SUBSPAC

A World Without Plastic

The Rundown (7/17/21)

Danimer Scientific Is Building a New Plastic Economy 

Danimer Scientific produces Nodax PHA which is a fully biodegradable, renewable plastic which has a wide variety of applications including water bottles, straws and food containers. Nodax is biodegradable in, soil, water and compost within three to six months depending on the conditions, compared to the hundreds of years it can take for petrochemical plastics. After the company received widespread attention over the potential opportunity and addressable market, shares skyrocketed to $64, but have since cooled off to the current price of $25. So is now a good opportunity to take a second look at this ESG play or are the shares still overvalued? 


Addressing the Global Plastic Crisis 

There has been a steady build up of microplastics in the oceans, especially over the last three decades and pose a great threat to marine life. The primary reason for the buildup in microplatsics is the ramp up in consumption of non-biodegradable plastics. Over 800 Billion pounds of plastic is produced annually, with only 10% of the supply recycled.

The other 90% ends up being incinerated or dumped in landfills and oceans. The company’s flagship product, Nordax PHA is an alternative to a wide variety of petroleum based plastics like PE and PET, which make up over 65% of the plastic packaging production. 

By contrast, PHA is fully biodegradable, recyclable plastic, which primarily uses canola oil as feedstock for sources of energy. PHA is completely biodegradable in all environments and degrades after 12-18 weeks after the product is discarded.

The waste free production process of PHA utilizes canola oil efficiently to ensure optimal sustainability. Currently, Bioplastics like PHA make up less than 1% of the global plastics market, which positions the company to capture future market share. Danimer expects that it could eliminate over $500 billion pounds of plastic waste by 2025. 


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Significant Tailwinds from ESG Boost 

Danimer is experiencing significant tailwinds from increased corporate initiatives on the Environmental Impact of the Global Pollution Crisis. This coupled with increasing government regulation on single use plastics has also put pressure on large corporations to adapt.

Leading foundations like the Ellen Macarthur Foundation have collaborated with the UN to mobilize over 450 companies to start bulldog a circular economy on plastics. Danimer has partnered with several companies who have made commitments on recycling as a part of the New Plastic Economy. 

The partnership includes PepsiCo, Target, Walmart, Kroger, Walgreens, Nestle, McDonald’s, Coca-Cola. The commitments from the companies aim to tackle unnecessary plastic packaging and move from single use plastic to reuse models by 2025.

The new plastic economy also aims to ensure that all plastic packaging has to be reusable, recyclable or compostable by 2025. In addition to the contracts from several companies, Danimer is also collaborating with PepsiCo and Mars with a joint R&D go design, develop and manufacture Nodax PHA for environmentally conscious consumers and retailers.


Expanding Capacity to Capture Growing Market Demand 

In December 2018, Danimer acquired the fermentation plant in Kentucky and simultaneously entered into a sale and leaseback transaction with the current REIT owner. With the full support from the REIT owner, the company plans to expand its Kentucky plant capacity using a two-phased approach.

The company completed Phase 1 of construction by improving real estate, adding and installing the first 3 fermenters to produce over 20 million pounds of annual finished products. The company plans to complete Phase 2 development this year and expects to invest over $96 million in engineering, installation and real estate development to bring the plant to its anticipated full capacity of 65 million annual finished products. 

In addition to the Kentucky plant, the company is also planning to expand production through the Greenfield facility. The company expects to break ground on the new facility in the first quarter of 2022, with construction taking 18 months to be completed.

The company expects the factory to be operational in the fourth quarter of 2023, but based on the current pipeline, it anticipates that the Greenfield plant will be sold out through 2025 without adding any additional customers. The company expects to meaningfully improve production by 2027 through continued onsite expansions and expects around 250 million pounds of annual finished products. 


Rapid Growth and Improving Production Efficiency 

The company delivered impressive growth from 2019 to 2020, as revenues grew from $32 million to $51 million. The company expects PHA resins to be its main revenue stream. Revenues are expected to significantly grow as the current contracts ensure that the company’s position is fully sold out through 2022, even as the Kentucky facility completes its Phase II buildout.

Management also projects further growth in 2024 as the fermenters from the Greenfield facility are expected to approach full utilization. All in all, management expects revenues to scale up from $51 million in 2020 to over $500 million by 2025 at an implied CAGR of 59%. 

Margins are also expected to significantly improve as the company completes its development of the Kentucky and Greenfield facilities. The company expects EBITDA margins to reach 30% as it reaches full utilization of the Kentucky facility in 2023. Starting from 2024, Management expects operational efficiencies from the Greenfield Facility to translate into EBITDA in excess of 30%. As a result, Danimer expects EBITDA to grow from $2 million in 2020 to $169 million in 2025, at a CAGR of 140%. 


Valuation  

As a result of its merger with SPAC Live Oak, Danimer has $385 million in cash on the balance sheet. As a result, the company expects to be substantially unlevered with debt capacity to internally finance operations. The company also believes that the liquidity along with the credit facility should help it expand its capacity in the Kentucky Plant and Build operations in the Greenfield plant.

Danimer currently boasts a market capitalization of $2.1 Billion, and is trading at a premium considering that the company anticipates revenues in 2021 to be around $117 million. The premium in the current shares reflect the optimism towards long term opportunity and market potential. The company estimates production capacity to grow from 20 million pounds to over 315 million by 2025, with revenues growing over 5x over the next five years, which will enable the company’s earnings to catch up to its premium valuations. 


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