Ag Renewables' RNG Expansion Powers Up Revenue With Environmental Initiatives

Key Takeaways

• The new Apex RNG facility and Blue Granite project are expected to drive future revenue once operational, despite commissioning delays.
  
• Regulatory approvals and strategic contracts could stabilize margins and enhance earnings from environmental attribute sales and RNG project efficiencies.
  
• Potential production and revenue impacts stem from weather events, regulatory delays, market price fluctuations, and infrastructure challenges in renewable natural gas operations.

Catalysts

A renewable energy company, engages in recovery and processing of biogas from landfills and other non-fossil fuel sources.

• The construction of Montauk Renewables' second Apex RNG facility, driven by increased landfill waste intake and gas feedstock availability, is expected to provide excess processing capacity and contribute to revenue growth upon its scheduled commissioning in 2025.
  
• Delays in utility upgrades for the Blue Granite RNG project, due to Hurricane Helene's remediation efforts, shift its commissioning expectation to 2027, which, once operational, is anticipated to impact long-term revenue positively.
  
• Montauk Ag Renewables' project in Turkey, North Carolina, gained regulatory approval to sell electricity generated from swine waste, which could enhance revenue from environmental attribute sales under the Renewable Fuel Standard and the California Low Carbon Fuel Standard.
  
• Current trends impacting landfill hosts' infrastructure installations could delay projected production increases. Montauk is considering fixed-price contracts to mitigate the impact of higher environmental attribute sharing percentage increases, potentially stabilizing revenue and net margins.
  
• The company’s engagement with various regulatory agencies for the development and optimization of RNG projects signifies potential future expansions and improved efficiency, potentially leading to enhanced earnings through increased environmental attribute generation and sales.

Montauk Renewables Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Montauk Renewables's revenue will grow by 18.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.2% today to 15.9% in 3 years time.
• Analysts expect earnings to reach $49.2 million (and earnings per share of $0.34) by about November 2027, up from $18.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $58.3 million in earnings, and the most bearish expecting $42.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.6x on those 2027 earnings, down from 39.1x today. This future PE is lower than the current PE for the US Renewable Energy industry at 22.7x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Montauk Renewables Future Earnings Per Share Growth

Risks

• Severe weather events and utility power outages in Houston facilities, which contribute to over half of Montauk’s RNG production, could impact overall production levels and revenue.
  
• Delays in utility upgrades and interconnection for projects like Blue Granite and potential impacts of regulatory changes at Frank R. Bowerman Landfill may lead to project commissioning delays, affecting future earnings and project timelines.
  
• Increases in pathway renewal percentages for environmental attributes without corresponding revenue increases could pressure profit margins and reduce net earnings.
  
• Fluctuations in the market price for environmental attributes like RINs and reliance on self-marketing these attributes pose revenue uncertainty and may impact net margins.
  
• Landfill-driven delays in installing wellfield infrastructure might impact gas feedstock supply and consequently production volumes, potentially limiting revenue growth in the renewable natural gas segment.

Valuation

• The analysts have a consensus price target of $6.31 for Montauk Renewables 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 $7.0, and the most bearish reporting a price target of just $6.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $310.4 million, earnings will come to $49.2 million, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $5.19, the analyst's price target of $6.31 is 17.8% 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.