Tidewater Renewables Inc. is “well positioned to be a leader in the growing North American biofuels sector,” according to Stifel GMP analyst Cole Pereira.
In a research report released Thursday, he initiated coverage of the Calgary-based company, a subsidiary of Tidewater Midstream and Infrastructure Ltd. , with a “buy” recommendation, saying he’s “positive” on its investment outlook.
“We view North American biofuels as poised for significant growth over the next few years, as the sector remains relatively early-stage, particularly in Canada,” said Mr. Pereira. “In our view Tidewater is well-positioned given its ‘first-mover’ advantage as it builds the first large-scale Renewable Diesel & Hydrogen facility in Canada, as well as its parent TWM’s ownership of infrastructure and refining assets.”
“Tidewater’s projects boast robust economics driven by government incentives for both constructing and operating biofuels facilities, improving profitability and lowering net capex. We forecast a 1.4-times year EBITDA payback on the net capex for its RDH2 facility based on 2023 estimated EBITDA ($85-million), which is reflected in a ROCE of 16 per cent in 2023 and 17 per cent in 2024. While free cash flow is negative from 2021-2022 during the buildout phase, we forecast attractive FCF yields of 20 per cent in 2023 and 21 per cent in 2024, and its debt to be paid down by 2Q24.”
Also touting its “enviable” ESG characteristics and “attractive” valuation, he set a target of $22.50 per share, exceeding the current average of $21.21.
“Tidewater Renewables currently trades at 4.3 times 2023 estimated EV/EBITDA, a significant discount to its biofuel peers that trade at 10.2 times 2023 EV/EBITDA on average and range between 7.7-12.8 times,” said Mr. Pereira. “While Tidewater Renewables’ business is earlier stage than most of its peers, we view this valuation discount as too large and expect the stock to re-rate over time as we get closer to the 1Q23e ISD of its Renewable Diesel & Hydrogen facility.”