Firering Strategic Minerals: From explorer to producer. Watch the video here.
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With nastid MIA, thought I'd better do a post for him.
Hydrodec* 12/02/19
Fuelling Growth – Initiating with Buy
We initiate on Hydrodec with a buy rating and 100p target price.
Our view is predicated on the likely sharp increase in EBITDA and
cash flow as working capital inflows from the recent capital raise
drive improving capacity utilisation and operating leverage. In
our view, the shares currently price very limited operational
improvements, if any, and although we acknowledge that
refining is a technically challenging process, we believe the
Group’s expertise is sufficient to manage the increasing output,
driving revenue and EBITDA CAGR of 30% and 92% respectively
2018-21E.
Working capital to drive utilisation – We believe the Group can achieve
capacity utilisation of 85% in 2021 which drives 72% 2yr EBITDA CAGR as
the benefits of increasing capacity utilisation are realised with increased
throughput of working capital in to Hydrodec’s US facility. The operating
leverage is such that a 1ppt change in capacity utilisation in 2020 can
impact EBITDA by 2.6% and EPS by 5%, due to financial leverage. This
provides very strong risk-reward for execution, which we believe is not
appropriately priced in the shares at current levels.
Favourable utility market dynamics – The demand for transformer oil,
particularly in the USA exhibits fundamentally strong growth prospects,
providing a positive outlook for Hydrodec’s SUPERFINE™ oil. Recent and
forecasted investment in the US transmission network, along with an
increasing need to service an ageing infrastructure, in our view, provides
the foundations for this growth with attractive pricing dynamics for
Hydrodec in the utility markets.
Longer Term Capacity expansion – Hydrodec’s proprietary technology
and market opportunity suggests high utilisation is possible and strong
double digit returns on capital employed for incremental capacity reflect
scope for significant value creation for equity investors in the medium-tolong term.
Financial forecasts – Our forecasts represent 30% revenue CAGR and
92% EBITDA CAGR (pre-central costs), driven by improving capacity
utilisation from 70% to 85% and pricing uplift of c.30% from utility
customers over the next 3 years.
Attractive valuation considering growth – 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.