By Alex Gavrish, Etalon Investment Research; author of Wall Street Back To Basics

Enzymotec

After a successful IPO in 2013, Enzymotec Ltd (NASDAQ:ENZY) recently completed a secondary public offering. John Paulson’s fund increased its stake and presently owns 20% of the company

Company profile

Enzymotec is a global supplier of specialty lipid-based products and solutions. The company develops, manufactures and markets innovative bio-active lipid ingredients, as well as final products based on sophisticated processes and technologies. Enzymotec Ltd (NASDAQ:ENZY) develops clinically-validated products including bio-functional, lipid-based compounds that address a wide spectrum of growing consumer demands, such as optimal development, supplementation for nutritional deficiencies and needs, and the management of medical disorders and diseases.

Company divides its operations in two segments: Nutrition and VAYA Pharma

The nutrition segment develops and manufactures lipid compositions and bioactive ingredients as ingredients for infant formula and dietary supplements, which are tailored to the special needs of the nutrition industry. These ingredients include InFat, a proprietary, clinically-proven infant formula fat ingredient that mimics human breast milk fat to facilitate healthy infant development and premium phospholipids-based bioactive ingredients for nutritional supplements. The best-selling product is krill oil, which provides the anti-aging benefits of Omega-3 fatty acids. Other products are targeted at improving brain health and providing benefits in memory, learning abilities and concentration.

VAYA Pharma segment develops, manufactures and sells branded lipid-based medical foods for the dietary management of medical disorders and common diseases. This is a research-based, specialty pharmaceutical segment, which currently offers medical foods products for the cardiovascular and neurological markets.

Enzymotec IPO

Enzymotec Ltd (NASDAQ:ENZY) went public in September 2013 through an initial public offering on NASDAQ. Company priced shares at $14 in an IPO. Underwriters also exercised their option to purchase additional shares and the company sold a total of 5.074 million shares for total proceeds of $71 million and net proceeds to the company of $64 million. IPO shares represent 23.5% of shares outstanding, based on a 21.6 million of shares currently outstanding. The company intends to use the net proceeds from the offering to meet its anticipated increased working capital requirements resulting from the expected growth in the company’s business and for general corporate purposes. The IPO was received favorably by the market: shares started trading at $18.26 and during first three months reached $30.28, returning 65.8% since first day of trading or 116% from the IPO price.

Secondary offering

On February 27th, 2014, Enzymotec Ltd (NASDAQ:ENZY) announced secondary public offering of 5.4 million shares at a price of $28 per share. Proceeds from the secondary offering were not received by the company as offered shares were sold by company’s existing shareholders. It is worthwhile to note that demand from investors was robust as the offering was initially planned for 4.6 million shares and was increased further.

Paulson & Co funds’ stake

On February 14th, 2014 Paulson & Co file a SEC form in which it disclosed that its funds collectively own 8.3% of Enzymotec. On March 10th, 2014 – after the company completed its secondary offer in which shares were sold by existing shareholders, Paulson & Co filed an update to its holding in which it disclosed a stake of 19.2% percent, which implies that it participated in the secondary offering and increased its stake. Judging by the size of disclosed stake and amount of shares sold in the secondary offering, it is probable that Paulson & Co was the main investor and bought approximately half of the offered shares. Based on the March 27th closing price of $21.52 per share, its stake is valued at about $91 million.

Valuation

As of March 27thh, 2014 close, Enzymotec had a market capitalization of $464 million and an enterprise value of $393 million. For the full fiscal 2013 year, company generated $65 mil in revenues, $11.7 mil in operating income, $11.6 mil in net income ($13.8 mil excluding IPO expenses). FY 2013 EBITDA stood at $16 million and 2013 fourth quarter EBITDA at $6.3 million. In terms of valuation, company is currently trading at an EV/EBITDA multiple of x24.4 (based on FY 2013 financials), an EV/EBITDA of x15.6 (based on annualized Q4 2013 results), and a P/E ratio of x40.7. For fiscal 2014 company expects revenues in a range of $88 to $95 million and Non-GAAP net income of $18 to $22 million. Based on this expected FY 2014 Non-GAAP net income, company trades at a P/E ratio of about x23.

Enzymotec is an emerging growth company and presents investors with all the risks usually associated with such companies. At the same time, a focus on attractive and global markets, and presence of such prominent investor as John Paulson with almost a 20% percent stake in the company certainly warrant further research and analysis about the company.

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