Why PureCycle Technologies Should Rebound (NASDAQ:PCT)

Analysts Expect Profitable Global Polypropylene Markets in the Next Few Years

Globally, the demand and supply of polypropylene can create the conditions for very profitable markets, as the specific properties such as tensile strength combined with good chemical and heat resistance, in addition to durability, make this industrial good very suitable for a wide range of applications in different industries.

On the demand side, the healthcare and food packaging industries are leading the demand for polypropylene to make effective plastic products that serve as lifesavers through personal protective equipment and other disposable medical devices, or to ensure food safety through ad hoc packaging solutions. The importance of these polypropylene-made products has been re-emphasized during the pandemic caused by the spread of the COVID-19 virus.

Demand for polypropylene will receive an incredible boost from electric and hybrid vehicle manufacturers. The industrial product is largely used in the automotive subsector of manufacturers of electric and hybrid vehicles as well. The demand is expected to grow exponentially from one million units in 2018 to an estimated 18 million units by 2025, according to the Edison Electric Institute, as reported by Straits Research via GlobeNewswire.

Straits Research predicts that the global polypropylene market, valued at $122.5 billion in 2021, will grow at a compound annual rate of nearly 3.5% over the next 8 years to reach $158.2 billion by the end of 2030.

The analyst expects the North American polypropylene market to grow the fastest over the next 8 years, driven by rapid growth in flexible packaging adoption in the food and beverage industry.

On the supply side, some key players are poised to benefit from the expected rising demand for polypropylene. Some private companies and the US-listed manufacturer LyondellBasell Industries N.V. (LYB) dominate the market.

Coming Soon to the Polypropylene Market: PureCycle Technologies

However, with such a fast-growing market, there is also room for smaller operators like PureCycle Technologies, Inc. (NASDAQ:PCT).

PureCycle Technologies, Inc. is expected to begin production of recycled polypropylene at a facility in Ohio soon, capitalizing on the strong momentum in the North American markets. Especially in the US packaging industry where many companies are increasingly attracted to flexible packaging because of its ease of use, compactness and lightweight.

Additional PureCycle Technologies, Inc.’s operations will follow in the coming years.

The market has already shown a strong interest in PureCycle’s high-pure recycled polypropylene as the company could enter into multiple off-take agreements that commit or overcommit its future production from recycling facilities in Ohio and Georgia.

After the ramp-up of polypropylene production in Ohio, the share price, which trades significantly lower than recent market valuations, could potentially rise sharply. This and other longer-term growth catalysts are attracting the attention of investors who may be interested in buying PureCycle Technologies, Inc. stock.

About PureCycle Technologies, Inc. in the Pollution & Treatment Controls Industry

PureCycle Technologies, Inc., headquartered in Orlando, Florida, is a manufacturer of recycled polypropylene.

Polypropylene is an industrial raw material (a thermoplastic polymer) that has a wide range of applications in the fields of piping, textile fibers, the manufacture of containers and parts for electrical appliances, and chemical and heat-resistant equipment.

The company is licensed to convert polypropylene waste into an ultra-pure recycled resin. The recycling process implemented by PureCycle is a technology that makes it possible to remove plastic waste contaminants such as color, odor and others until a new pure resin is obtained.

An Operational Update

In its Q3 2022 report, PureCycle Technologies, Inc. informed the market that it expects to begin polypropylene pellets production sometime in the first quarter of the current year. PureCycle polypropylene pellets will be manufactured at a purification plant in Ironton, Ohio, and every year the asset will manufacture approximately 107 million pounds of ultra-pure recycled resin.

The company cooperates with SK Geo Centric Co Ltd, a South Korean petrochemicals manufacturer and distributor, to build a recycling plant in Pin on Ulsan, South Korea, aiming to produce 130 million pounds of polypropylene annually, with production expected to ramp up before the end of 2025.

In Augusta, Georgia, PureCycle Technologies is building a multi-line recycling facility, with the first two lines expected to start production in approximately 1.5 years. The company has signed multiple offtake agreements for Augusta’s first two lines, which are now tied into multi-year contracts.

PureCycle Technologies is building three PreP plants in Florida, Pennsylvania and Georgia that will serve as feedstock suppliers for its Augusta recycling operations. The company anticipates that this portion of the project will be fully operational before Augusta’s first two recycling lines are completed.

The Stock Valuation

PureCycle Technologies’ shares are trading at $6.30 per piece at the time of this writing, giving it a market cap of $1.11 billion.

The stock price is 21.7% below the long-term trend of the 200-day simple moving average of $8.07 and 20.7% below the median of $7.945 of the 52-week range of $4.94 to $10.95.

Based on the comparisons above, the shares are trading low and therefore appear to offer an interesting entry point in anticipation of a potential rally following the company’s strategic growth plans which, if successful, should soon see PureCycle Technologies on board the profitable world market for polypropylene.

Sometime in the current quarter, the company will finally start producing pellets of recycled polypropylene at its flagship Ironton plant in Ohio, which could potentially give shares a big boost.

There might still be a risk that the company will have to postpone commissioning again if mechanical completion has not taken place yet. This is because mechanical completion has been delayed in recent weeks due to setbacks in the supply of key processing equipment.

However, since the company has already assembled all the construction modules, there should be no further postponement of the start of polypropylene pellets production at the Ironton plant in Ohio.

Some headwinds to PureCycle Technologies’ stock price may come from unfavorable macro factors, but these appear to moderate going forward and become less and less of a concern for the company and the stock market, primarily due to the following considerations.

Although still far from the 2% target, inflation (7.1% last seen in November) appears to be on track to meet the central bank’s target.

The tightening of monetary policy to reduce inflation is working, and further implications for inflation are yet to come as the spillover effects of rate hike decisions on the economy are deferred. And, with the economic recession set to be the dominant theme in financial markets in 2023, the US Federal Reserve will inevitably shift to an accommodative low-interest-rate policy and support the rise in stock prices.

The tight labor market has also been a major contributor to inflationary pressures so far, with the unemployment rate remaining stable in a narrow range of 3.5-3.7% over the past 10 months. This situation should change, however, as the expected slowdown in economic activity is likely to worsen the unemployment rate from 3.7% in November 2022 to an estimated 4.4% in 2023, according to economists’ forecasts. This will spur the FED’s acceleration of policy change and US-listed equity markets will no doubt be among the first to welcome the decision.

Lower borrowing costs following the change in the FED’s monetary policy strategy will allow PureCycle Technologies to access borrowed capital at much less onerous terms. This will prove fundamental for a company that will need some time before it can also raise the required capital through self-funding.

In summary, the company requires funding to bring Ironton into production beginning this quarter of 2023 and to fund the construction of recycling facilities in Augusta and three PreP facilities on the east coast.

As of September 30, 2022, PureCycle’s balance sheet reported total cash and cash equivalents of $416.1 million, of which $201.1 million was restricted cash. PureCycle’s debts totaled $233.3 million. PureCycle’s flagship recycling facility in Ironton, Ohio has a budget of approximately $317 million.

Furthermore, the energy crisis arising from concerns about regular supplies of fossil fuels from Russia no longer seems as serious as it was a couple of months ago, despite weather forecasts for severe winters north and hot summers south of the equator line. All the eurozone countries are no longer under the pressure of the energy crisis thanks to resource diversification strategies that have made it possible to significantly reduce dependence on Russian gas and oil.

Lower energy and other input prices should have an immediate positive effect on PureCycle Technologies’ production costs, as waste polypropylene can be recycled more cheaply, boosting the company’s profit margin and ultimately being a powerful catalyst for higher share prices.

Although down 31.58% so far, PureCycle Technologies’ shares are not yet oversold, as a 14-day relative strength indicator shows at 52.60. This indicator also means that a decline under the pressure of unfavorable macroeconomic factors cannot be ruled out.

However, as these headwinds (as outlined above) should not continue as severely as they have weathered most of 2022, the stock price is likely to deviate slightly from current levels rather than fall further in a remarkable way.

While the Ironton startup could instead set the stage for a strong recovery, it then makes sense to stock up on PureCycle Technologies at current stock prices.

Conclusion

The world market for polypropylene should grow very well in the next few years and offer business opportunities for large manufacturers, but not only them. Even a smaller manufacturer like PureCycle Technologies, Inc., which is starting up its first production line this quarter, should find room for success. The company will not only recycle polypropylene waste in Ohio but plans to do so in Georgia and South Korea as well in the next few years. The expansion project requires funds, which the company also must raise from banks.

With the US Federal Reserve policy on track to return to more accommodative interest rates, this will create favorable conditions for PureCycle Technologies Inc. to borrow capital for its expansion projects. The reduction in energy and raw material prices will also significantly support production in Ohio.

The stock looks cheap today as the technically low-price level is combined with some positive catalysts.

Thus, investors may be interested in purchasing shares of PureCycle Technologies, Inc.