Reason 1. Growing industry supported by government

Origin Materials operates in a growing and up-and-coming market. According to Facts and Factors, the global biodegradable plastics market was valued at approximately $7.69 billion in 2021 and is expected to reach $31.39 billion by 2028, implying a compound annual growth rate (CAGR) of around 22.25% from 2022 to 2028.

The expected biodegradable plastics market dynamics; Source: compiled by author

Driven by public demand for sustainable development, governments in developed countries are taking active steps to achieve zero carbon goals. As a result, companies like Origin Materials are taking advantage of the significant incentives offered in order to combat climate change and accelerate the transition to green technologies.

The Inflation Reduction Act, signed into law by the US president in August 2022, significantly expands the tax credit available for clean energy producers investing in production facilities. Origin Materials is considering opportunities for a tax credit on its Origin 2 manufacturing facility, which is planned to begin operations in mid-2025.

In addition, Origin may be a beneficiary of the Advanced Industrial Facilities Deployment Program, which provides $5.8 billion in competitive funding, including grants, rebates, and direct loans. Potentially, the company could use the program to fund its West Sacramento pilot facility, Origin 2, and other future US plants.

It is worth noting that in early January, the Louisiana State Bond Commission passed a resolution approving the issuance of tax-free bonds to finance the construction of Origin 2 for up to $1.5 billion. The company is eligible to issue tax-free bonds because it uses solid waste to produce materials with negative carbon emissions.

Reason 2. Strong competitive positioning

While Origin Materials has yet to commercialize its years of research and development, we can already see that the company has a strong competitive positioning. It is mainly due to the company’s patented technology that allows it to convert biomass, mainly wood and forest waste, into chloromethylfurfural (CMF) and hydrothermal carbon (HTC). Substances produced using the technology have significant advantages compared to their petroleum-based counterparts in terms of carbon footprint, performance, and cost.

The use of plant-based biomass as a raw material has several undeniable advantages. First, the wood and forest wastes provide long-term sustainability due to their renewable nature. Secondly, their pricing is influenced by a relatively small number of factors, which ensures stability. Thus, in the period from 2015 to 2020, pulpwood prices ranged from $9.30 to $10.10 per ton, while the maximum deviation was 8.6%.

Over the past decade, Origin Materials has created significant barriers to market entry by competitors due to the company’s extensive patent portfolio, which includes preparation and purification methods for chloromethylfurfural. The company's patents expire between 2032 and 2034. Thus, Origin Materials is unlikely to face competition until at least 2032.

Reason 3. Enormous demand for solutions

A key proof that Origin Materials is a leading carbon-negative materials company is the sheer demand the firm is facing despite not having even started production at its first facility, Origin 1. Since February 2021, customer demand in the form of capacity reservations and purchase agreements grew more than 9-fold to reach $9.0 billion in the last quarter. Origin Materials’ clients and partners include big names, such as Ford Motor, Nestlé, PepsiCo, Danone, and LVMH Moët Hennessy Louis Vuitton.

Origin’s Customer Demand; Source: Company Presentation

During the latest conference call, the company’s management disclosed the structure of orders in the context of its development plants. While the company is taking orders for all three production sites, the most recent orders have been primarily for Origin 3. As of the last quarter, Origin 2 was almost fully booked for para-xylene and PET. The company is currently more focused on marketing carbon black, advanced chloromethylfurfural derivatives, and other high-margin products.

The construction of production facilities is going according to plan. Construction of Origin 1 was completed in January 2023. The plant is expected to be launched by the end of Q1 2023.

The budget and timing of Origin 2 also remain unchanged. The company is currently developing the project and plans to start the construction in 2023. The facility is expected to be launched by mid-2025. The Origin 3 project development will begin this year in order for the facility to be launched in late 2026/early 2027.

Construction schedule; Source: Company Presentation

Financial performance

As noted above, Origin Materials is at an early stage of development and has yet to commercialize its know-how. The company is expected to start generating revenue in 2023 and then grow it at CAGR of 84.33% through 2030. The forecast is based on the existing agreements with customers and expected future demand.

Origin Materials is expected to break even on EBITDA in 2025 and then increase the figure with a CAGR of 76.19%. Please see below the visualized projected financial results, including revenue, EBITDA, and EBITDA margin:

Projected financial results; Source: Company Presentation

Origin Materials has unveiled a capital expenditures plan through 2030 based on the estimates from the world-leading EPC companies and partners of Origin Materials on the projects. In its plan, Origin Materials has considered the current contract commitments/orders, future demand, and expected capacity requirements.

Origin Materials’ CapEx plan; источник: Company Presentation

It is expected that current transactions, anticipated financing, and grants will be sufficient to fully fund the construction of Origin 1 and Origin 2, as well as to achieve profitability on EBITDA.

The entire debt load of Origin Materials comes down to stockholder notes for $5.80 million, while cash equivalents and short-term investments account for $362.20 million. It is worth noting that a strong balance sheet is usually natural for companies at an early development stage since their assets are financed predominantly by equity capital, which is regularly diluted.

Additional paid-in capital; Source: compiled by author

It is worth noting that a significant increase in additional paid-in capital is due to the merger with Legacy Origin, a related party. We do not expect equity dilution in the short term as, as noted earlier, the company already has the financial capacity to fully fund Origin 1 and Origin 2 based on their current valuations.

Valuation

Origin Materials has no competitors, and the early stage of the company's development makes the classic comparable valuation irrelevant. However, based on the firm's forward EV/Sales and EV/EBITDA multiples, we can conclude that Origin Materials is heavily undervalued.

Forward EV/Sales and EV/EBITDA multiples; source: compiled by author

The minimum price target set by Credit Suisse is $7 per share. In turn, the maximum valuation is set at $20 per share (according to Refinitiv, which did not disclose the investment bank). By consensus, the fair market value of the stock is $12.6 per share, which implies a 112.5% upside potential.

Price targets of investment banks; Source: compiled by author

Key risks

Origin Materials is exposed to early-stage risk. The company is investing heavily in research and development and the construction of manufacturing facilities. However, before the facilities start operating we cannot be completely sure of the company’s economic efficiency.
Although the facilities' construction is progressing in line with the management's expectations, there is a risk of commissioning delays or significant budget overruns. Ultimately, this can lead to a significant reduction in the company's stock value.
Origin Materials will likely continue to dilute equity to fund growth until it achieves positive operating cash flow. The dilution of capital leads to a decrease in the market value of stock.
Origin Materials operates in a young and undeveloped market. The emergence of new unique technologies can lead to the loss of the company’s market position.

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