Africa Energy – excellent update from Pareto conference – valuation impact assessment

Garrett Soden delivered excellent performance at the Pareto Energy conference in Oslo yesterday.

AEC is my top oil company position. I believe it has a potential to triple over the next 12 months.

There is one big difference between AEC and other oil plays. There are many oil companies that have great portfolios and are buying cheaply oil assets from the majors. Where AEC differs is – it has one of the top gas condensate assets that it is intends to sell. Pareto believes the sale chould happen within 12 months. The sales price is most likely a multiple of its current market capitalization. If there is a low risk high return play, it is AEC.

Do watch the presentation, it is only 17 minutes – link is below.

Selected quotes by Garrett Soden, AEC’s CEO:

“Both 11B/12B discoveries are among the top five global discoveries in the last few years”

“…in Block 2B Azinam recently completed a well site survey and identified a semi-submersiblerig to drill a high-impact oil exploration well later this year. We expect to be fully carried on this. … It is very exciting exploration well – according to IHS, it is one of the top highimpact wells for 2021. It has over 300 million barrels of prospective resource. The prospect is relatively lowriskand it is very material to AEC shareholders… We retained 27.5% interest and this alone could be a companymaker. We know there is oil in the basin, and, because of the good commercial terms, we know that discovered oil in South Africa is very valuable and potentially there is a lot here. Across the block, there is up to a billion barrels of prospective resource .”. 

“We focus on South Africa for good reasons….. good commercial terms and very little production of gas right now. South Africa generates 90% of electricity from coal. It signed theParis protocol and wants to diversify its electricity production away from coal to gas. Except for expensive imports, it has few alternatives to do so. Block 11B/12B is the best domestic solution.”

“11B/12B is the best place to have a gas discovery, because you have an existing infrastructure nearby. There is a pipe only 70 km from our discovery, that goes to existing demand with a power generating facility in Mossel bay, that is currently burning expensive diesel…”

Also, there is a gas-to-liquids facility that was previously buying gas at USD 6-7 per Mcf. That production has now been depleted, and the facility is desperate for additional feedstock…”

…11B/12B originally had five giant prospectstextbook examples of what you want to see on seismic. It is the best thing our exploration team has ever seen… Both Brulpadda and Luiperd drilling results were better than expected… Total is now moving to development”

“Total is working on the development concept and negotiating the gas off-take agreement with the government.”

“Pre-drill estimates were above 500 million barrels for each of these prospects. The economics of this are very compelling. Using conservative assumptions of 6 USD per Mcf and 60 USD per barrel… The net present value of this is more than 5 USD per discovered barrel. Just this asset alone is worth a big premium to our current market capitalization.”

“Luiperd drilling results were better than expected. … It is very high-yielding gas condensate. We have excellent reservoir quality… with higher than expected productivity and higher than expected reservoir connectivity we expect to drill fewer drills to produce the resource. That is very positive for the development costs”

“We have de-risked the deposit, the next step is above ground. Total is finalizing the development concept and the gas price negotiations for the off-take agreement.”

“In summary we have net exposure to hundreds of millions of barrels of prospective resource. We have world class assets… we have probably the best exploration team in Africa … I believe we are undervalued. We have a floor value in the development and we have bluesky upside from the exploration.”

“I believe we can more than double our net asset value over the next 12 months and we have plenty of newsflow coming. It is a great time to be watching the stock.”

Video link: https://www.facebook.com/1102466875/videos/1547752532233316/

Implications from the call

Let’s do simple math:

• Garrett mentioned that pre-drill expectations were at least 500 million barrels for each of the five original prospects on block 11B/12B. He says that net present value of a discovery is about USD 5 per barrel. This means that each of the five deposits in 11B/12B could have a value of five times USD 500 million which equals USD 2.5 billion. Africa Energy owns 10%, so the value of each of the five deposits is USD 250 million.

• Garrett mentioned that these were pre-drill estimates and the two discoveries were better than expected. 


• The current market capitalization of AEC is USD 330 million. AEC’s stake in Brulpadda and Luiperd together represents at least USD 500 Million – 50% above its current share price. That is what Garrett meant when he stated that the current discoveries represent a floor for AEC share price. 

• After the discovery, it was announced that the Brulpadda deposit was potentially 1 billion barrels. AEC estimated that Luiperd is 50% bigger than Brulpadda. Together the deposits could represent 2.5 billion barrels. Using the USD 5 per barrel net present value, AEC’s stake in those two deposits could be USD 1.25 billion, which is almost 4 times its current market capitalization.

• The above is the valuation for only the two deposits. The above neglects the value of three additional prospects at 11B/12B and also excludes the value of 2B, which Garrett indicated could have a higher valuation per barrel value if oil.

• As Garrett indicated, the share price is undervalued and the value of its prospects has a blue sky limit. It is certainly several times its current market cap.

The Pareto analyst estimates that Total could finalize the gas off-take agreement with SA Government by October. Pareto also estimates that, with the off-take in hand, AEC could easily sell its stake in 11B/12B. Based on this, I assume this could all happen in the next 12 months. I believe AEC is the most attractive opportunity in the oil space.

DO WATCH THE PRESENTATION!

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Redeye Research on Biovica: the unnoticed news supports Bull case of SEK 325.

Redeye Tesearch just published new research note on Biovica. The research is available on Biovica website:

Biovica: Fundamental support and an administrative delay

When Biovica announced that the FDA was not yet ready to accept Biovica’s updated application, this triggered a severe negative overreaction despite no impact on fundamental support. Biovica announced the Novartis independent large study (BioItaLEE) indicated prognostic support for DiviTum in combination with Novartis CDK 4/6 inhibitor Kisqali (ribociclib), this triggered no positive reaction despite the, in our view, obvious fundamental support. If anything, this study gives more support for our Bull case. Our value proposition remains a base case value of SEK 95 (Bull SEK 325 and Bear SEK 20).

Fundamental support

Biovica can point to the CDK 4/6 inhibitor potential already from several studies, including the Pythia study (Pfizer’s market-leading Ibrance or Palbociclib) for patients with HR-positive/HER2 negative metastatic breast cancer. The BioItaLEE study that will feature at ESMO (16-21 September) is important for several reasons in our view.

The study is a larger independent study where Novartis has bought Divitum and used it for this study that is a large 287 patients study. The follow-up time is a respectable >26 months, and perhaps more importantly, it is a prognostic study. In our view, additional prognostic study support will be important for clinical use once the approval is in place, and prognostic studies will also support private and public pay in the future. Additional study support in the same class support the robustness of DiviTum and expanded future use. Either Ibrance or Kisqali or both are also in a good position to extend the label and clinical use earlier in the treatment of advanced breast cancer.

The actual results are also strong in the BioItaLEE study indicating that DivTum is a promising prognostic biomarker with reassuring p-values (statistical strength), and the results (TKa activity) indicates if the patient is likely to progress despite the CDK 4/6 inhibitor therapy or if they respond well. This support is indicated already after the first and the second cycle of treatment.

Fundamental irrelevance

The fact that FDA is not ready to accept the updated application has nothing to do with Biovica, and slippage of 1-3 months is irrelevant in our view. As a listed company, Biovica has to provide a guide regarding the timelines despite the challenge of second-guessing FDA’s workload and priorities. FDA is not yet running as normal, and delays are still rather frequent. Once approved, Bivica’s DiviTum is likely to be both first and best in class. In addition, FDA delays are likely to be more severe for candidates earlier in the approval process.

Value

Our value proposition remains a base case value of SEK 95 (Bull SEK 325 and Bear SEK 20).

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Quantafuel CEO at Pareto conference: “I am extremely confident we will make it work before the year end”

Quantafuel update from the Pareto conference today:

CEO Terje Eleken:

“… we are confident reaching the proof of concept before the year end…. I am extremely confident we will make it work”

“we have worked on this for a long time, we have run tests

Dr. Lach (deputy CEO):

“Esbjerg plant on time, we are now evaluating a partner selection. There is a good interest in partnering with us”

“Amsterdam project with Vitol – we have selected a site and working on submitting an application for the permit”

“we will be announcing new initiatives and new projects”

The company presented the below presentation:

https://live.euronext.com/en/product/equities/NO0010785967-MERK#CompanyPressRelease-6604324

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Norske Skog: Carnegie almost doubles its price target

Last week NSKOG was put on Top Ideal list for Septermber by Pareto and SpareBank. Sparebank believes the Norske Skog share price should be three times higher. Yesterday, Carnegie joined the NSKOG bulls with doubling its price target.

Carnegie brings another component into its valuation. NSKOG transformation into green products will increase the amount NSKOG will get for CO2 permits. Carnegie estimates, that over the next five years (including 2021) the company will collect EURO 260 mln for its CO2 permits. Carnegie also calculates that from 2022 the CO2 permits revenue will double to around EURO 60 mln from current about EURO 30 mln. This is material given NSKOG current market capitalisation of around EURO 300 mln.

I have been long NSKOG for some time and wrote here about it several times. For me the investment thesis is simple:

  • it is very cheap vs its peers –  Sparebank research stated : “if valued in line with peers, we argue that a fair price is closer to NOK 100” that is 250% above its current share price.
  • its renewable asset portfolio has a higher value than NSKOG current market capitalization
  • Newsprint plant closures are pushing prices higher that should multiply NSKOG profitability
  • Renewable assets come into production next year (mainly renewable packaging), that should significantly improve profitability further
  • Doubling income from selling CO2 permits from 2022 to EURO 60 mln per year should improve profitability materially.

Summary of Carnegie Research on Norske Skog

In focus: Transformation – here we come

In this In Focus report we have taken a closer look at Norske Skog’s CO2 emission rights sales, its CO2 compensation, the effect from the Bruck boiler and energy costs in general. Furthermore, we have now included the forthcoming EUR350m capacity conversion of 360kt of newsprint to 760kt of containerboard into our valuation. In short, the net effect of
these factors increases our target price to NOK72 (47).

While Norske Skog in mid-2020 guided for annual EBITDA of EUR75m when containerboard production was fully operational, m-t-m EBITDA now stands at more than EUR210m, given the price increases since then. In our estimates, we have landed at EBITDA of around EUR120m, which equates to an unrisked value per share of NOK40–64, based on an EV/EBITDA multiple between 6–8x and discount rate of 8–12%.

Though EBITDA in 2021e, particularly H2, is negatively impacted by escalating energy prices, we estimate that the Bruck boiler (through a significant cut in gas consumption and 150kt higher net CO2 sales) will increase EBITDA by around NOK400m in 2023 versus 2021e. We now include specific value forecasts for containerboard and the Bruck boiler, which we have risked by 33% and 75%, respectively. This adds NOK24 per share to our NOK48 per share valuation of the remaining business

See last week posts on this blog for summaries of Pareto and Sparebank research on Norske Skog

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Biovica: Redeye Research joins Pareto in declaring the sell off as a nervous overreaction without and support in changing fundamentals

Pareto issued a note on Monday, that the FDA delay has no material impact on the Biovica value, and the sale off is unjustified. Redye research also came up with the same conclusion. The research is available for free on Biovica website. Full report is below:

Redeye Research:

Biovica: The submission of the updated application will be slightly delayed

Biovica’s next step before the FDA decision is to formally submit the updated application after addressing all FDA’s questions from earlier this year. This is now delayed because FDA has declared that it is not ready to handle the submission. As a result, Biovica will not secure an FDA decision by the end of September, which was the earlier communicated objective. This is most likely a minor delay, and it is outside Biovica’s control and most likely without any impact on the likely outcome. We regard the share price reaction today as a nervous overreaction without any support in changing fundamentals. Our value proposition remains a base case value of SEK 95 (Bull SEK 325 and Bear SEK 20).

This is a negative overreaction

Biovica’s next step before the FDA decision is to formally submit the updated application after addressing all FDA’s questions that the company received just before the summer.

Biovica has an interactive process with the FDA. The message from the FDA is that the authority is not ready to handle this submission as earlier planned and in line with the expected timetable. As a result, Biovica will not secure an FDA decision by the end of September, which was the earlier communicated objective. This is most likely a minor delay, and it is outside Biovica’s control and most likely without any impact on the likely outcome.

We point to the fact that there are other indications that the FDA has not yet reached a business as usual. The FDA is not yet ready to accept new pre-submission meetings during 2021, as an example. Biovica is at the other end of the process, and this is a smaller slippage ahead of the finishing line. This is clearly outside Biovica’s control, and there is no indication that this is related to the outcome or the risk that the FDA should reply with additional questions. Perhaps the FDA is not yet ready to commit the resources to handle the updated application ahead of the decision. The next step for Biovica is to confirm that the FDA has accepted the submission. Once approved for clinical use on the US market, Biovica will have a first-mover advantage. The fact that FDA is still experiencing delays will not change this, and it could even extend the lead.

We regard the share price reaction today as a nervous overreaction without any support in changing fundamentals. Our value proposition remains a base case value of SEK 95 (Bull SEK 325 and Bear SEK 20).

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Biovica sell off – Minutes of the call with the management

The selling was due to the Biovica s press release stating that FDA is in delay due to the Corona Virus work overload. I enclose Pareto Minutes of the call with the management published minutes ago.

The minutes indicate, that there is no justification for the sell off. The Biovica value does not change whether the approval is this months or next month. Pareto believes the delay will be only by one month – approval should be coming by the end of October.

I am long Biovica, i have been buying more this morningn.

Pareto Research:

FDA’s handling delayed, call with CEO
Biovica today announced that there has been a delay in response from the FDA. In a call with the CEO this morning, it was confirmed that nothing new came up but that it is just an FDA-related delay. After the last meeting with the FDA, the company received the meeting minutes and prepared an answer based on all requests with minor questions surrounding the intended use to be discussed interactively (a point where a company usually aims for wider claims and the regulators wanting everything backed by data / keep the intended use narrow). These are detailed questions/negotiations surrounding the broadness of the intended use and there have been no questions anymore regarding predicate device, this has been solved early on. The FDA however has not come back yet on these intended use details, so the company is still waiting for them to ensure the best possible outcome of the submission/widest possible intended use for DiviTum. Based on these insights, we see no increased risk of a rejection of Biovica’s submission. As previously communicated, we expect approval before end of October, with additional delays depending on COVID-19 related regulatory workload for the FDA. We reiterate our rating on BIOVIC with a target price of SEK 103.                       

Full Biovica Investment thesis:

https://seekingalpha.com/article/4437698-biovica-international-should-double-on-novel-breast-cancer-test-launch-in-q3

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SpareBank joins Pareto by adding Norske Skog into Top Pick Portfolio for September

SpareBank and Pareto have in their Top Pick portfolio for September jointly just one stock – Norske Skog.

Two days ago I wrote here about Pareto strategic portfolio for September. I enclose below SpareBank Top Pick summary. As mentioned above, there is just one stock that is in both Top Pick portfolios – Norske Skog.

I enclose below SpareBank justification for adding the NSKOG into their Top Picks:

Newsprint and containerboard prices up 15-20% and marginal change up for input costs

The closures of capacity have rebalanced supply demand and according
to our knowledge, newsprint prices in Europe has had an material
increase in July. Q2 was a disappointment due to higher costs for
recovered paper (RCP), but RCP prices have been flat the last month.
Cost increases are front-end loaded.

The effect of the closures and hence increased utilisation have
according to our knowledge led to a material increase in prices for
newsprint in Europe. Our take is that the share prices for peers to
NSKOG have increased the last month due to this price increase with
NSKOG lagging peers. The enterprise value of NSKOG is small compared
to peers and NSKOG has a large investment programme starting in Q3
2021, but still we argue the disconnect to peers is unwarranted.

Overall, we expect prices for NSKOG will increase 15% compared to Q2
2021 for Q4 2021 and around 10% in Q3 2021 as some contracts will
have price increases later in Q3 2021. From Q4 2021, with 15% price
increase, flat RCP prices and higher gas prices, we expect NSKOG to
deliver an annualised EBITDA close to NOK1bn. If valued in line with
peers, we argue that a fair share price is NOK closer to NOK100
. The
conversion to containerboard is in our mind a step towards being
valued in line as a going-concern. As the majority of the current
portfolio for NSKOG is exposed to a declining market, we value NSKOG
based on a “5% decline in demand” scenario and view NOK50 as a fair
target price.

We recommend buying NSKOG ahead of the Q3 numbers as we expect
this quarter will show the effect of increased utilisation/prices and the
path to a NOK1bn EBITDA scenario.

SpareBank Top Pick portfolio:

Our analysisWe are getting closer to the end of the bull-cycle. Since the stock market bottomed out in March of 2020, MSCI World is up 96%, which compares to the median bull-market run of 88% since 1970. At P/B 2.86x, the Norwegian equity market is valued close to historical peak levels (3.0x before the 2008 financial crisis. Shiller P/E is at its highest since the tech bubble. But, what is the alternative investment with negative real 10-yrs interest rates?

Strong macro indicators, why worry now? Market crashes typically occur after a significant macro-economic weakening. For now, macro indicators support growth Our correction risk indicators are still neutral to positive (yellow/green). There is still significant earnings momentum, and 12m forward EPS for Norwegian and international markets are above pre-Covid levels as the economic growth continues.

Our portfolio is tilted towards financials, materials (early-cycle), IT (mid-cycle), and consumer staples, energy and materials (late cycle). SpareBank 1 SR-Bank, Webstep, Europris, Yara, Norsk Hydro, Circa Group, Norway Royal Salmon, Norske Skog, Equinor and Orkla

Note that our previous “long/short” Top Picks monthly portfolio is discontinued. Note also that we do not have analyst coverage of NRS, but would like the portfolio to have seafood exposure.

Disclosure: I am long NSKOG. I have been very bullish the stock, as the paper restructuring was know and the effects have been expected. I believe we are now entering the delivery phase.

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Sparebank on Norske Skog – Newsprint prices up 15%-20%. Share priced did not move, yet

Sparebank believes the Norske Skog share price should be three times higher. NSKOG is my favorite restructuring play. NSKOG has four levers for share price growth:

  • it is very cheap vs its peers – see below Sparebank: “if valued in line with peers, we argue that a fair price is closer to NOK 100”
  • its renewable asset portfolio has a higher value than the whole market capitalization
  • newsprint plant closures are pushing prices higher that should multiply NSKOG profitability
  • renewable assets come into production next year (mainly renewable packaging), that should significantly improve profitability further

SpareBank published research on Norske Skog today. Below is their front page summary:

Newsprint and containerboard prices up 15-20% and marginal change up for input costs

Power compensation alone could increase EBITDA with NOK250m, but political uncertainty (not included in estimates)

The closures of capacity have rebalanced supply demand and according
to our knowledge, newsprint prices in Europe has had an material
increase in July. Q2 was a disappointment due to higher costs for
recovered paper (RCP), but RCP prices have been flat the last month.
Cost increases are front-end loaded.


The effect of the closures and hence increased utilisation have
according to our knowledge led to a material increase in prices for
newsprint in Europe. Our take is that the share prices for peers to
NSKOG have increased the last month due to this price increase with
NSKOG lagging peers. The enterprise value of NSKOG is small compared
to peers and NSKOG has a large investment programme starting in Q3
2021, but still we argue the disconnect to peers is unwarranted.


Overall, we expect prices for NSKOG will increase 15% compared to Q2
2021 for Q4 2021 and around 10% in Q3 2021 as some contracts will
have price increases later in Q3 2021. From Q4 2021, with 15% price
increase, flat RCP prices and higher gas prices, we expect NSKOG to
deliver an annualised EBITDA close to NOK1bn. If valued in line with
peers, we argue that a fair share price is NOK closer to NOK100
. The
conversion to containerboard is in our mind a step towards being
valued in line as a going-concern. As the majority of the current
portfolio for NSKOG is exposed to a declining market, we value NSKOG
based on a “5% decline in demand” scenario and view NOK50 as a fair
target price.

We recommend buying NSKOG ahead of the Q3 numbers as we expect
this quarter will show the effect of increased utilisation/prices and the
path to a NOK1bn EBITDA scenario.

Interesting article on Hofseth Biocare

See my Friday blog on HBV. Pls also see the investment story on HBC. The company is now growing over 50% yoy. The growth is likely to accelerate further. Quite interesting opportunity. I am long HBV.

https://seekingalpha.com/article/4390174-top-value-creation-play-in-biocare

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ABG Sundal on Biovica: “Closing on the finish Line”

ABG Sundal Collier just issued their update on Biovica. I include the full report below. Very bullish

There are two major points in the research:

  1. During the quarter, the company has interacted with the
    FDA and undergone a Submission Issue Request (SIR) process . This is
    a routine way for the FDA to resolve or clarify minor issues or questions
    that have arisen during a submission process.

2. The company has compiled all the additional data and plans to send it to the FDA with an SIR in early September. The company expects that the FDA will provide feedback within 21 days, which means that a response should be received by the end of September.

The response should lead to either: 1) a 510(k) clearance or 2) a request for additional data and a slight delay of the process (months).

The management on their annual shareholder meeting video (available in 29/8 post on this blog) stated, that they believe FDA will very likely give their approval in September. If they are right, we are up for a strong re-rating shortly.

I am long Biovica. Since I first wrote about it, the stock is up 50% (from 40SEK to 60SEK). My price target for the stock in Q4 is over 100SEK. Very attractive short term upside in my view. Very similar situation to Xbrane, which under same situation increased from 70 SEK to 160SEK. I believe Biovica will be similarly good.

Link to the full ABG research:

Interesting article on Hofseth Biocare

See my Friday blog on HBV. Pls also see the investment story on HBC. The company is now growing over 50% yoy. The growth is likely to accelerate further. Quite interesting opportunity. I am long HBV.

https://seekingalpha.com/article/4390174-top-value-creation-play-in-biocare

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Hofseth Biocare – the transformational deal with Garden of Life launched

Hofseth BioCare (Oslo: HBC) is a Norway-based company engaged in processing marine raw materials into products to enhance global health.

Two years ago the company initiated its transformation. The road map to value creation is simple:

  1. In the first stage, move from low-margin animal feed towards high-margin finished products for pet and human-grade nutraceutical products available at retailers and pharmacies globally. This is happening now.
  2. In the second stage, reposition to pharmaceutical products with documented health benefits. This is starting to happen.

The first stage is now in full motion. Last year the company signed a contract with Nestle owned Garden of Life, under which it would supply its salmon protein for its new MD Protein product range. Hofseth started to supply Garden of Life in H1. As a result 21Q2 revenues were 55% up yoy. That was before the product was launched.

I just found out, that the Hofseth based product is now in Garden of Life sales network. The product is launched

See below the link Hofseth based Salmon protein products on Garden of Life network are the first two red products with with Salmon protein

https://www.gardenoflife.com/products

The human products are now launched. The Hofseth sales prices for protein for human products are at least three times higher than that for pet feed products.

Based on my discussions with the management, it is not unrealistic that protein sales should increase 10 times over the next 3-5 years. This quarter 55% sales growth was an indication. More to follow

Similarly promising is the deal with Catalent for using Hofseth’s Salmon oil for consumer health product.

This is due for launch in 1H22. I understand that management believes the cooperation should again multiply Hofseth’s Salmon oil revenues. See the below link for details:

https://www.catalent.com/catalent-news/hofseth-biocare-announces-global-innovation-partnership-with-catalent-to-develop-delayed-release-formulation-of-omego-fish-oil/

I believe that the Garden of Life is a transformation deal we have been waiting for some time. I am long HBC. I think this is very positive development.

The full investment thesis is below:

https://seekingalpha.com/article/4390174-top-value-creation-play-in-biocare

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Making money is about great ideas.