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Fresh and less expensive round of financing

Fresh and less expensive round of financing

FINANCING ISSUE

Europlasma launches a fresh round of financing, already allowed for in our forecasts. The cost looks less steep than could have been feared.

FACT

Europlasma collects another €8m of fresh financing. It broadly relies on the same financing mechanics as deployed in a 2016-17 round: issuance of immediately converted convertibles at a discount to the spot market price. This fresh financing is secured under significantly better conditions than the previous one (no warrants, half the discount), strong evidence that the company is marching towards more traditional funding now that its development risks are behind. The cost of this last round of financing is directly set in the conversion terms at 95.3% of the last 10 trading days, with the new shares essentially sold promptly. This means that the seller is always getting c.5% at the expense of the market, i.e. existing shareholders. Although limited, dilution is the price to pay for bridge financing.


ANALYSIS

Europlasma has reached a milestone in 2017 by getting the final acceptance of its client for the delivery of a much-delayed green power generation unit. The cash drain related to delays and further engineering work to extract more performance from the same unit has led the group to resort to successive layers of expensive dilutive financing. The €8m capital raising announced in early February 2018 is of a similar profile (although far less dilutive) but apparently on a tight calendar (last tranche of the raising completed by mid April 2018) and there is an issuer-held option not to go beyond €4m. This is evidence that the group is closer to raising more traditional funding and may mean it is close to being in a cash generative mode.
Indeed the cash drain of 2017 was a combination of furthering developments on the prototype power generation unit and facing disruptions in the normally cash-generative asbestos treatment unit. Both are sorted subjects by early 2018.
Year after year, the management of Europlasma has managed to find fresh financing in very adverse conditions. The remaining stumbling block to Europlasma becoming a green power generation proposition is less about technology and more about the funding of an ideal business model, whereby Europlasma would not build and manage power units for third parties but for itself.
That requires a quantum jump in resources but it is fair to mention that its technology is convincing enough for plant number 2 (dubbed Tiper) to be essentially financed already by debt. The ownership model would impact seriously the definition of Europlasma’s business model and presumably its valuation.


IMPACT

The dilution resulting from the new financing was effectively discounted in a rough way in our last review of Europlasma’s earnings outlook. A ball-park order is that the new financing may add 40-50m shares to the existing 153m ones. As it happens, we had allowed for 50m new shares anyway, as well as for the full dilution of C warrants. Such new equity effectively secures the ability of Europlasma to reach its positive cash flow objective so that it may even be that the market may react positively and absorb this new issuance. As a reminder, our fully-diluted target price stands well above current prices. In all, this is encouraging, and in any case better than no financing.