India Recycling Hub And European Delays Will Pressure Returns Yet Ultimately Support Long-Term Potential

Catalysts

About Loop Industries

Loop Industries develops and commercializes technology to produce PET resin and related monomers from 100% recycled content for applications in packaging, textiles and specialty chemicals.

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

• Although the Infinite Loop India facility has an anchor sportswear customer under a fixed price, take or pay contract, the project still depends on timely completion of the remaining offtake agreements to support debt syndication. This could limit future revenue visibility if customer signings slow.
• While partnerships with Shinkong and Hyosung plug Loop into existing apparel supply chains as brands look for more textile to textile recycling, apparel customers that are not used to buying resin may adopt slowly. This could weigh on utilization and delay any uplift in earnings from Twist volumes.
• Although European packaging regulations are pushing beverage brands toward higher recycled content and Loop is targeting this demand from India, any delays in European site selection or project execution with its partner could reduce anticipated engineering and milestone income that management expects to cover back office expenses.
• While the India site is positioned as a low cost manufacturing hub with access to textile waste feedstock, any pressure on feedstock pricing or availability, despite current studies, may compress net margins at the planned 70,000 ton and follow on 100,000 ton facilities.
• Although the DMT and MEG offerings open Loop to specialty polymers and chemical markets that require recycled inputs, the spot nature of parts of these markets and potential competition from fossil fuel based suppliers may create volatility in realized pricing and revenue from these product lines.

Assumptions

This narrative explores a more pessimistic perspective on Loop Industries 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 Loop Industries's revenue will grow by 8.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -105.1% today to 45.4% in 3 years time.
• The bearish analysts expect earnings to reach $6.4 million (and earnings per share of $0.11) by about January 2029, up from $-11.7 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $12.9 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 28.5x on those 2029 earnings, up from -4.6x today. This future PE is greater than the current PE for the US Chemicals industry at 25.2x.
• The bearish 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 project depends heavily on securing additional long term offtake contracts before lenders finalize debt syndication. Any slowdown in customer signings or weaker appetite from apparel, CPG or chemical buyers could delay or reduce the facility's ramp up and weigh on revenue and earnings.
• Loop is positioning India as a low cost global hub. Long term changes in labor costs, energy prices, logistics, or competition from other recycling technologies could erode the cost advantage that underpins management's comments about strong project returns and could put pressure on net margins.
• The European project is expected to generate meaningful engineering and milestone revenues that management believes can cover back office expenses for several years. Delays in European site selection, permitting, or partner investment could leave the group more reliant on its US$9.86 million of liquidity and constrain earnings.
• Customer interest in recycled materials is linked to both sustainability priorities and willingness to pay. If brand focus on sustainability weakens or if buyers push aggressively on price, Loop may need to accept lower pricing to maintain volumes, which could compress net margins even if capacity is fully utilized.
• DMT and MEG sales are tied to a chemical market that management describes as partly spot based. Exposure to volatile pricing, capable fossil fuel based competitors and cyclical demand in sectors like automotive and electronics could lead to earnings volatility and reduce revenue visibility over the long term.

Valuation

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

• The assumed bearish price target for Loop Industries is $3.0, which represents up to two standard deviations below the consensus price target of $4.55. This valuation is based on what can be assumed as the expectations of Loop Industries'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 $6.1, and the most bearish reporting a price target of just $3.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $14.0 million, earnings will come to $6.4 million, and it would be trading on a PE ratio of 28.5x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $1.11, the analyst price target of $3.0 is 63.0% 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.