Solar Foods CMD: Eyes on the US Health & Performance Nutrition category

Translation: Original published in Finnish on 12/11/2024 at 08:40 am EET

In its CMD, Solar Foods presented its strategic priorities, Solein’s commercialization process, technology projects and its financial targets for 2027-2030 and 2031-2035. We feel the most tangible takeaways from the event were the commercialization process of Solein, where the company is initially focusing on the US Health & Performance Nutrition category and more detailed calculations for the upcoming 02 factory. With the CMD, we see a need for changes in our forecasts and will update them in the coming days.

Milk-based whey protein is the primary product from which Solein aims to take market share

With its first product, Solein, Solar Foods initially focuses on the US Health & Performance Nutrition category. This product category is particularly attractive due to consumers' high liquidity and the good growth outlook of the category. We feel the decision is justified considering Solein's limited production capacity. According to Solar Foods’ estimate, the annual size of the category in question is 300,000–500,000 kilotons in the US, so a market share of one percent would generate revenue of approximately 50-100 MEUR.
 The first product applications that Solar Foods focuses on are powders to be mixed with liquid, protein bars and ready-made protein drinks. For now, milk-based wheyisolate dominates this product category and its prices per kilo are currently around USD 18-20. We expect Solein to resonate well, especially among consumers who limit their use of animal products. At a later stage, the company plans to expand to other product categories and new target markets, but based on management comments, the European or Japanese markets are not expected to open, at least during 2025.

The 02 factory is a significant but modular investment

The planning of Solar Foods’ future 02 factory is already underway and production is scheduled to start in 2028, which would require the construction of the factory to begin in 2026. The planned factory investment of 317 MEUR is modular and implemented in three parts (134 MEUR, 48 MEUR and 135 MEUR), which balances the capital needs. According to the company's calculations, the external financing need for the first 134 MEUR could be cut to 69 MEUR through various operational decisions and if 40 MEUR of the current 76 MEUR of undrawn IPCEI funding were allocated to the factory investment (the rest would be used for operational expenses related to the factory investment). If the remaining 69 MEUR of the factory investment is financed, according to the company's plan, with 50% debt and 50% equity, this would mean an equity requirement of approximately 34.5 MEUR for the first stage of the fixed factory investment. In our view, the modularity of the factory investment provides more leeway in financing. The company did not highlight any new funding sources or other financing arrangements in the event, nor progress in its licensing business, so financing-related risks remain the key threat to the investment story.

According to the company’s estimate, the first stage of the factory would reach 48-55 MEUR in revenue and EBITDA of 57-62%. When completed, the company estimates that the entire factory would generate annual revenue of 192-219 MEUR and EBITDA of 65-69%. According to the company’s estimate, the new 02 factory would turn the Group's EBITDA profitable in 2030, which is in line with our forecasts. Solar Foods’ financial estimates related to the 02 factory assume that Solein’s productivity will be 1.5 kg/m3/hr.

In its CMD, Solar Foods said that it had increased Solein’s productivity at its demonstration plant. This indicator shows the growth rate of Solein inside the bioreactor. In connection with the IPO, Solar Foods produced 1 kg of Solein per the bioreactor's cubic meter. Now the company is announcing that it has reached 1.5 kg, with a target of 2.0 kg/m3/h. The realized leap is huge in the context of the manufacturing industry, and the improvement of this indicator will, in principle, enable larger production at almost fixed costs. With the efficiency leap, the company is planning practical changes in Vehkala’s 01 factory to increase its production capacity from the current 160 tons to 230 tons in 2026.  This would alleviate the commercialization challenges posed by the limited manufacturing capacity of the existing factory.

The financial targets assume that the 02 factory will reach its full capacity in 2033

Solar Foods set separate financial targets for 2027-2030 and 2031-2035. By the end of the current decade, the company aims for revenue of approximately 110 MEUR and EBITDA of around 38 MEUR. By 2035, the company aims to generate some 220 MEUR in revenue and 116 MEUR annual EBITDA. Contrary to our expectations, the company’s longer-term growth target is to be achieved with one larger modular factory. Although the upcoming 02 factory turns profitable at EBITDA level in 2030, it will only reach full capacity utilization in 2033. When comparing the financial targets to our forecasts, it should be noted that the targets set by the company do not include new factories, space business or licensing revenue after 2030. According to the company, its objectives for space and licensing revenue are unchanged but we believe that this highlights the strategic focus on producing Solein from the company’s own balance sheet in the next few years.