MoneyTalks: Broker has big price target on circular economy-focused company Close the Loop
Despite sustainability-themed stocks losing market appeal, Canaccord Genuity sees a big revenue leap ahead or circular economy star Close the Loop.
MoneyTalks is Stockhead’s regular recap of the ASX stocks, sectors and trends that fund managers and analysts are looking at right now.
Despite sustainability-themed stocks losing market appeal, Canaccord Genuity sees a big revenue leap ahead or circular economy star Close the Loop.
Canaccord has slapped a Buy recommendation on Close the Loop (ASX:CLG), with a $0.65 price target (versus its price of $0.34 on Tuesday morning).
CLG is $180m-capped global leader in the circular economy space.
For the latest investment news, sign up here for free Stockhead daily newsletters
The company, which listed on the ASX in 2021, operates through two primary divisions: Resource Recovery and Packaging, both dedicated to reducing waste and promoting sustainability.
At the core of CLG’s Resource Recovery division is its print cartridge recycling business.
This involves the collection, recovery, and reuse of inkjet and toner cartridges.
The company collaborates with 17 of the largest global original equipment manufacturers (OEMs) – such as HP, Brother, Epson, Canon, and Fujifilm – managing their cartridge recycling programs.
With a network of 240,000 collection points across key markets like the US, Australia, and Europe, CLG processes around 50 million cartridges annually.
Canaccord believes this extensive network offers a major competitive advantage, reducing landfill waste and promoting recycling on a large scale.
The company’s Packaging division (previously OF Packaging Group) specialises in engineering flexible packaging solutions that are environmentally friendly.
This division focuses on creating reusable and recyclable packaging products that meet the increasing demand for sustainable packaging in various industries.
By offering alternatives to traditional packaging, CLG helps reduce plastic waste and supports the transition to a circular economy.
Meanwhile, one of CLG’s proprietary products, TonerPlas, is an asphalt additive made from waste toner powder and soft plastics.
Developed in partnership with Downer EDI (ASX:DOW), TonerPlas improves the mechanical properties of asphalt roads, enhancing durability, performance, and energy efficiency.
This product has been used in more than 1000km of Australian roads and is a testament, Canaccord says, to CLG’s ability to create high-value products from recycled materials.
MORE FROM STOCKHEAD: ASX upgrade divides brokers | Goldies catch FitzGerald’s eye | Discovery Capital’s five small cap picks
Current landscape supports CLG
The printer cartridge market, which includes both ink and toner, is worth $US14.2 billion, with a segment of $US4 billion specifically for toner cartridges (according to MarketsandMarkets).
Experts anticipate this market will grow at an average annual rate of 6.4 per cent up to 2030.
“We expect CLG can maintain elevated growth against industry trend, based on its established relationships with the top print cartridge OEMs,” Canaccord said.
“These OEMS control an increasingly large proportion of the market.”
The flexible packaging market, meanwhile, is a small but expanding part of the overall market worldwide.
It uses materials that are not rigid, which allows for more cost-effective and customisable packaging solutions.
Currently, the global market for flexible packaging is valued at around $US249 billion, with about 32 million tonnes used annually.
Experts predict this market will grow at an average annual rate of 3 per cent, reaching approximately $US292 billion by 2026.
“The Australian Government’s 2025 National Packaging Targets (program) is the most significant regulatory driver, which ensures all packaging available in Australia is designed to be recovered, reused, recycled and reprocessed safely in line with circular economy principles,” said Canaccord.
Why CLG could be undervalued
According to Canaccord, CLG is a profitable and cash-generative business.
In the first half of FY24, the company reported an EBITDA of $22.7 million and upgraded its full-year guidance to $44-46 million.
This positive trend is expected to continue, with forecasted EBITDA reaching $48 million in FY25 and $53 million in FY26.
“We forecast a three-year revenue CAGR of +23 per cent, which sees revenue increase from $136m in FY23 to $250m in FY26,” said Canaccord.
The acquisition of ISP Tek Services in 2023 expanded CLG’s capabilities into electronic equipment refurbishment, adding a significant growth driver.
CLG also trades at a modest valuation with a forward FY25 P/E ratio of 6.2x and EV/EBITDA of 3.6x.
Visit Stockhead, where ASX small caps are big deals
Canaccord said this was significantly lower than its peers, making it an undervalued investment with potential for substantial returns.
“We suspect these multiples, which we regard as very modest, are a function of the relatively out of favour nature of sustainability-themed stocks in the current environment,” said a note from Canaccord.
“CLG’s positive free cash flows differentiate it from other stocks in the space, many of which are in the early stages of building a revenue base.”
In CLG’s history on the ASX, it has traded at an average P/E ratio of 11x, and an average discount of 28 per cent relative to the S&P/ASX SMALL ORDINARIES INDEX.
Around March this year, that multiple capitulated to trade at the mid-single digit level and it has not recovered.
“In our view, both a comparison of CLG’s trading relative to peers, and its historic trading levels suggests its current 3.9x EBITDA and 6.4x PE undervalues the business,” added Canaccord.
In terms of the risks of investing in the stock, Canaccord warns that CLG could be something of a “black box”.
In Canaccord’s view, with operations in many different verticals and by virtue of the number of acquisitions CLG has made over time, the business is complex for its size.
“As a result, the market may lack early visibility should issues emerge in one or more parts of the business in the future, and this may contribute to the modest valuation metrics which the market attributes to the shares,” the broker said.
This content first appeared on stockhead.com.au
The views, information, or opinions expressed in the interview in this article are solely those of the broker and do not represent the views of Stockhead. Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
SUBSCRIBE
Get the latest Stockhead news delivered free to your inbox. Click here
Investor Guide: Energy FY2025 featuring Peter Strachan
In this special investor guide, capital markets veteran and resources analyst Peter Strachan leads Stockhead’s drill down into the ASX energy sector.
Investor Guide: Health & Biotech FY2025
In this special investor guide, health and biotech guru Tim Boreham leads Stockhead’s deep dive into the most cutting edge sector on the ASX.