Commercial Operations And Policy Tailwinds Will Drive Long Term Asphalt Recycling Expansion

Catalysts

About Northstar Clean Technologies

Northstar Clean Technologies recycles asphalt shingles into high quality asphalt products through a scalable network of reprocessing facilities.

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

• Commencement of sustained commercial operations and first product sales at the Calgary facility, supported by a five year shingle supply agreement with the City of Calgary, should transition the business model from primarily grant and tipping fee income to recurring product revenue, lifting top line growth and improving earnings visibility.
• Growing policy and municipal pressure to divert construction waste from landfills, combined with demonstrated provincial backing such as the Emissions Reduction Alberta grant, positions Northstar to secure similar nondilutive funding and supply agreements in new jurisdictions, reducing capital intensity per plant and supporting higher net margins.
• The rinse and repeat buildout model, using Calgary as a proven template for Hamilton, US#1, Vancouver and additional TAMKO linked sites, enables standardized engineering, faster permitting and lower per unit construction risk. This structure should support operating leverage and expanding EBITDA margins as the plant count scales toward management’s 10 facility road map.
• Strong offtake relationships with established asphalt players like TAMKO and McAsphalt, combined with pelletized product that can serve both regional and export markets, create a diversified demand base that can support premium pricing versus landfill alternatives and drive higher blended revenue per tonne processed.
• The planned use of government backed debt, strategic equity and nondilutive grants to finance future sites mirrors the Calgary capital structure. This approach can limit shareholder dilution, improve return on invested capital and accelerate the path from current losses to positive EBITDA and earnings as incremental facilities come online.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Northstar Clean Technologies's revenue will grow by 278.2% annually over the next 3 years.
• Analysts are not forecasting that Northstar Clean Technologies will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Northstar Clean Technologies's profit margin will increase from -2180.8% to the average CA Commercial Services industry of 4.2% in 3 years.
• If Northstar Clean Technologies's profit margin were to converge on the industry average, you could expect earnings to reach CA$1.4 million (and earnings per share of CA$0.01) by about December 2028, up from CA$-13.2 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 83.9x on those 2028 earnings, up from -3.2x today. This future PE is greater than the current PE for the CA Commercial Services industry at 23.3x.
• 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 7.84%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company remains loss making for longer than expected, with comprehensive loss already increasing from 3.2 million to 3.9 million in the latest quarter and higher operating costs from utilities, personnel and consulting becoming structurally embedded, which would delay any path to positive earnings and depress net margins.
• The Calgary facility may ramp more slowly than planned or fail to consistently achieve modeled throughput and pricing, especially given past delays and storage constraints. This would limit the expected step change from tipping fee revenue to higher value asphalt product sales and constrain top line revenue growth.
• The rinse and repeat expansion strategy to Hamilton, US number 1 and Delta is heavily dependent on timely permitting, site selection, offtake agreements and nondilutive government funding. Any setbacks in these processes or policy shifts away from grant support could slow the build out of the planned 10 facilities and reduce future EBITDA.
• Reliance on municipal waste diversion policies, shingle feedstock agreements and strategic offtakers such as TAMKO and McAsphalt creates concentration risk. Changes in local political priorities, construction activity cycles or buyer preferences could erode pricing power and create volatility in both revenue and earnings.
• The roadmap to a 1 billion valuation assumes each 80,000 tonne plant delivers around 10 million of EBITDA and commands a 10 times multiple. If long term waste to value sector valuations compress, operating performance falls short or capital costs rise above the estimated 25 million per plant, the company could face lower returns on invested capital and a structurally lower share price than implied by management’s targets.

Valuation

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

• The analysts have a consensus price target of CA$0.5 for Northstar Clean Technologies based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be CA$32.7 million, earnings will come to CA$1.4 million, and it would be trading on a PE ratio of 83.9x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of CA$0.28, the analyst price target of CA$0.5 is 44.0% 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.