Darling International is a provider of animal rendering, cooking oil and bakery waste recycling and recovery services. Essentially, Darling collects and recycles animal by-products, bakery waste and used cooking oil from poultry and meat processors, commercial bakeries, grocery stores, butcher shops, and restaurants. Darling also provides grease trap cleaning service. Darling processes the raw materials it collects and produces meat and bone meal protein, poultry meal, tallow, poultry grease, yellow grease, bakery by-products and hides. The products are sold nationally and internationally, primarily to producers of animal feed, pet food, fertilizer, bio-fuels and other consumer and industrial ingredients, including oleo-chemicals, soaps and leather goods for use as ingredients in their products or for further processing.
Darling’s prices are highly correlated with corn, soybean, and soybean oil prices. However, the majority of their margin (~70%) is protected because their raw material cost is based on a formula that is also related to the commodity price.
At $ 13.38 per share DAR is trading at only 5.3x LTM EBITDA and has a free cash flow yield of 10%. Darling has traditional traded at a 7-8x EBITDA multiple.
Valuation alone supports the long thesis, but there is an additional catalyst in place. DAR has formed a joint venture with Valero that could be very accretive to its valuation. The JV is constructing a renewable diesel facility to be completed by end of 2012 that will be co-located with the existing Valero refinery in Norco, Louisiana.
The facility will produce 137mm gallons of renewable diesel annually using DAR-rendered fat as feedstock with Valero as the off-taker. The 137mm gallons of renewable diesel meets Valero’s requirement under the Renewable Fuel Standard (RFS2).
The value of the JV is driven by the spread between soybean oil and DAR’s feedstock. At current prices the JV would generate $ 230mm of EBITD with 50% or $ 115mm going to DAR. This would increase EBITDA by over 30%.
Pro forma for the EBITDA from the JV DAR is trading at 4x. At 7x pro forma EBITDA DAR would be a $ 25 stock representing a return of over 85%.
Disclosure: I am long DAR.
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