Loop Industries is a Buy, says Paradigm

Corey Hammill of Paradigm Capital is looping himself in on Loop Industries (Loop Industries Stock Quote, Chart, News NASDAQ:LOOP), initiating coverage on September 10 with a “Buy” rating and target price of $21.00/share (all figures in US dollars) for a projected return of 94.1 per cent.

Founded by Daniel Solomita in 2014 and headquartered in Terrebonne, Que., Loop Industries focuses on depolymerizing waste polyethylene terephthalate (PET) plastics and polyester fibres into base building blocks, turning polymers into virgin-quality PET plastic for use in food-grade packaging like plastic water bottles and carbonated soft drinks and containers for food and other consumer products.

According to Hammill, Loop is a burgeoning consumer brand on the cusp of becoming something bigger.

“Loop’s patent-protected technology and unique process allow any kind of PET-based plastic waste to be recycled into a branded, food-safe grade of PET from 100% recycled content. In the next decade, Loop is targeting ten plants targeting 1-million MT of waste diversion,” Hammill said. “With regulatory, corporate sustainability and investor ESG targets acting as tailwinds, Loop’s technology has the potential to be a global standard for PET recycling.”

The company has been on a positive upward trajectory since its formation, initially listing on NASDAQ in 2017 before securing its first facility commercialization project, a joint venture with Asian chemical holding company Indorama in 2018. Loop then received significant support from Northern Private Capital, whose $35 million equity financing made them a significant shareholder.

2020 turned out to be a fruitful year for Loop, as the company announced a process engineering partnership with Australian engineering company Worley, an agreement and partnership with Kansas-based Invista to use its knowledge and engineering from Chemtex, as well as a partnership agreement with SUEZ to develop the first infinite Loop facility in Europe, which was followed by registration with REACH Monomer to clear the way for Loop to manufacture and import its products into Europe.

The company wrapped up its 2020 by obtaining a No Objection Letter from the U.S. Food and Drug Administration, which indicated Loop’s products were suitable for food contact.

In his coverage initiation, Hammill pointed to the company’s proprietary, branded technology surrounding its process of breaking down plastics and polyester fibres into their basic forms as a strength, particularly as the company has few direct competitors in the field at this time, while a rapidly-changing regulatory landscape also serves to work in Loop’s favour. Hammill said the process’s low usage of heat and water brings competitive advantages for the company, as those components help push Loop as an environmentally friendly solution.

“Loop’s unique 100 per cent recycled product is expected to command a premium price, generating very strong economics, to maintain a 50 per cent EBITDA margin and 20 per cent+ IRRs at each of its production facilities. With an estimated EBITDA generation of +$75 million per full-scale plant (assuming 100 per cent ownership), and a goal of ten plants by 2030, we see meaningful EBITDA growth over the next decade,” Hammill wrote.

The company, which currently has a market cap of $510 million, has also received support from South Korean chemical manufacturer SK GEO Centric, investing $56.5 million into the company in exchange for a ten per cent equity stake at $12.00/shares, with options to purchase additional shares at the $15.00/share and $20.00/share benchmarks.

Loop has also earned support in the corporate community, having secured partnerships with prominent brands like Danone, PepsiCo and the L’Oreal Group to supply its proprietary resin offering for future product packaging.

In the background, the company underwent an executive change earlier this year, with Drew Hickey being appointed the company’s new Chief Financial Officer effective March 1 following the retirement of Nelson Gentiletti after two years in the role.

Hammill believes the company is in a place where it can scale up its production quickly, projecting metric tonnes increases to 5,000 tonnes for 2022, then doubling each of the next two years to a projected 10,000 tonnes in 2023, 20,000 tonnes in 2024, then nearly tripling to 54,900 tonnes by 2025.

Hammill’s financial projections have revenue going up in a near parallel line with production outputs, projecting $10.8 million in revenue for 2022, then doubling each of the next two years to a projected $21.5 million in 2023 and $43 million in 2024, then exploding to a projected $119.1 million by 2025, which is also the first year Hammill projects a positive EBITDA for the company at $21.2 million, following projected losses of $54.9 million in 2022, $11.5 million in 2023, and $8.3 million in 2024.

With the next set of financial results expected some time in October, Hammill believes Loop could be a significant player in its industry.

“We believe Loop’s strong proprietary patent position, its ability to leverage joint ventures and its strong association with distinguished consumer brands, along with superior EBITDA growth, should command a premium EBITDA multiple,” he said.

Overall, Loop’s stock price has risen by 23.2 per cent for the year to date, reaching a high point of $15.90/share on June 24.