Enviro: Updated estimates following FID for Uddevalla

Research Update

2024-02-09

08:45

Redeye updates its estimates and fair value range for Enviro following the final investment decision for the Uddevalla plant. We argue that the case has been derisked following the signed offtake agreements with Michelin, Nokian tyres, Preem, and H&G Group. Furthermore, the total value of the offtake agreements was higher than we expected, which we consider positive.

Mattias Ehrenborg

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We recommend reading our previous research note

We update our Enviro estimates following the news of a final investment decision (FID) for the Uddevalla plant. We have previously shared our view on the press release in a research note published yesterday (2024-02-08), and we now get back with updated estimates. We recommend reading the research note for additional insights.

Key estimate changes

Our key estimate changes refer to a 14% increase in revenue per ton of ELT, going from SEK7771 per ton to SEK8861 per ton, due to the offtake agreements indicating a higher price level than we expected before. We also slightly pushed the timing of the roll-out due to the final investment decision coming later than we previously expected, as well as Enviro highlighted that the second plant construction (after Uddevalla) won’t be initiated until Uddevalla has been commissioned, whereas we had previously expected semi-parallel construction.

Updated fair value range

We argue that the risk in the Enviro case has been reduced on the back of the legally binding offtake agreements, as the revenue generation from the Uddevalla plant is more certain now than before. Also, the financing of the plant is guaranteed by Antin (in line with earlier communication), which we consider positive. We lower our WACC from 12.5% to 11.5% on the back of these factors. All in all, the new fair value range sits at SEK1.2(1.1)-SEK11.6(11.1) with a base case of SEK8.0(5.9) per share.

Key financials

SEKm	2020	2021	2022	2023e	2024e
Revenues	1.9	8.6	7.7	13.0	37.5
Revenue Growth	59.6%	353%	-10.7%	69.5%	189%
EBITDA	-37.0	-43.5	-69.8	-76.8	-56.7
EBIT	-49.8	-56.9	-83.8	-90.9	-70.7
EBIT Margin	-2629%	-663%	-1094%	-700%	-189%
Net Income	-50.0	-57.0	-83.6	-91.3	-71.1
EV/Sales	885	140	169	121	118
EV/EBIT	-26.8	-18.6	-16.1	-17.0	-24.4

Updated price levels for recycled raw materials

In the press release, Enviro states that the total value of the offtake agreement amounts to EUR180m or around SEK2bn. We understand that the value is for 5-10 years, indicating EUR18-36m or SEK200-400m pa during the same time period. It does not state if there will be a ramp-up in volumes or what the selling price of each material will be per ton of end-of-life tyres (ELT).

However, we understand that the offtake agreements do not consider the total capacity of Uddevalla (34,500k tons), as Enviro wants to have a margin of safety to be able to fulfil its side of the offtake agreement. Otherwise, there would likely be negative financial repercussions if Enviro failed to deliver the promised volumes.

Assuming that 80% of the expected total capacity in Uddevalla is a target for the offtake agreements, this implies 27,600k tons. If we go back to the value of EUR18-36m pa, it indicates a selling value of around EUR650-1300 per ton ELT. However, in its latest investor presentation from May 2023, Enviro indicated a price level of EUR659-766 per ton, which we understand was based on talks with potential customers. As such, we believe that the underlying revenue per ton ELT should be quite close to this, or somewhere between the lower-end (EUR650/ton) and the middle of the range (EUR870/ton) rather than the higher-end of the total range of EUR650-1300 range.

We increase our expected revenue per ton ELT by 14% from SEK7771/ton to SEK8861/ton, until we have further insights into the underlying revenue per ton of ELT. Combined with a 1-percentage point lower WACC of 11.5% (12.5%) and a slight push in the timing of future plants, due to FID taking longer than previously expected and as there won’t be parallel construction of another plant until Uddevalla has been commissioned in 2025, our new fair value range sits at SEK1.2(1.1)-SEK11.6(11.1) with a base case of SEK8.0(5.9) per share.

Investment thesis

Case

Offering a highly attractive solution for unsolved ELT recovery issue

Over the years, many attempts have been made to recover the valuable materials inside a tyre once it has reached its end of life. Attempts have failed due to material complexity, making it very difficult to produce high-quality materials for commercial use. Enviro has proved it possible, using its patented technology that allows for full ELT material recovery (rCB, TPO, steel) that can be sold, and re-introduced to a wide range of applications. As a pioneer in the industry, with many years of trial and error and a good track record in terms of material validation from production tests, we argue Enviro enjoys a first-mover advantage and should be several years ahead of competitors.

Evidence

Michelin and Antin have validated Enviro and its technology

Since 2020, Enviro has managed to attract Michelin to become the largest shareholder in Enviro, who also has unveiled 2 sustainable commercial tyres with rCB inside for launch in 2025. Enviro has also received ISCC certification for its rCB and TPO, making it possible to sell it commercially - and successful production tests from a top 10 global oil company have taken place. These events have led to a JV establishment with Antin and Michelin, which we argue provides an attractive framework for reaching up to 1m tons in ELT capacity by 2030. This also categorises the plants as infrastructure (allowing for a high degree of debt, thus reducing equity requirements, which we have considered a concern for Enviro). We, therefore, argue that Enviro has managed to fulfil its growth plan upon this point. The demand for Enviro’s products has been further spurred since the war in Ukraine and structural high oil prices –increasing incentives for companies to use Enviro’s recycled products.

Challenge

Capital intensive business

Enviro plans to co-own the production facilities it builds through the JV with Antin and Michelin, where we expect it to hold a 30% equity stake. CAPEX for one plant is expected to be around SEK400m, which is a sizeable figure for a company of Enviro’s current size. Even a 30% share in the venture (SEK120m) is a significant amount that needs to be financed, which may require future capital injections into Enviro if the JV does not manage to reach a high degree of debt in each plant. However, we believe that plant financing will be possible if Enviro signs off-take agreements for its raw materials, and we do not believe Antin would have been interested in establishing a JV if it was not certain it could use high leverage.

Challenge

rCB fails to take off

Following the successful TPO production test from one of the worlds leading oil companies, we believe there should be no issues offsetting produced TPO volumes, given its sustainable characteristics and the high global demand for crude oil. Instead, one of our greatest concerns is that rCB-demand fails to take off, which would harm the calculation of Enviro’s plants and/or the pace of the rollout phase. However, after Michelin’s unveiling of two sustainable tires (incl.- rCB) approved for road use that will be launched within 2-3 years, we feel more comfortable than ever that rCB will play an important role in the future.

Valuation

Significant upside potential but dependent on growth plan execution

We have derived a fair value range for Enviro of SEK1.2 – SEK11.6, with a base case of SEK8.0 per share. Our scenarios are primarily driven by the extent to which recovered materials can replace current materials in the future and Enviro's estimated market share. In our base case, Enviro will install a plant capacity equivalent to 930k tons by 2030, equivalent to 27% of total ELT arisings in 2020. The wide range illustrates our long-term horizon in our estimates and the risks involved, as Enviro is still to construct its first plant and is yet to sell significant volumes of its raw materials. As milestones are met and risks removed, we expect to tighten this wide range, reduce the risk premium, and make updated base case assumptions using the realised sales figures from the sales of TPO and rCB.

Quality Rating

People: 3

Enviro has since 2001 developed its pyrolysis process, which evidently produces high-quality materials – which has been confirmed by Michelin and global oil companies. This gives us great belief in the people, as the founder is still active in the company (R&D manager) and CEO and CFO holds 5 years in their current positions, showcasing they can develop a technology to produce high-quality products. Furthermore, Enviro has attracted and successfully negotiated with Michelin, and is set to co-produce and co-own a production facility – a result of a demanding process that requires competences not often found in a relatively small organization as Enviro. However, given Enviro’s governance structure, a wide range of competencies can be found and utilized in the board of directors, in addition to management. Enviro is still in the inception of its commercialization phase, which makes it difficult to assess the track record of Enviro’s management, however, it looks solid to this date. To raise the score to a five, we would like to see a successful rollout of the commercialisation phase.

Business: 4

We believe Enviro is in an excellent position to benefit from several sustainability- and ESG trends in several markets. Enviro has a strong value proposition for customers and partners, offering raw materials with attractive sustainable characteristics with attractive margins and short payback times – whilst solving the environmental issue caused by ELTs. However, to this date, the business model is relatively unproven as Enviro is just entering its commercialisation phase, therefore scoring low in our rating system. However, future demand is expected to be very high, and we consider Enviro to possess several moats such as high product quality due to its patented pyrolysis process, and its partnership with Michelin, which we believe puts Enviro in the pole position.

Financials: 1

Enviro is now on the verge of fully commercializing its patented ELT pyrolysis technology. However, historical sales figures have been very low, and earnings deep in the reds – 2021 recorded a loss of SEK-57m. Without significant sales and so far, only negative earnings and cash flows, Enviro scores low in Financials category. We expect the company to rapidly grow sales over time from its current levels as plants are consecutively installed, while we also view additional funding necessary before break-even.

Financials

Income statement
SEKm	2020	2021	2022	2023e	2024e
Revenues	1.9	8.6	7.7	13.0	37.5
Cost of Revenue	0.40	1.9	0.99	1.3	25.7
Operating Expenses	-38.5	-50.5	-75.9	-88.6	-91.2
EBITDA	-37.0	-43.5	-69.8	-76.8	-56.7
Depreciation	-12.8	-13.4	-14.0	-14.0	-14.0
Amortizations	0.00	0.00	0.00	0.00	0.00
EBIT	-49.8	-56.9	-83.8	-90.9	-70.7
Shares in Associates	0.00	0.00	0.00	0.00	0.00
Interest Expenses	0.40	0.30	0.21	0.85	0.85
Net Financial Items	-0.21	-0.14	0.20	-0.44	-0.44
EBT	-50.0	-57.0	-83.6	-91.3	-71.1
Income Tax Expenses	0.00	0.00	0.00	0.00	0.00
Net Income	-50.0	-57.0	-83.6	-91.3	-71.1
Balance sheet
Assets
Non-current assets
SEKm	2020	2021	2022	2023e	2024e
Property, Plant and Equipment (Net)	70.6	70.7	78.8	71.0	183.1
Goodwill	0.00	0.00	0.00	0.00	0.00
Intangible Assets	41.3	42.2	53.0	51.8	50.6
Right-of-Use Assets	0.00	0.00	0.00	0.00	0.00
Other Non-Current Assets	0.15	0.15	0.00	0.00	0.00
Total Non-Current Assets	112.1	113.1	131.8	122.8	233.7
Current assets
SEKm	2020	2021	2022	2023e	2024e
Inventories	1.8	2.3	2.1	3.5	4.1
Accounts Receivable	0.15	0.37	0.77	1.6	1.8
Other Current Assets	3.0	4.1	6.2	12.8	12.8
Cash Equivalents	39.6	123.2	30.0	233.9	53.7
Total Current Assets	44.6	130.0	39.0	251.8	72.3
Total Assets	156.6	243.0	170.8	374.5	306.1
Equity and Liabilities
Equity
SEKm	2020	2021	2022	2023e	2024e
Non Controlling Interest	0.00	0.00	0.00	0.00	0.00
Shareholder's Equity	141.6	227.2	143.6	334.8	263.7
Non-current liabilities
SEKm	2020	2021	2022	2023e	2024e
Long Term Debt	0.78	0.00	5.2	21.2	21.2
Long Term Lease Liabilities	0.00	0.00	0.00	0.00	0.00
Other Non-Current Lease Liabilities	0.00	0.00	0.00	0.00	0.00
Total Non-Current Liabilities	0.78	0.00	5.2	21.2	21.2
Current liabilities
SEKm	2020	2021	2022	2023e	2024e
Short Term Debt	3.2	0.78	0.82	0.82	0.82
Short Term Lease Liabilities	0.00	0.00	0.00	0.00	0.00
Accounts Payable	11.1	15.1	21.2	17.7	20.4
Other Current Liabilities	0.00	0.00	0.00	0.00	0.00
Total Current Liabilities	14.2	15.9	22.1	18.5	21.2
Total Liabilities and Equity	156.6	243.0	170.8	374.5	306.1
Cash flow
SEKm	2020	2021	2022	2023e	2024e
Operating Cash Flow	-37.6	-41.3	-65.7	-89.6	-55.2
Investing Cash Flow	-10.8	-14.4	-32.8	-5.0	-125.0
Financing Cash Flow	29.3	139.4	5.2	298.5	0.00

Rating definitions

The team

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