After living in India, where plastic litter is very extensive, for 3 years I got very interested in learning about new ways of recycling plastic. In my research I found several companies trying to develop solutions for oxo-degradable, bio-degradable and even compostable plastic recycling (which could be a topic for another post at a later stage), but until today I have only found one company that has focused on solving the short term need of recycling non-degradable plastic waste. The company is Norwegian and is called Quantafuel.
The Idea, Product and Potential
Plastic is perhaps the most versatile product ever created by man. It’s the world’s fastest growing man-made material (doubling every 15 years), and we have become completely reliant on it. There are currently no satisfactory replacements, because plastic has a number of unique properties; it’s inexpensive, durable, easy to produce in bulk and easy to shape – properties that wood, metal and glass are unable to match. We depend on plastic and its amazing properties.
The greatest challenge is that the properties that make plastic great to use, also make it a huge threat to the environment. Plastic doesn’t decompose, and is rarely recycled or reused.
One problem is that used plastic is virtually worthless. We collect steel and other metals because they can easily be melted down and reused. Mixed plastic waste, on the other hand, has no reasonable recycling value today.
Annual global plastic production is around 360 million tons and 32% of that waste end up in nature. Only 14% is recycled.
Plastic is without a doubt, one of the most significant environmental challenges that the world is currently facing, and Quantafuel is doing something about it.
Quantafuel’s purpose is to end wasteful and unsustainable handling of our planet’s resources.
Quantafuel has, as the first company, developed a method that captures, purifies and alters the molecules of the gas, produced by heating plastic to 450 degrees. Pyrolysis, the chemical recycling method, is not completely new, but Quantafuel have found a way (a catalyst) to purify (from impurities like chlorine, ash, sulphur, nitrogen etc.) the gas, so that the product, which is a liquid oil, can be used for new plastic products. Upcycling is the highest form of recycling, both in commercial and sustainability terms. The benefit of chemical recycling is that they take mixed, soiled waste and break these hydrocarbons down to their respective constituents and rebuild them in accordance with all requirements. By this Quantafuel have finally created a circular economy for plastic.
The obvious moat at the current point in time is clearly the catalyst, that makes Quantafuel the only company to be able to do pyrolysis with such pure outcome. Very importantly Quantafuel have acquired the IP rights to the catalyst from the developer Hulteberg, and recently initiated an R&D center in Malmö, Sweden.
Furthermore three major companies; Vitol, the world's largest oil trader, BASF, the world's largest chemical company and KirkBi, the investment company for the Lego family, have made significant investments in Quantafuel, and are partnering with Quantafuel for knowledge sharing, plant space and offtake agreements. I consider this partnership a significant competitive advantage for Quantafuel, and a way to quickly build a moat from the head start of 6-7 years that Quantafuel have since it initiated tests.
Quantafuel will get paid to receive the plastic, and will furthermore get paid for the final substance. All products manufactured in Skive will, for now, be shipped to BASF in Germany, who will upgrade the raw material to new plastic products and chemicals.
The production process have been tested and validated since 2013 in Mexico, but now Quantafuel have built the first commercial production plant in Skive in Denmark with a capacity of 20.000 tons of mixed plastic waste per year. Investment in Skive plant amounts to NOK 548 million. (65 mUSD) Further capacity increases are expected as follows:
Lately they have been limiting the risk of two of the most significant risks that was previously very apparent. One, the production plant in Skive is now commissioned and in operation, and two, the output quality of the liquid product has been confirmed to be well within the range of BASF.
Looking at the political space there is significant movement. Clearly recycling targets will drive innovation, and in Europe, things are changing quickly as the EU is implementing a series of measures that increases the need for Quantafuel’s solutions. In the course of five years, Europe shall have a recycling rate of 50% for plastic, increasing to 55% in 2030. According to several estimates, the current rate is as low as 10-20%. The EU is furthermore introducing a 0.80 EUR/kg tax on non-recycled plastic packaging waste from 2021. This will promote the development of circular plastic solutions. I do expect further focus and tightening of regulations globally on this particular area, as the environmental impacts are becoming more visible and generally recognized.
McKinsey is stating that the chemical recycling industry could become a USD 75 billion industry within 10 years, with a USD 25 billion profit to it.
Several oil majors and recycling companies are working on this. Neste, Shell, Esso, Sabic and Veolia are among the players currently running projects to establish similar solutions. What makes Quantafuel different is the purification of the oil produced.
Financials
The general business case for Quantafuel is developing while we speak. They get paid by taking plastic waste, and the further restrictions we will see from political hold, the more they can charge for taking the plastic waste from companies and households. Furthermore the end product liquids are sold for further processing in the chemical plastic industry.
Currently Quantafuel is basically a pre-revenue company, and the coming year or two will determine whether they can build significant industrialization of the process. In general from the numbers that has been presented by Quantafuel, a 100 mUSD Capex plant would be able to run a 50 mUSD EBITDA, meaning a payback period of 2 years. This would be phenominal plant economics if they were to succeed, and we will have to follow this in coming years.
Quantafuel recently raised additional equity of NOK 852 million, and end of Q3 2020 they have NOK 770 million on the balance sheet, but at the same time NOK 655 million in debt. This doesn't give a lot of playing room for further investments in scale. Especially with the current negative operational margins and negative FCF of NOK -85 million, I will expect co-investment from partners in the coming capacity increase and potentially another round or two of equity raise in the coming 12 months.
If QFUEL succeeds to have the 6 facilities in operation by 2023 and if we assume a plant cost per 100.000 tons of approximately 100 mUSD, and EBITDA at 50 mUSD, and furthermore we can overall expect a 50/50 ownership structure, Quantafuel would have around 105 mUSD (895 mNOK) in EBITDA in 2023. Taking a 20% cut of that for interests, depreciation and tax, a 715 mNOK net result would lead to a P/E of 9 assuming the current price of 57. Not bad for a company in the front of a mega trend, that could see further growth if the years ahead. It would not be unusual to see a P/E of 20 on this type of growing industry leader, which would indicate a doubling of the stock until 2023.
Management and Culture
Headquartered in Oslo, Norway. Looking at the management team and the directors of the board, it is obvious that they have been able to attract significant personalities from the oil and gas sector.
Kjetil Bøhn is the founder and CEO, and have put everything into making Quantafuel a success. Though he have drawn back somewhat on his stake in the company, which is now 2,7%.
There is currently share based options available to the board, management and employees for around 4% of the ownership. This seems to have been given over three years, while we can expect around 1-1.5% share dilution per year, which is not unusual for a company in this stage of their growth story, but something to bear in mind.
I have not been able to find any data on the evaluation of the leadership.
Stock
The stock has been on a good trajectory since IPO, and have been moving slowly but steady with many other ESG companies.
Risks
Quantafuel, being pre-revenue, is still in a very early stage of their industrialization. Valuation if you look at classic measures are at very high levels. Furthermore they are as mentioned at this stage very dependent on the partnerships with BASF and Vitol. Furthermore it seems like competitors are lining up to compete for a the future market.
MoGeBat Score: 64
An investment in Quantafuel is for the long run. The mission of the company hits a mega trend with political backing, and we have seen in many years what a global political agenda can do to industries. If they are able to execute on the industrialization case, this could be a huge growth story and a multi-bagger over the next decades. The risks at the current stage are obvious, as Quantafuel is still in pre-revenue stage, combined with the fact that they will need to develop new customers, as currently only BASF is there. The industrialization will require significant capex investments, and share dilution must be expected in the coming years, until the business becomes profitable. On the other hand, it is an impressive list of partners that are currently supporting Quantafuel, and they could become one of the means for future success for Quantafuel.
Thank you very much for an intersting post on Quantafuel.
:-)
Interesting...