Regulatory Tailwinds And Brand Demand Will Support Recycling Capacity Despite Execution Risks

Catalysts

About PureCycle Technologies

PureCycle Technologies converts post consumer polypropylene waste into high quality recycled resin for use in packaging, consumer goods, automotive parts and other applications.

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

• Although interest from large global brands and QSRs is translating into expected annual demand indications of about 40 million to 50 million pounds from a handful of projects, the pace of brand approvals and staged rollouts can slow the revenue conversion of this pipeline and delay the point at which Ironton consistently operates near nameplate capacity, which affects the timing of revenue and earnings.
• Despite regulatory moves such as EPR rules in several US states, recycled content mandates and upcoming European packaging and automotive requirements that encourage plastic to plastic solutions, brand owners currently relying on ISCC Plus credits may adjust compliance strategies more slowly than PureCycle anticipates. This could moderate the ramp of premium pricing and keep gross margins below management’s targeted unit economics for longer.
• While the build out of global projects in Thailand and Antwerp is supported by signed feedstock LOIs, an accepted €40 million EU Innovation Fund grant and local debt discussions, execution risks around permitting, financing close and construction schedules could push out capacity additions and extend the period during which corporate and growth capital spending weighs on earnings without a matching increase in revenue.
• Although co product monetization and the ability to sell non polypropylene fractions and co product pellets at around $0.20 to $0.30 per pound are contributing to roughly a 20% reduction in net feedstock costs, the early stage nature of this optimization means the full benefit to unit costs and net margins depends on further recipe development, customer adoption and regional market depth for these materials.
• While progress with technically demanding customers such as Procter & Gamble, major snack brands and an automotive OEM validates PureCycle’s product portfolio and certifications like FDA LNOs, GreenCircle, APR and REACH, long qualification cycles in areas such as fiber and automotive, combined with staged volume ramps, can lead to a more gradual build in revenue and operating leverage than implied by the breadth of applications in the funnel.

Assumptions

This narrative explores a more pessimistic perspective on PureCycle Technologies 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 PureCycle Technologies's revenue will grow by 256.6% annually over the next 3 years.
• The bearish 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 $24.7 million (and earnings per share of $0.13) by about January 2029, up from $-234.4 million today.
• 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 83.7x on those 2029 earnings, up from -7.3x today. This future PE is greater than the current PE for the US Chemicals industry at 24.9x.
• The bearish 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 7.88%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is progressing multiple large-volume applications with global brands such as Procter & Gamble, several top 5 QSRs and major snack brands, and management highlights that demand indications from just a handful of projects could reach 40 million to 50 million pounds annually at full ramp. If converted to long-term contracts and sustained shipments, this could support higher revenue and potentially stronger earnings than implied by a flat share price view.
• Regulatory trends are moving toward extended producer responsibility rules and recycled content mandates in both the US and Europe. Management expects more states and regions to implement policies over the next several years, which could increase structural demand for PureCycle’s plastic-to-plastic solution and support premium pricing, with a favourable effect on long-run revenue and net margins.
• The acceptance of up to €40 million from the EU Innovation Fund for the Antwerp project, together with progress on Thailand and ongoing debt financing discussions with local banks, points to external capital support for capacity growth outside the US. If these projects are built and utilized efficiently over time, they could add substantial processing capacity and improve long-term earnings power.
• Management reports that co-product monetization is already reducing net feedstock costs by roughly 20% and that early sales of co-product pellets are occurring at around $0.20 to $0.30 per pound. Further progress in recipe development and broader end markets for these materials could structurally lower unit costs and support improved net margins.

Valuation

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

• The assumed bearish price target for PureCycle Technologies is $9.0, which represents up to two standard deviations below 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 more bearish 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 bearish analyst cohort, you'd need to believe that by 2029, revenues will be $256.6 million, earnings will come to $24.7 million, and it would be trading on a PE ratio of 83.7x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $9.46, the analyst price target of $9.0 is 5.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.