ORGN - Origin Materials: A Future Leader In Producing Cheap Carbon-Negative Materials

2023-04-16 05:03:35 ET

Summary

• Origin aspires to lead the race for decarbonizing materials using timber feedstocks instead of petroleum.
• The idea is to produce carbon-negative materials at a lower cost than bioplastic alternatives and traditional fossil materials.
• Origin's technology has attracted top-tier corporate investors such as Nestle Waters, Danone, and PepsiCo, as well as top-tier clients.
• The company is currently at a pre-revenue stage and expects to start production in Q2 2023, aspiring to achieve revenue of at least $4B by the end of the decade.
• The current valuation seems to be attractive from a long-term point of view.

Investment Thesis

In the age of the "green transition", almost every sector will be impacted. This should be seen as a tremendous opportunity for transformation, sustaining economic growth while aiming for a cleaner, safer planet. Contrary to what many people believe, that getting "greener" is all about energy, decarbonization of materials is an equally important task.

Origin Materials, Inc. ( ORGN ) is an innovative, leading, carbon-negative materials company expected to experience rapid growth in the coming years. The idea is to produce cheap, carbon-negative materials applicable to various industries, to replace pollutive materials used today. Top-tier corporations are involved as investors, clients, or partners providing a vote of confidence in Origin Materials. In addition, there is a large TAM that Origin can benefit from.

Despite the company being at a pre-revenue stage (yet revenue is expected to start flowing later in 2023), the promising project, the involvement of top-tier corporate names, and the hot decarbonization trend are all ingredients of a successful recipe that shouldn't leave long-term, forward-thinking investors untouched.

Company Overview

Origin was founded in 2008 to cost-effectively produce various materials using biomass instead of petroleum while capturing carbon in the process. In 2016 an important step was made with the formation of the "NaturALL Bottle Alliance", with Nestle Waters ( NSRGY ) and Danone ( DANOY ) joining forces with Origin to achieve the production of a PET plastic bottle made from bio-based material. In 2018 PepsiCo, Inc. ( PEP ) also joined the alliance. On June 23, 2021, Origin Materials completed the business combination with the SPAC Artius Acquisition, Inc. and commenced trading on the Nasdaq on June 25, 2021. Cash proceeds totalled ~$385.4M . The 2008 vision was ready to become a reality.

Origin has developed materials such as

• PET (Polyethylene Terephthalate)
• CMF (Chloromethylfurfural)
• Para-xylene
• PTA (Terephthalic Acid)
• FDCA (Furandicarboxylic Acid)
• Carbon Black
• HTC (Hydrothermal Carbon)
• Furfural
• Levulinic Acid

that can be used in end products in many industries (Automotive, Construction, Packaging, Specialty Chemicals, Textiles, etc.). The company uses sustainable feedstocks such as wood residues to develop these materials that will gradually replace those made from fossil feedstocks. Not only the project seems to be environmentally friendly but also financially competitive compared to other bioplastics companies and those producing fossil materials.

Origin's innovative, proprietary technology is protected by 23 patent families as well as trade secrets concerning critical manufacturing processes.

Apart from investors/clients Nestle, Danone, and PepsiCo, Origin has established partnerships with other top-tier corporations, including Kolon Industries, Ford Motor Company ( F ), Mitsubishi Gas Chemical, PrimaLoft, Solvay, AECI, Stepan ( SCL ), Mitsui & Co., Packaging Matters, Minafin Group, LVMH Beauty, Mitsubishi Chemical Group, Kuraray, Revlon, ATC Plastics, and Intertex.

SPAC forecasts, FY 2022 ER , and 2023 outlook

Initial forecasts about Origin's growth presented a bright future and an investment opportunity. Revenue was expected to start flowing in 2023 with the production start of the Origin 1 plant expected by year-end 2022 (currently expected in Q2 2023). Cash proceeds from the SPAC transaction were less than initially expected. Finally, the expected revenue guidance for FY 2023, as announced on 02-23-2023, meets the initial forecast in its upper end.

Despite the aforementioned facts, the project seems to be well-executed and broadly in line with expectations. The company holds $324M in cash, as of 12-31-2022, and expects to be fully financed until reaching positive EBITDA. Customer demand remains strong and capacity reservation agreements currently exceed $9.3B vs the ~$1B that had been announced in 02-2021. Finally, a recent important development was the revelation that the company is exploring biofuel production from an "oils and extractives" stream co-produced with CMF and HTC, a project not initially planned.

Origin 1 plant is mechanically complete and is expected to start production in Q2 2023. Concerning Origin 2, the site for the construction of the plant, located at Geismar, Louisiana, was selected and purchased. Approvals from Louisiana authorities for the issuance of up to $1.5B of tax-exempt bonds have been made. The plant is expected to start production in 2025. The company estimates that ~20 plants would be needed only to fully meet the needs of the 3 "NaturALL Bottle Alliance" partners.

Valuation

As mentioned, the company is at a pre-revenue stage, expected to start production in Q2 2023. Hence, an attempt to examine if investing in Origin is worthwhile must be focused on future revenue and profit forecasts. Looking at 2025, the year that Origin is expected to present positive EBITDA for the first time, forecasted revenue stands at $475M while the EBITDA estimate is $139M. Origin's current EV is ~$238.26M. A 2025 EV/EBITDA projected ratio would be ~1.71. The sector median EV/EBITDA((FWD)) current ratio is 7.56 according to Seeking Alpha metrics . That would mean that a fair valuation for Origin should be at ~$1.05B in 2025, not taking into account though that the company will have many years of significant growth ahead so that a premium valuation could be justified. Summarizing, a long-term investor would expect their investment to at least quadruple by 2025.

Risks

Origin is a high-growth, pre-revenue company that is not expected to be profitable until 2025. Thus, there are certain risks that investors could face over time.

• The initial planning may not go as expected, causing delays or additional expenses.
• Clients may delay or cancel their reservations.
• Suppliers may not provide the quantity needed at expected prices.
• Raw materials prices can fluctuate, negatively affecting Origin's financials.
• Competitors may appear and perform better than expected.
• Financial forecasts may prove wrong, forcing the company to take on debt or cause dilution to shareholders to raise capital.
• US and global policies concerning the "green transition" may change.
• Certain products may not be competitive.
• The stock price may decline and present volatility.
• The company may get acquired at a lower-than-anticipated valuation.

Conclusion

To cut a long story short, Origin seems to have a bright future. Despite currently being at a pre-revenue stage, the company claims that funding is secured until profitability is achieved. The "green transition" megatrend, the large TAM, the top-tier investors/clients, and the innovative, cost-competitive technology pave the way for Origin to grow and become an established, profitable, and environmentally friendly company that long-term, forward-thinking investors would buy and hold for the years to come. Initiating a position at current levels seems rational with a view to 2025, however, investors should closely watch the execution of the plan and have in mind to seek momentum in case gradual future buys might need to keep their average at relatively low levels.

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