Hydrodec (HYR) – Am I nuts for buying back in?

Hydrodec (HYR) – Am I nuts for buying back in?

This week, Hydrodec announced a discounted placing at its lowest price ever of 0.75p – this is a circa 40% discount to the share price last Friday. I’d been considering purchasing shares following some positive EBITDA figures from July/August at around 1.2p. Thank God I didn’t!

I previously held a small amount of the shares in my portfolio from 1.89p down to about 1.37p before cutting my losses due to non-performance. Directors have been hit by the discount as they owned 30% of the shares. Assuming 100% uptake of the open offer of £2.8 million the £10 million institutional raise and a £3.5 million debt for equity swap at 0.75p, Hydrodec’s market cap will be £23 million (latest share price: 0.675p).

Hydrodec’s primary business is re-refining oil using its proprietary process at its facility in Canton, Ohio. The company has historically been plagued by issues such as the Canton facility going up in flames. More recently the company has been unable to procure enough feedstock for its plant to be profitable.

Risks

Car crash of a business – investors and management have thus far seen their capital crushed due to unprofitable operations.

Sentiment – existing investors will be disappointed by the discounted placing and may well threw in the towel.

Chart – looks like something out of a horror movie, as can be seen from the five year chart:

(Source Google Finance)

Investor Relations – There is no company telephone number or email address that investors can use to contact management. The company’s restructuring announcements are detailed and it would have been good to see management use Proactive, etc. to directly speak to investors about their plans.

Rewards

Breakeven? – July/August EBITDA from operations are likely to have exceeded H1 EBITDA of $799k with July EBITDA $463k, August is stated to have been similar by the company. Given the circa $200k loss for H1 then should this continue, the company could achieve breakeven.

Feedstock – ahead additional feedstock will be purchased for the plant, increasing revenues and margins. According to the RNS, “The proposed investment out of the proceeds of the Capital Raising in working capital should enable the Group to purchase the necessary feedstock to meet demand and build up feedstock inventories.”

Balance sheet strengthened – Andrew Black has agreed to convert £4.5 million of shares into equity and a minimum of a further £3 million of debt will be paid off. The company will be left with about £3.5 million of debt, assuming no take up of the open offer, which the company plans to pay down rapidly.

Board Support – Andrew Black (co-founder of Betfair and non-exec at Hydrodec) lent the business over £11 million and prior to the placing owned 26% of Hydrodec shares.

Ability to raise – given the company’s past performance and illiquidity, raising £10 million from institutional investors is impressive. The plan communicated to them must have stood up to scrutiny! For example, Miton will join the share register and own over 13% of the enlarged capital.

20 year patent – Hydrodec owns a 20 year US/EU patents for its world class process of re-refining oil. The process is incredibly efficient, creates no hazardous waste and generates carbon credits. For more info see: this link

Dividend – The board has stated its intention to pay a dividend in 2019 should performance allow, although I view this as bit cart before horse.

Assuming July performance continues the company should generate EBITDA  of about $5 million.

Given the circa £23 million market cap, performance needs to improve to show real value from a cash generation perspective. The world class technology does have underlying value although to what extent is difficult to quantify. If feedstock issues can be addressed, prospects will be materially improved – I’ll be monitoring the quarterlies closely.

I’ve put a small amount of my portfolio into Hydrodec and plan to see if management are able to turn around the business. If I’m correct, the business has been able to demonstrate to institutions that it can be transformed with this injection of capital. The company has stated that general and administrative costs are at their lowest for years and management appear to be serious about generating material returns for investors. They still need to prove that they can execute on their plans and therefore this is not a share I’d be recommending for widows and orphans this stage.

If you’d like to read more about Hydrodec, I’d also recommend the highly detailed blog entry by @162Shares, which will be updated once Q3 figures are released.

At the time of publication, the author holds a long position in HYR.

0
0
CATEGORIES

COMMENTS

Wordpress (0)
Your Cart