Solar Foods - Initiation of coverage: Scaling to the top of cellular agriculture

This report is a summary translation of the report “Skaalaamassa solumaatalouden kärkeen” published on 9/12/2024 at 8:50 am EEST.

We initiate our coverage of Solar Foods with a target price of EUR 11.0 and a Sell recommendation. Despite its early stage of development, the company is a leading global player in a rapidly growing and evolving industry. The key risk to the stock is the capital required to scale up production, which we believe will be the dividing line between successful cellular agriculture companies and others. If cellular agriculture delivers, we expect the winners of the industry to be rewarded with significant first-mover advantages and an attractive long-term investment horizon. In our view, the current price level is pricing in the potential of the stock in an unnecessarily premature manner, making the risk/reward ratio weak. 

Primary food production and technology licensing at the heart of the business

Solar Foods is an early-stage food technology company. The company's spearhead product, Solein, is a nutrient-rich single cell protein whose commercialization is at the heart of the company's strategy for the coming years. With the commissioning of Factory 01 at the beginning of the year and access to the US market, the company is in a better position to realize the potential of Solein and hydrogen fermentation technology. At the heart of the scale-up phase are two different business models: the manufacture and sale of Solein to the food industry and the licensing of Solein's manufacturing technology to primary food producers and space operators.  We expect significant capital expenditure requirements to be a bottleneck to industry-wide growth, which is why we see a capital-intensive licensing business that leverages a partner's balance sheet as particularly attractive at this stage of development. Solein's production has also attracted interest in space applications, as evidenced by Solar Foods winning its category in the NASA and CSA Deep Space Challenge this fall.

Cellular agriculture is still in its infancy, but there is plenty of potential for those who can bridge the funding gap

Cellular agriculture is still taking shape, but it is attracting significant interest from a variety of stakeholders. Protein fermentation offers a means to reduce the environmental impact of the food sector, and the industry is expected to grow significantly over the next 10 years. Scaling up production requires significant capital, and Solar Foods' planned industrial-scale plant represents an investment of approximately 150-420 MEUR, depending on its size and location. We believe that partners and public authorities have a key role to play in bridging the funding gap in the industry and the company has received a 110 MEUR IPCEI notification from the EU to expand production. We see companies that cross the financial chasm gaining a clear advantage by building their brands and customer relationships and being able to invest in patents and product development, raising the bar for the next wave of entrants. In our baseline scenario, the company will achieve a revenue of over 700 MEUR in 2040 and an EBIT margin of over 30%, which is high for the food industry, supported by high licensing revenues.

Current share price level is between positive and baseline scenario

Due to the early stage of development, the valuation multiples of the stock will not provide anchor points until the early 2030s, when the upcoming Factory 02 will reach sufficient capacity utilization. Our DCF models based on different commercialization scenarios show a wide range of EUR 2-15 for the value of the share, and in our baseline case the value remains at EUR 9.0. With limited track record and no public financial targets, our confidence in the upper end of the range remains weak and our baseline scenario of a good outcome is not sufficient to justify the current share price.