By T. Moore, CFA

OTCQB: PNDHF | TSX.V: POND

READ THE FULL PNDHF RESEARCH REPORT

What’s New

We recently spoke with the management team and we remain confident in the company’s prospects of revenue growth in 2022 and 2023.

Pond Technologies Inc (OTCQB: PNDHF) (TSX.V: POND) is laser-focused on its Carbon division opportunities for selling and licensing its carbon dioxide (CO2) reduction technology and algae formation for animal feed, aqua farming and nutraceuticals. AB Agri contract is underway.

We reduce our price target valuation because of the stock market correction over the past two months causing the relative peer group to trade at lower valuation multiples (-18% de-rating of the group). We expect this to be transitory.

Business Update

We caught up with the management team of Pond Technologies. Following the private placement of net proceeds and their press release about the Carbon Division launch. Our thesis appears on track and we continue to expect at least 40% sales growth for calendar 2021 and 45% for 2022.

In November, we had modeled the Carbon Division in our initiation report, as the main topline growth driver. We are pleased to learn it is now a standalone division. Rather than including Biotech in that segment or division, which is not a near-term driver. We are confident that the management team is laser-focused on the commercialization opportunity set for Carbon.

While the Nutraceuticals side has a mid-single-digit sales growth profile, investors are beginning to hone in on the Carbon Division where the funnel and pipeline of opportunities has grown since last summer.

We forecast the Carbon Division could achieve 145% sales growth in 2022.

The company is likely to report year-end results in late April. We remind investors to think of revenues as a rolling 12-month measure rather than a single standalone quarter. Royalties and milestones are lumpy.

Highlights & Takeaways:

Funnel of opportunities and incoming calls has improved since last summer. Awareness of Pond Technologies solutions is improving with ample runway remaining.

Animal feed is a large opportunity set, where algae protein can be added into animal feed (at 3-5% of the feed). Cost-effective and helps with sustainability of food sources, while also drastically reducing methane emissions. Less arable land, depletion of fertile soil and climate change impact is beginning to compel a search for more sustainable agriculture and livestock.

Cattle, pigs, chickens and goats are all viable potential beneficiaries of animal feed with algae.

Pet food and dog food are additional possibilities for inroads of Spirulina and chlorella for treats, supplements and daily pet food. Plant-based source of protein and an Omega-3 source (EPA & DHA). We noticed that Chewy.com now offers a few vegetarian dry dog ​​foods made from plant-protein (Addiction Zen, Natural Balance, Wild Earth).

Methane emissions reduction from algae replacing some of the grain in cattle’s diet. A mere 3% of a cow’s diet intake being from algae protein (like Spirulina) could lead to a 90% decrease in methane emissions. Spirulina can also increase milk production by 20%.

Cattle cause nearly 37% of all US methane emissions. Nearly 10% of global greenhouse gas emissions are caused by livestock, especially from cattle burps! On a yearly basis, one cow can belch 200 pounds of biogenic methane.

While carbon dioxide (CO2) emissions linger longer in the atmosphere than methane emissions (taking 50-200 years to dissolve compared to 12 years for methane), methane is 25-30 times more potent at trapping heat.

Methane is highly regarded as the second most dangerous gas for global warming. The United States, along with 32 other countries, pledged to reduce methane emission by 30% by 2030. We envision some regulatory impact or subsidies going to cattle ranches and farmers in 2023 or 2024.

Cow feed would be a breakthrough win and has been on our wish list since November. We would like to see Pond Technologies achieve a maiden win of a cattle feed contract in the United States or Canada. That would then become a springboard for a series of wins after the first customer is successful with it and methane reduction. A very important catalyst, in our view.

Livalta (AB Agri, part of Associated British Foods) project for animal feed might begin its procurement stage next month. The installation of the stack gas emitter top could occur in April. Despite continued supply chain constraints faced by many industrial companies, we believe that Pond Technologies can install the demonstration facility in the UK in 4Q22. While there have been delays for centrifuges and spray dryers, the complete system could be up and running by December.

Natural coloring opportunity set for cosmetics and food snacks remains a continued growth opportunity with ample potential for future new wins. Some customers and branded products are moving towards more sustainable sources like spirulina, astaxanthin or chlorella. Algae extract can function as antioxidants, carotenoids, anti-inflammatory, protein to improve skin health & beauty.

• Fish feed remains a growing opportunity, especially as American diets are tilting more towards salmon, trout and shrimp.

• New win conversion leadtimes could be six months for lab trial centric potential customers. A pilot plant, with investments of $ 2-5 million, is more likely to require a leadtime of 6-12 months from initial talks to when full contract terms are signed.

• Climate change urgency has heightened during the past year. Global carbon dioxide emission levels hit historic highs in 2021 according to the IEA. The United States, European Union, United Nations and Intergovernmental Panel on Climate Change (IPCC) have hone in more on global warming and reduction targets.

• Biotech & Therapeutics remain on the radar as a pursuit. We continue to model very minimal revenues for late 2023, but see it as optionality or gravy on top of its core business later on.

• Private placement this month raises at least $ 1 million for project equipment & staff hiring.

• Auditor change appears to stem from the prior auditor not as comfortable with public companies, having served as its pre-going public auditor when minimal revenues and no European revenues. Lastly, our understanding is that the prior auditor’s account person covering the account for seven years was no longer going to be the pointperson after 2021. Upgrade to the more comprehensive firm of Baker Tilly WM LLP seems reasonable.

Conclusion

We believe that Pond Technologies is becoming well-positioned for winning additional contracts and can execute well on its Livalta (AB Agri) relationship. Animal feed and methane reduction remain are favorite growth catalysts for new contracts and project wins.

We reduce our price target valuation to $ 0.80 CAD & $ 0.65 USD because of the stock market correction over the past two months causing the relative peer group to trade at lower valuation multiples. This -18% de-rating of the peer group valuation since our initiation report in November could be transitory.

We remain hopeful that the board and management team consider an uplisting of the stock to the Nasdaq over the summer and a reverse stock split of 1-for-20 shares to accelerate a re-rating. Some portfolio managers are restricted from buying stocks below $ 2.

We refer investors to our initiation report from November 18 with complete thesis & catalysts.

Valuation

We value Pond Technologies using a peer comparables valuation methodology based on EV / Sales for 2022 estimates.

We reach $ 0.65 USD stock price per share for PNDHF and $ 0.80 CAD for POND.V by applying the peer group average of 3.0x EV / Sales 2022 to our 2023 Sales forecast.

We apply 2023 as our base year because it being the first full year of commercialization terms with Livalta (AB Agri). We apply a 15% premium to it because of embedded optionality for the likelihood that one large deal ($ 3m revenues) is signed over the next 9 months. ESG stocks have also been commanding a premium valuation in recent years.

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