The H1 earnings released on 31/10 showed some improvement, but were substantially below what our modelling implied with a €-5.2m cash loss when we were banking on a €-1.4m loss for the full year. While we downgrade our near-term expectations, funding issues have been pushed to the fore as the recap planned before year-end has not yet materialised.

The reliance on convertible issuance for short-term funding has been stopped on 12/11 as its dilutive impact is amplified when the share price drops. Management is focused on sorting the need for fresh funding for the deployment of Renewable Energy waste to power generation and the execution of a broad industrial agreement with Orano.

The H1 net earnings at €-10.5m were dominated by a €-7.1m loss from renewable energy (including €-3.6m accounting non-cash loss) which is at the heart of the redesigned Europlasma. Our last April forecast of a €-1.4m loss for 2018 is out of kilter.

H1 has burnt c. €8m, offset by about €7m in equity issuance. The group is facing a €28m net debt, of which c. €13m is due to the highly welcomed change in consolidation perimeter earlier this year whereby CHO Morcenx is now fully consolidated in the Renewable Energy activity. Group share of equity stands at €-10m with minorities contributing €14.3m, so that equity is a modest €4m or so.

The H1 operating earnings were disappointing as far as power generation goes. Once the change of scope of consolidation is allowed for (a negative €-2.1m impact), one is still left with a €-4.5m loss. This is at some distance from our computation for the year which was banking on a €4.3m…profit. The gap is due to upgrades at CHO Morcenx which are still requiring long plant stoppages.

H2 power generation will also suffer from extra testing periods after a set of technological improvements with a reopening last September. We have slashed our revenue expectations from €10m down to €4m and our EBIT expectation from €4.3m to €-3.7m. Further down the line the growth expected from the opening of a second power generation site (CHO Tiper) has been pushed back some months as the funding has to be fully raised. The first MWh are now a 2020 prospect.

The other main line of business is asbestos waste treatment (Inertam). Here again H1 revenues (€4.4m) are below our expectations so that we slightly cut down our full-year forecasts by €1m to €9m. The segment still sees a halving of its operating loss to €-1.5m vs. last year.

We trim our full-year EBIT expectations for Inertam from €0.7m to c.€0.2m. This may be optimistic as the kiln has been shut down for more than a month for a partial relining in H2. Long-standing plans to have another ready kiln are ready but have been delayed by funding constraints.

Central costs which allow for R&D efforts clearly remain (necessarily) high at c. €2.5m

Funding delayed

Good progress on power generation both on technology and the legal set-up which handed over control to Europlasma as opposed to financing partners were conducive of positive expectations for a fresh round of funding. Fresh funding was primarily aimed at coping with the group share of funding into new power plants.

Earlier expectations of a completion by early November have been dashed (reason unknown) so that Europlasma had relaunched its expensive issuance of convertibles, subsequently converted into equity and sold in the market. The fast-forward drop in the share price led to an interruption of this funding.

This difficult patch is self-feeding, obviously, as some major projects (agreement with Orano on the treatment of toxic & radioactive waste, launch of CHO Tiper) are pushed back. We allow for some of this in our new forecasts.

The combination of lower than expected H1 cash generation, the delays in funding and consequent push back of expansion plants, as well as the cost of short-term risky funding, all conspire to a very material drop in expectations in 2018 and potentially 2019 group earnings. This is further compounded by an even higher than expected dilution cost.

We raised our expected number of shares by about 40% to allow for the current very low share prices which reflects more liquidity concerns than a loss of substanece. Please see the relevant tables in our full report with a rough estimate of a target price brought down to €0.22 from €0.34 before the release.

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