Disruptive Technology Stocks

[Tommy]

$BIOA - BioAmber: A Disruptive Green Tech Platform With Attractive Upside And Sizeable Cash Cushion

http://seekingalpha.com/article/1753632-bioamber-a-disruptive-green-tech-platform-with-attractive-upside-and-sizeable-cash-cushion?source=feed

Thesis: BioAmber (BIOA) is a differentiated player in the green chemicals space, with a low-cost and disruptive technology platform that already has industry partners in hand, and is on the cusp of scaling to service an industry that is eager to adopt usage of its renewable feedstocks. This article will outline brief background (which is more fully explained on the website & investor deck), but notably, to provide my outlook on the risk/reward at current levels- which I believe is attractive with limited downside from here.

Brief Corporate History

BioAmber was established in December 2008 as DNP Green Technology, when the succinic acid assets were spun off from Diversified Natural Products. Following the spin off, the company's shares were distributed to Diversified Natural Product's shareholders, making BioAmber a standalone legal entity with no ties to Diversified Natural Products.

In the fall of 2009, DNP Green Technology completed a $12 million financing and then in the fall of 2010, DNP Green Technology acquired 100% of the shares of its Bioamber joint venture from ARD. DNP Green Technology changed its name to BioAmber Inc. BioAmber raised two additional rounds of capital in 2011 and 2012, with gross proceeds of $75 million, and in May 2013, BioAmber completed its IPO on NYSE & raised $80 million in gross proceeds (with $44m in warrants for common).

Brief Background: Technology Platform

BioAmber is a chemical company. As per its comprehensive Investor Deck, the Company manufactures its bio-succinic acid in a facility using a commercial scale 350,000 liter fermenter in Pomacle, France. Succinic acid is used to manufacture a range of products used every day, including plastics, food additives and personal care products, and can also be used as a building block for a range of derivative chemicals. The Company produces and sells bio-succinic acid using its process for petroleum-derived succinic acid. It also has additional bio-based products under development with partners including bio-succinic acid derivatives, such as BDO, and applications of bio-succinic acid, such as plasticizers, polyurethanes and de-icing solutions.

The real "hook" here in my opinion is that just looking at corn futures of $4 per bushel, the succinic acid cost is basically equivalent to oil being at $25 per barrel which is at least 30% cheaper than its bio competitors. Simply put, BIOA is already operating at commercial scale in France & has worked out commercial processing details thus lowering its commercial scale-up risk and therefore at a major advantage vs. other bio-succinic acid companies (like Gevo INC (GEVO).

3Q Results & Catalyst Pathway.

BIOA reported ~in line results in its 3Q (in August), with revenues of $1m and 9 new customer additions, and noted that it will be burning $6m a quarter. The company also offered a useful update on the bio-succinic acid market, noting that volumes are up in polyurethanes, food, personal care, and coatings, despite prices falling (due to market penetration).

In my opinion, all eyes remain on the Sarnia plant build up and tracking the demonstration plant's yield (in France). Sarnia is scheduled to be completed by year end '14 and with it, a $125m CapEx project completion across 2 phases. Until then, I expect the market to focus on new customer additions- to date, named customers have included Brenntag (Succinic Acid, BDO) (BNR: ETR) , IMCD (Succinic acid in EU).

The company already has licensing from Cargill and DuPont, has partners with Mitsui (MITSY.PK) on production, and has customers including Lanxess (LXS: FRA).

Risk/Reward Outlook

Part of the decline in BIOA since the IPO is due to a perceived overhang from another capital raise necessary to fully fund the Sarnia facility. With management commentary that it will burn $6m per quarter in burn, and the projected Sarnia 'go live' in YE '14, it appears reasonable that BIOA can actually turn cash positive without a raise. Specifically, with $103m in cash exiting 3Q (after $72m from IPO and $25m from Hercules revolver), the company will exit 2014 with about $75m left, assuming it does not get any governmental loans (non dilutive, and can be $25-30m), partner contributions from Mitsui ($20m or so).

In scanning consensus (sell side estimates), it appears the Street is looking for revenues of $40m in '15, then ramping to $80m in '16 and $125m in '17- at these levels, EPS turns positive in '17 and cash burn is $27m in '15, and only $6m in '16. This yields an ample cash buffer at these proposed burn rates of about $40-50mm at the trough exiting the revenue ramp in late '15 before tapping these additional lines mentioned.

At the CURRENT share count, that provides you with a TROUGH cash balance of $3.50 per share; in the out years, it likely falls to about $2 per share (assuming share count comes in at 25mm in '15-'16).

As such, assuming the company continues to sign customers at a modest pace, the worst case scenario is that the stock is dead money for the next year ahead of any inflection ahead of the plant, i.e. that timing will most likely not slip significantly until close to the completion time- therefore the bear case for the next 12-18 months should be set around $5, which reflects the current cash balance ($5.50 per share) less a discount for forward burn rate- i.e. -25% from current levels, but likely a hard floor

On the upside scenario, assuming that the Sarnia OpEx comes in ahead of schedule, burn is reduced, and the company can generate increased customer interest and named signings, an ostensible scenario could yield a share price north of $12 (for reference, Pac Crest has target of $11, Credit Suisse has a target of $15, Societe General has a target of $22), which only includes the forward value of Sarnia at projected top line growth rates. BIOA is differentiated vs. peers in that it has a platform that can scale, has a fully funded model, and a lower break even level.