Spinnova Initiation of coverage: Alea iacta est

We initiate the coverage of Spinnova with accumulate recommendation and EUR 2.00 target price. Spinnova has been held back in recent years by changes in the operating environment and also by internal challenges in last years. The company updated its strategy and business model this spring to be much simpler and based solely on the sale of fiber production technology. In the coming years, Spinnova must prove the techno-economic competitiveness of its concept and create the conditions for the technology to enter the mass market in textile fibers. The company's positive cash flow is a long way off at best, but with a large target market and a capital-light and scalable business model, the stock's upside potential could be huge once commercialization gets underway. Despite the high risk level, we believe the stock already has a positive long-term expected value. 

Commercialization will continue with a strategy based on technology sales

Listed in 2021, Spinnova's innovation is a production technology that uses mostly cellulose-based material to produce fibers in a very environmentally friendly way, for example for the apparel industry. The strengths of the fibers are not only their environmental performance but also their natural and soft (i.e. cotton-like) feel, while the main challenges are the still high investment and production costs of the technology and, consequently, the still too high price of the fibers for the mass market. After the updates in spring 2024, Spinnova's strategy and business model will be based on technology sales (incl. projects, royalties and services), as the strategy covering a broader part of the value chain at the time of the IPO became unfeasible due to higher interest rates, among other reasons. Spinnova should be able to demonstrate the techno-economic competitiveness of its technological concept in the coming years, with the progress of the letter of intent with Suzano for a plant of around 20,000 tons playing a key role. In addition, the company should be able to significantly reduce the CAPEX and OPEX associated with the technology through R&D work, which in turn would lower the price point of the fiber and expand the addressable market. Success in these areas would allow the company to enter a scalable growth phase in the 2030s.

The next few years will be loss-making, and scalable growth will not come until the 2030s

Spinnova does not have any revenue targets, but the company aims to achieve positive EBIT by 2028-2030 and EBIT of more than 100 MEUR between 2034 and 2036. In addition, Spinnova intends to continue commercialization with its current cash position (61 MEUR at the end of 2023). The forecastability of Spinnova is still weak. In the positive scenario of our forecasts, commercialization will proceed roughly in line with the company's volume targets. The low revenue will keep the company in the red until 2028, and the business will not begin to scale until the 2030s, when several and larger technology projects will be delivered at the same time. According to our projections, the company's financing needs for the coming years are covered by the current cash position and the share is not threatened by dilution in the near future. However, the tightest cash situation will take place in 2028-2029.

We believe pricing is beginning to look cautiously attractive to long-term risk investors

We have forked the return potential of the stock through near term EV/S for the next few years, DCF and long-term expected return scenarios. Based on overall picture of valuation, we see the stock’s return potential as cautiously attractive from the current share price level (e.g. DCF-value some 2 €/share). However, we emphasize that investing in the company requires patience and a high tolerance for risk, as there is still a long way to go in terms of time and hurdles to overcome to reach the scalable growth stage enabled by the business model and market size.