Investing Ideas for a Finite Planet: Episode #2 - Danimer Scientific
Our guide to the business AND environmental fundamentals of this high-growth stock 🌱✨
Welcome to the second of my write-ups exploring growth stocks in the emerging clean, circular economy. We know the climate crisis is accelerating, and business as usual is unacceptable. At the same time, achieving financial independence has never been more important - and long-term investing in the stock market is proven to be a safe way to do this. I want to connect these two phenomena, by exploring the sustainability of companies at the head of emerging megatrends in our rapidly-changing world.
None of what you read is financial advice. Please do your own due diligence.
Danimer Scientific is a high-growth biotechnology company that produces biodegradable polymers for use in plastic alternatives
Trading since 2004, they recently came to market through Live Oak Acq (SPAC) in 2020
Sector: biomaterials, packaging
Megatrends: circular economy, clean transition
Tailwinds: circular economy, ‘buy clean, buy American’, corporate ‘go green’ intiatives
The company has 150 patents, including some bought from Proctor & Gamble. It claims its products provide the following benefits:
Reduced dependency on petrochemicals
Adherence to ASTM and EN requirements for biodegradability and compostability
FDA approved for food contact
Biodegradation in a fraction of the time it takes for petro-based plastic decomposition
Virtually no carbon footprint
CORE PRODUCTS
1) Nodax, a PHA seed material for a 'more natural' plastic, producing polymers which make the end product more biodegradable & compostable. America's first certified marine degradable plastic alternative. Derived from bacteria feeding on canola oil. Will decompose after a few weeks in aerobic or anaerobic conditions (on land, in sea, with or without moisture present)
Approx ~$400M or 80% of sales by 2025
2) PLA, a dextrose sugar based polymer derived from corn. Less compostable, requires heat and moisture to break down. This is manufactured by 3rd parties, purchased and processed into packaging products by Danimer
Approx ~90M or 20% of sales by 2025
APPLICATIONS
The uses for their biopolymers include additives, aqueous coatings, fibers, filaments, films, and injection-molded articles, such as:
Diapers
Toys
Medical implements
Single-use food-service items
Food packaging and storage products
Beverage bottles
Carryout shopping bags
Shipping materials
Glues
Trash bags
Agricultural mulch films
Flexible films
Obviously given the scope of the legacy market they’re challenging, other consumer and industrial goods are open to inclusion
KEY PARTNERSHIPS
Danimer is working with bluechip customers including PepsiCo, Target, Walmart and Nestle:
VALUATION AND FINANCIALS
(Source: Danimer Investor Presentation)
(Source: Atom)
TAM
â—¼ Over 75% of the global plastic production finds it way into consumer homes, with over 80% of those plastics being prime targets for PHA substitution
â—¼ PHA can be an alternative to a wide variety of petroleum based plastics like PE and PET which make up ~65% of plastic packaging production
â—¼ Currently, bioplastics make up less than 1% of the global plastics market positioning Danimer to capture future market share
CAPACITY
Production growth enabled by the new facility in Knetucky into which they moved in 2018
â—¼ acquired fermentation plant in Kentucky in December 2018 and
simultaneously entered into a sale and leaseback transaction with the current
REIT owner
â—¼ plans to expand the Kentucky plant capacity using a two-phased
approach with full support from the REIT owner
─ Phase I (Completed 2020): ~$44mm in real estate improvements, additional
equipment and installation to bring the first 3 fermenters online to produce
~20mm lbs. of annual finished products
─ Phase II (2021E): ~$96mm(1) to be invested in additional engineering,
equipment, installation costs and real estate expenditures
IS IT CLEAN DISRUPTION?
Why are plastics are a problem?
Plastic comes from oil - here's a great video explaining how its traditionally produced
To no-one's surprise the plastic market is currently huge and growing
And we know this is bad. Plastic pollutes in a number of ways:
- microplastics - tiny pieces of plastic which are found in every living being
- large debris - where its not being ingested by humans, fish or animals, its accumulating in land and finding its way via rivers into the sea, where it creates enormous floating gyres. 60% of plastic is less dense than water, so floats and gathers on the surface in enormous masses that can be seen from space
Whats being done about it?
Its either burned or shipped overseas in, frankly, a chain of exploitation of people and land
IS BIOPLASTICS THE ANSWER?
Stopping making things that are hard to repurpose, and which cause toxic pollution is GOOD:
1) Its good for the public purse
Lets take a look
- cost savings from public purse of avoiding logistics of plastic recycling estimated at $33000/tonne/year
2) Its good for health (which is also the public purse)
In order to know if bioplastics are NOT ONLY REMOVING plastic but also causing no harm, we need to know:
1) WHAT ITS MADE FROM
Danimer make their core product from plants, specifically Canola Oil:
But how green is canola oil? The canola council of Canada say its fine, claiming herbicides reduce the fossil fuels needed in the operation of tilling vehicles..
But this is an insufficient measures of the impact of the production process. We know from a tonne of scientific work that the way we make things - and especially the way we grow things - impacts upon the biosphere. And if the intricate network of living things around us - because of the chemicals we use for example - is unable to function normally - to move around, to pollinate crops, to feed on pests, the closer we get to a really difficult situation.
This video explains it well
Lets say you have a small holding. If you use pesticides and kill a bunch of bees and other pollinating insects, its bad but its not really bad. The land will recover. If on the other hand, you want to grow crops at a scale so significant that you can grab major market share in one a multi billion dollar industry - and you STILL use pesticides.. well, that is a big deal. And Danimer say that if they want to make a 1% impact on global plastics, they would need to 100x the growing area. But lets see how Danimer source their Canola seeds that they make into oil.
Well, in this report in 2015 by sister company Meridien which was merged with Danimer, it looks promising - they've thought about the distance between field and factory, and have brought it in house.
Indeed it looks like there are spillover effects for the local farming community to grow crops at seasons where their field lie fallow, so there's a local economy element to this. I've some concerns about the wider problem of soil nutrients and why we need to think carefully about covering so much of our countryside in agriculture to feed consumption. I'll be writing about how regenerative agriculture should inform our investing decisions soon!
I wonder if, long term, we'll see something like the indoor Vertical Agriculture that AppHarvest and others are doing. Or perhaps the lab-grown approach of the meat-substitute industry providing the source for this.
So lets, look at how they score on the United Nations’ Sustainable Development Goals:
Danimer’s work looks like it aligns with 8 of the 17 SDG goals.
I believe based on the information to hand this is a justifiable investment on sustainability grounds.
RISKS
What is the competitive landscape? Are there bigger/better operators working in bioplastics? While there are MANY small operators, Danimer look to be in a strong position:
The innovations and the potential impact on the global plastics pollution problem are very exciting. The primary risk seems to be, from an environmental perspective, that it transpires the company is not adhering to practices in line with the health of the ecosystems in which they operaate. I have contacted the company for further information
FORECASTS
(Source: Financial Times)
POSITION SIZING
I have an entry position in $DNMR, currently enjoying my entry point at $14. I will add to the stock once i’ve confirmed the impact of the feedstock. If the answer is not satisfactory i’d have to sell. If this is in order i expect this stock will be foundational in the emerging clean transition, and has huge growth potential which i intend to hold for the long term.