Recycled PET Demand And India Expansion Will Drive Long Term Earnings Potential

Catalysts

About Loop Industries

Loop Industries uses proprietary depolymerization technology to produce virgin quality PET resin and monomers from 100 percent recycled feedstocks for packaging, textiles and specialty chemicals.

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

• Ramp up of the Infinite Loop India plant, supported by an anchor take or pay sportswear contract and additional offtake under negotiation, positions Loop to convert substantial committed demand into recurring revenue and more visible earnings growth post 2027.
• Global brands face rising regulatory and consumer pressure for high recycled content packaging and apparel, especially in Europe. This should lift demand for Loop’s FDA approved bottle grade resin and Twist textile resin and support higher utilization, stronger top line and improved operating leverage.
• Unique ability to supply virgin quality DMT and MEG from 100 percent recycled content into specialty polymers and chemicals provides a differentiated offering in a tight and fossil based market. This enables portfolio diversification, higher value mix and potential margin expansion.
• Modular, low cost production in India and reuse of utilities on a planned second 100,000 ton line on the same 93 acre site are expected to reduce per ton CapEx and operating costs. This may improve project returns, net margins and free cash flow as capacity scales.
• Engineering and milestone payments from the European Infinite Loop project structure, with Societe Generale and other financing partners, are set to create a capital light revenue stream that can cover back office costs for several years. This may help stabilize earnings and reduce cash burn risk.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Loop Industries's revenue will grow by 68.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -105.1% today to 15.8% in 3 years time.
• Analysts expect earnings to reach $8.4 million (and earnings per share of $0.13) by about December 2028, up from $-11.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $12.6 million in earnings, and the most bearish expecting $6.2 million.
• 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 32.8x on those 2028 earnings, up from -4.0x today. This future PE is greater than the current PE for the US Chemicals industry at 23.9x.
• Analysts expect the number of shares outstanding to grow by 0.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The Infinite Loop India facility is not expected to be operational until the end of 2027, which leaves several years where the company relies on limited engineering fees and a small Montreal footprint. Any construction delay, cost overrun or debt syndication setback could prolong cash burn and pressure earnings and net margins.
• Although management describes demand as significantly exceeding supply, key offtake contracts are still under negotiation and some end markets like specialty chemicals are driven by spot pricing. Weaker than expected contract coverage or lower spot prices could reduce utilization and constrain revenue growth.
• The strategy depends heavily on India as a low cost manufacturing hub and on favorable sustainability regulations in Europe. Changes in labor costs, energy costs, trade policy or a cyclical pullback in regulatory enforcement on recycled content could compress the cost advantage and hurt net margins.
• Current liquidity of $9.86 million and a history of negative profitability mean the company may need additional equity or dilutive financing to fund its share of project equity. Any delay in milestone and engineering payments from the European project could increase dilution and weigh on earnings per share.
• The narrative assumes Loop remains one of the only sources of virgin quality DMT and high end recycled PET. If large chemical or packaging players commercialize competing depolymerization or advanced recycling technologies at scale, Loop could face pricing pressure and loss of market share that would impact revenue and long term earnings power.

Valuation

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

• The analysts have a consensus price target of $4.55 for Loop Industries 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 $6.1, and the most bearish reporting a price target of just $3.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $53.0 million, earnings will come to $8.4 million, and it would be trading on a PE ratio of 32.8x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $0.97, the analyst price target of $4.55 is 78.7% 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.