Translation: Original published in Finnish on 12/20/2024 at 8:00 am EET.

The Solar Foods Capital Markets Day provided a concrete insight into Solein's commercialization process, the upcoming 02 factory investment and the company's financial targets. The content of the Capital Markets Day focused on Solar Foods' role as a manufacturer of Solein, which is a capital-intensive route to scaling the business. We found the omission of capital-light businesses at the CMD disappointing, as they, along with financing solutions, are the key drivers of the share price at this stage in the company's development. With the share price decline, the price tag for future equity financing has increased, which inevitably weighs on the value of cash flows in the distant future. We lower our target price to EUR 5.0 (was EUR 10.0) and reiterate our Reduce recommendation.

Solar Foods to focus initially on the US Health & Performance Nutrition category

With its first product, Solein, Solar Foods focuses initially on the US Health & Performance Nutrition category. The category is particularly attractive due to consumers' high liquidity and the good growth outlook of the category. The annual size of the category in question is 300,000–500,000 tons in the US, so a market share of one percent would generate revenue of approximately 50–100 MEUR. Solein's first product applications are powders to be mixed with liquid, protein bars and ready-made protein drinks. At a later stage, the company plans to expand into other product categories and new market areas.

Company sees Factory 02 as a modular and highly profitable factory investment

Production at Solar Foods' future Factory 02 is scheduled to start in 2028. The planned factory investment of
317 MEUR is more expensive than we had previously expected but will be modular and implemented in three parts, which will smooth out the capital needs. The factory is expected to be highly profitable in the context of the manufacturing industry and capable of achieving an EBITDA of close to 70%. In our view, the underlying assumptions about Solein's selling prices are realistic, so expectations of the factory's profitability are linked to the company's ability to reduce Solein's manufacturing costs in line with its targets on an industrial scale. The company expects the future factory to deliver profitable EBITDA from 2030 onwards, which is in line with our expectations. By the end of the current decade, the company is targeting revenue of around 110 MEUR and EBITDA of around 38 MEUR, while by 2035 the targets are around 220 MEUR and EBITDA of 116 MEUR. The financial targets cover only food manufacturing and do not take into account the capital-light space and licensing businesses, although the targets for these businesses were stated to be unchanged. The sidelining of capital-light businesses in the CMD was, in our view, disappointing, as at the time of the IPO, the company announced a letter of intent with a major fermentation company to build an industrial-scale factory and discussions with several space operators.

Higher cost of capital and forecast changes pushed down our view of the stock's fair value

We have increased the cost of capital for Solar Foods in this update as the story, at least for now, is tied to a manufacturing business that is capital intensive and requires more investment than we expected. At the same time, the share price decline has increased the price of equity financing from a dilution perspective. The share value is particularly sensitive to changes in the cost of capital due to the distant cash flows, and as a result of this, the updated investment needs for the Factory 02 and forecast changes consisting of operational refinements, our fair value range has been reduced to EUR 1.2-10.6 (was EUR 2.2-15.3). Due to the early stage of development, share price movements and the price of equity financing will be driven by news flow in the short term.