A Tale of two Solazymes: SZYM reports for Q1 and the analysts offer cheers, jeers

May 6, 2014 |

Rockin’ on at Clinton/Galva, and start-up delays in Moema. Which storyline is for you?

It was the best of times, it was the worst of times, depnding on which analyst you follow. With price targets ranging from $4 to $18 — and warnings from one end over delays at Moema, compared to happy celebration of new customer wins at the other.

Let’s take a look at the hard data.

In California, Solazyme announced Q1 2014 revenue of $12.4M compared with $6.7 million in Q1 2013, an increase of 85%. Q1 GAAP net loss was $34.7M, which compares with a net loss of $26.5 million for Q1 2013

Recent Business Highlights

Solazyme reports:

Unilever commercial production of Lux soap featuring Solazyme algal oil. Last week, our partner Unilever announced that it has incorporated our sustainable algal oil into one of Unilever’s premier soap brands, Lux. The soap has been on store shelves in Brazil since early March.

Commercialization progress at Clinton/Galva continues. Since late February Solazyme has doubled the number of customers purchasing ingredients manufactured at the Clinton/Galva facilities. Additionally, the Company is filling repeat orders, demonstrating strong progress in building trust and reliability of supply.

Encapso lubricants launched in oil field services market. Solazyme’s first-of-its-kind encapsulated lubricant, Encapso, was launched into the oil field services market in March. Solazyme is working with multiple drilling operators and customers, including some repeat end customers, to rapidly expand commercial use and testing. Encapso lubricants have been used in about 20 wells to date, a 50% increase in well-count in just a few weeks, and has already been used in six basins.

Algenist launched in Nordstrom stores. In April, Solazyme reported that its award-winning anti-aging skin care brand, Algenist, is available for sale in select Nordstrom locations nationwide and on the retailer’s website. The Algenist line is featured as part of Nordstrom’s “Advanced Skincare” category.

Raised $202.8 million in hybrid financing. On April 1, 2014, Solazyme announced the closing of its sale of 5,750,000 shares of its common stock, and $149.5 million aggregate principal amount of 5.00% Convertible Senior Subordinated Notes due 2019. Aggregate estimated net proceeds from the hybrid offering were $202.8 million.

Delays at Moema

Commissioning is continuing at the Moema facility, production equipment fermentation through Encapso downstream is commissioned…and in fact, we’ve successfully inoculated fermentation in the 625,000 liter fermenters multiple times. However, our facility has been experiencing, intermitting power and steam availability resulting from the start-up of a new cogent facility at the adjoining Moema sugar mill.

On the call, Raymond James energy analyst Pavel Molchanov asked, “Had it not been for the disrupted power supply from the cogen plant at the sugar mill, would you have made the original timetable for starting up Moema?”

Wolfson replied, “[We believe that had] we had consistent power and steam, we would have produced first commercial product by now absolutely, yes.” He later added: “It’s a big disappointment, not to be able to report from our first commercial product for Moema today. We were really hoping to do that right up to the wire. But as we’ve said many times, starting a large industrial facility can be an unpredictable process.”

On fuels, going forward

The area where I think Solazyme can play an important role in commercialization of the advanced biofuels today is in the area of higher value blend stock provision. Today, we believe the area where we can make an impact, given economics and opportunity and margin is really on the blend stock side. down the road, we certainly are – hope we’re able to provide straight neat fuels and much larger volumes.

On the future with Bunge

Our joint venture is with Bunge Limited and Bunge Global Innovations and not with the sugar and bioenergy business. and we’ve been assured by leadership at Bunge that the JV is directly strategic to Bunge.

The Analysts disagree

Rob Stone, Cowen & Company
Price target $18.00 (unchanged). “The Q1:14 loss was wider than St. (lower revenue, higher expenses) and Moema had some mechanical delays. However, commercialization progress included: Clinton shipping four products and 2x as many customers, Algenist expanded distribution to Nordstrom, a food oil completed the GRAS regulatory process, Unilever began shipping a soap using SZYM oil, and Encapso expanded to 20 wells.

Pavel Molchanov, Raymond James
Price target $12.50. “The versatility of Solazyme’s algae-produced oils has created a wide range of opportunities across the chemical, personal care and nutrition markets, and longer-term, fuels as well. While fully recognizing the inherent execution risks in early-stage industrial biotech, the key inflection point for scale-up has arrived in 2014. The balance sheet is also in great shape, with by far the largest cash balance in the peer group, implying optionality of yet-to-be-disclosed growth initiatives. We reiterate our Outperform rating, and Solazyme remains our top pick in the space.”

Mike Ritzenthaler, Piper Jaffray
We maintain our Underweight rating and $4 target…Moema’s startup was delayed and the company again missed its target to produce commercial oils from the plant due to inconsistent and unreliable utility service. These issues will likely get fixed, ultimately, but they also importantly underscore that Solazyme is not immune to startup problems that have plagued several others in the industry, and therefore the lofty valuation ascribed in the market is unwarranted at this time. $310 million in cash is a positive but we remain cautious on the significant burn rate ($34 million in Q1), lack of firm supply agreements, and partner risks potentially facing the SB Oils JV.

The bottom line

Who’s right, the pessimists or the optimists?

Well, we started out with Dickens and A Tale of Two Cities, and we’ll end with a pair of quotes therefrom:

“Although it is a long time on the road, it is on the road and coming.”

“They never could lay their heads upon their pillows…never tolerate the idea of their wives laying their heads upon their pillows…never endure the notion of their children laying their heads on their pillows…there never more could be…any laying of heads upon pillows at all, unless the prisoner’s head was taken off.”

Note: Our thanks to Seeking Alpha for permission to quote from the earnings call transcript, which is here. 

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