The fact that a leading private equity firm within infrastructure investments (Antin) has conducted market research of the ELT market identified its problems and opportunities for more than one year, to conclude that tyre pyrolysis offers a fantastic market opportunity – followed by more than one-year-long JV negotiation to conclude in a JV with Enviro and Michelin, is a validation of Enviro’s value proposition. Furthermore, the JV aligns all stakeholder’s interests and incentivizes them all to succeed.

We believe Antin has evaluated all of Enviro’s competitors only to conclude that Enviro is the best company to partner with in terms of technology, products, strategic partnerships etc. This, once again, verifies Enviro and its business case, as well as the opportunity to categorize Enviro’s plants as infrastructure investments (allowing a high portion of debt financing) as opposed to traditional industrial investments.

This allows for very high leverage, requiring relatively small equity investments, thus making the plant roll-out until 2030 very asset-light from an equity investment perspective.

For example, this means Enviro does not have to invest SEK400m in equity in a new plant, as 80% gearing would only require SEK80m in total equity, of which Enviro (through its 30% ownership) would invest SEK24m – which is roughly 3x the amount of Enviro’s recurring royalties per plant.

We also find it very positive that Enviro will be reimbursed for all its previous work, and future works, regarding the Uddevalla plant and other plants included in the JV. This further reduces the financial risk in Enviro.

Also, Antin has designated its own management team in the JV and has a long track record of scaling industrial initiatives such as this – which provides further comfort in the roll-out, even if we consider the first plant to be critical in terms of proving the commercial viability and modular concept of Enviro’s plants.

We believe Enviro will be compensated for historical costs related to Uddevalla once a final investment decision has been made, which we expect to take place during Q2-Q3 2023 – as construction needs to start by then in order to meet the deadline of commissioning by the end of 2024 (we expect 18 months construction time). This should be further supported by Michelin’s dependency on the JV’s near-term success as it is to launch its recycled tyres containing Enviro’s rCB in 2025.

We expect Enviro to have a capacity of 960k tons by 2030 – equivalent to 27% of total ELTs arising in 2020. By 2040, we expect 1560k tons, which is equivalent to 45% of Europe’s total ELT arisings in 2020, or equivalent to 27% of the market in Europe and 16% in the US.

Should Enviro sign a similar strategic partnership in the US, we should also expect to increase our assumptions further, even if we already include 1.5m tons capacity in 2040. Even if Enviro should deliver on our estimates, that global potential remains massive.

We make estimate changes following the JV announcement, primarily related to prices per ton, the roll-out of plant capacity, and awaiting capital requirements, where we expect a directed share issue of up to SEK300m to take place in the coming quarters. Our assumptions for this expected share issue include the issuance of 150m shares, at the price of SEK2.0 per share (19% dilution). All in all, this results in an increased fair value range of SEK2.1 (1.1) – SEK11.0 (9.6) per share, with a base case of SEK6.1 (4.1) per share.

We expect the JV to be able to fund its operations with a very high degree of debt. This is something that characterizes Infrastructure investments, and we are certain Antin would not have been interested in creating a JV and taking the operational lead in it if it was not as certain it could reach a high degree of leverage.

The beauty of high leverage, coupled with solid and recurring cash flows, is that it requires a relatively low degree of equity as opposed to if the venture was to be solely funded with equity. We argue this makes an immense difference for Enviro going forward, as we have previously highlighted the otherwise massive equity investments ahead.

However, for the first plant (Uddevalla), we do not expect 80% leverage. We rather think it will be financed by equity solely to fully prove its commercial viability. We also believe the first plant could be more expensive to construct than coming plants – given that it is the first time Enviro and the JV will construct a commercial plant of this dignity.

Enviro has previously stated SEK400m in CAPEX per plant. If we take a conservative approach and expect SEK500m for the first plant, combined with 100% equity financing, it would require a SEK150m investment from Enviro for its 30% owner share. We also believe this SEK150 m will make Enviro a 30% shareholder in the JV – which is the option Enviro has 24 months from now to utilize.

Enviro is to receive royalties from each plant, which is linked to the profitability of each plant (we expect 7% of EBITDA). We have previously expected 5% of sales, corresponding to 7% of EBITDA, which we still consider a fair level given that the JV depends on Enviro’s technology. Having royalties linked to EBITDA also protects the JV from downside risk for the JV if it should not be as profitable as previously expected, given a certain level of sales.

Given Enviro’s favourable long-term outlook, coupled with near-term capital requirements (to fund the first plant), and the lack of institutions in the list of shareholders, we argue the company should try to raise new equity through a directed share issue.

We note the company has a mandate of 20% dilution, equivalent to 25% of total market capitalization – and we believe a directed share issue could be a very cost- and time-efficient approach to raising the desired amount of capital.

We argue the interest in Enviro should be high following the press release regarding the JV with Antin and Michelin – as the path toward 2030 has crystalized, with offtake agreements and capital commitments from one of the biggest private equity firms within infrastructure investments in Europe with more than EUR30bn in AUM, and one of the largest tyre manufacturers in the world, whose interests and incentives are all aligned.

Given the valuation of listed companies with similar characteristics as Enviro (primarily unique recycling technologies), who have not come as far with regards to technology, business model, and financing - but still have a valuation higher than Enviro - should provide a good opportunity for new institutional investors to enter the share.

We have previously expected SEK240m to be raised in equity/debt to fund the previous business plan ahead of the roll-out. We still think this is realistic: however, Enviro will receive fees for its work put down for the JV, which means its underlying OPEX will be lower going forward. We still think Enviro should utilize as much as possible of the mandate, however, if it has the possibility, to remove any doubts of future equity raises and capital requirements to become cash flow positive. This is also likely something that would give support for the Enviro share. Furthermore, should Enviro need additional capital beyond the scope of the first plant, we believe various types of green debt could be an attractive alternative.

We make several estimate changes following the announcement of the JV as we believe the road towards 1m tons capacity by 2030 has crystalized. The following section describes the key parameters behind our estimate changes.

Increased price per ton
We use the lower range of Enviro’s previously communicated price range in our base case and its upper range for our bull case. For our bear case, we use 75% of our base case for oil and 50% of the carbon black. All in all, this results in a bear/bull price range of SEK4888 – SEK9443 per ton, with a base case of SEK7771 per ton. These numbers are the same as Enviro has previously communicated in various presentations, but we decided not to fully incorporate them in our estimates before we saw more evidence. We now believe the price levels of the offtake agreements in the JV are largely in line with what Enviro has communicated before – otherwise; we think it would have to be restated.

An increased pace of plant roll-out
Regarding plant roll-out, we expect Enviro to reach a capacity of 960k tons by 2030, which aligns with the JVs target of capacity of up to 1m tons by 2030. We had previously expected a capacity of 1m tons by 2036. The new figure corresponds to 27% of ELT arisings in 2020, which we find fair given the JV’s growth agenda until 2030 and its first-mover advantage. By 2040, we expect a capacity of 1560k tons, which is equivalent to 27% in Europe and 16% in the US. This capacity is still only scratching the global surface, as it is equivalent to 6% of the total global annual supply of ELT.

Cost compensation
Enviro will be compensated for historical costs related to Uddevalla once a final investment decision has been made, which we expect to take place during Q2-Q3 2023 – as construction needs to start by then if it is supposed to be commissioned by the end of 2024 (we expect 18 months construction time). Enviro will also be compensated for future work that will benefit the JV. This means Enviro can address more capital on R&D and future potential partnerships. We believe the historical costs might amount to SEK50m, which is a majority of the total OPEX during the last two years. Going forward, we expect around 50% of OPEX to be compensated for, which means Enviro will invoice the JV and thus recognize revenues of the corresponding amount in the P&L.

Capital structure in future plants
We expect plants in the coming years to have 80% leverage, which means 20% equity needs to be injected. For Enviro, with a 30% owner share, each plant should require an equity injection of SEK24m, given a total plant CAPEX of SEK400m. Given Enviro’s expected royalties and cash flows from the ownership in the JV, the roll-out should be financed. Especially if Enviro can raise additional debt in its holding company.Furthermore, we do not rule out that EU grants can come into play, but we do not include it in our estimates.

All in all, we believe the outlook is more favourable today relative to our old estimates, where we had anticipated Enviro to hold a 20% owner share in its initial plants and a 50% equity ratio. The new assumptions mean Enviro will invest less equity than before but have a larger ownership share than before.

Capital requirements
As previously stated, we had expected Enviro to raise SEK240m ahead of its plant roll-out. We had previously modelled Enviro would raise this sum in debt, but we now expect SEK300m to be raised in equity – or roughly 23% of current market cap. As a result, this increases the share base by 23% (19% dilution), negatively affecting our fair value per share range.

Profitability
The plants’ high profitability, with EBITDA margins of 65%, is mainly driven by the very cheap raw material end-of-life tyres offer. This is because it is an environmental problem hard to deal with, but that pyrolysis offer a circular approach. Long term, we think competition for ELTs will increase, which will likely increase the price per ton of ELT, given the very high profitability levels in the sector.

As a result, we lower the current gross margin of 77% to 72% in 2030 and 54% in 2040, down to 31% in 2070 (terminal). The EBITDA margin per plant also goes from today’s expected 65% to 60% in 2030 and 41% in 2040 to 18% in 2070. The margin drop could be offset by price increases higher than inflation of TPO and rCB – but we do not expect it in our current estimates.

Following our estimate changes, primarily related to prices per ton, the roll-out of plant capacity, and awaiting capital requirements, where we expect a directed share issue of up to SEK300m to take place in the coming quarters. Our assumptions for this share issue include the issuance of 150m shares, at the price of SEK2.0 per share. All in all, this results in an increased fair value range of SEK2.1 (1.1) – SEK11.0 (9.6) per share, with a base case of SEK6.1 (4.1) per share.

Going forward, we consider the next big events for the share to be:

We consider the two latter events to be somewhat more long-term oriented in its character relative to the first two events.

We at Redeye will host a recycling event on 19 April where Enviro will present, and a consecutive Q&A session will be held, where we will allow investors to ask questions via a web form found on the site (questions can be posted already today).