PCT - PureCycle Technologies: 2024 Could See Tangible Benefits

2023-11-29 11:26:23 ET

Summary

• PureCycle Technologies is a small-cap stock that addresses environmental challenges associated with polypropylene wastage.
• PCT is commercializing a technology to convert wasted polypropylene, something which has a low threshold of recycling, into ultra-pure recycled resin, using lower energy and production costs.
• Despite some execution roadblocks, PCT is expected to generate significant sales and expand production in FY24 and FY25.
• Given the sales potential on offer, the forward P/S multiple looks cheap.
• Insiders have stepped up buying in a big way this month, and the charts suggest good risk-reward at this juncture.

Introduction

Investors looking for a small-cap stock that dabbles in the environmental services terrain may consider a position in PureCycle Technologies (PCT). We think an entity like PCT could soon prove to be a fitting panacea in addressing some of the environmental challenges associated with plastic wastage across the world.

The Raison d'être of PureCycle Technologies

One of the chief culprits here is polypropylene or PP, whose relative robustness is valued by a whole host of industries, particularly consumer products and automotives. The issue with being so robust and hard to break down is that the traditional chemical and mechanical recycling methods used for other plastics have limited effectiveness with PP. For instance, something like 20% of PET (polyethylene terephthalate) is currently recycled, as opposed to less than 5% of PP. As a result, after initial use, PP can prove to be an inconvenient and dormant pollutant across water bodies, landfills, and the like.

PCT estimates that every year 170bn pounds of PP comes into the system, typically growing at 5% a year. Now PCT is currently in the midst of commercializing a technology (which was originally developed by P&G and is now licensed by PCT) that could put to good use all the wasted polypropylene, by converting it into UPR (ultra-pure recycled) resin which has similar properties to the virgin alternative.

Crucially, there's a good chance the purification technology of PCT will gain significant traction on account of better cost competitiveness. PCT's tech filters out contaminants without changing the chemical makeup of the polymer resulting in lower energy costs and lower production costs relative to virgin resin. For instance, PCT management believes they typically utilize only one-fourth of the energy used to produce virgin resin.

Meanwhile, the other alternate recycling methods such as chemical and mechanical incur higher energy costs or are less effective in eradicating the waste contaminants from the end product which can also result in significantly worse odor profiles.

Note that PCT isn't a novice in this space, and since 2019, it has been running a pilot scheme adjacent to its upcoming Ironton facility, that has been used to ascertain the quality of feedstock and also provide sample UPR resin to potential clients.

Some Roadblocks In The Execution, But 2024 Could Be Less Stressful

Currently, investor interest is primarily dictated by the progress made in getting PCT's Irontron facility up to speed, and unfortunately, there have been a few hiccups here.

Most recently, issues have stemmed during the final process of pelletization where leaking adsorber beads were plugging and causing bead contamination and production roadblocks. PCT will ostensibly have resolved this last week, as the plant was shut down from November 8 to the 22 to incorporate an automatic screen changer, whose purpose will be to automate the removal of beads and ensure the pelletizer runs without any hindrances.

Management sounded confident that once these changes were made, they would be well placed to generate 4.45m pounds of UPR at 50% production capacity by December. Once they achieve this, you could see them hit 8.9m pounds of production by Q2-24.

Note that once PCT irons out the bottlenecks at the Ironton facility and gets it running smoothly on a consistent basis, this would provide further validation of the technology and help the company lock in favorable project financing deals for its second purification facility in Augusta, which is due to come on board by the end of next year. Even otherwise, it's worth noting that PCT was recently able to successfully raise around $250m in a 7.25% convertible note issue which was oversubscribed multiple times.

Nonetheless, the Augusta facility could take PCT to the next level, as it will have eight purification lines, with each line designed to produce 130m pounds of UPR per annum! The Augusta facility is also strategically well-located as it has useful rail access (potentially lower transportation costs) and access to multiple ports, thus putting it in an ideal position to cater to the export markets.

Closing Thoughts - Valuation and Technical Considerations

With Ironton potentially running at full tilt next year, PCT's production could also be supplemented by the Augusta facility which is expected to come online by Q4-24. All in all, consensus believes that by the end of next year, PCT could be generating over $100m of sales, and this could grow by another 33% in the following year, and hit levels of $137m by FY25.

It wouldn't be unreasonable to expect PCT to sign even further client offtake contracts over the next 12 months, given the dearth of UPR resin supply in the market. Put another way, that $137m topline number for FY25 has plenty of upside risk.

For a business growing its topline at 33% levels, we also think the forward price-to-sales multiple of ~6.5x comes across as very cheap. For context, do note that just around three months back, this multiple was perched at rather elevated levels within the high-teens.

We also like the risk-reward on the charts. Within the materials space, we view PCT as one of the ripe candidates to benefit from rotational interest. As things stand, PCT's relative strength versus its peers from the material space looks very oversold and is 5-6x lower than the mid-point of its long-term range, offering up some scope for mean-reversion.

Then, developments on PCT's weekly chart over the last two years suggest that the price has been losing ground gradually within a certain descending channel. In recent weeks, it looked like the stock was going to drop below the channel boundary, but after a breakdown, we've seen some recovery, with the stock making some tenuous attempts to flatten out at around the lower boundary.

What also makes PCT quite intriguing is that it appears to be a stock that could benefit from potential short-covering momentum. As things stand, well over a third of the float is currently short and the days-to-cover ratio is pretty high at almost 10 days, so it's not as if the bears can quickly get out of this counter if things go against them.

Finally, we're also enthused to discover some favorable insider positioning this month. After a dearth of insider activity all through this year, you'd be interested to note that key cogs of the C-Suite, including the CEO, CFO, and the Chairman, have all stepped up their interest in PCT stock, buying shares worth over half a million in aggregate, this month alone. This certainly speaks volumes about how confident they feel about the company's prospects as we head into the new year.

To conclude, if you're someone with an aggressive risk appetite, we think a stock like PCT wouldn't necessarily be a bad option at these levels.

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