Monday, May 2, 2016

63rd AIM Equity Update by Clermond Jean. BioAmber (BIOA): “Looking for a Pathway Towards Profitability”


BioAmber (BIOA, $4.11): “Brace Yourself for a Bumpy Ride”

By: Clermond Jean, AIM student at Marquette University

Image result for bio amber logo

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

BioAmber, Inc. (NYSE:BIOA) is an industrial biotechnology company which produces sustainable chemicals. The firm combines chemical catalysis with industrialized biotechnology to convert renewable feedstock into sustainable chemicals with widespread application ranging from plasticizers to food additives and resins

• BioAmber continues to gradually ramp and optimize commercial production at Sarnia, Canada.

• The average selling price for Q4 2015 was above the $2,000 / MT guidance, despite low oil prices;

• After 4Q15 Mitsui invested $CDN25MM (US$18.8MM) in the Sarnia joint venture.

• Bio-SA sales were ~$1.1MM in the period including first shipments to key off-taker PTTMCC Biochem in Thailand.

For BioAmber the road towards translating environmental sustainability into profitability has been anything but a smooth ride. Over the past year, BioAmber stock price has been in a tailspin downward due to a variety of factors including: suppressed energy prices and a need for additional capital. The current stock price for BioAmber is almost half the value it was when coverage was initiated on the company. Nevertheless, during this same time period, BioAmber has begun commercial production at their Sarnia facility and secured several strategic partnerships that better position the company for future success.

BioAmber’s products have faced pricing pressure as a result of low oil prices. Although BioAmber’s supply contracts have selling prices decoupled from oil, the Company has reduced their selling price for certain customers to have them more align with petro-based counterparts. Furthermore, there is no guarantee BioAmber’s customers will not seek lower prices when they renegotiate their contracts, prices are currently set based on the value the company’s biosuccinic offers. However, in their fourth quarter earnings call, CEO Jean-Francois Huc noted that BioAmber could be exposed to softening demand for its products if oil prices were to stay in the $30-40 per-barrel range for an extended time.
Nevertheless, BioAmber has also had two equity offerings over the past year raising $35.1MM (May 2015) and $11.8MM (January 2016) in net proceeds. Both of the offerings led to a significant decline in the Company’s share price. Proceeds from the offerings were used to reimburse $12.5MM of corporate debt that it has with Tennenbaum Capital Partners to remove a restriction it had on the use of $15MM of cash. Proceeds will also be used to finance construction of a new facility that is expected to open in 2018.

BioAmber has begun commercial production at their Sarnia facility, achieving several milestones in their commercialization stage. Their Sarnia facility has been performing well and the bio-succinic acid produced has met the quality standards set in 2015. Over 100 companies have qualified the bio-succinic acid produced in Sarnia and more than 100 additional companies are currently at various stages of assessment and qualification. After the end of the quarter, the Sarnia facility obtained several important quality management certifications. The average selling price for 4Q15 was above the $2,000 / MT guidance, despite low oil prices.
BioAmber has also forged several strategic partnerships with other companies that will further promote its growth. Mitsui & Co. have invested $CDN25MM in the Sarnia joint venture, increasing its equity stake from 30% to 40% and committing to play a bigger role in commercialization of the facility. Other strategic partnerships include technology licensing and off-take agreements in order to also support their Sarnia facility. BioAmber has signed take-or-pay agreements with both Vinmar and PTTMCC that represent sales volumes of over 15,000 metric tons of succinic-acid in 2016 and 2017. BioAmber has also signed a number of other supply agreements with non-binding volume commitments that collectively exceed the available capacity in the plant. These strategic partnerships coupled with new supply agreements shows a bright road ahead for BioAmber.

What has the stock done lately?

Past Year Performance: Over the past year, this stock has performed terribly. In 2015, the stock traded as high as $10.98, versus $4.74 on 4/25/2016. (In 2015, the stock retreated significantly from its high, and by the end of the year was at $6.18). For the 52 weeks ending 4/25/2016, the stock of this company was down 59.5% to $4.74. During the past 13 weeks, the stock has risen modestly to 11.8%. Bioamber Inc is trading at 2.41 times book value.

1 Year Stock Chart vs. Benchmark from FactSet here


 Source: FactSet


My Takeaway

Over the past year, BioAmber has experienced a lot of the ups and downs as they have begun transitioning from their demo-phase to commercial production. Nonetheless, management at BioAmber have developed a strong plan to achieve success in their commercialization stage, making strategic decisions that better poise the company for long-term success. I continue to believe BioAmber is a long-term play for shareholders and that they stand to become an industry giant in the fast growing industrialized biotechnology industry. In the short term, I believe BioAmber’s focus on a long-term growth strategy will hamper the performance of their shares. I believe that although the original drivers of the Company’s growth remain intact, the market will continue to undervalue the company until the pathway towards profitability becomes clearer.

1 Month Stock Chart from FactSet here (optional)


 Source: FactSet