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Pontus Protein (TSXV:HULK) DD - AI-based, aquaponic plant protein producer

Updated: Nov 13, 2021

This plant-based protein company has surged over 100% in the past week, catching the eye of investors looking for a disruptive company with substantial growth potential. Here’s what we think about Pontus Protein (TSVX:HULK):

Summary

  • Pontus grows, produces, and sells protein created from water lentils using a proprietary AI-based system

  • Pontus’ unique production method combines hydroponics (growing in water) and aquaculture (raising fish), creating a closed-loop system where fish produce the nutrients to grow water lentils

  • The company listed last week on the TSX venture exchange through a reverse takeover with its last raise at $0.15; shares traded as of Feb-5 close at $1.24 ($74mn market cap)

  • Our Investment thesis

  • Pontus provides a unique, attractive product offering (sustainable plant-based protein powder) and operates in an industry with a deep, growing end user market

  • Its proprietary technology and production methods solidify its leading position in its niche market through best-in-class efficiency

  • Opportunity for scalable growth (outside of current plant growth) though leasing its patented technology (see Financial Overview)

  • Unique production method (zero carbon footprint through aquaponics) presents an interesting sustainability/ESG play


  • Catalysts / Risks

  • Executing on production plants - its two contemplated plants are in development and roadblocks limit the cash flowing ability of Pontus

  • Accessing its targeted end market - the company produces a niche product with an unproved customer base; Pontus must develop a robust and consistent offtaker market for its product

  • Achievement of licensing arrangements - the company envisions a licensing model with stable cash flows to scale its business, this may be difficult to achieve in near-term given the limited customer base today


Here’s all you need to know about Pontus Water Lentils.

Outline:

  1. Overview of the Business

  2. Market Overview / Competitive Landscape

  3. Timeline of Recent Developments

  4. Financial Overview

  5. Valuation

1. Overview of the Business

Pontus’ mission is to provide the world with an environmentally sustainable source of nutrient-rich, organic, bio-secure plant-based protein. It does so through leveraging its proprietary CEVAS technology (detailed below) to grow water lentils which are then used to create protein. Pontus builds production farms which it uses to produce water lentils, and sells its protein direct-to-consumer. In addition to producing a unique product, Pontus’ plants use aquaponic systems (using fish in tanks to help cultivate plants in water) to grow its water lentils. Pontus’ production facility is unique in that the water used in its ponds is recirculated back to the aquaculture system, establishing a closed-loop, zero carbon footprint system.

Protein Powder Product:

“Pontus Protein Power'' is Pontus’s principal product, a protein powder produced from water lentils that are dehydrated and processed. The company markets the following benefits:

  • Non-GMO plant-based protein

  • High in antioxidants, essential vitamins and minerals

  • No solvents, chemicals, dyes, additives, preservatives, or pesticides

  • Allergen safe, gluten-free and vegan

  • Low in oxalic acid

  • A good source of dietary fibre

  • Rich in omega 3/6 fatty acids

Licensing Service:

The Company plans to license its Closed Environment Vertical Aquaponics SystemTM (CEVAS) technology to support the production of water lentils. The CEVAS system is a network of automated bio-secure aquaponic farms utilizing AI to grow the crops. Through leveraging its technology, which drives efficiency improvements over existing aquaponic systems, and its building and operational expertise, the company hopes to drive a long-term stream of cash flows from licensing and scale its business.

Method of Production

Pontus’ aquaponic production method is based on a symbiotic relationship with the fish and the plants in its production facilities

CEVASTM System

Pontus acquired all intellectual property rights and assets associated with the CEVAS tradename, system and brand developed by Green Oasis.

The CEVAS system automatically adjusts environmental parameters to optimize efficiency and leverages machine learning, collecting data points and facilitating automated harvesting / processing to maximize crop yield and quality. Some of these controls (per the company) include:

  • Artificial Light Control System: Photobio LEDs are used for providing a spectrum of light specific to vigorous vegetative growth

  • Machine Learning & AI: Using statistical analysis, the AI is able to make and test hypotheses to draw conclusions in real-time. The AI can automatically adjust environmental parameters within the building to boost productivity, maintain the health of the environment for the plants and fish, save on energy, and act as the smart security system

  • Control Solutions: The Control System monitors and maintains the water quality parameters of the fish farms and crop production.

  • Plant Productivity System: The Plant Productivity System monitors, manages and forecasts crop growing/harvest parameters.

2. Market Overview / Competitive Landscape

Market Overview

The plant-based protein supplement industry is an attractive and growing market, and we see Pontus being well-aligned to capitalize on this opportunity with its water lentil-based protein powder. The protein supplements market is approximately 18.9 billion USD in 2020, and is expected to grow at a 8.1% CAGR from 2020 to 2027. Protein powder segment makes up the large majority (~64%) of the market. Alternative protein products are also expected to grow at an outsized rate, and Pontus has communicated their plan to offer new products (protein bars, ready to drink products) after the establishment of the Surrey Facility.

Plant-based protein products represented ~32% of the market in terms of revenue in 2019 and this segment is anticipated to have the fastest growth, driven by growing popularity among vegans, vegetarians, and people allergic to dairy and egg proteins. Similarly, the sustainable nature of Pontus’ operations supports the trend to the more environmentally-conscious consumer.

Competitive Landscape

Within the water lentil protein space, Parabel, Biorefinery Solutions, Aquibledo, and Lentein are some of the direct competitors of Pontus, with Parabel as the incumbent player with a product in market (albeit with a different mode of production). These competitors have yet to reach the mass market, and with its scalability and efficiency, we think Pontus has the strongest tailwinds.

3. Timeline of Recent Developments

April 23, 2018: Pontus Protein Ltd. is formed

August 14, 2020: AmWolf Capital and Pontus Water Lentils enter into definitive agreement for Qualifying Transaction

January 26, 2021: Pontus completed Qualifying Transaction with Amwolf Capital

January 29, 2021: Pontus completes first successful day trading on the TSX.V under the ticker symbol TSXV: HULK

February 3, 2021: Pontus submits a building permit application for the Surrey aquaponics facility

4. Financial Overview

Pontus’ go-forward financials will represent the consolidated results of both AmWolf Capital Corp (shell company used as part of Pontus’ listing process) and Pontus standalone, with Pontus representing the go-forward operations of the business. Given that both businesses are pre-revenue, our focus on valuation is on forward-looking cash flows and EBITDA.

Revenue & EBITDA:

Pontus’ near-term revenue and EBITDA is centered around two planned production facilities, one based in Surrey, British Columbia with a size of ~20k square feet (the “Surrey Farm”) and an additional ~60k square foot commercial farm to be built in British Columbia. The farms are expected to begin operations in 2021 and 2023, respectively.

We expect the Surrey Farm to ramp up over time as demand increases, generating ~$2.5mn in EBITDA in 2023 with the commercial farm generating ~$7.5mn in EBITDA post-completion in 2023. As licensing revenue comes in and the output of the farms increases, we can see EBITDA growing to ~$20-$25mn in 2025.

Licensing:

Pontus envisions adding an additional revenue stream to its business, licensing the CEVAS technology and lending its building/operating expertise to third parties. This enables scalability outside of Pontus’ own farms to grow its top line. While this provides interesting upside to the company, potential licensing cash flow streams are not considered in our valuation, given the lack of proven end market. Due to this, we don’t expect licensing revenue at least until the finishing of the commercial farm (2023).

It may be hard to find companies that will want to license the technology primarily due to the risk in accessing the targeted end market, as the licensee would essentially be competing with Pontus to sell their own produced protein. As an alternative, we see a streaming model, similar to those seen in precious metal industries, where Pontus licences the technology but also undertakes agreements to buy up a portion or all of the production of externally owned production plants as attractive. This model has also been successful in cannabis production, which we view as a space similar to Pontus’. This provides the licensee with guaranteed revenue, shifting the risk (and reward) of selling the product to the end market back to Pontus.

Share Count:

Pro forma for its recent private placement and concurrent equity financing, the company has ~59.9 million shares outstanding with a fully diluted share count of ~93.0 million shares (~20 million warrants at $0.30/share). Outside of dilution from the warrants, we don’t expect further dilution as the company has sufficient capital to fund its near-term growth and should be able to fund future projects with either debt or free cash flows.

5. Valuation

Whereas other agriculture peers either produce proprietary crop inputs (fertilizer, herbicides, etc) or produce commoditized crops, Pontus doesn’t have the benefit of a broad, deep offtaker market for its product. Instead, to grow, the business has to both develop/scale its production and also create a market in the competitive supplement space for its product. If the business is able to execute on this, we feel this unique business model warrants a premium as it operates along its entire value chain, but until we see the broad market demand for its product and stable offtaker contracts, we don’t think a valuation premium is warranted.

Trading Multiples:

Farming/Agriculture businesses in the US trade at ~15x EV/EBITDA, with these multiples being inflated by companies with business models more closely aligned with software (agriculture drones, crop protection) and biotech companies (fertilizer and herbicide producers), both of which trade at significantly higher multiples.

While Pontus provides a differentiated product with a proprietary production method, it relies on scaling its production to grow, as-is, its business model is more in line with traditional crop producers than with agritech companies. There are meaningful opportunities (see financial overview) to scale, but without clear visibility beyond its two proposed plants, we see this as a ~7x multiple business. If a streaming/licensing-type growth strategy proves fruitful, this would warrant a significant multiple revaluation in line with the 15x multiples currently seen in the space due to the ability to rapidly scale.

We also see potential for a trading premium as a unique sustainability play, with the company’s “mission” and sustainability upside warranting an elevated market multiple marked by a fiercely supportive long-only retail ownership (think Tesla)

As noted above, we see three key risk factors for this valuation:

  • Executing on production plants - its two contemplated plants are in development and roadblocks limit the cash flowing ability of Pontus

  • Accessing its targeted end market - the company produces a niche product with an unproved customer base; Pontus must develop a robust and consistent offtaker market for its product

  • Achievement of licensing arrangements - the company envisions a licensing model with stable cash flows to scale its business, this may be difficult to achieve in near-term given the limited customer base today

Disclosure: I certify that the views expressed in this research report accurately reflect my personal views about the subject securities; and I certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. I have a business relationship with a member of management of the company and will suspend coverage in the event of any conflicts.

I have a position in TSX.V HULK

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