Initial Report: Origin Materials (NASDAQ:ORGN), 185% 5-yr Potential Upside (EIP, Gaius ANG)

Gaius presents a "BUY" recommendation based on its leadership in carbon-negative materials, strong contracts, and industry growth potential.

LinkedIn: Gaius Ang

Company Overview

Origin Materials is a leader in carbon-negative materials, offering a platform that converts sustainable feedstocks like wood residues into alternatives to petroleum-based products. They became publicly listed on NASDAQ in June 2021 through a SPAC merger with Artius Acquisition Inc. that allowed Origin to raise capital more quickly and gain a public listing without the traditional IPO process. After merging with Artius Acquisition Inc. in June 2021, Origin transitioned into a publicly traded company under the Nasdaq ticker ORGN.

Origin Materials operates through several key business segments:

1. PET Caps and Closures: This is a significant focus area for the company, with growing demand for sustainable, carbon-negative PET caps in a $65 billion market. They are scaling production to meet increasing orders from clients like beverage and consumer goods companies.

2. Biomass Conversion Technology: Origin’s patented platform converts biomass into carbon-negative materials for a range of products, from packaging to textiles.

3. Furanics Platform: This segment explores the conversion of biomass into specialty chemicals for further applications in sustainable materials.

Industry Overview

Origin Materials operates in the carbon-negative materials and bioplastics industry. This industry focuses on creating products and materials that allow companies to reduce their GhG emissions. The carbon-negative materials industry is rapidly expanding due to increased demand for sustainable products and materials that help reduce greenhouse gas emissions. The global focus on environmental, social, and governance (ESG) factors has driven companies and governments to seek sustainable alternatives to traditional petroleum-based products. The bioplastics market is projected to grow significantly, driven by consumer and regulatory pressures to reduce plastic waste.

According to Grand View Research, the United State's bioplastics market is growing at a compound annual growth rate (CAGR) of 19.3% from 2024 to 2032. The market is projected to reach USD 37.11 billion by 2032. Fortune Business Insights projects that the global bioplastics market will grow at an even more aggressive projection of 29%.

This growth opens up vast opportunities for companies like Origin Materials.

Thesis

Strong industry tailwinds

As mentioned in the industry overview, the carbon-negative materials and bioplastics industry is rapidly growing. I expect this growth to continue due to a few key reasons:

1. Increased focus on Scope 3 GhG emissions

   1. In a study done by McKinsey & Company, it was found that commitments to accelerate Scope 3 GhG emissions are accelerating, unlike previously where the focus was primarily on Scope 1 and 2 emissions. The carbon-negative materials and bioplastic industry are expected to benefit from this as packaging related emissions are a key component of many FMCG companies' Scope 3 emissions.

2. Regulatory Pressures

   1. Governments and organizations worldwide are implementing stringent regulations to reduce the use of conventional plastics. This includes initiatives like the EU’s Single-Use Plastics Directive and various national bans on plastic bags and non-biodegradable packaging. These policies are creating significant demand for sustainable alternatives, accelerating growth in bioplastics and carbon-negative materials. Another significant framework is the UN’s Global Plastic Treaty that is pushing industries to shift away from conventional plastics, further accelerating the demand for Origin's products.

3. Consumer Demand

   1. Consumers are becoming increasingly aware of environmental issues, particularly plastic pollution. This awareness is driving demand for eco-friendly products, pushing companies to integrate bioplastics and carbon-negative materials into packaging, consumer goods, and textiles. Consumers are now willing to pay premiums for sustainable options, which benefits companies that focus on producing environmentally conscious materials.

4. Lower cost solutions - Innovation and incentive-driven

   1. Companies are focusing on using bio-based feedstock such as agricultural waste, corn starch, or cellulose to produce bioplastics. Furthermore, advancements in carbon capture technologies are allowing companies to create plastics that not only reduce reliance on fossil fuels but also actively sequester carbon from the atmosphere. Innovations like direct carbon capture and biodegradable polymers (such as PLA and PHA) are gaining traction as they offer more sustainable and cost-effective alternatives to traditional plastics. Increasingly favourable regulatory environments with policies such as carbon credits and grants for environmentally friendly companies will further previously prohibitive cost levels to levels acceptable even in industries with thinner margins which will allow Origin Materials to capitalize on its position as a market leader within this space.

Strong competitive positioning

First-mover technological advantage

Origin Materials has developed proprietary technology to produce carbon-negative materials by converting biomass, such as wood residues, into useful chemicals like bio-based polyethylene terephthalate (PET). These materials can be used across several industries, including consumer goods, packaging, and textiles. Origin’s ability to produce carbon-negative plastics places it in a strong position to capitalize on the growing demand for sustainable alternatives.

As one of the few companies offering carbon-negative materials, Origin is well-positioned to dominate this growing niche, with the potential to set industry standards and be seen as the market leader of the industry.

Highly contracted revenue with key high-capacity customers

Origin Materials has managed to secure multi-year offtake agreements with many large conglomerates that have large appetites for its products. This allows them to strategically position themselves as a key supplier, in particular, within the FCMG space, by leveraging its position as the incumbent market leader. Contract sizes are expected to get larger over time as these industry giants phase out plastic packaging in favour of sustainable alternatives. Other large companies also have contracts with Origin Materials.

Origin has secured $9.3 billion in customer demand through offtake agreements with major corporations such as Nestlé, PepsiCo, and Danone. Recently, Origin Materials also signed a Memorandum of Understanding (MOU) for PET caps and closures with an undisclosed customer that is projected to generate over $100 million in revenue over the next two years, with production scaling by 2025.

Apart from FMCG, Origin also has an agreement with Primaloft, a leading brand in high-performance insulation and fabric solutions, to develop bio-based, carbon-negative fibers. Origin Materials also has a collaboration with Ford Motor Company aimed at exploring the use of carbon-negative materials in automotive applications, such as producing sustainable materials for car interiors.

Portfolio of patents and IPs

The company holds 23 patent families, establishing a strong intellectual property (IP) moat that safeguards its technological edge. Origin plans to commercialize its PET bottles, automotive parts, and other sustainable products, ensuring growth in the packaging, consumer goods, and industrial sectors.

Owning the IP's also allows for the company’s strategy to focus more on licensing its technology, providing an additional high margin revenue stream. Having this strong portfolio of patents and IPs allows Origin Materials to defend its position as market leader without fear of competitors replicating its technology and competing away its market share.

Strong operating advantages

Scalable and Cost-Effective Production Process

Origin’s technology allows it to produce bio-based materials at scale while maintaining cost competitiveness with petroleum-based plastics. The company is building its first commercial-scale plant, Origin 1, which is expected to start production in 2024. This will enable Origin to demonstrate its ability to scale and meet large industrial demand. Once operational, Origin’s process is expected to be cost-competitive with traditional petrochemical processes, providing a pathway to substantial market share as companies increasingly transition toward sustainable materials.

Scalability is a substantial advantage due to the industry's rapid growth. Origin Materials will have the supply elasticity to meet rapidly increasing demand that could arise from increased quantities in its offtaker agreements with FMCG giants if they decide to continue phasing out plastic use in packaging. Competitors without the ability to scale will lose out on the opportunity to leverage unexpected increases in demand that could occur sporadically.

Proprietary Unit Economics

Origin Materials' technology provides cost advantages by using biomass feedstocks such as timber and forest residues. These are cheaper than traditional petrochemical inputs. They also confer the additional benefit of having historical price stability. This gives the company a competitive edge in pricing while maintaining sustainability due to the abundant and low cost nature of its factor inputs.

Another added benefit of this technology is the simplified manufacturing process which requires only a single catalytic reaction. This further improves overall unit economics at scale. The lower complexity means a higher yield and lesser problems during the production process that could increase unit cost.

Valuation

As there is a lack of complete financial statements for Origin Materials prior to 2023, it is difficult to construct a DCF valuation model for the company.

I derived a LTM Price/Revenue market multiple of 9.75x using the following companies below:

1. Origin Materials (ORGN): 6.93x

2. LanzaTech Global (LNZA): 17.45x

3. Agilyx (AGLX): 13.13x

4. Axalta Coating Systems (AXTA): 1.51x

I was unable to find reliable NTM projections. Using this above multiple, ORGN should have a market capitalization of USD 332.25m compared to its current market cap of USD 236.12m, which translates to a 40.7% upside at the current share price of USD 1.62 or a target price of USD 2.28.

Using a beta of 1 (CapitalIQ), a RfR of 3.78% (US 10-year Treasury) and a Equity Risk Premium of 7.5%, the firm's Cost of Equity is the industry's equity risk premium at 7.5%.

Risk & Mitigation

Execution Risk in Scaling Production:

A key risk for Origin Materials lies in the successful scaling of its technology from pilot projects to commercial-scale production. Delays or cost overruns in the construction of its Origin 1 plant or technical challenges in scaling could impact the company's ability to meet demand and generate revenues.

Mitigation: Origin has engaged with experienced engineering partners to help with plant construction and scaling. The company has a clear timeline and substantial backing from partners and investors to mitigate the financial and operational risks. Additionally, the company’s phased approach to scaling production minimizes the likelihood of overwhelming setbacks.

Volatile Market for Feedstock:

The availability and pricing of biomass feedstock, such as wood residues, could fluctuate, impacting production costs. A potential shortage of feedstock or rising prices could erode the cost advantage of Origin's products.

Mitigation: Origin’s technology is feedstock-flexible, allowing it to use a variety of biomass inputs, which reduces dependence on any single resource. Timber and forest residues which Origin Materials uses have also historically maintained their price stability. Furthermore, the company has also secured long-term agreements with suppliers to ensure stable feedstock availability, minimizing the risk of price volatility or supply shortages affecting production.

Recommendation

Origin Materials is a key player in a rapidly growing industry that has distinct advantages over its peers. I believe that this will enable it to deliver superior performance for investors in the longer term. I believe the company is currently mispriced for a few key reasons:

1. Delayed revenue and profitability: While Origin Materials has signed substantial contracts, including over $9.3 billion in customer demand, the company has not yet achieved significant revenue or profitability. Investors may have become impatient, as the company’s large-scale commercialization and revenue growth are projected to take place in 2025 and beyond, creating a disconnect between short-term expectations and long-term growth

2. SPAC Volatility: The company went public via a SPAC merger and had a substantial dip as the post-merger investor enthusiasm faded, leading to the share price declining. I believe the substantial dip has turned many investors off as the stock is now seen as a volatile, speculative stock

3. Rotation out of growth stocks: The macroeconomic environment, including elevated interest rates and concerns about inflation, has led to a shift away from speculative growth stocks toward more stable, income-generating companies

4. Execution Risks and Scaling Challenges: Investors may have concerns about the company's ability to scale its operations effectively. Origin is still developing its first commercial plants, and any delays or challenges in ramping up production could impact investor confidence

I issue a BUY recommendation for Origin Materials with a target price of $2.28.

*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk.

References

1. https://www.grandviewresearch.com/industry-analysis/us-bioplastics-market-report

2. https://www.fortunebusinessinsights.com/industry-reports/bioplastics-market-101940

3. https://www.investing.com/news/company-news/origin-materials-shifts-focus-to-pet-caps-eyes-profitability-93CH-3627367

4. https://www.packaging-gateway.com/news/origin-materials-business-cap-closures/

5. https://www.equities.com/news/origin-materials-is-the-leading-player-in-the-carbon-negative-materials-market/

6. https://www.marketwatch.com/story/origin-materials-shares-drop-18-after-layoffs-reorganization-bfeca22b