The SPAC space and the ESG space have their share of over-promising and under-delivering companies, but Origin Materials (NASDAQ: ORGN) seems to be a clear exception to this. The company has not only developed its offtake agreements since announcing its merger with SPAC, but is also well ahead of its first plant construction schedule. Combine that with the growing interest in climate change and zero emissions, and you have a company that is poised to win over the next few years.
Over the past few days, climate change has been a hot topic due to the recent COP26 conference, a 2-week conference that brought together world leaders to decide on the actions needed to limit the impact of climate change over the next few days. years.
Currently, global warming is now 1.2 degrees Celsius above pre-industrial levels and is projected to increase to 2.7 degrees by 2100. Ideally, the increase in global temperatures should be limited to 1.5 degrees, but the current commitments (which I doubt will be kept) will lead to a rise of 2.1 degrees. Clearly, more action needs to be taken.
As regulations and public perception change, funding will begin to shift from fossil fuel companies to ESG companies. During COP26, dozens of countries agreed to cut funding for fossil fuel companies by 2022, and 450 companies managing $130,000,000 pledged to use their funds to reach net zero by 2050 .
The opportunity is huge – the estimated market for compliance carbon offsets is $40-120 billion globally, and I believe the market will only continue to grow as more governments establish carbon emission rules. I believe Origin’s clear value proposition will enable the company to capture a large chunk of this market – by simply switching their plastics supplier to Origin, companies can automatically reduce carbon emissions from plastics to zero, with minimum additional cost.
Direct debit agreements
As the only company offering carbon negative plastics, Origin has seen a massive increase in demand for its products since going public through SPAC. As the chart below shows, Origin has quadrupled its signed offtake deals to nearly $4.2 billion, up from $1 billion when the SPAC merger was just announced.
Source: Origin Q3 presentation
One of the most exciting deals is Origin’s partnership with Drive+, a global alliance of 11 automakers that aims to improve sustainability in the automotive industry. When Origin first went public, the company unveiled a partnership with the NaturALL Bottle Alliance that helped the company secure orders from major CPG companies Nestle (OTCPK:NSRGY) (OTCPK:NSRGF), Pepsi (PEP) and Danone (OTCQX:DANOY) (OTCQX:GPDNF). Likewise, I believe the Drive+ partnership could significantly increase demand for Origin in the automotive sector, with big names such as Toyota (TM) (OTCPK:TOYOF), Volkswagen (OTCPK:VWAGY) (OTCPK:VLKAF), Volvo (OTCPK:VOLAF) (OTCPK:VLVLY), etc. within the group.
Origin 1 Build
On the construction front, Origin’s execution has been truly astonishing, especially given the massive supply chain and labor shortages plaguing businesses in the United States. In this type of environment, Origin is months ahead of schedule, something you rarely see in the SPAC world.
Source: Origin Q3 presentation
Origin 1 is currently under construction and expected to be completed by Q4 2022. The first goal, module installation, was originally scheduled for Q1 2022, but the schedule was moved to YE 2021 in August before finally be completed in October, 6 months ahead of schedule. Next, the installation of the ENCON evaporator module is expected to be completed by the end of Q4 2021, 3 months ahead of the previous deadline. Finally, Origin expects manufacturing of the piping to begin by the end of Q1 2022, three months ahead of its previous target of the end of Q2 2022.
Source: Origin Q3 presentation – Installing the module
Before start-up, the last 2 steps are to receive the remaining major equipment on site during the third quarter of 2022 and to start the electrical installation at around the same time. With the way the schedule has unfolded so far, I would expect these milestones, as well as the start-up, to occur at least a quarter ahead of schedule, although management has yet to given guidance on this.
Origin build 2
Origin 2 is Origin’s first commercial factory and is expected to be built by mid-2025. The first major step to start building Origin 2 is site selection, which is expected to be completed by 2021, and Origin has already narrowed down the potential sites to just 3 and is in negotiations to purchase one of the sites, with an announcement expected by the end of the first quarter of 2022.
Source: Origin Q3 presentation
Next, Origin plans to complete some basic design work for the site by Q3 2022, after which they will prepare a front-end technical design package by the end of Q1 2023. After that, construction can start and should take 3 years before the site starts mid-2025.
Origin’s track record of meeting deadlines will prove invaluable if it can be replicated in the build of Origin 2. As a commercial-scale factory, Origin 2 will achieve nearly a billion dollars in sales each year, which will advance the startup by a few months can generate hundreds of millions in revenue.
Once again, Origin reiterated its expectation of having enough funding for Origin 1 and 2 through free cash flow and traditional project funding.
Since Origin 1 is 3-6 months ahead of schedule, I wanted to try and model what Origin’s finances would look like assuming Origin 1 and 2 could be completed 6 months ahead of schedule. In this scenario (Scenario 2), Origin 1 is expected to be completed by mid-2022, allowing it to start generating six months of revenue in 2022. Also, as Origin 2 can be completed by the end from 2024, it can fully accelerate increase production in 2025.
Source: Source Materials, WY Capital estimates
Also, in the original SPAC presentation, Origin made a more optimistic projection which assumed the company was able to obtain moderately higher prices per plant and added 2 trains per plant to double capacity. Over the past few months, Origin has significantly increased its pickup agreements, which makes me incredibly confident that management will decide to continue down this path. Combined with Scenario 2, I believe this could see Origin potentially generating $1.6B in revenue by 2025E (Scenario 3).
Obviously, despite being ahead of schedule and despite quadrupling its pickup deals, Origin ultimately remains an early-stage company and therefore it will be extremely difficult to assess the company.
That being said, assuming all goes well and Origin manages to open 7 plants by 2030, and assuming a 15x EV/EBITDA multiple (similar to other publicly listed chemical companies), I think that Origin should be worth $13-50 per share today. Even in 2030, Origin’s growth path will remain important since the capacity of these 7 plants would only represent a penetration rate of barely 0.5% of the total chemical market.
Source: Origin Investor Presentation
The main risk for Origin will be securing funding for these factories, which I estimate would cost $4.4 billion for the first 7 factories (see above). As interest rates are expected to rise in the coming years, it may become more difficult for Origin to receive the necessary financing. Additionally, the macroeconomic environment is also very challenging for Origin, with rising labor costs as well as supply chain issues that could lead to delays and cost overruns.
Overall, I believe Origin’s carbon negative plastics technology has the potential to completely disrupt the centuries-old plastics industry, allowing companies around the world to dramatically reduce their carbon emissions at no additional cost. At a time when climate change is one of the greatest threats facing humanity today, this technology will be vital to the world.