Biomethane Ramp Up And Carbon Credit Headwinds Will Pressure Long Term Earnings Potential

Catalysts

About Orizon Valorização de Resíduos

Orizon Valorização de Resíduos develops and operates waste ecoparks that monetize final disposal through biomethane, energy generation and carbon credits.

What are the underlying business or industry changes driving this perspective?

• The rapid build out of biomethane capacity at Jaboatão and Paulínia, in a context of evolving gas regulation and grid constraints, risks prolonged ramp up delays and suboptimal load factors. This would materially undershoot current expectations for revenue growth and EBITDA contribution.
• Increasing reliance on international voluntary carbon markets, just as global buyers tighten quality and additionality criteria, could compress achievable prices and volumes for credits sold to large tech and industrial clients. This would pressure net margins and earnings despite rising project volumes.
• The aggressive pipeline of new ecoparks and biomethane plants, combined with front loaded CapEx and long asset lives, heightens the risk that waste volumes, gate fees and gas offtake contracts fail to scale as projected. This could leave leverage elevated and returns on invested capital below the company’s current valuation assumptions.
• As more Brazilian players and infrastructure funds enter advanced waste treatment, renewable gas and carbon credit projects, intensified competition for contracts and assets may cap future gate fee increases and biomethane contract spreads. This would limit real revenue growth and EBITDA margin expansion.
• Expected long term tightening of environmental rules on landfills and leachate treatment may require incremental compliance CapEx beyond what is currently indicated. This would increase unit operating costs per ton of waste and dilute net income growth from the core disposal business.

Assumptions

This narrative explores a more pessimistic perspective on Orizon Valorização de Resíduos compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Orizon Valorização de Resíduos's revenue will grow by 23.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.0% today to 30.2% in 3 years time.
• The bearish analysts expect earnings to reach R$577.1 million (and earnings per share of R$8.57) by about December 2028, up from R$30.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as R$781.1 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.5x on those 2028 earnings, down from 214.8x today. This future PE is lower than the current PE for the BR Commercial Services industry at 71.7x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.92%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Waste volumes and gate fees may fail to grow steadily above inflation. If asset lives at recently licensed ecoparks are shorter than anticipated or contracted price increases do not materialize, this could undermine structural revenue growth and limit expansion in net margins and earnings over the long term.
• Biomethane plants at Jaboatão and Paulínia may experience delays or operational issues during ramp up, and additional projects in advanced planning may not proceed as expected. In that case, capital intensive investments may not convert into high margin, recurring cash flow streams, and EBITDA and earnings may not benefit as these assets remain a CapEx drag rather than reaching full contribution.
• Orizon may be unable to build a durable competitive position in international voluntary carbon markets. If reference clients such as Google and Volkswagen reduce activity, project registration slows or the dedicated global sales effort underperforms, carbon credit revenues could be less predictable and lower quality, with a negative impact on overall net margins.
• The company may not maintain a conservative balance sheet with more than BRL 1 billion in cash, extended average debt maturities and lower funding costs. If leverage increases or funding conditions tighten, its ability to pursue organic growth and M&A could be constrained, with higher financial risk and weaker long term earnings resilience.
• The M&A pipeline may not prove as robust as anticipated and newly acquired ecoparks in regions with strong demand for advanced waste treatment and biomethane, such as Presidente Prudente, may be slower to scale. This could prevent the company’s growth trajectory from accelerating beyond current expectations and limit potential increases in revenue, EBITDA and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Orizon Valorização de Resíduos is R$54.0, which represents up to two standard deviations below the consensus price target of R$67.28. This valuation is based on what can be assumed as the expectations of Orizon Valorização de Resíduos's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$90.0, and the most bearish reporting a price target of just R$54.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be R$1.9 billion, earnings will come to R$577.1 million, and it would be trading on a PE ratio of 18.5x, assuming you use a discount rate of 18.9%.
  
• Given the current share price of R$67.66, the analyst price target of R$54.0 is 25.3% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.