Solazyme double take? Analysts split over Q1 earnings, company update

| May 9, 2012

Yesterday, following the Solazyme earnings call, highly differentiated viewpoints were released by key analysts covering the stock.

The view from Raymond James

Raymond James’ Pavel Molchanov wrote, “The adjusted earnings per share of $(0.21) topped our $(0.29) estimate and the Street’s $(0.30). Revenue of $13.6 million, while down sequentially, topped our estimate by 5%. What we especially like is that the beat came purely from product sales (rather than
R&D and licensing revenue). Year-to-date, Algenist sales have doubled from 2011 levels. In April, Solazyme finalized its JV with agribusiness giant Bunge (BG) for its first Brazilian production facility to be co-located at Bunge’s Moema sugar mill.

“Last week, Solazyme signed a contingent offtake agreement with Dow Chemical aimed at dielectric fluid applications. Deliveries are expected to begin in 2H13, and pricing is partly tied to feedstock costs.The versatility of Solazyme’s algae-produced oils opens the door to wide-ranging opportunities across the fuel, chemical, personal care, and nutrition markets. While fully recognizing the inherent execution risks in this early-stage story, we are bullish on Solazyme’s roadmap to commercialization. We reiterate our Outperform rating with a price target of $14.00.”

The Piper Jaffray view

Over at Piper Jaffray, senior analyst Mike Ritzenthaler wrote, ” We maintain our Underweight rating and $9 price target on shares of SZYM following a 1Q12 print that included an adjusted loss per share of -$0.21 on revenues of $13.6 million, versus consensus of -$0.30 on $10.5 million of revenues.

“Incomplete Peoria data points gloss over several important aspects of the scale-up issues, and are still too preliminary from which to draw meaningful conclusions… SRN plant delayed by 3-6 months, capex for Moema escalating for tax errors… We believe that the ‘low pH’ fermentation media that management discussed on the call yesterday may be around pH 5.5 – 6, which, in our view, is not sufficient to create an environment that is hostile to native contaminants.”

Three Takeaways

Solazyme has remained quiet on the differences between the two reports – but a couple of points can be raised.

1. Scale up. Solazyme has confirmed that they have scaled to 128,000 liter fermenters with no loss in yield, based on numerous production runs. A slide in the quarterly results deck gives the tale of the tape.

2. Yield. The company has not released rate, titer and yield figures for some time, last giving a slew of data at the time of its S-1 IPO registration – but has continued to offer general guidance that it is reaching all its commercial milestones.

The Digest generally relies on the serious investment that Bunge has made in the past 12 months, virtually committing its massive Moema plant to support the Solazyme-Bunge JV, as well as committing to cover half the conversion and development costs, as a sign that Solazyme is, indeed, reaching commercial-level scale targets across its key metrics, and Bunge has confirmed, without releasing data, that they support that view.

3. Costs. The company indeed is running into spiraling costs in Brazil – the Moema project is now projected in the $146 million range, up from the original estimate of $90-$110 million given at the time of the company’s IPO.

We have seen rising costs in Brazil for all near-term projects, generally relating to a strong uptick in Brazilian construction as a flow-through from development around the upcoming World Cup and the 2016 Olympics., and there are going to be equipment shortages that will force developers to import technology, which will trigger import taxes, and that’s going to add to production costs. Also worth noting that the Bunge-Solazyme JV have confirmed elsewhere that they have added capabilities to their proposed system to increase production time from the 250-260 crush season range up to 300 days per year.

Overall, given the expected availability of debt on the Bunge-Solazyme JV project, and Bunge’s commitment to fund its half, readers should expect Solazyme’s share of the equity cost of the project to fall somewhere in the $25-$30 million range.

Our take? Not a huge flag for Solazyme on this project, but rising costs may well be a factor on future projects in Brazil, for Solazyme and other companies, through the 2016 period as Brazilian growth surges.

The Bigger News, a new oil platform

From the Digest’s view, the focus on short-term prospects and projects that have firm customer orders attached to them by all Solazyme analysts, overlooks the key takeaway from the Q1 investor update, which is the development of a new oil platform by the company.

The new oil profile – which is nameless so far as we know, to this point, features high oleic and saturate levels and is absent any polyunsaturates. It’s been a high-value target for companies developing plant-based oils for some time, and until this point was unsolved as a commercial proposition.

OK, why is high oleic content important? According to DuPont, high oleic content makes the oil extremely stable, eliminating the need for partial hydrogenation. What’s the issue with partial hydrogenation? “It’s a  process that increases oil stability and lengthens the shelf life of packaged foods but, unfortunately, produces unhealthy trans fats,” adds Dupont. A slide shows the comparison between the Solazyme oil and its competitors from the plant world.

Two points – one, we see massively faster, cheaper development, Two, we see a high-performance, high-value molecule coming forward. To the Digest, this was the key takeaway from the Q1 presentation.



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