Global Recycling Regulations And Capacity Expansion Will Drive Significant Long Term Opportunity

Catalysts

About PureCycle Technologies

PureCycle Technologies converts post consumer polypropylene waste into high quality recycled resin for use in demanding consumer, packaging and industrial applications.

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

• Rapid operational ramp at Ironton and Denver, including added shifts and compounding capacity, is expected to lift utilization toward nameplate levels and unlock meaningful operating leverage. This is expected to support higher revenue and improve earnings as fixed costs are spread over greater volumes.
• Deepening commercial relationships with global brands such as Procter and Gamble, leading quick service restaurants, snack companies and major converters are poised to translate a strong application funnel into 40 to 50 million pounds of annualized volume from only a handful of projects. This is expected to drive recurring revenue growth and increase visibility on future cash flows.
• Growing regulatory momentum in the United States and Europe around extended producer responsibility, mandated recycled content and packaging rules is set to push large brands toward plastic to plastic solutions. This should support premium pricing for PureCycle’s differentiated resin and expand long term margins.
• Global expansion projects in Thailand and Antwerp, supported by strong feedstock availability, local debt initiatives and a grant of up to 40 million euros, are expected to deliver capital efficient capacity growth and diversify income streams. This may improve long term earnings power and return on invested capital.
• Advances in co product optimization and compounding, including monetization of non polypropylene material from bales and co product 2, are reducing effective feedstock costs and widening the addressable market. This should enhance net margins and help stabilize profitability across economic cycles.

Assumptions

This narrative explores a more optimistic perspective on PureCycle Technologies 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 PureCycle Technologies's revenue will grow by 271.3% annually over the next 3 years.
• The bullish analysts are not forecasting that PureCycle Technologies will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate PureCycle Technologies's profit margin will increase from -4141.0% to the average US Chemicals industry of 9.6% in 3 years.
• If PureCycle Technologies's profit margin were to converge on the industry average, you could expect earnings to reach $27.8 million (and earnings per share of $0.15) by about December 2028, up from $-234.4 million today.
• 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 189.7x on those 2028 earnings, up from -6.2x today. This future PE is greater than the current PE for the US Chemicals industry at 24.0x.
• The bullish analysts expect the number of shares outstanding to grow by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.89%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The long and uncertain qualification and brand approval cycles with global consumer, QSR, fiber and automotive customers could delay or limit conversion of the large application funnel into firm, sustained offtake, which would constrain realized volumes and revenue growth in spite of the current demand pipeline.
• The capital intensive global expansion strategy into Thailand, Antwerp and future Gen 2 purification lines depends heavily on external debt, grants and warrant exercises. Any tightening in credit markets, delays in financial close or cost overruns could strain PureCycle's cash position and increase dilution, pressuring future earnings and returns on invested capital.
• The business model relies on structurally attractive feedstock economics and continued success in monetizing co products, but shifts in waste handling economics, competition for polypropylene bales or weaker markets for co product 2 and other non polypropylene outputs could erode the anticipated 20 percent effective feedstock cost reduction and compress net margins.
• The current regulatory momentum toward extended producer responsibility and mandated recycled content in the United States and Europe may evolve in ways that disadvantage specific plastic to plastic technologies. For example, restrictive definitions or heightened scrutiny of advanced recycling could dampen pricing power, slow customer adoption and reduce long term revenue visibility.
• Scaling a first of its kind technology to higher utilization at Ironton and Denver and then to much larger Gen 2 plants introduces operational and execution risk. Persistent reliability issues, lower than expected yields or prolonged sub nameplate operations would increase unit costs, limit operating leverage and delay the path to positive earnings.

Valuation

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

• The assumed bullish price target for PureCycle Technologies is $23.0, which represents up to two standard deviations above the consensus price target of $15.17. This valuation is based on what can be assumed as the expectations of PureCycle Technologies'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 $23.0, and the most bearish reporting a price target of just $9.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $289.7 million, earnings will come to $27.8 million, and it would be trading on a PE ratio of 189.7x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $8.01, the analyst price target of $23.0 is 65.2% 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.