Story Stock Syndrome: Biobased companies fight investor disbelief

| November 7, 2012

With every step towards commercialization, early-stage companies find the skeptics, ironically, piling up. Why, and what can be done about it?

There’s been an awful lot of coverage of what analysts term “early-stage multiple compression” among renewables stocks, of late. That’s analyst-speak for situations where prices are in free-fall even when the fundamentals such as discounted cash flow, earnings and revenues are not.

On the other hand, perceptions of a sector in a retreat that has something in common with Napoleon’s withdrawal from Russia – well, those may be perceptions rather than realities, especially for investors who took a balanced approach to investing in the renewables sector.

Those who took, for example, a basket of stocks that mirrored the Biofuels Digest Index – those stocks are down 15 percent in the past 12 months and only 1.5 percent off for the 13-month period – (a big October rally took place in the sector last year).

One of the reasons for the drift in valuations has been a perception that delays in ramp-up at Amyris, Gevo may be signs that expectations on scale-up across the sector are either exaggerated or, worse, unfounded. Certainly, the situation at Amyris – where bullish ramp-up was replaced with a wholesale withdrawal of guidance – gave legitimate cause for some free-fall in AMRS shares.

The slowdowns at Gevo, however, have not convinced analysts that the stock is doomed – rather, that scale-up of industrial process should be looked at as a journey rather than as a precisely scheduled set of red-letter dates in the calendar. Gevo’s expectations of operating cash flow – generally expected in 2015 – are so far off that the drift in the stock is generally tied to the timing of isobutanol conversions at scale (at its initial Luverne plant and, later, at Redfield). Investors have pounded Gevo even while sector analysts have continued to recommend the stock.

The bummed-out feelings about the sector appear to have infected Solazyme as well, even though they have no major scale-up events scheduled for this period – and have generally tracked in their progress towards scale according to their guidance.

The downturn in SZYM prompted energy analyst Pavel Molchanov at Raymond James to write:

“We are taking this opportunity to reiterate our Outperform on Solazyme after a 25% decline in the stock (including 16 out of 20 down days) since the end of September. In the context of an extraordinarily risk-averse market, we see this as a textbook case of multiple compression for a pre-earnings company, pure and simple. We see three specific factors at work here, none of which have any bearing on company fundamentals.

“First, this is a proverbial “story stock,” and in the absence of any newsflow (other than the hiring of a COO) since the 2Q12 call nearly three months ago, a stock like this would naturally have a tendency to drift lower. Second, following last month’s disclosure by Gevo of delays in scaling up fermentation, we sense that some investors are fearful of analogous difficulties at Solazyme. Third, we have also heard from some current (and potential) shareholders that they are concerned about the insider selling in recent weeks.”

Earnings time at DSM

Meanwhile, earnings data for Q3 is coming in, most recently for DSM, Metabolix and Renewable Energy Group.

At DSM, generally good news, generating Q3 EBITDA of €270 million which included a negative caprolactam related impact of €105 million compared to Q3 2011.Cash provided by operating activities amounted to €547 million during the first three quarters of 2012 versus €479 million during the same period last year. Net debt increased by €839 million compared to year-end 2011 to a level of €1,157 million, mainly due to acquisitions.

Feike Sijbesma, CEO/Chairman of the DSM Managing Board, said: “Despite a challenging global trading environment DSM continued to generate good results mainly driven by our Nutrition cluster. We continued to make good progress towards our strategic goals with the purchase of Tortuga and Cargill’s cultures and enzymes business. We have now invested €2.3 billion in acquisitions since the end of 2010, of which €1.9 billion in Nutrition.”

Amyris reports

At Amyris, the company beat the Street’s consensus. Aggregate revenues for the quarter ended September 30, 2012 were $19.1 million versus $36.3 million in the third quarter of 2011. The decline in revenue was due to the company’s planned transition out of the ethanol and ethanol-blended gasoline business, which is now complete. Partially offsetting this decline were increased revenues from renewable products sales and collaborations, primarily related to the amendment of the Company’s collaboration agreement with Total.

Rob Stone at Cowen & Company wrote: “The 22c cash loss/share in Q3 was 41% narrower than the (58c) consensus. Paraiso is in final commissioning, and the planned early 2013 startup should benefit from process and procedure improvements at Tate & Lyle. Business and technology developments are positive, and funding partners (Total and others) are in place to cover cash burn through 2014E. However, a three-year ramp to full scale production lies ahead, and we remain Neutral (2).

Over at REGI

Another strong performer this quarter has been Renewable Energy Group. Revenues for the third quarter were $322.9 million, an increase of 26% compared to revenues of $256.5 million for the same period in 2011. Third quarter 2012 adjusted EBITDA was a loss of $2.3 million, a decrease of 105% compared to $46.7 million for the same period in 2011. Cash totaled $88.3 million at the close of the quarter, compared to $87.1 million at June 30, 2012.

“REG achieved meaningful success in the quarter, even with the adjusted EBITDA loss that was caused by accounting for risk management positions and RIN price declines,” said Daniel J. Oh, President and Chief Executive Officer of REG. “Our revenues continued to increase, our gallons sold were up 40% compared to third quarter 2011, we acquired additional production capacity at an attractive price, and we expanded distribution.”
Oh continued, “With a 2013 Renewable Volume Obligation that is 28% above this year’s, the industry demand outlook is solid. Our acquisition of the New Boston, Texas facility is evidence of our long-term confidence and our commitment to remain a leader in the industry.”

Over at Metabolix

Results were much as expected at Metabolix, with a Q3 loss of $0.23 per share on $674K in revenues.

Of Metabolix’s prospects, energy analyst Mike Ritzenthaler at Piper Jaffray wrote: “While we are encouraged by the progress on new opportunities in PVC and on new capacity with Antibióticos – we remain concerned about market development and whether a sustained demand for PHAs can be developed at the necessary scale for profitability. In addition, we believe the $53.6 million currently on the balance sheet is probably insufficient to build new supply capacity while simultaneously funding adequate marketing efforts before the end of 2014. Management lowered their guidance for cash at EOY 2012 to $47 million (from $48-$50 million previously) but reiterated the expected annual burn rate of $24 million post 2012. We maintain our price target of $2.”

The downward drift at KiOR

KiOR has been falling quite a bit since a report appeared in a local Texas newspaper suggesting a slowdown in the ramp-up at the company’s first commercial-scale plant. The company aggressively discounted the report – but, on the other hand, has suffered from the “story stock syndrome” where news of the progress on scale-up has been coming less quickly than some investors would hope, prompting a sell-off.

The company’s earnings call is scheduled for Thursday and we expect to hear a lot more about scale-up activities then. For now, Cowen & Company analysts Rob Stone and James Medvedeff write: “Investors may be understandably nervous, as some biomaterials peers have struggled to ramp production. However, KIOR’s thermal/catalytic process is not subject to the same challenges as fermentation. KIOR’s BFCC process is a modification of FCC (fluid catalytic cracking), a technology used today in 450 of 650 oil refineries world wide that was first developed during WWII. Some peers (AMRS, Neutral, $2.41 and GEVO, Neutral, $2.00) had issues such as moving from batch to continuous fermentation processes, separation losses, and contamination by other organisms. KIOR’s process is continuous, has been proven in a 10 ton/day demo plant since Q1:10, and the key parameters are reactor temperature and residence time.

Elsewhere in the sector – upside potential at Pacific Ethanol

In recent days, there’s been a bit of a run up on Pacific Ethanol (PEIX) shares. Overall, some of the fundamentals in the ethanol sector have been improved – after a devastating drought sent corn prices sky-high and prompted a wave of capacity reduction across the sector.

One of the bright spots in ethanol has been the rise of corn oil extraction technology. This week, Pacific Ethanol announced it will implement corn oil separation technology at its Stockton plant, representing the second Pacific Ethanol plant to utilize the technology. In June 2012, the company announced the implementation of corn oil separation technology at its Magic Valley plant. The company has awarded Edeniq with a contract for its patented OilPlus technology, which is expected to be implemented at the Stockton plant by the second quarter of 2013.

Neil Koehler, the company’s president and CEO, stated: “Corn oil is a high value co-product for the Pacific Ethanol plants, provides us with further diversification of our revenue streams and contributes additional operating income to the plants. Our Stockton plant is the second of our facilities to implement corn oil separation technology, and we expect to soon award contracts for our two other Pacific Ethanol
plants.”

The bottom line

It’s been a rough patch for renewables investors. A 15 percent downturn over 12 months is, as the saying goes, “not nothing”. However, analysts continue to point to multiple compression, and slowdowns in ramp-up, rather than outright failures. While the sector is so new and filled with start-ups that there is is almost a statistical certainty that some companies will fail, or be merged as the sector consolidates – the intrepid investor may well find throughout this earnings season some seasonal bargains amongst equities where the stories, but not the fundamentals, have gone awry.

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