Spinnova: Destabilized by the delay, but not knocked out yet

Translation: Original published in Finnish on 11/28/2024 at 9:03 am EET.

We lower our target price for Spinnova to EUR 1.10 (was EUR 2.00), as the company's announcement last week of a delay in the 20,000-ton factory plan with Suzano shifted our projections and increased our required return. While a setback at the very first tangible checkpoint of the new strategy was a clear disappointment for us and a concrete reminder of the risks associated with early-stage businesses, we believe that Spinnova and Suzano will be able to overcome the techno-economic challenges in less than a year. We think that this scenario would offer good return potential from a drastically reduced enterprise value (2024e: EV 12 MEUR), so we reiterate our Accumulate recommendation for the company. However, the risk level of investing in the company is now high. 

Suzano's investment in SPINNOVA® fiber production will not move to the next phase this year

Last week, Spinnova reported that the factory project of about 20,000 tons planned by Suzano for the production of SPINNOVA® fiber has been delayed due to the fact that the target parameters required to move to pre-engineering have not been reached within the original timeline. In practice, Spinnova and Suzano will not be able to secure process efficiency metrics at the targeted capital and operating expenditure levels this year. Yet this was a prerequisite for the project to move into the pre-engineering phase, which would bring revenue to Spinnova. Spinnova did not provide a new timeline for the completion of the process. Based on the comments in the press release and the lack of a timetable, we suspect that the root cause of the unresolved issues lies in the raw material side of the project, namely the properties of the microfibrillated cellulose, for which Suzano is responsible. This is a critical issue for Spinnova's growth trajectory, as reducing the investment and production costs associated with its technology is a prerequisite for the successful commercialization of the company's technology in both the short and long term. Thus, the penalty loop at the first checkpoint of the new strategy understandably spooked investors and also reminded them of the worst-case scenarios, although we believe that the problems can be solved in the light of current knowledge.  

We pushed back our revenue estimates for Suzano by roughly one year

Due to the delay, we pushed back our forecasts for Spinnova's projects with Suzano by about one year for almost the entire forecast horizon, as we do not expect Suzano to advance multiple high-risk projects at the same time, at least in this decade. We did not update our estimates for other cellulose (incl. apparel fiber) and leather waste projects, as we do not expect the delay to be relevant to them and their commercialization is progressing at a slower pace in our forecasts compared to the commercialization of wood pulp material (i.e., Suzano projects), which has been the most advanced. As a result of these changes, our revenue forecasts for Spinnova this year and next have been reduced by approximately 70% and the company's rise to positive EBIT has been delayed by one year to 2030 (vs. the company's continued target of positive EBIT in 2028-2030). Our predictions for the 2030s have also shifted slightly forward.

As the bar gets lower, high risks are not enough to scare off a greedy investor

We raised the required return used in our valuation of Spinnova significantly, as the threat of longer delays than our assumptions has become tangible due to the lack of a timeline and the probability of the worst-case scenario (i.e. failure of the development) has also increased. With an estimated enterprise value of around 12 MEUR at the end of the current year (e.g. DCF around EUR 1.3/share), we consider the earnings potential of the stock to be cautiously attractive, even considering the risks. However, investing in the company requires patience and a high risk tolerance, as there is still a long and rocky road ahead before reaching the scalable growth phase enabled by the business model and market size.