In a press release announced after the close on Wednesday, BioAmber (BIOA) announced that it signed a take-or-pay contract, i.e. an off-take agreement, with Vinmar for BDO for a 100,000 ton plant. The contract specifically guarantees that 100% of the output from the 100k ton per year plant will be sold for 15 years (which will commence when BioA builds and commences the plant in 2017), and is a major vindication of the progress of the BDO technology.
The most important aspect of this agreement is that BDO is downstream from succinic acid and thus this represents the next stage of BIOA's growth plan and diversifies its revenue stream away from just the Sarnia plant ramp up (which is very much intact). Further, partnering with a solid partner such as Vinmar, who is willing to go with such a long term (15 years) and terms such that they are willing to guarantee purchase of the product, should further solidify BIOA's position as a leading BDO player.
Background on BDO & Vinmar
BDO is a building block chemical that is used in a wide range of products, including engineering plastics for the automotive industry, polyurethanes, biodegradable plastics and spandex. BioAmber produces BDO by combining its succinic acid technology with a catalyst technology licensed from DuPont (DD) and the company believes its bio-based BDO is cost competitive with petroleum derived BDO. BIOA estimates the size of the global BDO market to be $4b.
Vinmar is a private company that markets a broad range of chemicals, plastic resins and rubber products. Vinmar International generated revenues of approximately $4.5 billion in 2012, with 800 employees and offices in 30 countries. From 2003 to 2013, Vinmar was the principal off-taker of a Saudi BDO plant and was selling approximately 50,000 tons of BDO per year globally.
Financial Implications & Thesis
BIOA stock is up 27% over the past 3 months, outperforming the S&P which is up 5% over the same time period. Enthusiasm for the name continues to build after a stellar 3Q (see my last article here describing the results). The recent news should add credence to the bull argument (which I share) that BIOA is a solid operator whose differentiation within the green chemical space is its low cost and disruptive technology platform. With strong industry partnerships already in place and the ability to scale in an industry that is eager to adopt usage of renewable feed stocks, the company is potentially poised to accelerate operating growth in the next years as it ramps up capacity. The company has a reduced commercial scale up risk (owing to commercial scale operations already in France, and as the Sarnia plant is expected to be completed by the end of 2014, production yields should strengthen and with it, revenues and EBITDA.
My up/down skew remains favorable despite the recent run. On the downside, the cash buffer at current run rates of $40-50mm imply $5 per share as a cushion, before it turns cash flow positive post Sarnia. 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.
On the upside, 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 $15 (Credit Suisse has a target of $15, Societe Generale has a target of $22), which only includes the forward value of Sarnia at projected top line growth rates. I believe that 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 and as such should continue to ramp into the Sarnia launch.