Pareto on Quantafuel: Light at the End of the Tunnel

Pareto issued an update on QFUEL this morning. See the summary below.

Quantafuel Joins forces with Saipem in the implementation of waste plastics recycling solutions

QFUEL announced signing of a MoU to collaborate with Saipem in the industrialization and construction of waste plastics chemical recycling plants. This positions Saipem to construct under QFUEL’s technology license in industrial plants specialised in pyrolysis, while QFUEL strengthens its project implementation capabilities and adds the licensing approach to its existing business plan, creating additional opportunities to commercialise its technologies.

Light at the end of the tunnel 
Despite negative news flow regarding tight margins at Skive, we see the rest of the project pipeline progressing nicelyduring the quarter. A financial partner is secured for the Esbjerg sorting facility and a FEED agreement is signed for the Dubai PtL project. Due to operational hurdles, we lower our short-term estimates, but keep our long-term thesis unchanged. In sum, we decrease our TP to NOK 17 (19), while arguing that current price could be an attractive entry point considering the guided project economics for the pipeline plants. Buy reiterated.     

An operationally challenging quarter, but pipeline projects progress nicely
QFUEL will report its Q2’22 figures on 31 August. The quarter might have been a rough one, with pressure on operating costs at Skive due to sky high gas prices in combination with a fixed selling price contract with QFUEL’s offtake partner BASF. The margin squeeze is likely to have reduced the production output at Skive, which might threaten the company’s volume guiding of 6,000-8,000 tonnes for FY 2022E. However, we believe these are transient issues, as all reactors will be retrofitted during September and thereafter run on the pyrolysis gas which is currently not utilised. For Q2’22 we expect NOK 18/-50m in revenues/EBITDA.

Gross margins increased and short-term revenue outlook lowered
With the recent operational difficulties, we lower our revenue outlook for FY 2022-24E, as we acknowledge that the capacity expansions at Skive and Kristiansand might take longer than anticipated. For FY 2022E, we expect NOK 82m/-177m in revenues/EBITDA. We are however keeping our long-term view unchanged and expect the plastic to liquid projects in Dubai, Sunderland, Esbjerg and Amsterdam to come onstream during late 24E to late 25E. When all pipeline projects are completed, we eye NOK 2bn in revenues and NOK 1bn in EBTIDA for FY2026E. 

Some short-term hurdles, but the story is still intact, Buy TP NOK 17 (19)
Our valuation is based on a DCF reaching steady state after all the announced projects have come on stream by 2026. We apply a WACC of 9.5%, which one could argue is somewhat aggressive considering operational risk and technology risk remaining elevated. However, when taking the guided plant economics into account, in addition to favorable market conditions for petroleum alternatives, we believe it is fair. Even though we expect the company to have a large capital need, we still see upside to current market. Buy TP NOK 17 (19).     

The goal of the blog is to provide investment ideas for further research. I/we have a beneficial position in the shares discussed above either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. The article does not represent investment advice. Please do your own research before making any investment action.

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