Tightening Water Standards And New Carbon Uses Will Drive Significant Long Term Upside

Catalysts

About Arq

Arq produces powdered and granular activated carbon products that serve regulated water, power and industrial markets, while developing higher value carbon and mineral applications.

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

• Accelerating demand for activated carbon driven by tightening water quality and emissions standards, combined with a supply constrained market, supports structurally higher pricing and is expected to expand revenue and gross margins as GAC volumes ramp toward nameplate capacity.
• The transformed PAC platform, now generating $16.7 million of trailing twelve month adjusted EBITDA with continued ASP increases and diversified end markets, provides a cash engine to fund growth projects and increase consolidated earnings without heavy incremental SG&A.
• Installation of a larger purpose-built thermal oxidizer and optimization of feedstock handling are expected to unlock 25 million pounds of GAC capacity around mid 2026, creating operating leverage as fixed costs are spread over higher volumes and potentially improving net margins.
• Emerging uses of Arq Wetcake in asphalt, purified coal for semiconductors, rare earth recovery and synthetic graphite position the company to participate in long duration infrastructure, electronics and energy transition cycles, which may create incremental higher margin revenue streams over time.
• Phase 2 GAC expansion, already essentially permitted and planned to follow Phase 1 reaching full capacity, is intended to allow Arq to scale into long term demand in both water and renewable natural gas markets, supporting multi year growth in revenue, EBITDA and free cash flow.

Assumptions

This narrative explores a more optimistic perspective on Arq compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Arq's revenue will grow by 24.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -3.3% today to 9.4% in 3 years time.
• The bullish analysts expect earnings to reach $21.5 million (and earnings per share of $0.5) by about January 2029, up from $-3.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $17.6 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 31.4x on those 2029 earnings, up from -36.2x today. This future PE is greater than the current PE for the US Chemicals industry at 23.7x.
• The bullish analysts expect the number of shares outstanding to grow by 1.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.81%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent design flaws and feedstock handling challenges at the Red River facility, including moisture-related plugging and tarring in the GAC line, could delay reaching nameplate capacity beyond mid 2026. This could limit GAC volume growth and constrain revenue and EBITDA expansion.
• If the company is forced to rely on more expensive process changes, such as installing the new purpose-built thermal oxidizer and potentially undertaking further redesign work, GAC ramp-up costs may escalate beyond the currently planned 2026 CapEx envelope. This could depress net margins and delay the path to sustainable earnings growth.
• Switching from Corbin Wetcake toward drier coal feedstock or blending alternatives to solve design issues may sacrifice some of the original cost and logistics advantages of waste derived inputs. This could structurally raise unit production costs for GAC and compress gross margins over the long term.
• Continued underutilization of GAC capacity while fixed production costs remain high could keep consolidated gross margins well below historic PAC levels, particularly if PAC ASP growth normalizes from recent high single digit increases. This could limit improvement in company wide earnings and free cash flow.
• The emerging applications for Arq Wetcake in asphalt, purified coal for semiconductors, rare earth recovery and synthetic graphite are still in early testing or depend on uncertain government funding. Failure to commercialize these avenues at scale would remove a key pillar of the longer term high margin diversification story and cap upside to revenue mix and net profitability.

Valuation

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

• The assumed bullish price target for Arq is $12.0, which represents up to two standard deviations above the consensus price target of $8.75. This valuation is based on what can be assumed as the expectations of Arq's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.0, and the most bearish reporting a price target of just $7.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $229.0 million, earnings will come to $21.5 million, and it would be trading on a PE ratio of 31.4x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $3.33, the analyst price target of $12.0 is 72.2% 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.