Shares digital

After years of lubrication, the wheels are starting to turn for the oil recycler

by Tom Sieber

Hydrodec (HYR:AIM) 53p STOP LOSS 42.4p

Shares summary

Operating in a potentially lucrative niche market the company is just beginning to unlock the potential of its proprietary technology.

Business:

Re-refiner of contaminated

transformer oils

Vital stats:

Market value: £103 million

Historic PE 2007: n/a

Prospective PE 2008: n/a

Prospective PE 2009: 22.1

Sector PE: 14

1-month relative strength: 15.8%

1-year relative strength: 123%

Yield 2008: n/a

NMS: n/a

Spread: 1.87%

After several years of work Hydrodec finally seems to have beaten down the door in terms of getting its story understood by the market.

The company re-refines or recycles contaminated oils using its proprietary technology to produce its own brand of oil known as Superfine. Currently this process is applied to the transformer oils that insulate and cool utility transformer boxes but it also has the potential to be used on other types of oil.

The company joined the junior market at the end of 2004 but the stock has really taken off in the past six months – its relative performance stands at 229% – and it is currently just shy of record highs. There is enough in the pipeline to suggest it has further to go.

At present Hydrodec operates a small plant in Australia, but it is ahead of schedule in bringing on stream the first of two plants planned for the US in Canton, Ohio.

The US is the biggest market for transformer oils and in March, alongside its prelims, the company announced it had reached price agreement with, and secured a conditional commitment from one of the largest transformer oil buyers in the US, to purchase more than 50% of the maximum production capacity of the Ohio plant, due on stream in H2, plus a firm expression of interest in increasing purchase quantities on commissioning of the second US plant in Laurel, Mississippi.

Another key development is the contract it has signed to supply Superfine to Turkey. The deal is helping the Australian plant reach full capacity and is also likely to prompt expansion. As CEO Mark McNamara explains, it has changed the way the group is structured. He says: ‘It has made us focus on building global capacity and increasing our spread to geographic areas where there is good access to feedstock.’

To that end Hydrodec is hoping to have a plant in Japan up and running by 2010 and expects clarification on the opportunity to access the EU market for transformer oil through Turkey before the end of the year.

A key risk for to the growth story is the cost of feedstock, explains analyst David Toms from Numis Securities: ‘We view this as the most important long-term challenge for Hydrodec. Used transformer oil feedstock has an alternative use as low grade bunker fuel, thus the company is to an extent in competition with other buyers who may be prepared to pay 40c a litre for bunker fuel – a price that has doubled in the past 12 months.’

The group is making positive noises about overcoming this challenge, highlighting the fact that the environmental soundness of its business may make it a preferred disposal route.

Having spent the best part of a decade developing its technology, Hydrodec is now in the process of ramping up capacity and unlocking its potential. Continued progress should provide a catalyst for the stock.