REGI - Valens Credit Report - 2022 01 06
Credit markets are materially overstating REGI's credit risk with a YTW of 5.142%, relative to an Intrinsic YTW of 2.642% and an Intrinsic CDS of 130bps. Meanwhile, Moody's is grossly overstating the firm's fundamental credit risk, with its highly speculative B1 credit rating nine notches lower than Valens' IG3+ (A1) credit rating.Incentives Dictate Behavior™ analysis highlights mixed signals for creditors. Specifically, REGI's compensation framework should focus management on margin expansion and revenue growth, which could lead to Uniform ROA expansion and increased cash flow generation. Additionally, members of management are material holders of REGI equity relative to their annual compensation, indicating they may be well-aligned with shareholders for long-term value creation. Furthermore, management has low change-in-control compensation relative to their average annual compensation, indicating they may not be incentivized to accept a takeover or pursue a sale of the company, reducing event risk.
Earnings Call Forensics™ of the firm's Q3 2021 earnings call (11/3) highlights that management is confident biodiesel demand continues to rise and is up 12% versus pre-pandemic levels and that they are regularly delivering biodiesel blends to satisfied customers across targeted industries. They are also confident there are big incentives being discussed in policy circles around sustainable aviation fuel (SAF) production which could help commercial clients satisfy pledges to reduce emissions. In addition, they are confident their ability to source entire vessels has helped them get around supply chain issues and that their unique position in the SAF market allows them to have differentiated conversations with customers around product capabilities.
Renewable Energy Group is a biofuels producer with a nationwide distribution and logistics system. The company participates in each aspect of biomass-based diesel production, from acquiring feedstock, managing construction and operating biomass-based diesel production facilities, to marketing, selling and distributing biomass-based diesel and its co-products. To do this, the company utilizes this nationwide production, distribution and logistics system to focus on converting natural fats, oils and greases into biofuels. The company owns and operates a network of biorefineries, which are located in the United States and Germany.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
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