We believe shares of Renewable Energy Group Inc (NASDAQ:REGI), are grossly overvalued, and that an imminent catalyst will result in the convergence of intrinsic value and stock price.
Renewable Energy Group Inc (NASDAQ:REGI) equity has not yet priced in the likely impact of the impending December 31, 2013 expiration of the Blenders Tax Credit, which we estimate to have contributed 77% and 104% of Adjusted EBITDA in 2012 and in the 9ME 9/30/2013, respectively. Upon expiration of this subsidy in 2.5 weeks’ time, we believe REGI’s margins will be wiped out and that it will operate at a significant loss. The expiration of the Blender’s Tax Credit is not without precedence. The BTC was also not renewed throughout 2010 or 2012.
According to Renewable Energy Group Inc (NASDAQ:REGI), “The absence of and uncertainty around the blenders’ tax credit during most of 2010 materially curtailed demand for biodiesel and our ability to cost effectively produce and sell biodiesel, resulting in our idling production at several of our facilities during that period.” In 2012, REGI generated $39m of Adjusted EBITDA, relative to $107m in the 9ME 9/30/2013.
From period to period, Renewable Energy Group Inc (NASDAQ:REGI) does not discuss the specifics pertaining to the size of its Blender’s Tax Credit (BTC) benefit anywhere in its financial filings; and, it aggregates revenues from all types of incentives into a single line item, “Biodiesel Government Incentives,” obscuring the significance of BTC revenues. We believe this has prevented investors from ascertaining the impact of the tax credit on REGI’s financial state, resulting in a steep disconnect between intrinsic value and trading levels.
Renewable Energy Group Inc (NASDAQ:REGI)’s share price also dislodged from the realities reflected by the D4 RIN which is down ~40% in 2013 price – indicating substantially weakened biodiesel demand – while REGI’s share price is up 75%. We believe most investors are not tracking the D4 RIN price.
US Renewable Group (USRG) – which is headed by Jonathan Koch, a former REGI board member – was a long time shareholder and the second largest shareholder in REGI as of a few months ago. Over the course of June and July, USRG liquidated over 3 million shares for total proceeds of approximately $43M, and on many days accounted for ~20% of average volume, indicating an urgent exit.
We believe that Renewable Energy Group Inc (NASDAQ:REGI)’s EBITDA will decline precipitously in 2014, to levels last seen in 2012, another period in which the Blenders Tax Credit was not renewed. We believe the equity is highly overvalued at current levels, and has an intrinsic value of $4.70/share, ~55% below current trading levels.
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