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Financial Forecasts
Our forecasts represent 30% revenue CAGR and 92% EBITDA CAGR (pre-central costs),
driven by improving capacity utilisation and pricing uplift from utility customers over the
next 3 years.
In our model, this is largely driven by increased capacity utilisation from improved
feedstock levels, although there are some pricing and cost assumptions which reflect
Hydrodec’s access to the utility market.
Valuation
Hydrodec trades on 4.6x EV/EBITDA, 9.4x P/E, 5.6% dividend yield and a 15% FCF yield
(all 2020E). Although we acknowledge execution is required through 2019, we believe
the existing assets and potential for high cash returns are extremely attractive to equity
investors at current levels.
We base our target price on forward peer multiples, sense checked with a DCF
methodology. The US refining sector broadly trades on a 5-7x EV/EBITDA and 9-11x P/E
(eg. Valero, Phillips, Marathon) but we believe Hydrodec can trade at the top end or
above this range given the transformative growth on offer and would see this as
conservative.
We set our target price at 100p which equates to 6.8x EV/EBITDA 2020E (ie. Top of the
range) and 14x 2020E P/E. On our forecasts, 2020E represents a strong operational year
but with significant earnings upside in to 2021 as further pricing and operating leverage
comes through. As such, on 2021E multiples, the stock only trades on 1.8x EV/EBITDA
and 3.7x P/E with a 30% FCF yield.
We model a DCF valuation to sense check the numbers. Inevitably, given the large
weighting of cash flow in the later forecast years and the terminal value, the DCF
provides a valuation of c. 250p a share although we recognise the execution required
over the coming years to crystallise this value. That said, our view of Hydrodec’s assets and strategy leads us to believe there is material upside for investors in this stock and
initiate with a buy rating.
I’m back
Thanks legobrickgirl, interesting read. It reiterates the feeling that the return promised for so long, may actually appear. Obviously those in long ago, not so much.
I’m waiting to hear how they’ve got on with the feedstocks issues. I think the pressures caused from the Mexican trade in oils, are less so, and with greater capital they can compete for the larger feedstock bids, rather than smaller expensive spot pricing (I’m assuming). If there were going to be any, the new marine regulations will already be having an effect, so the next update should be interesting.
During the slower period the paraffinic market had a less stable time than naphthenic but generally, the market is doing well. Carbon pricing is edging up, and on some platforms, the price floor is shifted up over time. Not sure where & at what price, HYR achieve on their credits but it is another longer term resource to tap.
I also want them to flesh out the proposed projects in the pipeline, especially around the potential collaboration. Long term projects obviously eat into capital, so some numbers identifying the possible revenue streams, would be nice.