Anticipated Fuel Of The Future Law Will Stimulate Biomethane Demand And Pricing

Key Takeaways

• Regulatory changes enabling carbon credit sales from restricted landfills are set to boost revenue growth.
  
• Expansion into biomethane production and strategic acquisitions will enhance revenues and margins.
  
• Heavy reliance on shifting regulatory frameworks and strategic partnerships creates significant revenue risks, while acquisitions introduce integration challenges and leverage concerns.

Catalysts

Operates as a waste recovery process company.

• Orizon's ability to commercialize carbon credits from previously restricted landfills due to changes in regulatory frameworks is likely to drive revenue growth through increased sales of carbon credits.
  
• The acquisition of thermal power plants, which will allow for early monetization of biogas before biomethane plants are operational, is projected to positively impact future EBITDA starting from Q4 2024 to Q1 2025.
  
• The expansion into biomethane production with new capacity from both owned and third-party landfills, alongside increasing average prices, is expected to boost revenues and enhance net margins in the coming quarters.
  
• Strategic acquisitions of landfills and investments in biogas and biomethane projects are anticipated to contribute to increased waste processing volume and geographic growth, resulting in higher revenues and long-term earnings improvements.
  
• The anticipated regulatory advancements, such as the Fuel of the Future Law, are expected to stimulate demand for biomethane and positively influence pricing, which should lead to improved long-term revenue streams and profitability.

Orizon Valorização de Resíduos Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Orizon Valorização de Resíduos's revenue will grow by 27.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.3% today to 25.3% in 3 years time.
• Analysts expect earnings to reach R$451.7 million (and earnings per share of R$5.44) by about February 2028, up from R$159.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.9x on those 2028 earnings, down from 22.1x today. This future PE is lower than the current PE for the BR Commercial Services industry at 18.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.48%, as per the Simply Wall St company report.

Orizon Valorização de Resíduos Future Earnings Per Share Growth

Risks

• The company's operations are heavily reliant on volatile regulatory frameworks for carbon credits and biomethane, which can lead to uncertainties in future revenue streams if regulations change unfavorably. This impacts revenue and earnings.
  
• There is increasing pressure on costs, particularly in SG&A, linked to carbon credit trading and M&A activities. If these transactions are not efficiently managed, it may affect the net margins negatively.
  
• The biomethane segment's success hinges significantly on strategic partnerships and acquiring thermal power plants, which carries execution risks. Failures or delays could affect projected revenues and earnings.
  
• The company's growth strategy includes frequent acquisitions, which brings integration risk and the potential for over-leverage, potentially impacting the capital structure adversely if the deals do not yield expected returns.
  
• There is competitive risk in trading carbon credits, as many projects still await migration to regulatory markets, which may not deliver expected returns if market conditions or competition intensify, affecting revenue and profitability.

Valuation

• The analysts have a consensus price target of R$57.79 for Orizon Valorização de Resíduos based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$62.0, and the most bearish reporting a price target of just R$51.7.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$1.8 billion, earnings will come to R$451.7 million, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 19.5%.
  
• Given the current share price of R$42.65, the analyst price target of R$57.79 is 26.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.