Strong economics from Loop Industries, says Paradigm

Paradigm Capital analysts J. Marvin Wolff and Corey Hammill like what they see out of Loop Industries (Loop Industries Stock Quote, Chart, News, Analysts, Financials NASDAQ:LOOP), maintaining a “Buy” rating and target price of $21.00/share (all report figures in US dollars unless otherwise noted) for a potential return of 63 per cent in an update to clients on Wednesday.

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.

Paradigm’s latest analysis comes after Loop’s recent release of its second quarter financial results for the 2022 fiscal year.

As Loop is not reporting revenue yet, the company’s financial results were headlined by losses in EBITDA ($8.5 million) and EPS ($0.19/share), with cash on hand coming in at around $70 million, which Wolff and Hammill noted to be in line with expectations.

Loop’s press release announcing the results noted that the increased losses were attributed to increased research and development expenses of $2.5 million and increased general and administrative expenses of $1.1 million, offset by a lower foreign exchange loss of $280,000 and a decrease in depreciation and amortization expenses of $160,000.

Loop’s products contain no virgin plastic, and the company has developed a proprietary process that breaks down PET plastics and polyester fibers into their base monomer forms, which are then purified, eliminating all contaminants and then turned back into plastic without any loss of quality or clarity, allowing Loop to provide food-grade solutions to global brands that aim to meet sustainability targets.

The company’s next major move will come through its partnership with evian, which will begin in South Korea in 2022 as the company aims to use recycled bottles for 100 per cent of its products worldwide by 2025, which would require between 35,000 tpa and 50,000 tpa of Loop resin from the company’s Quebec plant.

In addition, the company also has multi-year agreements with a number of major players in the Consumer-Packaged Goods (CPG) industry to supply its branded resin for product packaging, including Danone, PepsiCo and the L’Oréal Group.

“The investments in our small-scale production facility enable us to produce commercial volumes of Loop PET resin for co-branded campaign launches with our key customers,” said Solomita in the company’s October 15 press release. “The engineering for the Infinite Loop manufacturing facilities is progressing on schedule. Our ‘design one, build many’ engineering philosophy will allow for multiple facilities to be built within a similar timeframe. We see modular construction of our facilities as another important pillar as it will enhance time to market and reduce risks associated with construction execution and delays. We continue to strengthen our engineering and operations teams as we prepare to execute our commercial roll out across three continents. The recent confirmation of food-grade compliance of our PET in Canada, the U.S. and Europe is important confirmation of Loop’s value proposition to our customers who are seeking virgin-quality, food-grade PET plastic resin made from 100 percent recycled content.”

According to Wolff and Hammill, 2025 will be a pivotal year for Loop’s financial picture. The analysts expect production to begin and small revenue figures ($1 million) to come in 2022, with steep growth to a projected $119.1 million in 2025, with 54,900 metric tonnes of production coming from plants in Becancour, Quebec for 70,000 tpa (100 per cent ownership), a plant in France with Suez Group for 70,000 tpa (50 per cent ownership) and a plant with SK geo centric outside of Seoul, South Korea for 70,000 tpa (49 per cent ownership).

2025 is also when Wolff and Hammill expect EBITDA to turn positive for the company at a projected $21.7 million, after incurring projected losses ranging from $18.5 million to $38.1 million annually from 2021 to 2024.

Wolff and Hammill believe Loop is an attractive investment for a number of reasons, including its commitment to its ESG strategies, strong market demand with global growth, Loop’s presence as a branded ingredient on various product labels moving forward, strong protection of its intellectual property to remain competitive, third-party validation through the 10 per cent company stake investment from SK GEO Centric, strong economics in the form of a 50 per cent EBITDA margin and IRR above 20 per cent, a new revenue stream with licensing fees, expected EBITDA growth through various joint ventures and an attractive valuation.

“Loop’s unique 100 per cent recycled product is expected to command a premium price, generating very strong economics,” Wolff and Hammill said.

Overall, Loop’s stock price has risen by 48.9 per cent for the year to date, reaching a high point of $15.90/share on June 23.