WellInvestmentsResearch
www.wellinvestmentsresearch.com
[email protected]
DirectorofResearch:YukiArai
euglena(2931):
AOne-TrickOrganism
WithoutFuelforGrowth
January19,2017
1
Summary:Stockis55%-65%Overvalued
• euglenaisaCo.thatdreamsbig.Itseemstohavemadeinvestorsbelieveinitsdreamsandoverlookrealities,
whichhasinflatedsharestofairytalelevels.Weexaminedtheco.’sstrategyandfounditutterlyunconvincing.
• Co.saysitsmajorvalueliesinbeingafuturesupplierofbiofuel,especiallyforairplanes.Therealityisthatthe
costofproducingalgae-basedbiofuelremainat$300to$1,000perbarrelofcrudeoilequivalent.Costswon’t
droptocompetitivelevelsattestfacilitiesuntilatleast2022,accordingtotheU.S.DepartmentofEnergy.
• Co.statesitsplanstolaunchcommercialbiofuelsalesby2020.Atthesametime,itreportsthatitspreliminary
testfacilityisalreadybehindscheduleandwon’tstartoperatinguntil2019.
• Co.’stestfacility(oncecomplete)willproduceonlyenoughbiofuelfor1airplanetoflyTokyo-Osakaandback.
• Co.hasnopatentsprotectingitstechnological“advantage.”Bigger,better-capitalizedJapanesecompaniesare
startingtoenterthemarket.
• U.S.rivalshavebeatenCo.tocommercializingalgae-basedbiofuel.Despitethis,thestockoflistedU.S.rivalshas
dropped~90%onoilpricedecline.WeexpectCo.’ssharestofollow.
• MajorU.S.biofuelplayersarechangingstrategytohealthsupplements.WequestionCo.’scommitmentto
biofueldevelopmentgiventhezerohopeofprofitinnext5years(basedonCo.’sownover-optimisticstrategy).
• TherealityofCo.’sbusinessisthatitearns99.9%fromhealthfoods,anichethatisclosetosaturation.
2
WhatIsaEuglena?
Euglenahasthepropertiesof
bothaplantandananimaland
livesinfreshandsaltwater.It
usesphotosynthesistomake
oxygen.
Oilstoredintheeuglenabody
producesafuelthatissimilarto
diesel.Forthisreason,euglenabasedfuelhasbeenmixedwith
kerosenetoproducebio-fuelfor
jets.Euglenaisalsousedforother
algae(seaweed)basedproducts.
3
euglena:DreamingofBiofuel,LivingoffSnacks
Dreams
euglenaisayoung
companythatpresents
itselfasaneco-friendly
solutionforenergyneeds
inthe21st century.Its
businessisbasedon
cultivatingeuglena,a
single-cellorganismthat
theco.sayscanbe
appliedtomanyfieldsin
thefuture…
Reality
Asoftodayandthe
nextfewyears,the
onlyrealbusinesses
theco.hasorganized
foritsproductsare:
1)healthfood
2)feedstockforbiofuel
4
Dreams
Reality
euglenasaysthatthecorevalue
ofthecompanyisinbiofuelsas
airlineslookforeco-friendlyand
sustainablealternativestocrude
oil-basedfuel.
Forthenext4-5years,theonly
significantprofittheco.canearn
isfromsellinghealthsnacks.This
segmentrepresents99.9%ofco.
revenue.
5
1.ExaminingReality:GrowthMarket?
o Japan’smarketforhealthfoodsand
supplementsisnotanewmarket
abouttotakeoff.It’salready largeand
mature,growingjust2%ayear.
o That’sbecausethenumberofhealth
foodandsupplementconsumersin
Japanisabout57millionpeople– half
thepopulation!
o Accordingtoeuglenafigures,thesize
ofthemarketnicheinwhichits
productscompeteisjust¥90Bto
¥100B.Thatmeansitssalesaccount
for10%oftheniche,makingfast
growthfromhereonunlikely.
6
euglena’sInitialGrowthFactors:Novelty
euglenaproductshadinitial
successbecause:
1.noveltyofalgaegoods
2.feel-goodPRmessage.
However,theproductsareno
longeranovelty:
1.Otherfirmsmakealgaebasedfoods.
2.Consumertrendchange
quickly.
3.Therearemore“exotic”
healthfoodsonthemarket.
7
But,NoveltyFactorisGone…
Noticethehuge
mediainterestthat
euglenahighlightson
thechikarakun.com
promotional
website…
Itendedabout2-3
yearsago.
8
BiggerCompaniesEnteringHealthFoodsNiche
NewrulespassedbyJapaninlasttwoyearsmakeiteasierfor
companiestoclaimthattheirproductshavehealthbenefits.
AsofOct.2015,120applicationsfornewso-called“functional”
foodswerefiledwiththeConsumerAffairsAgencyofwhich43
camefromcompaniesthathadnevermadefoodbefore.
AmongtheapplicantswereNippon
PaperIndustriesCo.(teathathelps
controlcholesterol)andtextilemaker
Omikenshi Co.(fiber-richflourthat
hasnoglutenorfat).
9
DirectCompetitorinEuglenaCultivation:Kobelco
10
HealthSegmentOutlook:Defense,NotOffense
• euglena’srevenuegrowthinFY16was87%.TheCo.’sownrevenuetargetforFY17
impliesgrowthof35%.WeseethisasthestartofasignificantslowdowninCo.sales–
whichare99.9%reliantonthehealthsegment.
• Co.’smostrecentstockoptionsplanshowsthatmanagementseeprofitgrowthstalling.
Striketermsfor6th seriesplandouble2020revenuetargetto¥30Bfrom¥15Bin5th
series,butretainordinaryprofittargetat¥1B.
• Co.isalreadyamajorplayerinalgae-basedsupplementsandhealthsnacksinJapan.Its
ownfiguresshowsizeofproductnicheis¥90Bto¥100B,whichmeansCo.’ssales
accountfor10%ofmarket.Wedon’tseeCo.maintainingsamefast-growthfromhere
onoutonsaturation.
• Co.haslostthenoveltyfactorforitsproducts.
• Newrivalsareenteringhealthfoodsnicheduetoeasierentryrules.
• Co.hasnotfiledpatentsforalgaecultivation,hencenoprotection.
• KobeSteelunithassetitselfupasadirectrivalineuglena-basedproducts.More
competitionwillleadtolowerprofitmarginsfortheCo.asitsseekstodefendmarket
share.
11
2.ExaminingDreams:NotCostCompetitive
Thepremiseofusing
alternativeoils,including
thosesourcedfromalgae,
tomakebiofuelisbasedon
thembeingareplacement
forgasoline-basedoil.
WTICrudePriceGraph
Theproblemisthatthe
manufacturingcostof
algae-basedoilisaround
$300to$1,000perbarrel
ofcrudeoilequivalent.*
Meanwhiletheabsolute
peakforcrudewas$147
perbarrel.Inmorerecent
months,crudehastraded
at$40-$60perbarrel.
*Sources:JapanPetroleumEnergyCenter,BloombergNewEnergy
Finance,SapphireEnergy,others.
12
2020OilPriceOutlook:$60-$80PerBarrel
TheCo.hassaiditstargetistostart
manufactureofbiofuelin2020.
However,theoutlookforcrudeoilprices
through2020fromsourcessuchasthe
InternationalEnergyAgency,U.S.Energy
InformationAdministration,theWorldBank
andmorethan30investmentbanks,think
tanksandinstitutespointstotheirprice
ranginginthe$60to$80perbbl zone.
Thus,theideathatalgae-basedfuel,whichhasproductioncostsof
$300to$1,000perbbl,cancompetewithcrudeinthenext5-8years
ishardtoimagine.
13
WhenWillAlgaeBiofuelsBegintoCompete?
• TheU.S.DepartmentofEnergyinaMarch2015policy
papersetthegoalforalgae-basedfueltobeproducedat
$3pergallonofgasolineequivalent.Atthatlevel,the
DoEbelievesalgae-basedfuelcancompetewithgasoline
derivedoilcosting$75to$90perbarrel.
• Whenwillthishappen?TheDoEreportlistsa2022
deadlineforvalidatingdemonstration technologythat
canoperateatthedesired$3pergallonlevel.
• ExxonMobileismorepessimistic.Theoilmajorscrapped
a$600millioninvestmentprogramintoalgaejustthree
orsoyearsago,sayingthiskindofproductis25years
away frommainstreamsuccess.
• Plus,whenalgae-basedfuelisfinallycompetitive,itwill
stillneedtocompeteonpricewithotheralternative
energysourcessuchasshaleoil,whichisalreadycostcompetitivewithconventionalcrude.
14
Co.’sBiofuelPlantisRunningBehindSchedule
InaDec.1,2015pressrelease,theCo.
announceditwillcommercializealgaebasedjetfuelby2020.
Theplanwasbasedontheconstruction
ofademonstrationfacilityduetocome
onlinebyearly2018.
Lessthanayearlater,onAug.12,2016,
theCo.announcesthattheplanwas
behindschedule:thedemonstration
plantwouldnotbeoperationaluntil1H
2019.
DemonstrationPlant:
Itsentireoutput,basedonastandard
90%kerosene/10%algae-based
biofuelmix,wouldbeenoughfora
singleairplanetomakeonereturn
flightaweekbetweenTokyoand
Osaka,accordingtotheestimates
fromANAHoldings,apotentialbuyer
ofeuglena’sproduct.
Thiseffectivelymakesanyhopeof
achievingcommercial-scaleproduction
by2020completelylaughable.
15
WillBiofuelBringinBetterProfitMargins?
o
Onitswebsite,theCo.saysthatbiofuelhasthe
lowestunitcostbasedonproductionvolumes.See
thecostsperformancepyramidfromCo.’swebsite
totheleft.Healthcare(“Food”inthepyramid)has
thehighest.
o
If“Fuel”haslowercosts,whywouldthattranslate
intobetterprofitmarginsthanhealthcare?Airlines
areunlikelytopayeuglenahighermarginsforbulk
volumethanconsumersbuyingafewhealthsnacks.
So,ifbiofuelsdonotofferbettermargins,surelythe
developmentofthatbusinessspellsadropinCo.
overallprofitability.
16
DomesticRivalsinBiofuelHaveMoreResources
TheCo.isnotaloneinseekingto
commercializethemanufactureof
algae-basedbiofuel.Japaneserivals
includeIHICorp.,J-Power,Toyota
Motors-affiliateDensoCorp.,and
DICCorp.
Thosefourrivalsaimtoreachthe
goalofcommercialsalesatthesame
timeastheCo.andtheyhave
greaterresources.
Source:Nikkei
17
U.S.RivalsAlreadyatCommercializationStage
Companiesinthe
U.S.,wherealgaebasedbiofuel
researchhasbeen
ongoingfor30+
years,havealready
achieved
commercialization.
Totherightarejusta
fewoftheexamples.
Despitethis,
SapphireEnergy
reportedinFeb.
2015thatitscostof
productionwasstill
$26pergallon,which
is$1,000percrude
oilbarrelequivalent.
Name
TerraVia
(formerly
Solazyme)
SapphireEnergy
Founded
Partner
2003
Chevron
Unilever
2007
DOE
Monsanto
Technology
Cultivationofhighoilcontent
algaewithoutuseof
photosynthesisviaspecial
microalgae
Civilianplaneloadedwitha
fuelthathad40%algaesourcedoilcontent
completeda1,500kmflight
Manufactureofalgae-basedoil
usingspecialalgaeand
photosynthesis
Afterraising$300millionin
financingbuilttheworld’s
firstalgae-derivedbiofuel
commercial-scaletest
facility,whichhasbeenin
operationsinceAugust2012
Manufactureofethanolfrom
DowChemical
microalgaethatarecultivatedin
RelianceIndustries
tanksfilledwithseawater
Algenol BioTech
2006
Cellana
2004
RoyalDutchShell
Synthetic
Genomics
2005
ExxonMobil
Results
Manufactureofalgae-basedoil
throughmicroalgaeand
photosynthesis
Builtademonstrationplant
nexttoRelianceIndustry’s
JamnagarRefineryinIndia
(nowinoperation).Hasa
Floridatestfacility.
Demonstrationplantin
HawaiiStateoperatingsince
2009
Initial$600Mplantobeona
Manufactureofbiofuelfromalgae
commercialscaleputon
grownusingphotosynthesis
pause
18
U.S.BiofuelRivalsChangeStrategyasStocksFall
Giventheun-competitivecostsandoutlook
foralgae-basedbiofuels,thebiggestU.S.
companiesinthefield(TerraVia andSapphire
Energy)arechangingstrategytofocusmore
onvalue-addhealthfoodsandsupplements.
TerraVia StockComparedwithWTICrudePrice
ThisisexactlythereverseofCo.’sstrategy!
InvestorsshouldasktheCo.ifitstillbelieves
thatitsbiofuelsbusinesshasaviablefuture
inthenext5-8years.
Source:Bloomberg
It’sinterestingtonotewhathashappenedtothestockpriceofTerraVia,oneofthefewlisted
companiesinthealgae-basedbiofuelindustry.SincethecrudepricedropTerraVia stocksis
down90%.Aseuglena’sfuturevalueisjudgedtobeinitsbiofuelbusiness,webelieveasimilar
fateawaitseuglenashares.
19
euglenaFinancialsandStockPerformance
Sales/NetProfitMarginandGrowthRate
Shareprice
売上・当期純利益／成⻑率の推移
ユーグレナ社の株価推移
¥160
350%
¥140
300%
¥120
250%
200%
¥100
¥3,000
¥2,500
¥2,000
150%
¥80
100%
¥60
50%
¥40
0%
¥20
-50%
¥1,500
¥1,000
¥500
-100%
¥0
Sep-13
Sep-14
売上
Legend:
Blue
Orange
Yellow
Navy
Sep-15
当期純利益
Sep-16
利益成長率
- Revenue
- NetMargin%
- ProfitGrowth%
- SalesGrowth%
Sep-17(予)
売上成⻑率
¥0
Oct-12
May-13
Nov-13
Jun-14
Dec-14
Jul-15
Jan-16
Aug-16
Mar-17
20
Valuation
• Givenhowfaroutpotential profitfromCo.’sbiofuelbusiness
lies,webelieveeuglenashouldbevaluedsolelyonthebasisof
itsHealthcaredivision(whichgenerates99.9%ofrevenue).
• AsofJan.17,euglenatradedatapricetoearningsratioof150.
Thisisfarbeyondtheratioscompanieswithasimilarbusiness
profileenjoy.Webelieve30xPEwouldbemorethangenerous.
CompanyName
PER
ROE
ROA
MCAP
（inbnyen）
euglenaCo.,Ltd
151.4
5.2
5.5
102.9
MorishitaJintanCo.,Ltd
27.01
4.7
3.1
11.5
AMSLifeScienceCo.,Ltd
26.66
5.2
2.3
10.1
Nippi.Inc.
5.84
7.8
3.0
11.6
• Underthemostbullishscenariowecanimagine,euglena
maintainsitstopmargins– 15%,from2Q16– andachieves
annualrevenuetargetof¥15BinFY2017.Ifthat’sthecasewe
estimateitwillpostannualOPof¥2.25BandannualNPof
¥1.6B(¥19.36pershare*).
*Note:thisNPestimateisactuallymorethandoublewhattheCo.forecastsforFY17
METHOD1:
WetakethemostbullishNP
estimateof¥1.6Bandapplythe
generous30xPE.Thatgivesus
MCAPof¥48B(¥580pershare).
METHOD2:
Wetakethe2020revenuetarget
(¥30B)fromCo.’slatestmid-term
strategyandassumeithassame
ratiotoNPasinpreviousstrategy
(4.6%).Usingthe2020revenue
targetnumber:
Rev¥30B×4.6%margin×30xPE
ratio=MCAPof¥41.4B(¥500per
share).
21
Summary
• euglenahasonlyonebusiness(Healthcare)thatgeneratesrevenue/profitand
thiswillnotsignificantlychangeinthenext4-5years
• euglena’sfast-growth inthatonebusinessisstartingtoslowandweexpectprofit
marginstobegintocontractwithincreasingcompetition
• euglena’sspendingonbiofuel developmentisburningcashand unlikelytoprovide
anyreturnsforinvestorsinthenext5-8years
• euglenatechnologyhasnopatentprotectionanditsbiofueldivisioniscompeting
withrivals thatenjoymuchlargerresources
• Thestockismassivelyover-valuedat150xPE ifwevalueagainstotherhealthcare
firms.IfwecompareVslistedbiofuelrivals(TerraVia)thenstockshouldfollowoil
pricedrop.Overall,weseeFairPricetarget55%-60%belowcurrentshareprice.
• Webelievethemarketinnearfuturewillrevisitassumptionsonco.’sbusiness
andfuturepotential,puttingconsiderabledownwardpressureonthestock.
22