EBIOSS has reported half-year revenues that contracted 42% to 1.77m as strategic measures had been taken by the company that delayed the invoicing and consolidation of many projects which are either under negotiation or in advanced stages of development.
The decrease in revenues also generated a decrease in cost of goods sold (COGS), which have been under control as they contracted by 47.4% to 1.96m. However, an increase of +11.97% in employee benefits, added to a +48% yoy increase in depreciation expenses and a +49% increase in other expenses, have pushed operating profit further into red territory to -3.5m. In addition, a +106% increase in financial expenses has reduced profit before tax by 22.8% to -4.3m. With -1m in losses being attributable to minority interests, then the group posted a net income loss of -3.22m in the first half of the year (down 34.7%).
As a result, given the negotiation delays and the lack of visibility in terms of the expected contract signatures, the group has decided to drop its current business plan and extend the timeline for the capital increase that was supposed to be completed by 12 December 2017.
Moreover, EBIOSS Energy is currently in a Reverse Takeover (RTO) negotiations whereby its Irish subsidiary EQTEC plc, held at 50.03% by the company, would buy the Spanish engineering arm for gasification projects (EQTEC Iberia) held also by EBIOSS at 67%. The agreement for the negotiations had been signed on July 2017 and since that date the EQTEC plc shares have been frozen.
Despite the weak P&L performance, operating cash flows remained relatively stable (+1.5%), but are still in negative territory at -3.548m. Investment was cut by 61% to 330k, while net cash flows from financing activities increased by 3.95m, mainly driven by the 1.14m capital increase and 3.85m from the issue of corporate bonds, which allowed free cash flows to be stable at +35k. As a result, net debt increased to 27.4m (+36.8% ytd), while equity levels contracted by 3.7bn to 29.19m (-11.3% ytd).
The lowering of the yearly objectives can be explained by the weak degree of fulfillment of previous expectations both at the revenue and operating profit level with only 4% of expected revenues achieved and -97% in operating profit (FY17 now expected with 38.7m in revenues and 3.6m in operating profit).
The timing delays on the projects under development is in part related to EBIOSS’s strategic partner China Energy, as the latter has not completed the necessary financial structuring of two different projects in the UK that have a combined investment of 211m. The expected closure of the financing structure is now expected to be achieved in March 2018, the date at which EBIOSS’s engineering arm EQTEC Iberia would start to invoice the services provided for the projects.
Once the financing of the UK projects is achieved, further projects under negotiation with various strategic partners are expected to advance according to previous expectations. However, this implies that both our 2018 and 2019 forecasts are most likely to be postponed.
The Reverse Takeover Action (RTO)
In February 2017, EBIOSS Energy bought a 51% stake in the Irish company (React Energy plc) through a debt conversion. React was then renamed EQTEC Plc, which would focus on project development in the UK for either electricity or heat generation through waste gasification technology. Following this, EQTEC Plc had two capital increases for 985,000, while EBIOSS converted 920,717 from debt into shares. Following the transactions, EBIOSS holds 50.03% of EQTEC plc.
This transaction allowed EBIOSS to enter the English capital market while having a pipeline of projects in the country. EQTEC Plc currently has three different projects in the country with a total 28MW of combined capacity split between Newry (4MW), Enfield (12MW) and Claycross (12MW).
If the RTO transaction goes forward, EBIOSS would combine both its gasification subsidiaries under one umbrella, whereby the Irish subsidiary (EQTEC plc) would be owner of the engineering arm, providing vertical integration. Such an integration may provide a consolidation of the know-how under a single subsidiary, providing more effective pricing models and cost optimisation compared to competitors within the sector. The reverse takeover transaction is expected to be completed by the end of November 2017.
We will integrate the results into our model with a most likely downgrade in our target price and recommendation following the drop in 2017 objectives due to the postponement of expected contracts. This should put pressure as well on our 2018 and 2019 objectives, which are likely to be revised downwards due to timing issues.
Nonetheless, we put on hold our update of the target price and recommendation until more visibility is given in the RTO transaction to integrate the financial impact the new structure would have on EBIOSS’s valuation.