In a Dec. 2 research note, analyst Tom Erik Kristiansen reported that Pareto Securities initiated coverage on Quantafuel SA (QFUEL:NO) with a Buy rating and a NOK250 per share target price that "upon proof of commerciality could more than double over the next year." Further, Quantafuel is "likely to add additional projects to its portfolio that leads to an even larger long-term upside potential." The current share price is NOK165.
Kristiansen highlighted that Quantafuel is "well positioned to benefit from its potential first mover advantage in a large, underserved chemical recycling market." Also, it has a scalable business model and a well-defined plan to facilitate growth near term.
The company produces high-quality synthetic fuels and chemical products, such as low-carbon diesel, naphtha and heating oil, from nonrecyclable plastic waste through a proprietary chemical process. This affords the business an attractive environmental social governance profile.
The next major catalyst for Quantafuel, scheduled to occur shortly, by year-end 2019, is the launch of commercial production at its plant in Skive, Denmark, Kristiansen relayed. "If successful, Quantafuel will have the first, large-scale commercial plant for chemical recycling of plastic waste in the world," he added.
It also will then, with its partners, look to expand in the short term, building two more facilities, each with a capacity of 300 million tons per day, likely in Antwerp and Bayern. Quantafuel already has plans to triple the capacity of the Skive plant to 180 million tons per day.
The renewable energy company has partly derisked production ramp-up by engaging strong partners, in Vitol, a large oil trader, and BASF, a chemical producer, Kristiansen indicated. Together, both companies invested US$25 million in Quantafuel. Having these partners also validates the potential of the company's technology.
Kristiansen noted that at current prices, Quantafuel's products are estimated to generate, through its processes at new large-scale plants, an unleveraged internal rate of return of 30%-plus.
Many view Quantafuel's technology as "the future solution as it will enable larger volumes to be turned into high quality products," the analyst pointed out, referring to the problem of unrecyclable plastics, production of which is projected to double by 2050. Additionally, recycling capacity in Europe will have to double by 2025 to meet current mandates. The need for a remedy is compounded by China's ban on plastic imports in 2018, which "implies that about 19 million containers of plastic waste will need to find a new home over the next decade."
With three plants operating, Quantafuel could process about "3% of the additional need caused by the China ban alone, highlighting the industry and Quantafuel's high growth potential," wrote Kristiansen.
To maximize the potential benefit from first mover advantage, Quantafuel is taking steps to standardize its production concept. "This may also make it an attractive acquisition candidate as some of world's largest petrochemical companies, refiners and oil majors today are targeting this market," Kristiansen added.
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