Value Investing HNRG - HALLADOR ENERGY - RENEWABLE PLAY – SUPER UNDERVALUED - DD - THESIS |
| HNRG - HALLADOR ENERGY - RENEWABLE PLAY – SUPER UNDERVALUED - DD - THESIS Posted: 04 Jan 2022 04:38 AM PST Thesis Summary My HNRG thesis is there's more asymmetric upside: HNRG is either going to reinvent itself as a solar company after Oaktown & capture part of the rapidly growing $223b solar industry – if it does it's worth significantly more and the downside is limited to FCF+ DCF. I am long on HNRG and a current shareholder. Why I like this stock?
HNRG Hallador Long Thesis HNRG is an Indiana based coal company and they don't export their coal. It's a domestic coal company and most of their coal goes to the state of Indiana. Hallador energy's main mine is the Oaktown mine and they sell about 8 tons a year. If they have about 66 proven reserves left and they sell 8 tons a year, they have little over 8 years of reserves left. What happens after Oaktown, does the party end? I think the real value of Hallador isn't from coal, but from the transitioning they are making to solar renewables. I think investors are valuing this stock as a coal stock, but I think Halldor should be valued as a future solar renewable company, but I think this is a long term hold, since they can't plug into the June 2023 but I think the PPA starts in 2025 Why I think they will make the successful transition from coal to solar renewable? Positive Cash Flow Decreasing Debt They took out money to buy a coal mine, but they have been paying off the debt since then. In order to pay off the debt they have to have CF+. As of September 30, 2021 the Long Term Bank debt has decreased to $83m. If they are paying off about $30m a year, in about 3 years they should be LT Bank debt free. So by 2024, they should be LT debt free and they have 5 years of free cash flow to transition to solar renewables. They have to be making money to pay off the debt and they have stable revenue Even at the current valuation, HNRG is undervalued If I look at the stock from the stockholder's equity the intrinsic over $6 and if I look at it based on annual revenue the intrinsic value is close to $8 and if I look at it based on DCF, the NPV is over $10. However, I think it's worth more than $10, because of the transition to renewables? Most ESG related companies trades at 50x EBITDA. Insiders own close to 30% of the stock They have already hired leadership with renewable expertise Now what would it take for the company to be successful while they transition to solar renewables. The average price per ton need to be close to the mid 40s The Illinois basin is currently in the mid-40s. The good thing is HRNG is contract based for multi years and they don't have spot pricing. Since the Oaktown party probably ends by 2029, if they can keep up the price in the mid-40s they should be good. I think many investors were unhappy to see that they already sold close to 7 tons at $39.50, I think many were hoping for the mid $40s. Since they only sell about 8 tons a year and 7 was already sold 2022 is not a good year. They have only sold about 4 tons at $41.30. Hopefully the rest of the 4 tons are in the mid-40s. They tend do contracts for multi years and hopefully the 2023 and going forward would be in the mid-40s. Could they sell out in the mid-40s into 2028? If they can sell it out into 2028, I think they would have enough FCF+ for a transition to solar renewables. I was disappointed at the 4th quarter cost per ton. Their average cost per ton has increased to mid30s and I think it might stay that way for a while, but what I would like to see is that cost to be in the lower 30s or similar to 1st 2021 around $28. I think the higher cost is here to stay the short term. Hopefully the long terms they can bring down the cost back to around $30 I really like that their # 1 goal is to pay down the debt and use the free cash flow to transition to renewables I do think that solar platform would be some kind of JV and co-developed. I would like to hear your thoughts on whether they can transition to a solar company. Summary The valuation for HNRG's solar I think would come from FCF+ from 2024 to 2029 and we assume the LT bank debt is paid down by 2024. They can use the FCF+ until Oaktown mine reserves are depleted. I am assuming they can bring down the cost per ton in the long terms to low 30s and the average price sold is in the mid-40s. As a shareholder what I need from the company is that does the solar transition looks like. I know that the generation will be located near the Merom Coal Generation Station, but has the land already been purchased for solar renewable installation and if so, how many acres has been installed. I need to the leadership to provide more information about the solar renewable business model. For example, are they just focusing in Indiana or will Hallador become a national solar renewable company? What does the capital increase look like for a solar transition? Is the FCF+ enough for the capital increase for the solar transition? I think there's an upside for Hallador because I think the wind is in their back to pay off the long-term bank debt with the low supply of domestic coal and increased in price of coal. Also, they have long term contracts and these contracts should take them through 2028 when the Oaktown party ends and then they can transition to a renewable solar company. If they can make the transition from a coal company to a renewable company, I think this is one of the most undervalued companies out there. Based on the recent earnings call more of their earnings would eventually come from renewables. Can Hallador make the successful transition to a renewable company? [link] [comments] |
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