Member Info for legobrickgirl

Good to see a large buy go through.
Been able to buy smaller trades of £1.5k at 64p and sell at 64.1p. Strange eh? Not big enough to make a profit straight away. MMS trying to make the share more liquid maybe? Good to see you can sell £1500 without going NT where before used to be as little as £300. Not sure if that changed today after the £40k buy or whether it was earlier.
I’m tempted to buy more but it’s not far off my original buy so will wait and only buy more if it does drop more.

Bit of a long report out today. Worth a read to see targets ect.
Plenty of potential here providing issues resolved.
Be warned though, the stock is very illiquid so you would have to sell through NT. Easy to buy but not sell. This could change though if favourable results/news comes out.
NAV is approx 80p.
There is resistance at about 57p.
My opinion - hold, possible buy on 57p but generally wait for positive news regarding Australian plant and also future feedstock supply.

VALUATION

Hydrodec trades on high valuation multiples in the current year as the operations move from underutilisation in 2018 to a well-managed and efficient, profitable plant in 2020 through a transition year in 2019.
Hydrodec trades on 4.6x EV/EBITDA, 9.4x P/E, 5.6% dividend yield and a 15% FCF yield (all in 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.

Hydrodec Group – valuation multiples
2018E 2019E 2020E 2021E
Share price (p)66 66 66 66 66
Market Cap $m 25.1 24.2 24.2 24.2
Enterprise value $m 32.5 30.1 26.1 18.2
EV/Sales x 2.4 1.5 1.1 0.6
EV/EBITDA x 247.2 8.4 4.4 1.7
EV/EBIT x -15.3 21.1 6.6 2.1
EV/NOPAT x 247.2 8.4 4.4 1.7
P/E x -7.8 44.8 9.1 3.6
Dividend Yield % 0.0% 2.3% 5.9% 14.8%
FCF Yield % -20.7% -0.1% 16.2% 31.1%

We base our target price on forward peer multiples, sense checked with a DCF methodology.
The US refining sector broadly trades on a 5x-7x EV/EBITDA and 9x-11x P/E (e.g. Valero, Phillips and Marathon) but we believe Hydrodec can trade at the top end or above this range given the transformative growth on offer and cash flow dynamics.
We set our target price at 100p, which equates to 6.8x EV/EBITDA 2020E (i.e. 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

CASH FLOW STATEMENT
There are several moving parts to the cash flow, given the capital raise and the application of the working capital over the next two years as well as the anticipated sale of the Australian business during 2019.

Hydrodec Group – cash flow forecasts ($m)
2017 2018E 2019E 2020E 2021E
Cash Flow
EBITDA 0.3 0.1 3.6 5.9 10.7
Working Capital 1.3 (3.0) (1.3) 0.1 0.0
Exceptional (Australia) (0.2) (3.8) (1.3) 0.0 0.0
CFO 1.4 (6.7) 1.0 6.0 10.7
Capex (0.3) (0.3) (1.0) (1.0) (1.0)
Acquisitions/Disposals (0.1) 0.0 2.0 0.0 0.0
Share Issuance 0.0 20.3 0.0 0.0 0.0
Repayment of Borrowings 1.6 (10.6) 0.0 0.0 0.0
Dividend 0.0 0.0 0.0 (0.6) (1.4)
Interest Expenses (0.5) (0.5) (0.5) (0.5) (0.5)
Gross Debt (20.3) (8.2) (6.7) (5.1) (3.4)
Cash 0.1 0.8 0.8 3.2 9.3
Net Cash/(Debt) (20.2) (7.4) (5.9) (1.9) 6.0

The restructuring of the G&S shareholding in Hydrodec North America will result in a working capital outflow consistent with the repayment of trade payables owed to G&S in late 2018, and we forecast a further outflow in 2019 of $1.3m, consistent with the increase in feedstock inventories to boost capacity utilisation and smooth operations through seasonal downturns.
In terms of restructuring the capital base, we include an inflow of $20.25m. This equates to a £10m capital raise, additional open offer of £1.2m and the debt-forequity swap of £4.5m of Andrew Black’s debt. The latter, despite being non-cash, is included for modelling purposes only and is reversed in the next item which is a borrowings outflow. This represents the other side of the debt-for-equity swap, and the actual debt pay-down of £3.7m ($4.7m).

In total, gross debt falls by c.$12m in 2018, being the debt-for-equity swap ($5.8m), $4.7m of further debt pay down and $1.5m of fina

Our 30% revenue CAGR reflects the following assumptions: 70% capacity utilisation in 2019, rising to 75% in 2020 and 85% in 2021; Our pricing assumptions for 2019-2021 reflect the progressive penetration of utility customers within the mix at a price level of $3.3/gallon compared with the existing transformer oil pricing of $2.3/gallon.

These assumptions drive revenue of $20.2m in 2019 (+ 51% YoY), rising to $23.2m (+25% YoY) and $29.3m (+26.4% YoY). However, we believe there could be upside to the progression in utilisation and pricing through 2020 and 2021, which could accelerate earnings and cash flow growth and potentially help to fund further capacity expansion if warranted by the supply-demand picture as the market for re-refined transformer oil develops.

INPUT COSTS

In our model, increases in certain input costs, notably feedstock, are likely to be mitigated by decreasing variable production costs as efficiency and plant utilisation improves.
We forecast an increase in landed feedstock costs on a per gallon basis from $0.8/gallon currently in 2018 to $0.95/gallon in 2019 and $1/gallon in 2020-2021 as the Group acquires feedstock across a broader geographic area,
incurring increased transport costs in a temporarily more competitive market.
Other variable costs should see some benefit from efficiencies through more consistent throughput at the plant so we model a decrease in variable production costs from $0.35/gallon in 2018 to $0.28/gallon in 2021.

For Hydrodec North America, this results in EBITDA at the plant level of $5.2m in 2019, rising to $7.5m in 2020 and $12.3m in 2021, a 92% CAGR over three years; Our EPS forecasts show a loss of 29.3¢ in 2018 reflecting 50% capacity utilisation through the year, rising to 1.98c 8¢ in 2019, 9.4¢ in 2020 and 23.8¢ in 2021.

Alongside this we forecast a dividend of 2¢ per share in 2019 on the assumption that reserves are likely to be restructured at the AGM, following the capital raise and increased capital base.

We show in the table below the indicative impact of two further processing trains (2x 2 million gallons for capex of $5m) that could be added to existing capacity from 2022 and highlight the strong cash flow characteristics of the investment and high returns. This is enabled by the highly cash generative nature of the core business once the feedstock limitations are overcome and further working capital is put to work.

Hydrodec – additional processing capacity scenario

Average utilisation % 70% 80% 90%
Plant capacity m gallons 4 4 4
Plant output m gallons 2.8 3.2 3.6

Utility mix % 50% 70% 100%
Utility price $/gallon 3.5 3.5 3.5
Overall price achieved $/gallon 2.875 3.125 3.5
Feedstock cost $/gallon 1 1 1
Variable processing cost (e.g. energy) $/gallon 0.35 0.35 0.35
Fixed costs per month (rise with capacity) $k/m gallons 400 400 400
Revenue $m 8.1 10.0 12.6
Feedstock cost $m (2.8) (3.2) (3.6)
Processing cost $m (1.0) (1.1) (1.3)
Fixed costs (rising with capacity) $m (1.6) (1.6) (1.6)
EBITDA $m 2.7 4.1 6.1
D&A $m (0.5) (0.5) (0.5)
Tax $m (0.4) (0.7) (1.1)
FCF (assume maintenace capex = depr’ion)$m 1.7 2.9 4.5
Assumed capex $m 5 5 5
Annual cash return on investment $m 35% 57% 90%

Thirdly, we highlight the potential for this trend to increase in the medium-to-long term owing to the fact that the average age of “large power transformers” in the US is estimated to be 38-40 years, with 70% of them being 25 years or older. This suggests two things: first, we can expect a greater need to service the ageing transformers by replacing the used oil on a regular basis, providing an opportunity for “closed loop” synergies. Secondly, we anticipate a growing need to decommission transformers, therefore providing valuable feedstock of used oil
for Hydrodec through relationships with decommissioners such as G&S Technologies (15% interest in HoNA).

THE OPPORTUNITY THIS PRESENTS IS PROFOUND

Overall, we believe that the fundamentally strong prospects for transformer oil demand in the US leads itself to two key opportunities for Hydrodec. We believe there is scope to capitalise on this through the quality of the SUPERFINE™ product it sells (as we outline in further detail later in this note), alongside the credibility that is brought about through its carbon credits.

Firstly, we believe that this provides appropriate justification for pricing upside. As noted, current prices for SUPERFINE™ amount to c.US$2.30/gallon. Management’s view to increase the price of SUPERFINE™ to a price of US$3.25-3.50/gallon appears warranted in the context of the fundamentally supportive market dynamics.

Secondly, we highlight the significant activity that has occurred within the market over the past few years ranging from company expansion to M&A. We highlight this as we believe that this demonstrates increasing levels of activity in the rerefinery market and therefore the potential for Hydrodec to capitalise on this.

LONGER-TERM CAPACITY EXPANSION

Although somewhat beyond the initial scope for the investment case, given the nearer-term execution required to raise capacity utilisation, we highlight the potential for further capacity expansion given the return on investment available at current input cost and utilisation assumptions.

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-to-long term.

FAVOURABLE UTILITY MARKET DYNAMICS

The demand for transformer oil, particularly in the US 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. We believe Hydrodec has i) the ability to draw this demand through the attractiveness of its carbon credit offering to environmentally-conscious utility providers, and ii) the capability to monetise this through price
increases.

Globally, the market for mineral-based transformer oil is set to grow at a CAGR of 7.79% from US$1.8bn in 2015 to US$2.6bn by 2020 (Markets&Markets). In particular, we see North America (15% of market share) as being a key player in driving this growth, thereby playing into Hydrodec’s revised business strategy to focus its attention on this region.

DEVELOPING RELATIONSHIPS WITH UTILITIES TO FUEL GROWTH

We see the market opportunity as being vast, arising from both a growing need for transformer oil amongst utility providers and an environmental push amongst these utilities towards using re-refined oil to service energy consumption.
In our view, we believe the emphasis on forming relationships with the utility providers plays nicely into the synergies that the “closed loop” model offers (whereby used oil from electrical utilities is processed by a re-refiner like Hydrodec to produce a “cleaner” oil, which can then be sold back to the utilities).

Firstly, it is estimated that the pace of growth in demand for transformer oil will be more profound amongst the utilities, at 8.2% CAGR 2015-2020, demonstrating the market opportunity that exists.

Secondly, we point towards the fact that much of this demand is being reflected in recent investments by the utilities. Members of the Edison Electric Institute, which includes the likes of Duke Energy, Avista Corp and the National Grid,are deemed to have invested US$20.8bn in the US electrical transmission infrastructure and are forecast to invest an additional US$90bn through to 2020.
Naturally, this investment leads itself to a growing need for transformers, and, thus, transformer oil to support the infrastructure.

The Canton facility has a name plate capacity of 12 million gallons with maximum utilisation of 90% due to existing equipment limitations, although the capital raise will enable the Group to replace certain pieces of equipment to raise potential utilisation to 100%. However, running at 50% utilisation suggests only 6 million gallons of feedstock have been available or managed through the storage tanks and, thus, the acquisition of a further 3 million gallons of feedstock is required to achieve 75% utilisation.

However, to ensure appropriate consistent operation through the seasonally lower winter months, the Group needs access to further feedstock readily available in storage tanks to ensure that capacity can be managed through the winter months when feedstock is not as readily available. At c.$0.8-1/gallon and short payment terms, the likely working capital requirements to fully supply the plant could be $2-3m, hence the capital raise. However, beyond this capital outlay, the attractive economics of the business and operating leverage provide ongoing cash flows, which provide very quick payback on the working capital.

The Group raised £11.2m in new equity to help pay down debt and provide working capital to accelerate purchases of used oil feed stock to feed the rerefinery.

The operating leverage is such that a 1ppt change in capacity utilisation in 2020 can impact EBITDA by 2.5% and EPS by 5%, due to financial leverage.
Thus, the increase in capacity utilisation that we forecast, just driven by the availability of working capital, provides a highly compelling proposition in our view and offers 80% EBITDA 2yr CAGR 2019-21 to 85% utilisation and, thus, there remains upside beyond this. In our view, the stock is not priced for such an uplift
in EBITDA, cash generation and, therefore, deleveraging.

Through 2018 the facility was able to run at c.55% (H1 reported: 48%) due to the limited availability of feedstock, and the core US operations were loss making on such low utilisation. As with most oil refineries, they are designed to run at high utilisation to take advantage of the high initial capital outlay and fixed costs but low ongoing operating costs. Logistical management around feedstock availability and storage is crucial to the effective operation and economics of refineries and Hydrodec is no exception.

Refinery processes are, by their very nature, highly complex and, therefore, it is rarely as simple a fix as driving more feedstock through the systems as increases in utilisation require carefully managed temperature and pressure monitoring. However, given that the plant has achieved higher utilisation at times previously than in 2018, we believe there is sufficient technical and operational expertise on site to manage increased utilisation as feedstock levels improve and the plant is able to consistently run at higher levels of utilisation, ultimately benefiting plant efficiency and product quality – a key element of the Hydrodec commercial offering.

FUELLING GROWTH

Our positive 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 ENHANCEMENTS
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 executing on the increase
in feedstock availability and therefore plant utilisation, which we believe is not appropriately priced in the shares at current levels.

One of the core tenets of our investment thesis for Hydrodec is that working capital availability, following the equity capital raising, will allow Hydrodec to vastly improve the capacity utilisation at its Canton, OH facility, reducing existing operational payable balances and benefit from significant operating leverage in
the business.

Our positive 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 US 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-to-long term. Strategic progress – Hydrodec is already making strategic progress, per its recent trading update, winning new feedstock, negotiating with new suppliers,
investing in sales and marketing and raising capacity utilisation. This provides confidence in strategy and execution going forward.

Attractive valuation considering growth – Hydrodec trades on 4.3x EV/EBITDA, 8.8x P/E, 6.1% dividend yield and a 17% 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.

I agree with you Gramp. Selling Aussie site will be best option I’d imagine though they are looking at adding more trains in the future, so relocating would possible be done instead.
As for feedstock, well it’s improving but certainly not at right level yet.
There is still obviously a lot of risk here still even though the share price is lower than the NAV.
Until we know exactly what will happen with the Australian site and then confirmation that feedstock is not an issue I wouldn’t recommend buying in big yet especially with the stock being illiquid.
As soon as we know for sure about these two issues I’ll add more if good news. (May add a couple of k at 55p too).

Certainly not looking strong in regards to the share price.
The share is very much illiquid where you can only sell a couple of hundred pounds worth without going nt. im guessing there is a seller too, that is just waiting on buyers. I am not worried though as the share price will not rerate until results come in showing profitability and that is going to need a year to happen and i am happy to hold for a few years. I do think HYR could possible see 55p at which I will buy some more.

The positives are:
NAV of approx 80p
Feedstock issues being redressed.
Financing sorted with debt reduced to a low amount.
Loss making plant in Australia will be sold or relocated to states.

Everything is pointing to hyr becoming profitable unless they are lying about feedstock or if there is another fire or earthquake.

I can understand where you are coming from. For any long term holder it’s been pretty bad and could be quite a few years for them to get even again.
It’s never been the case of constant dilution. Hyr have had a bad 4 years where one thing after another went wrong which left them almost bankrupt.

What I’m expecting now is next results to be close to breaking even.
Feed stock problem sorted via G&S which will enable them to produce at higher capacity and therefore higher percentage profit.
Sale of Australian plant in the next 2-4 months.

Chris Ellis will not cost any where near the amount as he did before as a ncd.
I think people will be pleasantly surprised this year but as always, it doesn’t happen over night and there are never any guarantees.

Now it doesn't say a lot, but speaks volumes.

"I am pleased to welcome Chris Ellis back to the Board. Hydrodec is now focused on building an even stronger business in the US, uniquely able to sell carbon credits to US utilities as a result of its market- leading technology. This will be a turnaround year when we will build strong partnerships to secure feedstock and extend the reach of the sales of Superfine, our re-refined transformer oil. I will be providing a trading update to the market before the end of the month."

https://www.letsrecycle.com/news/latest-news/slicker-recycling-expansion-avos/

The CEO, Mr Verfürth commented: “This deal is consistent with our vertical integration strategy, while partnering with Slicker Recycling who are well placed to ensure the continued success of the AVISTA OIL business. We look forward to exploring further opportunities with Slicker to expand our respective market leading positions.”

https://www.avista-oil.de/en/

Across Europe and 12 states of the southeastern US, our collections logistics professionals collect used oil directly on site from consumers, then bring it to an AVISTA OIL refinery for upcycling.

Slickers bought Avista uk last year. A Black is still a big shareholder in HYR and is the owner of Slickers.

Now this is interesting, pay attention to the wording in particular.

“Hydrodec has historically had operations outside of the USA including in the UK and Australia, identifying the market opportunity that exists globally for clean transformer oil. However, a recent business strategy update highlighted the company’s intention to focus on the US market, where it runs six “processing trains” with a nameplate capacity of 45 million litres of SUPERFINETM. As a result, Hydrodec announced the planned disposal of its Australian business in Bomen, New South Wales, which is a smaller operation (one processing train with a nameplate capacity of 6.5 million litres of SUPERFINETM). The disposal is due to complete in the coming months with proceeds to be reinvested in the US business, with a view to maximise shareholder returns.”

I think you could be right. I was hoping for a good bounce of this support but doesn't seem to be happening.
I'm out with a £65 loss. Will wait until it settles down properly and re-asses.
gla

Not surprised to see here the buying going on from 800p level with all the positive news recently. Thought it might of broke out of the trading range though and continued up a few days ago.