Hallador Energy reported impressive net sales and EBITDA growth driven by inorganic growth.
The company's recent acquisition of the Merom power plant and decrease in net debt/EBITDA may lead to further acquisitions and net sales growth.
Risks include concentration of clients, commodity price volatility, and legal restrictions, but Hallador Energy looks undervalued.
Hallador Energy Company (HNRG) recently reported impressive net sales growth and EBITDA growth coming from inorganic growth. Given the recent decline in the net leverage and the experience of management in the M&A markets, HNRG may acquire more targets, which may enhance future FCF generation. Besides, I think that further inventory growth and purchases for the Merom Power Plant could also accelerate future net sales growth. I do see risks from renegotiation of the price of certain commodities, legal restrictions, or concentration of clients, however HNRG does look cheap.
Hallador Energy Reported Impressive Quarterly Net Sales And Consolidated Net Income Thanks To Inorganic Growth
Hallador Energy is a company in the energy sector whose historical business has been the development and manufacturing of coal to serve the electricity generation industry, through its subsidiary Sunrise Coal. Starting in 2022, with the acquisition of Merom one gigawatt power plant in Sullivan County, Indiana, Hallador expanded its business to activities within this sector.
In addition, the company has interests within Sunrise Energy and Sunrise Terminal, two companies dedicated to gas export and transportation and logistics services respectively. In the same way, the activity of the coal industry appears to be registering new price records, which appears to be leading the company to seek to expand its productive capacities by taking advantage of new opportunities.
Operations are divided into several segments: coal and electricity generation, and corporate. As shown in the image below, coal operations increased substantially in 2023 as well as electric operations driven by the company's inorganic actions. As a result, the increase in consolidated income from operations in the three months ended June 30, 2023 is impressive. In the last quarter, the consolidated income from operations stood at $22 million. In the same quarter in 2022, Hallador Energy reported negative consolidated income.
Quarterly sales also increased to close to $161 million in the last quarter. In the three months ended June 30, 2023, Hallador Energy reported only $65 million in total sales. I believe that further net sales increase in the coming years will most likely lead to increases in the total market capitalization.
Source: 10-Q
Balance Sheet
As of June 30, 2023, the company reported cash and cash equivalents worth $2 million, with restricted cash of about $4 million, and accounts receivable close to $21 million. Total current assets stand at about $112 million, and total current liabilities are equal to $177million, so many investors may not appreciate the way the current ratio stands right now. With that, the asset/liability is equal to more than 1x, so I would say that the balance sheet is stable.
The company reports a large amount of total property, plant, and equipment worth $819 million or net plant and equipment of $476 million. With that level of properties, I think that management may be able to create new credit lines if necessary.
Source: 10-Q
I really do not think that the list of liabilities is scary. Additionally, the company does not really report a significant amount of debt. More in particular, the company reported accounts payable and accrued liabilities worth $70 million, with deferred revenue of close to $41 million, and total current liabilities worth $177 million. Additionally, the company reported convertible note payable worth $10 million, convertible notes payable of a related party close to $9 million, and total liabilities worth $345 million.
Source: 10-Q
The interest rate paid by Hallador Energy includes interest rates close to SOFR plus 4.00% to SOFR plus 5.00%. These days, SOFR appears to be close to 5% , so I believe that the cost of debt may be close to 9%. I did take into account this information in my financial model.
The interest rate per the amendment will transition from LIBOR to SOFR based pricing with ranges from SOFR plus 4.00% to SOFR plus 5.00%, depending on the Company's leverage ratio. The Company expects the interest rate to be SOFR plus 4.00% for the majority of 2023. Source: 10-k
Source: New York Fed
Further Reduction In The Long-Term Debt Would Allow Inorganic Growth, And May Also Bring More Interest From Investors
I believe that the recent decrease in leverage reported in the last quarter will most likely interest investors. As a result, the net income may benefit from less interest expenses. I believe that Hallador Energy may have more options with regards to inorganic growth as debt holders may not block new transactions. In the last quarter, the company noted Debt to EBITDA multiple of less than 1x, however annual Debt to EBITDA multiple declined from around 3x to less than 1.4x.
Hallador has dramatically improved both the quality of our business, with the addition of Hallador Power last October, and the quality of our balance sheet by reducing our Debt to EBITDA multiple to less than 1X. Source: 10-Q
Source: Ycharts
As Seen In The Most Recent Quarter, Additional Inventory To Hallador Will Most Likely Bring Net Income Growth
I believe that further increases in inventory and purchases of the Merom Power Plant will most likely bring further net income growth as we saw in the most recent quarterly report. As a result, if more output becomes available for sale, I think that net sales growth will most likely trend higher. In this regard, readers may want to have a look at the following lines.
Our plan is to ship this additional inventory to Hallador Power enabling us to generate more MWh in the second half of the year than previously planned. Hallador Power contributed $9.2 million net income during the quarter due to existing energy commitments through May 2023, that were associated with the purchase of the Merom Power Plant. Starting in June 2023, approximately 80% of the output of the plant became available to sell on the open market. Source: 10-Q
Further Acquisitions Like That Of The Merom Power Plant Will Most Likely Bring Net Sales Growth And FCF Generation
The company's growth strategy is oriented towards the expansion of its productive capacities and the possibility of acquisitions of businesses from related companies. In this sense, the implementation of infrastructure development on current extraction plants will be of fundamental value to achieve these growth objectives. Considering the recent acquisition of the Merom power plant and lower net debt/EBITDA, I really believe that further M&A operations will most likely happen. As a result, we could expect significant capacity expansion and net sales growth driven by increases in production.
Under the APA, Hallador acquired the Merom power plant, along with equipment and machinery in the power plant; materials inventory; a coal purchase agreement; a coal combustion certified coal ash landfill; certain Generation Interconnection Agreements, and coal inventory. Source: 10-Q
Source: 10-Q
My Financial Model
My cash flow model includes conservative net income growth pretty much in line with previous net income growth seen in the past. I also included changes in working capital, changes in inventories, D&A, and capex close to previous numbers seen in other cash flow statements. I believe that my numbers are quite conservative.
Source: Ycharts
Source: Ycharts
Considering the previous figures, I included 2029 net income worth $101 million, with depreciation and amortization close to $46 million, but no losses from sale of asset or asset writedown costs, which I believe are extraordinary events.
Besides, with stock-based compensation close to -$2 million, changes in other operating activities of about -$4 million, and changes in accounts receivable worth $13 million, I also included changes in inventories of about -$57 million.
Moreover, with changes in accounts payable of about $63 million and changes in other net operating assets close to -$16 million, CFO would be close to $139 million, and 2029 FCF would be about $91 million.
Source: Cash Flow Expectations
With the previous cash flow statement projections, I included a WACC around 8% and 13% and terminal EV/FCF close to 11x-14x. The median EV/FCF in the last 7, 5, and 10 years stands at close to 12x and 16x, so I believe that I am using a conservative exit multiple.
The results also include a forecast price of about $17-$30 with a median around $22-$23 per share. Additionally, the internal rate of return would stand between 2% and 14% with a median close to 8%. In any case, I believe that Hallador Energy appears undervalued.
Source: Results From My DCF Model
Competitors, And Risks
There are some large coal exploitation companies that have managed to establish national infrastructure, and are currently the biggest competitors in the market, such as Peabody Energy Corporation ( BTU ) and Alliance Resource Partners ( ARLP ). Furthermore, depending on the type of coal and the chemical composition of the material, its final application has various outcomes. In the case of the Illinois basin, the material is mainly destined for electricity generation, and in that framework, Hallador competes with companies of similar size within this region, with regard to the acquisition of land with potential coal reserves and signing with clients in this industry.
The great concentration on its clients and its geographical activity can mean risks for the company, especially in the cases of signed long-term contracts, which could, if not fulfilled, affect operating margins and their estimates. In the same sense, several of these contracts have the doors open for the negotiation of prices per ton, and Hallador depends on factors of the global economy, competition, and demand within the industry to establish rates at favorable prices.
On the other hand, the acquisition of Merom is recent activity, and an effective integration has not yet been carried out. In every sense, this implies a risk, in knowing the operating costs of this business and the margins it offers as well as its activity and general functioning. Ultimately, in the long term, due to the nature of the business, there may be large legal restrictions in the future in the development of the company's activities.
It is also worth noting that analysts out there do not expect net sales growth in 2024 and 2025. They also believe that the EBITDA and the net income may decline. In particular, 2025 net sales are expected to be close to $654 million, with 2025 EBITDA of about $113 million, 2025 EBIT close to $54.3 million, and net margin close to 5.9%. In my view, further negative forecasts from the investment community may lower the demand for the stock, and may push the stock price down.
My Takeaway
With impressive net sales growth and consolidated income growth driven by inorganic growth, Hallador Energy appears extremely active in the M&A markets. Taking into account recent decreases in net debt/EBITDA, I believe that management has room for further acquisitions. Additionally, further increases in inventory for the Merom Power Plant, as we saw in the last quarter, and output available for sale will most likely bring additional net revenue growth. Yes, there are risks coming from certain concentration of clients, volatility in the price of certain commodities, or negotiations of prices per ton. With that, in my view, Hallador remains cheap.
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2024-07-27 01:02:00 ET Stock Traders Daily has produced this trading report using a proprietary method. This methodology seeks to optimize the entry and exit levels to maximize results and limit risk, and it is also applied to Index options, ETFs, and futures for our subscribers. This...
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