For Hydrodec Group, 2012 Was A Watershed Year

2012 has been a watershed year for Hydrodec (HYR.L). Sales volumes and revenues have shown their eighth successive year of growth. Crucially, the new management has laid the foundations for a step change in growth going forwards. It is in the advanced stages of forming a JV that will potentially more than double processing capacity in the US, is applying its IP to the larger industrial and engine oils markets and has strengthened the balance sheet. We are deferring issuing an indicative valuation and estimates for FY13 and beyond until the formal JV agreement is signed.

Eighth successive year of volume and revenue growth
Sales volumes rose by 11% to a record 22.5 million litres, driving a 16.5% increase in revenues to a record US$26.1m, in line with our estimates. This improvement reflects the progress made in strengthening the feedstock supply base and the increased acceptance of Hydrodec’s re-refining technology. The stronger supply base helped deliver an increase in average plant utilisation by seven percentage points to 70%. The anticipated investment in operational personnel and senior management to support the group’s ambitious growth programme resulted in a reported loss after tax of US$14.2m, also in line with our estimates. Following the financing activity during Q4, cash and cash equivalents at the end of FY12 totalled US$1.6m, with the remaining £2.5m cash received in Q113. Management targets break even operating cash flow (before interest) by end 2013.

Significant progress towards achieving long-term goals
The proposed JV announced in November substantially de-risks Hydrodec’s plans for expansion in the US by providing access to long-term stable supplies of feedstock and a mechanism for funding a more than doubling in capacity; the deal will enable Hydrodec to scale up its North American operations with confidence. The deal will also be the first concrete example of Hydrodec’s new bipartite business model, in which operating profits are supplemented with royalty revenues. Hydrodec is also likely to adopt a licensing model when addressing the global industrial and engine oils and Japanese PCB-contaminated transformer oil markets. Following successful proof of concept of the technology for used industrial and crank case motor oils during Q412, this programme is expected to progress to a full pilot and testing during FY13.

Valuation: Indicative valuation awaiting completion of JV
Our valuation has been based on the sum of discounted cash flows from programmes in which Hydrodec is engaged. As the proposed JV will be a transformative deal for Hydrodec, we leave our indicative valuation under review until the JV agreement is signed and there is clarity on the associated expansion programme.

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