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Carbios (OTCPK:COOSF) is well shored up with advantaged financing, and its PET plant project, which in our last article we pointed out was early on track to completion, is already mostly financed, with industrial agreements covering the majority of the PET plant’s capacity already in place. We’re not sure exactly what sort of deals they have in place, but solid industrial returns can be expected based on some indicative data and some comps from rebate values in the UK. The licensing angle continues to hold for the long term, and we continue to like the valuation particularly as the stock continues to languish.
FY Update
Let’s begin with the current financial position, with balance sheet being the biggest consideration for a pre-revenue company.
Cash and cash equivalents are at 191 million EUR, at the conclusion of a series of financing arrangements exploiting favourable repayable grants and other advantaged green financing initiatives.
R&D and other initiatives in order to prepare the company for licensing out its PET recycling technology is underway, and the run-rate cash burn for that is around 25 million EUR per year.
As for the new PET facility, which is going to have around 50kt in feedstock capacity, they had gotten all the permits ahead of schedule and are getting ready to break ground as we speak, with an expectation to complete the project in 2026 and for it to also go into production in 2026. The expectation is that in addition to run-rate cash burn, the investment required to realize the PET plant is going to be around 230 million EUR. With the 50 million of cash burn until 2026 expected based on current cash burn run-rates, the cash sink is around 280 million EUR ahead of the 190 million EUR that they have in cash. The Longlaville plant is around 68% financed. They will likely need more capital at some point in the next couple of years unless they are able to start generating new cash flows by closing some licensing agreements, but they also already have agreements in place to process enough feedstock to account for 70% of their total annual capacity which could be enough to court further financing, hopefully at the low cost of capital that they’ve managed so far. More agreements are likely to come given the network Carbios has established among the various industry players who produce excessive plastics.
Bottom Line
Longer term, there is the situation where the company plans on using the demonstration of its technologies and equipment to start doing a licensing of its technology and franchise out its system to other manufacturers. We are optimistic about the prospects of this and agree with the principles. They finished the documentation in April 2023.
Vision (Carbios Investor Presentation)
But it’s good to try benchmark what the possible returns might be on the demonstration plant, which is going to be the tool for pitching the project to manufacturers who may be interested in paying Carbios for the license to their system. In fact, the whole possibility of licensing out their technology will likely depend on the success of the plant, which is somewhat of a demonstration of what is possible but at a larger scale.
Virgin PET prices are around 1000-1200 EUR / metric tonne, depending on sources. This is consistent with assuming around a 20% royalty rate and seeing the Carbios assumption of 250 EUR / metric tonne in recurring royalty revenue from licensing. The rebate value of selling scrap plastics can be around 50-400 EUR / metric tonne depending on the quality of the plastics. The capacity of the facility is around 50kt per year. Assuming a flat gross margin of around 700 EUR / metric tonne, gross profit yield on the 230 million EUR investment is around 15%. Including energy costs, returns would go down some more, but around 10% gross margin yield on investment seems possible if not higher. That’s not a terrible rate of return, especially if costs of capital are going to be lower for anyone that is trying to replicate the Carbios plant. They will have to stay within budget of the 230 million, which is not guaranteed considering construction contracts tend to be inflation indexed nowadays.
If Carbios achieves this, we think that there is probably some upside at this valuation considering the 60 billion EUR in market size possible by 2035, and possibly billions in EBITDA towards the end of the decade if the licensing business model gains some traction. At just a 330 million EUR market cap, and maybe around 430 million EUR in EV taking the outstanding CAPEX burden as debt, valuations look attractive at around a 60 billion EUR market size with Carbios possibly cashing in with a capital lite and profitable licensing model. Not a bad pick.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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