Close the Loop (ASX: CLG) collects, processes, and repurposes end-of-life technology and packaging across four continents, sitting at the heart of the circular economy. At A$0.026 versus a fair value of A$0.046 (USD$3.62 translated to AUD at prevailing rates), the stock appears deeply discounted — but that gap reflects genuine execution risk, not hidden value waiting to be unlocked. The company is destroying capital at current returns, and the recovery thesis rests entirely on management proving it can fix North American operations before larger competitors replicate the model.

The most natural fit for CLG is a thematic investor with a high tolerance for execution risk. The structural case — mandatory recycling legislation, corporate sustainability budgets, and the global shift toward closed-loop supply chains — is compelling and durable. But this is a high-risk, satellite-position story. It suits investors who want direct exposure to circular economy growth, understand the turnaround is not guaranteed, and are prepared to hold through 18–24 months of operational noise before the thesis can reasonably be validated.

Close the Loop operates two connected businesses. Its Resource Recovery segment collects and processes end-of-life IT equipment — laptops, phones, toner cartridges — for corporate clients and OEM partners including HP. Its Packaging segment manufactures recycled-content packaging, closing the material loop from collection through to reuse. Revenue is split roughly 63% Resource Recovery and 37% Packaging, with operations across North America, Australia, Europe, and South Africa.

FY25 was a difficult year. Revenue fell as North American ITAD facilities ran at just 65% utilisation, dragging the EBIT line into negative territory at -USD$4.3 million. The HP Platinum partnership, while providing volume certainty, generated lower-than-expected margins. A covenant breach forced a debt renegotiation, and management changes at the chief executive level on two continents unsettled investor confidence.

The investment case is a turnaround. New management is targeting facility utilisation of 85% within 18–24 months, which would lift EBITDA margins from 10.5% toward 16%. The circular economy tailwind is genuine — regulatory mandates are tightening globally and corporate sustainability commitments are driving structural demand growth. The question is whether CLG can execute before Waste Management, Iron Mountain, and other well-capitalised rivals replicate the integrated model.

At A$0.026 versus a fair value of A$0.046, the stock appears undervalued by approximately 77% on a headline basis — but that figure assumes successful execution, which carries a base-case probability of only 50%.

What happened?

FY25 was a reset year. Revenue declined 6.6% to USD$195.1 million as North American ITAD volumes fell sharply, with facility utilisation dropping to 65% against a target above 80%. Rising direct costs compressed gross margins to 32.4%. The business posted a negative EBIT of USD$4.3 million, its weakest result since the OF Pack merger. Management changes and a debt covenant renegotiation compounded the operational difficulties.

What's next?

The FY26 recovery hinges on a single operational lever: getting North American ITAD facilities back to productive capacity. New management appointments in both Australia and North America are specifically targeting the utilisation problem, and we forecast a recovery to approximately 78% by end-FY26.

As volumes recover, fixed cost absorption drives meaningful margin expansion — EBITDA margins are forecast to nearly double from 10.5% to 14.7% in FY26 alone. Working capital normalisation should release approximately USD$9.6 million in cash, providing breathing room on covenants.

The HP partnership renewal in 2026 is the most consequential near-term event. HP represents 25% of revenue. A positive renewal would validate the OEM model and likely trigger a re-rating. The European Circular Planet programme, now enrolling 12 OEM partners, offers a medium-term growth avenue that is not yet reflected in forecasts. No dividends are expected through the forecast period as free cash flow is directed toward debt reduction.

The single biggest risk is operational: ITAD facilities that stay underutilised. At 65% utilisation today, the business destroys capital. The entire valuation recovery depends on management lifting that figure to 85% within 24 months — a target that requires flawless execution from a team with a historical achievement rate of just 75% against its own guidance.

If utilisation stalls below 70% for two consecutive quarters, the bear case of USD$1.28 becomes the relevant reference point — a 63% reduction from the base case fair value. Compounding that risk is the HP concentration problem. HP accounts for 25% of revenue, and the partnership faces renewal discussions in 2026. Loss of that contract would trigger immediate covenant pressure on a balance sheet carrying USD$85.8 million in debt.

Longer term, Waste Management and Iron Mountain are investing heavily to replicate CLG's integrated model. The company's competitive moat is narrow and likely to erode within three to four years. The window to build a defensible market position is real, but it is closing.