Hydrodec Group Agreement With Southern Oil Refining

Hydrodec has entered into an agreement whereby it will co-locate its Australian transformer oil re-refining operation at the Southern Oil Refining Pty site in New South Wales. Southern Oil will also support development of Hydrodec’s proprietary technology for re-refining used industrial and engine oils. We update our estimates to reflect the one-off costs of the relocation in FY14 and subsequent improvement in profitability from FY15 onwards. We raise our valuation from 20.3p/share to 20.9p/share to acknowledge the change to estimates and the reduction in risk to the Australian industrial oils programme.

Transformer oil plant co-location
Hydrodec will continue to sell SUPERFINE-branded transformer oil and base oil in Australia, but re-refining using its proprietary process will be carried out by Southern Oil at its plant in New South Wales, where it already processes used industrial and engine oil using conventional refining techniques. Hydrodec will retain all rights to its process and pay Southern Oil a tolling fee for processing the transformer oil. Hydrodec and Southern Oil will work together to commercialise Hydrodec’s proprietary process for potentially re-refining industrial and engine oil at the latter’s sites in New South Wales and Queensland.

Benefits of agreement
The rationale behind the agreement with Southern Oil is very similar to that behind the collaboration with Essar Oil in the UK and the strategic partnership agreement with G&S Technologies Group in the US. In all three cases, the relationship with an established industry partner both de-risks and accelerates technology deployment. In this particular case, the relationship also improves profitability from FY15 onwards, addresses the issues associated with the remote location of the current Australian transformer oil re-refining operation and provides a solid platform for developing an industrial oils re-refining business in the region.

Valuation: Raising valuation to reflect de-risking
Our valuation is based on the sum of discounted cash flows from the programmes in which Hydrodec is engaged, including both operational activities and those at the planning stage. We raise our valuation from £151.3m (20.3p/share) to £156.1m (20.9p/share) to acknowledge the change to estimates and reduction in risk to the Australian industrial oils programme. We note the upside to our valuation from potential adoption of Hydrodec’s process by Southern Oil at two refinery sites.

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