Latest Thoughts on PESI Post-Earnings

I think PESI is a good buy at the current price levels.

Nov 14, 2024

Perma-Fix Environmental Services (PESI) — initial post here

With the earnings season in full swing, I am sharing my thoughts on another portfolio position, PESI, following the company’s Q3 update.

For those unfamiliar with the investment thesis, PESI is a provider of nuclear and hazardous waste treatment and related environmental services. PESI presents an interesting bet on the company’s expected major revenue and profitability inflection in the coming years. The thesis centers around company’s opportunity to treat substantial volumes of radioactive waste from the decommissioned Hanford site under several large government contracts that have either been announced or are highly likely. Given the contracted/expected volumes of nuclear waste, the company is currently trading at around 2x the estimated EBITDA from the Hanford-related contracts—far too low a multiple for a highly visible, recurring, long-term (10+ years) revenue stream.

The main takeaways from Q3 earnings were management’s updates on key Hanford site-related awards/contracts and other growth opportunities, including the recent West Valley award and PFAS treatment.

Let’s start with updates on Hanford-related awards/contracts. By way of background, PESI’s Hanford site nuclear waste treatment opportunity consists of two key awards/contracts:

The award to treat 2m gallons of off-gas effluent (i.e., nuclear waste treatment by-product) annually. This effluent will be shipped from the government’s recently built DFLAW plant to PESI’s nearby Richland facility. The off-gas effluent will be generated during the nuclear waste vitrification process at the DFLAW plant.
The opportunity to grout nuclear waste (i.e., not by-product, as with the other contract), which the DFLAW plant will not treat due to capacity constraints. This opportunity, referred to as supplemental LAW, involves around 3.5m gallons of waste annually. PESI’s management has indicated that the company expects to treat around half of this volume.

During the Q3 update, PESI’s management largely reiterated the previously outlined timeline and volumes for both opportunities. Starting with the off-gas effluent treatment award, management confirmed that despite a slight delay in the timeline for DFLAW cold commissioning, the expected hot commissioning (i.e., treatment of actual tank waste) remains on track to begin in August 2025. PESI is expected to begin receiving and treating off-gas effluent shortly thereafter, in Q3 2025. During the call, PESI’s management highlighted that the DOE already has a significant backlog of 0.8m gallons of nuclear waste that has been pre-treated and is ready for vitrification at the DFLAW plant. As for volumes, management reiterated the previously outlined estimate of up to 8,000 cubic meters annually when the DFLAW plant ramps up to full capacity.

Moving on to the supplemental LAW opportunity, while no updated timeline for grouting was provided, management highlighted during the call that the DOE has been procuring a system to pump waste out of tanks before it can be shipped for offsite grouting. Why is this important? Well, PESI’s management expects the system not to be fully operational “for a couple of years,” which might potentially imply delays in the initially estimated grouting start timeline of January 2026. However, I would emphasize that this is speculation on my part, as the DOE has not provided any information on how it plans to address the potential pumping capacity shortfall before its previously outlined deadline. Even if a delay materializes, it is likely to be relatively insignificant, potentially shifting the timeline to mid/late 2026. In terms of supplemental LAW volumes, while no updated annual grouting estimate was provided, management explained that the new pumping system will be capable of transferring 3m gallons annually from the tanks before grouting at off-site facilities—broadly in line with management’s prior estimate.

So, overall there have not been any major changes to the expected timelines or volumes. There’s admittedly a chance of potential delays in the supplemental LAW timeline, so I will be monitoring for updates. Until further announcements from the DOE or PESI, however, I believe it is reasonable to conclude that both key Hanford site-related opportunities remain on track.

Let me quickly highlight just how transformative these opportunities could be for PESI. Here’s how the potential revenue contribution from each opportunity might look:

$80m in revenue from the off-gas effluent treatment contract. This assumes 2m gallons in annual volume at a price of $40 per gallon, in line with the lower end of management’s guided range. The pricing estimate also aligns with the $38 per gallon estimate for EnergySolutions’ nuclear waste disposal facility in Clive, Utah.
$150m in revenue from the supplemental LAW treatment opportunity. This assumes 1.5m gallons of nuclear waste at management’s estimated $100 per gallon. This pricing estimate seems reasonable, if not conservative, given that the cost of grouting per gallon at another decommissioned nuclear site, Savannah River, was previously estimated at $153 in 2021 and $200 last year.

With these assumptions, PESI might generate $230m in revenue starting in 2027 compared to $67m in TTM revenue. With management’s previously outlined incremental gross margins of 70% and incremental labor costs/SG&A (estimated at $50m), this would imply $111m in annual EBITDA compared to the current EV of c. $210m. I would emphasize here that both Hanford opportunities represent long-term, recurring revenue streams. The off-gas effluent record of decision specifies that the off-gas effluent will be shipped for 10 years, but for multiple reasons, there is a very high likelihood that the contract will be extended until at least 2050. As for supplemental LAW, during the Q3 call PESI’s management reiterated the disparity between DFLAW’s current nuclear waste treatment capacity and the total waste volume (see the quote below), suggesting that the need for off-site grouting will likely extend for decades. So, it is reasonable to say that, at current market prices, the market is ascribing limited value to either of these opportunities.

Right now, the DFLAW system, as we've been told, is designed to treat about 1 m gallons a year at full capacity. And that's as received. So it takes some water, some liquid to mobilize the waste in the tank. So one could say that literally, it takes about 2 gallons to get 1 gallon of waste out of the tank. So literally, the amount of waste at Hanford is closer to 150 m gallons, depending on how you can -- how efficiently you can get it out of the tank. Now they're developing new technologies for that. So that number could change. But the bottom line is, it's a lot more than 50 m gallons. And this is only going to do 1 m gallons a year. So it's going to go a long time, and that number is probably closer to 100 m gallons to 150 m gallons total.

Aside from Hanford-related opportunities, PESI has several other growth optionalities. The company recently participated in winning a $3bn, 10-year West Valley award as part of a consortium. Management has not provided details on the contract’s revenue/margin profile for PESI, as the award is still in a mandatory protest period, limiting any disclosures. Nonetheless, given the fact that the contract requires 20% of revenue to be paid to SMBs (which PESI qualifies as) and that there is only one other SMB member in the consortium, one could reasonably expect PESI to generate north of $20m in annual revenue from the award.

Another growth opportunity is related to PFAS treatment. In late October, PESI completed the installation and startup of its first commercial PFAS treatment system at the company’s Florida facility. Management intends to install additional units at each of PESI’s facilities throughout 2025. While management has guided for relatively insignificant revenue of $3m to $5m from PFAS treatment in 2025, given the massive TAM (here), the medium-term revenue potential is likely much greater. While I am unsure if revenues will grow substantially, I want to emphasize that this is simply a nice optionality that is not necessary for the investment thesis to work out successfully.

To briefly discuss core business performance, Q3 was a weak quarter, in line with Q2, driven by ongoing delays in service starts and waste shipments, along with the negative impact of Hurricane Helene. However, with these headwinds subsiding, management stated that performance has been steadily improving in Q4.

During the call, PESI’s CEO addressed the recent election developments, highlighting that the administration change could potentially have a positive impact on PESI and the broader commercial waste treatment sector (see the quote below).

A couple of things and given a lot of thought to this and talking to our lobbyists and some other colleagues in the industry, 3 points I'd like to make. First is the first Trump administration was quite good to the [ EM/DOEM ] division. Budgets grew. They were stable at least, but they did grow. And secondly, the Trump administration brought in a group of leaders from industry that were quite aggressive and seeing progress, and particularly at the Secretary levels, which is the most important ones for us. And that change should help overall for our goals. And the reason I say that is because what Perma-Fix has to offer is commercialization of waste treatment along with our services group. But the commercialization of waste treatment is a strong selling point for the first Trump administration. We expect it to be for the second, especially in light of cost savings that they're looking for and outsourcing to an organization that already has the buildings permits and capabilities to do that. We will be pushing very hard on commercialization as an offering, and we expect that to be well received by the new administration. So we see it very positively. It's always frightening here about looking at budgets and those types of things. But I think most of the commitments that departments in that we are focused on are driven by regulatory requirements for progress and moving waste and permits that drive that as well as state agreements. So I think most of those will stay stable, and we expect commercialization to be a broader theme that we will get some good traction with the new administration, particularly within the Department of Energy.

So, overall, I believe the earnings were largely confirmatory of the investment thesis. PESI is getting closer to treating substantial volumes of nuclear waste and nuclear waste by-products from the Hanford site, which will likely lead to a significant inflection in the company’s operational performance. In the meantime, investors are gaining exposure to other growth opportunities, most notably the recent West Valley award and the PFAS treatment opportunity.

While PESI stock has jumped nearly 40% since the initial pitch, I believe the setup remains compelling. As shown in the table below, with what I consider conservative assumptions, including a 5x 2027E EBITDA multiple, the stock could be worth over $32/share—130%+ above current levels. I would expect the stock to re-rate closer to this target as we approach the second half of 2025, when PESI will begin fulfilling the contracts. Another potential catalyst could be an official contract or decision announcement regarding the supplemental LAW treatment opportunity in the coming quarters.