addition to the existing IPCEI support, this factory investment will require significant additional funding, which we believe may consist of other grants, equity, debt and partner advances. We believe that successful licensing could provide a profitable earnings level faster than in-house production with lower capital requirements, and the company has a letter of intent with a global fermentation company to build an industrial scale plant. Visibility on licensing revenue growth and its emphasis in the investment story is currently low, but we will seek further visibility on strategic priorities at the Capital Markets Day in December.

Inaccurate valuation due to distant future cash flows

We have gauged a fair value of EUR 2-15 for Solar Foods through our DCF model scenarios. Due to the early stage of Solar Foods' development, the range is particularly wide and the figures for the next few years do not provide a basis for pricing the stock. At current price levels, we are cautious on the stock due to the unclear strategic direction and lack of financial targets. Solar Foods currently has no financial targets and given the nature of an early-stage company, strategic priorities can change quickly, making the upcoming CMD particularly interesting. As the price action is entirely narrative-driven at this stage, we see news flow, investor sentiment and changes in financing availability as the key near-term drivers of the stock.