There's a new kid in double-net land -- companies trading at between 1x and 2x net current asset value (NCAV) -- and it's about time we saw some new candidates in this underbelly of value. The rising tide of the markets has once again rendered names trading at low levels of NCAV to be few and far between.
Renewable Energy Group (REGI) provides lower carbon-transportation fuel converted from used cooking oil, canola and soybean oil, and inedible animal fats into diesel. In 2019, the company sold 700 million gallons of fuel, generating $2.64 billion in revenue, and $490 million in net income, for a seemingly very healthy 18.6% net profit margin (more on this later). Biomass-based diesel accounted for 78% of total revenue, while petroleum-based diesel accounted for 10%. As of year-end 2019, the company owned 13 biorefineries in the U.S. (11) and Germany (2).
There's plenty of incentive to produce biomass-based fuel- namely the federal biodiesel mixture excise tax credit (BTC)- a $1.00 per gallon refundable tax credit implemented in 2005, and now scheduled to run though the end of 2022. Forty states also encourage the use of biomass-based fuel, through various means, including required blend percentages in regular diesel as well as tax incentives.
REGI currently trades at 1.84x NCAV (NCAV = current assets - total liabilities), and boasts a decent balance sheet with less debt than I might have expected. The company ended its latest quarter with $189 million in cash, and $241 million in debt, although the majority of that debt is short-term.
Consensus earnings estimates for next year ($5.55) imply a forward price earnings ratio of just 4, suggesting a great deal of skepticism among investors. That may be warranted given the low cost of oil we are currently experiencing, as well as dependence of REGI and others in the industry on tax breaks and government regulations. However, there is an additional overhang on the stock. In late June the company revised second quarter estimated EBITDA from a prior range of $20 million to $35 million, to a loss of between $2 million and $12 million. It was the cause of the change that caught my eye; the company cited "inadvertent calculation errors". That sent shares down 26% on June 24th, and is the reason it is now in double-net land.
The company can't prosper without regulations that dictate the use of biomass as a blend in diesel, or without the $1.00 BTC. While there's no reason at this point to believe that either will change given the focus on renewable energy, it remains a risk. In addition, biomass is highly competitive and government related incentives and regulations may encourage more competition.
Earlier, I mentioned REGI's very solid net profit margin for 2019 (18.6%). One factor that greatly enhanced that margin is the fact that the company paid just $1.2 million in tax.
Still, at the very least, I am intrigued at this point.
