HDSN - 2024 Will Be A Step-Up Year For Hudson Technologies

2023-12-18 09:00:00 ET

Summary

• Hudson Technologies reported a decline in Q3'23 topline due to lower selling prices for refrigerants but offset some of the headwinds with higher volumes and carbon credit sales.
• The company is well-positioned for the upcoming reduction in virgin HFC production and consumption, which could result in inventory moderation and pricing tailwinds.
• Hudson's deleveraging efforts have been successful, with the complete payment of long-term debt, providing greater financial flexibility.

Hudson Technologies ( HDSN ) reported Q3'23 on challenging comps as the selling price for refrigerants declined by -27%, partially offset by stronger sales volumes when compared to the previous year, resulting in a topline decline of -15%. Hudson was able to offset some of these headwinds with carbon credit sales, providing a 2% uptick in gross margins. Despite these short-term headwinds, the firm managed to completely pay off all long-term debt, opening the door for greater financial flexibility.

Our industry is preparing for the unprecedented 40% baseline reduction in virgin HFC production and consumption allowances, which will be effective at the start of 2024. We believe that the current phasedown represents a significant opportunity for our business.

Brian Coleman

Hudson is well-positioned for the new ruling for the reduction in virgin HFC production and consumption. Despite the pricing headwinds experienced in q3'23, the mass reduction of virgin HFC should translate to inventory moderation and may add some pricing tailwinds as a result. In addition to this, Hudson should realize stronger margins on reclaimed refrigerants as gross margins for the product are typically closer to 50%. Management anticipates the demand for recycled refrigerants to experience 6-10x growth as virgin refrigerants become more restrictive.

Management discerned that the inventory cost and sales gap is narrowing back to historical norms and will result in moderating operating margins. Despite the high 40% gross margin, management anticipates this to revert closer to 35% going forward.

Hudson reached a major milestone in deleveraging the balance sheet by completely paying off the 2027 notes as well as their $5mm outstanding revolver. The firm also paid down their $100mm term loan over the last 15 months, saving $10mm in annual interest payments.

Looking forward to FY24, management suggested that the price for HFC has rebounded back towards the $10/lb seen at the beginning of 2023. Given this pricing upswing pre-cooling season, I believe the addition of the 40% reduction of virgin HFCs should add some pricing improvements going into the 2024 cooling season. I believe Hudson should also be able to leverage their 35% market share of HFC reclamation for better pricing as the mandate takes form.

Though 2023 has been a bit of a challenging year when compared to 2022, I believe Hudson continues to move in the right direction towards their $400mm 2025 revenue target. Despite the challenges posed in pricing due to a more moderate cooling season, I believe the environmental mandate as laid out above will be a positive catalyst for Hudson's long-term growth trajectory.

Valuation

HDSN shares are currently trading at 7x trailing EV/EBITDA, with a free cash flow yield of 7%. Considering the long-term runway with management's $400mm 2025 revenue goal in mind, I believe HDSN shares are well-positioned and set up to realize long-term capital growth.

I believe 7x EV/EBITDA is an appropriate trading multiple for HDSN shares, given its historical average.

A multi-stage DCF model confirms this price target using 14% market risk and the 20-year treasury note for the discount rate.

I also believe Elliot Wave analysis confirms this price target for a long-term strategy.

Bear in mind, this is a long-term buy and hold strategy and will take multiple years to materialize. Shares should be expected to go through multiple wave cycles between now and then before materializing at my $20.93/share price target. In the short term, I anticipate shares to reflect the current market trends and I expect some level of a pullback going into 2024 before recycled HFC pricing is realized. My short-term recommendation is a buy with a price target of $13.50/share, using eFY23 expectations with a long-term price target of $20.93/share.

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