As previously highlighted, we do not track the financial development closely until Enviro fully commercialises its business model and gets its first plant up and running. Instead, we monitor the operational development, news regarding plant talks, financing, and negotiations with relevant parties – such as potential customers and their production tests.

Enviro’s Q3 report was very similar to the Q2 report in terms of the quarter being dominated by work, planning, and preparations ahead of the final investment decision for the Uddevalla plant.

Thomas Sörensson states the following in the Q3 report: “Intense efforts have been underway ever since the announcement this spring, primarily with the intent of securing and performing quality assurance on all technical, commercial and legal parts that must be in place ahead of the construction of the Uddevalla plant, and also to lay the basis for the continued roll-out of forthcoming plants after the one being planned in Uddevalla. While the preparatory work has taken longer than we previously estimated, we are now nearing the point when the joint venture can make the final investment decision to then start construction of the plant in Uddevalla.”.

It is difficult to assess how near Enviro is to the point of making a final investment decision, but apart from the time component, which nonetheless is important, we understand things are progressing according to plan (which we find positive).

We have previously (in April 2023) expected a final investment decision to take place in Q2-Q3 2023, to revise it to Q3-Q4 in conjunction with the Q2 report in August, to now revising it to Q4-Q1. This clearly showcases how hard it is to predict the timing from an outside perspective and also that things have taken longer than expected.

However, we understand that a first-ever plant establishment of this character requires rigorous planning. Especially as every plant being rolled out after Uddevalle will use the same setup (in order to enjoy time and cost efficiency, which is needed for the roll-out and the financials of each plant). As such, we argue that getting it right from the start is very important.

We expect construction to take around 18 months, and we previously said that to have the plant up and running by the start of 2025, an investment decision was likely needed to be taken in Q3 2023 at the latest. It is also a possibility that construction might take longer than 18 months to complete since this is the first plant establishment Enviro will make. This is why the preparatory works are of great importance and also why we would rather see it taking an extra quarter to get in place rather than pushing it through too quickly. We now expect a FID by Q4-Q1, resulting in commercial operation by H2 2025.

Furthermore, Enviro’s Q2 report reiterated the target of having Uddevalla fully operational in 2025, but we have not found the same comment in this Q3 report. However, should the 2025 target not be relevant as of today, we believe the company would have highlighted this by now.

Apart from the preparatory work related to Uddevalla, we note that Enviro has launched a new type of carbon black, developed on the basis of the feedback it has received from its customers. This was press released in October, but we still consider R&D efforts like this positive, as they increase the potential carbon black penetration in end-products and possibly the adoption rate.

Enviro’s reported Q3 figures were all largely in line with our expectations. Sales amounted to SEK3.0m relative to SEK2.7m Q3 last year. We note that personnel costs have increased somewhat due to staff strengthening. All in all, EBIT amounted to SEK-20.7m relative to SEK-19.6m in Q3 2022, which is in line with what we expected.

We do not notice any compensation from the JV for historical costs that Enviro has historically invested. We believe that Enviro will receive this once a final investment decision has been made for Uddevalla.

Enviro’s cash position amounted to SEK243m by the end of the quarter, relative to SEK329m by the end of Q2 2023. The reason for this decrease is primarily due to a SEK40m amortisation of short-term debt that Enviro issued ahead of the directed share issue that took place in Q2 2023. Furthermore, Enviro generated a free cash flow of SEK-29m. We also note that cash flow expenses related to the share issue amounted to SEK-17m. In total, the net cash flow amounted to SEK-86m.

The Q3 report was largely in line with our expectations. However, given that the process ahead of the final investment decision (FID) has taken longer than we expected, we now expect the Uddevalla plant to be up and running by H2 2025 (instead of H1 2025) if we assume an FID in Q1 2024 (18 months construction time). Our previous estimates reflected a final investment decision in Q3, which did not happen. Therefore, we reduce our 2025 estimates and slightly postpone the following plant roll-out. For our bear case scenario, we take an even more conservative approach than in our base case, which is why the effect in this scenario is greater than in our other scenarios (which are kept rather intact).

We also reduce the expected debt-to-equity ratio for each plant going forward. We have previously had 80% leverage in our estimates, which is high but not entirely unusual for infrastructure investments. We reduce this number to 60%, which aligns with typical project financing for wind farms in this macro environment.

We also increase our WACC by 0.5pp (as Redeye has increased its risk-free rate on all covered companies). Due to this effect, our new fair value range sits at SEK1.1(2.1)-SEK11.1(11.1) with a base case of SEK5.9(6.1) per share. However, should the investment decision time increase significantly, there is further risk to our 2025 estimates and beyond.

All of our valuation scenarios are based on a successful launch of Uddevalla and the long-term roll-out of the following plants. We also expect all of the plants to be able to produce at full capacity and to sell their products largely at the rates Enviro has indicated in investor materials. Should the plants not produce at full capacity or sell their products at lower prices, there is a risk that the plants won’t be as profitable, which leaves a significant downside to our estimates and valuation if it were to play out.

This is a risk that is very difficult to assess here today, and we have not seen any signs until now that would imply this. However, this is something that we believe investors should be aware of.

The key catalyst we will be looking for going forward is the final investment decision regarding the Uddevalla plant, which we now expect will happen during Q4 or in Q1 at the latest. It is also in conjunction with the investment decision we expect Enviro to buy into the JV.