Quantafuel will never be so cheap – two days to Q1

During the last two weeks I doubled my position on Quantafuel. I believe it will never be so cheap. I believe the Q1 call should change the share price trajectory upwards.

I expect that on Friday the company will report several positives:

  1. First revenues from product sales to BASF – not sure how material the sales will be, but this is a proof that the product is as promised
  2. Reiterate their goal to have continues production by Q2 end – the continues production will be the game changer for the company and its shareholders fortunes
  3. Update on production – I understand from talking to broker’s analysts that they are making a good progress towards a continues production
  4. BASF deputy CEO introduction – the appointment of Dr. Lach is very significant for Quantafuel. He comes from the position as Project Lead ChemCycling in BASF. He was on the board of three plastic recycling companies. He choose Quantafuel, because it is the most ambitious company in this area. He knew what Quantafuel does and what the others do. His arrival is rubber stamp on Quantafuel future. I expect him to speak at the Q1 call for the first time.

I like the below investment case summary:

https://seekingalpha.com/article/4378135-quantafuel-global-leader-in-chemical-recycling-of-plastic-backed-basf-and-vitol-potential-to

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Quantafuel reporting on Friday

Congratulations to all that followed my XBrane idea here, prompted by the below article from SeekingAlpha. The stock is up 40% in one month. More like this!

https://seekingalpha.com/article/4419351-xbrane-partners-bausch-lomb-to-enter-usd-12-billion-market

Quantafuel – is my second largest position. I have been buying almost every day over the last two weeks. The company is reporting on Friday and I believe that we are seeing a share price bottom. I have doubled my position in the last 10 days. The stock is now around 30 NOK, it reached 80 in late January.

The stock has been declining since some unknown seller sold 1 mln shares in an SPO managed by Goldman. Initially there was a concern that the stock was sold by BASF, which triggered the sell off. The company announced that none of its partners sold. That did not stop the sell off. The possible reason is that the stock was placed by Goldmans to flippers, who were expecting a quick profit and drove the share price down as they were giving up.

The company should report positive news to the market on Friday. Both plants are now in trial production. The Skive plant has delivered the first products to BASF, so there will be the first tangible revenues this quarter. I also believe that they will reiterate their guidance that Skive will be in continues production by the end of this quarter. I believe that the stock price is bottoming now and I bought on again on today’s mkt weekness. I believe that once they reach continues production the share price will break 100 NOK and once they announce one large plant construction with a strong partner (BASF, Vitol) the share price will start quickly approaching 200 NOK. I am very bullish Quantafuel. The investment thesis is well summarised here:

https://seekingalpha.com/article/4378135-quantafuel-global-leader-in-chemical-recycling-of-plastic-backed-basf-and-vitol-potential-to

ERII Q1 report – the highest ever quarterly revenue plus announcemet of game changing product entering into USD55 billion market

ERII is my largest position. I first wrote about it here when the share price was 8USD. It is now around USD20. While the short term ride might be over, the longer term play is enact. I believe this will be triple digit stock within 3-5 years.

The Q1 was positive for ERII. The company delivered the highest revenue quarter in its history.

But the major event was the introduction of refrigeration / air-conditionaing product. More than 120 countries signed up to Kigali Amendment to the Montreal Protocol, in which companies committed to the elimination of greenhouse gasses. Those are used in air conditioning and refrigeration. The greenhouse gasses will be replaced by CO2. For CO2 to be effective, it has to run at much higher temperatures. ERII´s Pressure Exchanger technology could save 40% of energy costs. The USD55 billion market is vast and entering into this market is a game-changer for ERII. See the new page on ERII web site: https://energyrecovery.com/refrigeration/

ERII reported good progress on Vorteq – they have completed 25 frac stages, and Vorteq is now in operation with a client of LIberty Oil Services. The only issue is the durability of the PX cartridge, which would define the product’s profitability. ERII is now evaluating different commercial scenarios with Liberty. The final world of Vorteq commercialization will be provided during the June 10th shareholder meeting.


Do read the prepared notes for Q1: https://ir.energyrecovery.com/download/companies/energyrecover/AnnualMeetingPresentations/Earnings%20Script%202021%20Q1%20-%20FINAL.pdf

SKITUDE – GOOD REOPENING PLAY

The XBrane idea is working well, reaching new all time high today – it is 20% since I first wrote about this two weeks ago. I believe that ride will continue until the investor day in mid May, when they are very likely to announce the positive news on Phase 3 study. See the below write up

https://seekingalpha.com/article/4419351-xbrane-partners-bausch-lomb-to-enter-usd-12-billion-market

SKITUDE – top reopening game in ScandinaviaI had a call with CFO of Skitude. Skitude is the ultimate reopening game. They have the best skiing app and they are the largest provider of ski ticket sales in the world.

Due to the China virus competitors suffered. They picked up two large competitors for pennies. They are looking for further acquisitions – the virus helped the consolidation of the industry.

SKITUDE is beating the seasonality by selling tickets for water parks, mainly in the US. They announced latest such contract last week, signing up 8 waterparks.

There are several catalysts:

– reopening play

– further acquisition of competitors affected by China virus

– consolidation of the industry

– news flow on further acquisitions of water parks

– news flow on consolidation and cross-selling within its existing businesses

The risks are:

– slow consolidation and slow cross-selling

If you have time, review the previous post summarising the current ideas, that may be worth further research

Nordic Opportunities – weekend reading

I must congratulate all that followed my XBrane suggestion up 15% in two weeks and ERII, which is up 200% this year, which I suggested here several times.

Ideas for your further research

I like XBrane very much. They were due to announce the results of their phase 3 study in May. Historically, Biosimilars have 76% success rate in Phase 3 studies (see their website section Biosimilars). We know that they are due to announce the results in May. As the Phase 3 includes 583 patients, they already have 99% of the results by now. They already know the outcome. Last week they already announced investor day for mid May. Phase 3 is the only thing they have for announcement. Companies would not call an investor day, if they would have a bad news. My reading is that this further reduces the risk of Phase 3 failure. I believe the share price will reach 120-130 by the investor day. Good write up below:

https://seekingalpha.com/article/4419351-xbrane-partners-bausch-lomb-to-enter-usd-12-billion-market

Quantafuel – time to come back. I bought another shares today. I want to buy now gradually into the shareholder meeting. I believe that we are very close to continues production. The company claims they will be there by the end of Q2. When this happen the company will shoot up. My year end price target is well above 100 NOK. I would not hurry up into buying, but I would be gradual buyer. And I am doing that. Quantafuel will be my largest position by the time they announce continues production. That is my goal. I like the below article on Quantafuel:

https://seekingalpha.com/article/4378135-quantafuel-global-leader-in-chemical-recycling-of-plastic-backed-basf-and-vitol-potential-to

I had a call with CFO of Skitude. Skitude is the ultimate reopening game. They have the best skiing app and they are the largest provider of ticket sales in the world. Due to the China virus competitors suffered. They picked up two large competitors for pennies. They are looking for further purchases – the virus helped the consolidation of the industry. They are beating the seasonality by selling tickets for water parks, mainly in the US. They announced latest such contract yesterday, signing up 8 waterparks. I have a small position now, but trying to analyze this further. Any comments appreciated.

The other ideas that I like are:

https://seekingalpha.com/article/4395266-giant-hydrocarbons-discovery-total-and-africa-energy-better-expected

https://seekingalpha.com/article/4406713-next-biometrics-sales-wins-should-drive-revenues-400-percent-higher-this-year

https://seekingalpha.com/article/4364827-energy-recoverys-vorteq-game-changer-for-fracking-industry

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Prymed For Success

Fearnleys published an initiation report on Pryme – a chemical recycling company. They are now building their first production facility. There are two years behind Quantafuel. Their market capitalisation is EURO 70 million, vs Quantafuel’s EURO 550 million market capitalisation. It is quite possible the should be reaching similar valuation at that time.

I have a small position. I believe the upside is significant, but the share price will start really moving as they will be closing to the start of the platn – which should be in about 12 month time. If you believe in chemical recycling of plastic as I do, this is a good opportunity. One does not need to buy right now, but rather gradually average in over several months.

Fearnley research below:

Prymed For Success
Initiation of coverage – Buy, TP NOK 110/sh.
We see PRYME as a chemical recycling pure-play that has laid foundations for an exciting facility rollout, with a plethora of trigger-points ahead. Buy.


We initiate coverage of Pryme BV (PRYME-NO) with a Buy Recommendation and a NOK 110/sh TP.

PRYME converts plastic waste into valuable products through chemical recycling. The company has developed an efficient and scalable technology process which yields, to our view, extremely attractive economics. Combining this with a strong list of partnerships in place and a first facility on the horizon, we see a great opportunity for any investor to gain exposure to the next player in an exciting new industry. Buy. TP NOK 110/sh.

The world has a plastic waste problem – we need new solutions, now
Plastic is virtually everywhere you look. However, with only 9% of all plastic produced since 1950 estimated to have been recycled, it is clear the world has failed in dealing with plastic waste in an effective manner. Furthermore, decisions from countries such as China banning the import of plastic waste have put further pressure on regions around the
world; these actions have prompted governing bodies and major brands to set lofty recycling targets. In order to have any chance of hitting these targets, chemical recycling, and its underlying companies such as PRYME, will be vital to the cause.

A chemical recycling pure-play with an exciting rollout on the horizon
PRYME has developed an efficient and scalable technology process with differentiating characteristics compared to its public peers. PRYME stands to receive revenues from sale of pyrolysis oil and receipt of plastic waste, whilst favorable capex and opex requirements results in attractive economics from their first facility in Rotterdam (>60kmt p.a. input – production expected 3q22E). Earnings are set to improve further with significant scale-up in production in phase 2 (>460kmt p.a. input) followed by an exciting pan-European rollout. With a formidable list of partners in place, the future looks bright.

Valuation – bags of upside, despite deep risking
We use a cash flow to equity valuation methodology with a 10% WACC and risk each phase to yield NOK100/sh. Our analysis is then supported by comparison to peers and % of 2030 market, pointing towards significant upside. Taking the blended average, we arrive at a TP of NOK110/sh. However, as the company advances through their phases we see significant de-risking occurring, resulting in big upside. With a plethora of trigger points ahead of us, we see PRYME as a great investment.

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ANOTHER WIN FOR NEXT BIOMETRICS

I wrote several times on NEXT BIometrics. I recommended the purchase when the share price was 7 NOK based on the below investment article. The share price today is 9.2 NOK. The company has achieved a multiple sales wins (agreements with customers) that are translating into sales with 6-9 month lag. We know that they have been selected to deliver, we are just waiting for the contracts to transfer into sales and profits. Pareto believes the quarterly sales should increase by 400% by Q4. If that is correct the share price should multiply from here by the end of the year. It could increase 2-4 times. My base case is 25 NOK by the year end.

Detailed investment thesis

https://seekingalpha.com/article/4406713-next-biometrics-sales-wins-should-drive-revenues-400-percent-higher-this-year

Today NEXT reported another sales win. See below the press release

New design-win for NEXT in India

Oslo, April 28, 2021 -NEXT Biometrics (Oslo Bors: NEXT), a global company in finger-print sensor technology, has received an initial purchase order of sensors amounting to NOK 1 million
The initial purchase order is a result of NEXT`s collaboration with Mobiocean, a Fintech business partner to NEXT. It is an additional design win for POS devices within the India Fintech domain, similar to the order announced with Pagaria on 10 February 2021.The sensors are prepaid and planned to be shipped during the second quarter 2021. NEXT expects additional follow-on orders from the same business partner during 2021.
NEXT sensors will be integrated into payment POS terminals for financial inclusion projects by one of the largest state cooperative banks in India, providing door-step digital and banking services to the citizens of India.

About NEXT Biometrics

NEXT provides advanced fingerprint sensor technology that delivers uncompromised security and accuracy for the best possible user experience in the smart card, government ID, access control and notebook markets. The company’s patented NEXT Active Thermal principle allows the development of large, high quality fingerprint sensors in both rigid and flexible formats. NEXT Biometrics Group ASA (www.nextbiometrics.com) is headquartered in Oslo, with sales, support, and development operations in Seattle, Taipei, Bengaluru and Shanghai.

My top idea for the next three weeks is Xbrane. See below the write up. We first recommended this when the share price was 70 SEK. It is 101 SEK today. We believe that it should reach 120 SEK before the investor day scheduled for May 17. My year end target is 160 SEK. Very bullish.

See the thesis:

https://seekingalpha.com/article/4419351-xbrane-partners-bausch-lomb-to-enter-usd-12-billion-market

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Norweigan Brokers Increase Bullish Calls On NORSKE SKOG

Congratulations to all that followed my Energy Recovery idea published few months ago. The share price is up 200%. ERII is our largest position. I believe we are still at the early stage, as the company revealing new products in new industries almost every quarter. I believe the share price should multiply in the next 3 years. Do look at their presentation

After Friday results beat by Norske Skog, the brokerage houses rerate NSKOG. They are bullish both on higher paper prices due to recent industry closures as well as they are starting to recognize the strength of the new green project portfolio. We are long NSKOG and we are quite bullish. Our target is 60 NOK by the end of the year +55% from current levels:

AGB Research on NSKOG:

Q1 better than expected, hope for normalisation 
Clean EBITDA of NOK 80m was better than expected. Q1 showed a negative price effect, partly offset by cost savings and CO2 compensation. Norske Skog has suffered from COVID-19-related lockdowns as paper volumes fell 19% in ‘20. Its EBITDA margin has declined from previously 9% to 5% in Q1’21 and we expect it to decline further in Q2 due to FX and higher RCP prices. However, our paper price model points up 12-15% into ’22 due to capacity cuts and higher pulp prices (UPM and Norske talk about 15-20% on newsprint). This means that EBITDA is likely to increase towards a normalised paper margin of 7-8% into 2022. In addition, CO2-related payments amount to ~NOK 350m, and should provide an EBITDA floor. The CO2 payments could rise ~NOK 300m into ’22/’23 from higher CO2 prices and more allowances. We stick to BUY. TP up to NOK 42 (37).A pipeline of growth projects: ~NOK 66/share 
Norske Skog has several growth projects in the pipeline that could more than double EBITDA. The key projects are paper to packaging conversion and the new waste-to-energy facility, which could add NOK 650m and NOK 200m, respectively, with remaining capex of ~NOK 4bn. We arrive at a discounted value of NOK 66/share. Approximate values would be NOK 30/share for the existing Paper assets, NOK 25/share for the packaging conversion and NOK 12/share for the waste-to-energy facility. This calculation does not include the potential from its other projects, which could lift the values higher (read more in report).Conversion projects could be lucrative 
Paper to packaging conversion projects can be highly lucrative as margins and capacity double, while capex is very reasonable. The risk is that debt will increase significantly. Then, we have to wait until ’24-‘25 to see how much higher the EBITDA will be.

SpareBank on NSKOG:

Newsprint prices could normalise in 2H 2021 -> material upside for the NSKOG share, in our mind

Conclusion
We keep our Buy recommendation and NOK50 target price after the Q1 2021 report. The key reasons why we recommend buying NKSOG is i) NSKOG is in our mind an acquisition target, ii) newsprint prices are increasing in Asia/North America and we argue that this is will affect newsprint prices in Europe from 2H 2021 (management comments at the Q1 2021 presentation supports our view) and iii) we estimate that the conversion from newsprint to container board is accretive for shareholders in NSKOG. The main concern for investors in NSKOG is in our mind lack of cash flow to cover capex and risk for capex overruns. We expect that cash flows will increase with a stronger market and argue that the risk profile for the conversion capex is not as high as investors interpret. With newsprint prices 15% below 2019 level and an EBITDA-margin around 11%, NSKOG’s market cap could increase with NOK5.7bn – which is more than the containerboard conversion capex -> attractive risk/reward, in our mind.

Our analysisWe would not be surprised if NKSOG is acquired by StoraEnso. 
Our take is that NSKOG fits well with StoraEnso as i) StoraEnso is currently evaluating a consumer board investment in Skoghall with an estimated capex of EUR800 to 850m, ii) StoraEnso expects growth from building solutions and biomaterials (fit with NSKOG’s Circa, Cebina, bio-composites and FibreMatrix) and iii) a NSKOG acquisition would be a small ad-on for StoraEnso (NSKOG’s market cap is 3% of StoraEnso’s market cap). In addition, we estimate that OceanWood, which owns 42.85% of NSKOG has an IRR of 16% if it exits its investment at current market cap.

Newsprint prices expected up from 2H 2021 – prices have started to increase in Asia/North America. 
Our take is that more than 25% of newsprint capacity will be taken out in 2020/2021 (based on announcements from UPM, StoraEnso and SCA). Our take is that this will have a positive effect on prices from 2H 2021. The effect of lower supply has in our mind had an effect on prices, especially in Asia, and according to our knowledge NKSOG is now exporting to exporting to Asia. Our assumption on higher prices as production is down is supported by statements from RISI the last months commenting in the price increases in Asia and this will most likely affect Europe from 2H 2021. 

Management comments at the Q1 2021 presentation supports our view, in our mindAccretive containerboard conversion we argue investors are too concerned about capex overruns and funding. 
Based on the margin competitors are reporting, we argue that the containerboard conversion is accretive for NSKOG. The capex for NKSOG is sizable compared to its size, but we that expect cash flow from operations and increased leverage will be sufficient to cover the capex from late 2021 to 1H 2023. The EUR350m containerboard conversion is a sizeable investment for NSKOG, but the capex should in our mind be split according to the risk for the different capex components. We have divided the capex into three risk categories and see low capex risk for increased storage capacity and water treatment (estimate EUR70m of capex) and medium risk for OCC* treatment (estimate EUR140m of capex) and higher risk for conversion capex (estimate EUR140m of capex).

RANA GRUBER – Riding the raw-material rally

DNB RESEARCH PUBLISHED TODAY. We are long Rana since the IPO.

RANA GRUBER
Riding the raw-material rally

We expect solid EBITDA of NOK323m in Rana
Gruber’s first quarterly report. As the entire iron ore
futures curve has shifted up by cUSD17–18/t since
early March when we initiated, we have raised our
2021–2023e EPS by 5–54% and our target price to
NOK95 (85), to reflect the improved cash position and
better earnings prospects. We expect a first quarterly
DPS of NOK2.7, equivalent to a 70% payout ratio. We
reiterate our BUY and highlight Rana Gruber as one of
the most attractive stocks in our coverage exposed to a
potential continued raw-material rally.

Q1e EPS of NOK3.8. We estimate the average iron ore price was USD166/t in Q1, which would have yielded EPS of NOK6.0 with no effect from hedging; but, as c180,000 tonnes was hedged at cUSD99/t, we expect a hedging loss of NOK102m, leading to reported EPS of NOK3.8. Thanks to the strong price outlook, we believe
this is sufficient to allow the company to pay its first quarterly DPS, of NOK2.7, representing a 70% payout ratio. The results are due at 07:00 CET on 12 May.


Iron ore prices hitting new highs. Iron ore spot prices have risen from USD165/t when we initiated coverage in March to USD183/t. More importantly for the valuation of Rana Gruber, the futures curve has increased by a similar amount. As a result, we have lifted our 2021e EPS by 5% and 2023e by as much as 54%.

BUY reiterated and target price raised to NOK95 (85). Despite a very strong backdrop of rising iron ore prices, we continue to highlight the significant risk that they could swiftly fall to around Rana Gruber’s cash breakeven level. While we have lifted our 2022–2023e] EPS by 32–54%, we have increased our target price by only 12%, as we still see the company more as a call option on iron ore prices. We also believe
the stock should be trading at a considerable discount to the implicit valuation from the high prices in the market currently, as a pessimistic price scenario would likely lead to a greater loss (due to Rana Gruber’s relatively high breakeven price) than for most other listed raw-material producers. We highlight Rana Gruber as one of the most attractive stocks in our coverage exposed to a potential continued raw-material rally

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Sparebank: Norske Skog – Acquisition target, newsprint prices trending up and the share price could double in a normalised newsprint market

Below is a summary of research of Norske Skog. The company is reporting this Friday. We are very bullish on NSKOG due to its restructuring potential. We were right on our Circa Idea that doubled money. NSKOG owns 32% of Circa.

The green activities by NSKOG have a value equal to its market cap. I spoke to the management. They plan to focus on this story in their Q presentaion.

SpareBank research summary:

Conclusion

We keep our Buy recommendation and NOK50 target price ahead of Q1 2021 which will be reported on Friday 23 April. The key reasons why we recommend buying NKSOG is i) NSKOG is in our mind an acquisition target, ii) newsprint prices are increasing in Asia and we argue that this is will affect newsprint prices in Europe from 2H 2021 and iii) we estimate that the conversion from newsprint to container board is accretive for shareholders in NSKOG. The main concern for investors in NSKOG is in our mind lack of cash flow to cover capex and risk for capex overruns. We expect that cash flows will increase with a stronger market and argue that the risk profile for the conversion capex is not as high as investors interpret. With newsprint prices 15% below 2019 level and an EBITDA-margin around 10%, NSKOG’s market cap could increase with NOK4bn – which is more than the containerboard conversion capex -> attractive risk/reward, in our mind.

Our analysis

  • We would not be surprised if NKSOG is acquired by StoraEnso. Our take is that NSKOG fits well with StoraEnso as i) StoraEnso is currently evaluating a consumer board investment in Skoghall with an estimated capex of EUR800 to 850m, ii) StoraEnso expexts growth from building solutions and biomaterials (fit with NSKOG’s Circa, Cebina, bio-composites and FibreMatrix) and iii) a NSKOG acquisition would be a small ad-on for Stora Enso (NSKOG’s market cap is 2.5% of StoraEnso’s market cap). In addition, we estimate that OceanWood, which owns 42.85% of NSKOG has an IRR of 15% if it exits its investment at current market cap.
  • Newsprint prices expected up from 2H 2021 – prices have started to increase in Asia. Our take is that more than 20% of newsprint capacity will be taken out in 2020/2021 (based on announcements from UPM, Stora Enso and SCA). Our take is that this will have a positive effect on prices from 2H 2021. The effect of lower supply has in our mind had an effect on prices, especially in Asia, and according to our knowledge NKSOG is now exporting to exporting to Asia. Our assumption on higher prices as production is down is supported by statements from RISI the last months commenting in the price increases in Asia and this will most likely affect Europe from 2H 2021.
  • Accretive containerboard conversion we argue investors are too concerned about capex overruns and funding. Based on the margin competitors are reporting, we argue that the containerboard conversion is accretive for NSKOG. The capex for NKSOG is sizable compared to its size, but we that expect cash flow from operations and increased leverage will be sufficient to cover the capex from late 2021 to 1H 2023. The EUR350m containerboard conversion is a sizeable investment for NSKOG, but the capex should in our mind be split according to the risk for the different capex components. We have divided the capex into three risk categories and see low capex risk for increased storage capacity and water treatment (estimate EUR70m of capex) and medium risk for OCC* treatment (estimate EUR140m of capex) and higher risk for conversion capex (estimate EUR140m of capex).

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Making money is about great ideas.