Valmet to become Spinnova's exclusive partner for the delivery of process equipment

Translation: Original comment published in Finnish on 8/13/2024 at 7:24 am EEST.

We find the exclusive partnership promising from the perspective of both companies. From Spinnova's point of view, Valmet's fiber expertise, resources and solvency can facilitate the work to lower the investment and operational costs of the technology and increase credibility in the eyes of technology customers. On the other hand, deliveries based on Spinnova's technology can create a significant new growth opportunity for Valmet, especially in the field of equipment business.

Exclusivity limited both in scope and in time

Spinnova announced yesterday that it had signed a partnership agreement with Valmet. According to the agreement, Spinnova has appointed Valmet as its exclusive partner to supply process equipment to Spinnova's technology customers. The exclusivity is limited in time and scope and includes an exclusivity fee based on realized project deliveries.  Spinnova does not expect this to have a material impact on its 2024 financials.

Valmet has previously supplied drying technology for Woodspin's factory, a joint venture between Spinnova and Suzano. Spinnova and Valmet will continue to work together to increase the competitiveness of fiber production technology by lowering the capital and operational costs of fiber production.

We find Valmet to be a good partner for Spinnova's equipment deliveries

We did not find the news particularly surprising, as the companies have worked together before. In our opinion, it is justified from Spinnova's point of view to grant exclusive equipment manufacturing rights to a partner such as Valmet, since Valmet, with its long experience in fiber technologies and systematic improvements in production efficiency, is likely to contribute to lowering the production and investment costs of Spinnova's technology. These, in turn, are key factors for the long-term competitiveness and establishment of a relevant market size for Spinnova's technology as a whole. In addition, as a financially sound player accustomed to large projects, the counterparty risks associated with Valmet (i.e. the equipment supplier) are limited for Spinnova's technology customers. This is important for customers to minimize the overall risk profile of economically significant factory investments (i.e. total investments in industrial factories are probably in the range of hundreds of millions and equipment is a significant part of this).

Our initial assessment is that Valmet's exclusivity will apply to raw materials based on wood pulp and possibly also recycled textiles. We estimate that these raw materials will account for the majority of Spinnova's technology deliveries over the next decade.

The exclusivity fee in the deal was a small positive surprise

Our forecasts for Spinnova have so far not included exclusivity fees from equipment suppliers as such, so the inclusion of these in the Spinnova-Valmet deal is, in our view, somewhat positive news for Spinnova. However, margins on large equipment projects are typically quite thin, so we do not expect the exclusivity fee to be substantial, at least for the time being. Given the considerable uncertainty surrounding the magnitude of Spinnova's estimated income streams, the exclusivity fee does not put immediate upward pressure on our forecasts for Spinnova. We estimate that Spinnova will start to receive the exclusivity fee from Valmet in 2025 or 2026, which of course assumes that the first factory project under Suzano's letter of intent will proceed roughly on schedule to the investment decision and then to the equipment delivery phase.

The initiation of coverage report on Spinnova, published in May, is still very topical and freely available here. A video interview with Tuomas Oijala, CEO of Spinnova, conducted in June can be viewed here (subtitled in English). 

We think the agreement also looks good from Valmet's point of view

From Valmet's perspective, we believe that the apparel value chain is an interesting opportunity for the company, as the associated fiber technology is related to a technology that the company is very familiar with from the paper and pulp industry. This should give Valmet an advantage over many potential competitors in the industry in terms of new technologies such as Spinnova, as well as synergies with existing operations. New technologies in the apparel industry also have the potential to grow into a market of significant size on Valmet's scale, and we estimate that Spinnova's technology deliveries alone could generate billions in cumulative revenue for equipment suppliers over the next 10 years if Spinnova's growth strategy is successful. After the factory investments, the segment would also offer growth opportunities for Valmet in the service business (maintenance). Therefore, we believe that investing in the segment and the exclusivity agreement makes sense from Valmet's point of view as well.