Probiotics a Healthy Investment | The Prairie Trader Examines EnWave Corp. |
Food processors, vaccine makers are targets for EnWave
by Fabrice Taylor
Bacteria is big business. You’ve probably seen ads for yogurt or yogurt drinks extolling the virtues of the so-called probiotics they contain. Consumers care about intestinal health, and food makers are heeding the call.
So is a little company called EnWave Corp. (TSXV:ENW) EnWave makes drying equipment for food and food stocks. What does that have to do with bacteria? When it comes to food – yogurt, cheese, bread – a lot. The bacteria or yeast that go into these foods have to be dried to be used in industrial production.
As things stand, probiotics are freeze-dried. But freeze-drying, a decades-old technology, isn’t perfect – far from it. It’s wasteful. A lot of the bacteria don’t survive the harsh environment imposed by the process. Plus it’s expensive, both in terms of operating and capital costs, and much more time-consuming.
Enter EnWave and its potentially game-changing technology that will create a lot of wealth and value if successful. The technology is called REV, which stands for radiant energy vacuum. Developed by food scientist Tim Durance while at the University of British Columbia (EnWave is basically a spinoff of the school), REV uses microwaves and a vacuum to do what a freezer does.
But it does it far more cheaply, in terms of both equipment and operating expenses, and with better results.
When it comes to food – that is, drying fruits, berries, vegetables and so on, the first market EnWave plans to crack – the company says capital costs are about a sixth of freeze-drying while energy costs are about a third. It’s far faster and, because it’s continuous rather than done in huge batches à la freeze-drying, it’s more convenient and cheaper still.
The food is comparable in nutritional value and taste and in some cases looks better, the company says.
To test those claims, I found an ideal source: a customer. EnWave sold its first nutraREV machine to a B.C. company last year, privately held Cal-San Enterprises Ltd., a blueberry grower and winemaker. It confirms what EnWave says.
Cal-San has been tinkering with various drying technologies for a decade. It chose EnWave’s because it found that the capital and operating costs were substantially lower. The science and the UBC pedigree also helped in terms of credibility.
What’s more interesting is that the product is better; the berries look more like fresh or frozen ones than dried.
Cal-San, which has territorial exclusivity agreements with EnWave, told me that this is opening up big opportunities. Food companies, from bakeries to snack food and cereal makers, are clamouring for product. And given the improvements over freeze-dried, they should fetch a premium on top of having lower costs.
Cal-San wouldn’t say what returns it might earn on this investment other than to describe them as “healthy.” It is planning on buying another machine this year to ramp up production.
Another interesting angle in the EnWave story is health. The dried fruit and vegetable market is growing faster than the category as a whole and EnWave is targeting that market, and is negotiating with other growers. I’ve tasted REV-dried bananas and they’re remarkably good, even without any additives. The company can also dry sweet potatoes, fish, peas, apples and countless other foods.
This is obviously promising for EnWave and its shareholders. First, it’s a validation of the technology. Second, it’s a lead order and those usually make subsequent ones easier. Finally, EnWave has an interesting strategy for earning revenue. It charges for the machines, but also wants to earn a small royalty on the sale of products the machines make.
As mentioned earlier, EnWave’s technologies go beyond food though. Besides probiotics, they’re also being tested and developed for vaccines, enzymes and other things. There are encouraging test results and impressive alliances with respect to these businesses. EnWave, for example, is testing the use of its technology on bacterial cultures and probiotics with global food giant Danisco. The company recently announced big progress in its testing with Danisco in fact.
I interrogated co-CEO John McNicol for this column, and he held up well. He’s focused, to the point, and has an impressive track record of creating value.
As for numbers, the market for freeze-drying equipment is US$1.8 billion. Carving out a piece of that should produce profits.
The real juice is in the royalties. The company says the addressable market of applicable products (dried foods, antibodies, vaccines etc.) will be $120 billion in about a decade using current growth rates. (I couldn’t verify those numbers, but can say that the market is huge.) Getting just 2% of that market and earning a 2% royalty on it would yield income of almost $50 million – and keep in mind there are no costs against that income other than taxes and royalties payable to UBC. If things keep going as they have, though, EnWave will likely be bought before then.
There are the usual small-cap risks to the story of course, but on the positive side EnWave isn’t reinventing the wheel; demand for what it wants to sell exists already and, for what it’s worth, I’d say the rewards do seem to compensate for the risks.
With the stock changing hands for 95 cents (market cap of $43 million), the upside is interesting if they can keep the early success going.
Fabrice Taylor is the Prairie Trader. He is an award-winning journalist and equity analyst.
Prairie Trader is an independent overview and assessment of investments available to Albertans. Alberta Venture assumes no responsibility for the accuracy of any stock recommendations. You can send letters about this column to feedback.
