Risky Hydrodec is one to watch

By IAN LYALL FOR MAILONLINE
Updated: 16:42 EST, 12 March 2010

Hydrodec is an AIM-listed tiddler that caught my eye recently. It’s a greentech stock with an interesting past and a couple of pressing near-term problems. But if it can overcome these obstacles it ought to have a bright future.

What does it do?

It has invented a means of recycling refined transformer oil, an expensive lubricant used extensively in the electricity generation industry.

The global market for transformer oil is 5bn litres and growing. Hydrodec’s process not only refines the used oil by more than 99pc but also removes PCB, a toxic substance, during recycling.

Risky business: Hydrodec's cash flow is tight

Although PCBs were banned globally more than 20 years ago, billions of gallons are still in use in transformers or have been stockpiled in vast quantities.

Its history

Hydrodec was born out of an eight-year industrial research and development project between Australia’s Commonwealth Scientific Industrial Research Organisation and the nation’s power industry.

The technology was patented and in 2001 and the firm sought a listing on AIM in 2004. It operates major recycling plants in Australia and the US. 

The latest deal

On March 4 the firm signed a strategic joint venture deal with a unit of Japan’s Kobe Steel that opens up the lucrative market for recycling PCB.

Japan has led the world in eradicating the use of PCBs and Hydrodec’s process is the only one approved by its environmental ministry for recycling oil transformer oil while removing PCBs.

Driven by tight regulations, the firm believes there is pentup demand for its solution and plans to build two processing plants with its Japanese partner in the next two years.

Food for thought

The statement that accompanied the Kobelco deal also revealed that trading conditions in the US remained ‘ challenging’.

Alarm bells went off when it also warned that its ‘working capital position’ had been affected by the lower than anticipated sales and margins.

In layman’s terms this means Hydrodec’s cashflow is tight.

However, we are told this is a temporary squeeze. Fourth quarter production continued to comfortably meet demand and exceeded that in the third quarter.

But longer term, the group may tap the market for cash to fund its expansion plans.

What the broker says

‘In our view, Hydrodec remains a rare cleantech play that has successfully commercialised a technical process and has a clear existing end markets,’ says David Toms, of City Broker Numis.

‘If the board and other management changes can enable the company to finally capitalise on this, we see potential for significant upside.

‘However, given the challenges of the past two years we believe investors are likely to wait for clear evidence that the business is being run with appropriate financial discipline.’

OUR VIEW: Risky. So one for the watch list now.