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HERITAGE-CRYSTAL CLEAN INC HCCI
July 19, 2022 - 11:53pm EST by
mimval
2022 2023
Price: 28.84 EPS 0 0
Shares Out. (in M): 24 P/E 0 0
Market Cap (in $M): 700 P/FCF 0 0
Net Debt (in $M): -71 EBIT 0 0
TEV (in $M): 629 TEV/EBIT 0 0

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Description

Heritage-Crystal Clean Inc. (HCCI)
 
 
From HCCI’s current price of $28.84, we see upside potential of 39% to our $40.00 estimate of Fair
Value. $40 per share = $901M EV = 8.6x EBITDAaL (est. for CY2022) of $105M (17.5% margin on $600M
sales) = 18x FCF est. of $50M.
 
Closest competitor, Clean Harbors / Safety-Kleen (CLH $90) trades at 8.5x EBITDA (est. 2022) and 18x
FCF (CLH has roughly same EBITDA margin as HCCI, despite being 8x larger in sales & EBITDA)
 
 
(HCCI was last written up on VIC over a decade ago by Rightlanedriver as a well-timed short on May 9,
2012 at $20.43, on its way to $7.50 in Feb. 2016, where at the low he advised covering the short. It was
an award winning submission, which I highly recommend reading, particularly the comments, because
it’s a primer on this business that I don’t have the time or skill to recreate here.)
 
 
Company Description (from most recent 10-Q):
Heritage-Crystal Clean, Inc., a Delaware corporation and its subsidiaries (collectively the "Company”),
provide parts cleaning, hazardous and non-hazardous containerized waste, used oil collection,
wastewater vacuum, antifreeze recycling and field services primarily to small and mid-sized industrial
and vehicle maintenance customers. The Company owns and operates a used oil re-refinery where it re-
refines used oils and sells high quality base oil for use in the manufacture of finished lubricants as well as
other re-refinery products. The Company also has multiple locations where it dehydrates used oil. The
oil processed at these locations is primarily sold as recycled fuel oil. The Company also operates multiple
non-hazardous waste processing facilities as well as antifreeze recycling facilities at which it produces
virgin-quality antifreeze. The Company's locations are in the United States and Ontario, Canada. The
Company conducts its primary business operations through Heritage-Crystal Clean, LLC, its wholly
owned subsidiary, and all intercompany balances have been eliminated in consolidation.
The Company has two reportable segments: "Environmental Services" and "Oil Business." The
Environmental Services segment consists of the Company's parts cleaning, containerized waste
management, wastewater vacuum, antifreeze recycling activities, and field services. The Oil Business
segment consists of the Company's used oil collection, recycled fuel oil sales, used oil re-refining
 
activities, and used oil filter removal and disposal services. No customer represented greater than 10%
of consolidated revenues for any of the periods presented. There were no intersegment revenues. Both
segments operate in the United States and, to an immaterial degree, in Ontario, Canada. As such, the
Company is not disclosing operating results by geographic segment.
www.crystal-clean.com
 
https://www.crystal-clean.com/wp-content/uploads/2022/05/HCCI-Investor-Presentation-Q1-2022.pdf
 
This is a growth / cyclical, with about 40% of sales from re-refining of used oil, and 60% from less cyclical
environmental services. We think the valuation is penalized too much by the cyclical exposure with not
enough credit for the track record and prospect of continued growth:
 
 
 
The oil re-refining business is operating at an all-time high for HCCI recently, so that’s likely to flatten out
and with the obvious risk that it might more severely revert to the mean. But then again, if energy
prices stay somewhat elevated the better than normal spread HCCI’s re-refining business has enjoyed
recently might persist for some time. The cost of the used motor oil that HCCI collects from its various
customers has risen, but not as much as the re-refined products which HCCI sells, mostly Group 2 Base
Oil that goes into various lubricants.
 
 
 
 
Also, IMO 2020 regulations implemented Jan. 1, 2020 impose stricter sulfur limits on marine fuel which
increases demand for HCCI’s output:
 
Our willingness to endure the risk that the oil re-refining business is unsustainably over-earning is
because the environmental services side of the business (60%) holds a more than offsetting amount of
appeal, both from organic growth expectations and from acquisitions like the $156M purchase of Patriot
Environmental Services announced on June 30, 2022:
https://www.fuelsandlubes.com/flo-
article/heritage-crystal-clean-acquires-patriot-environmental-services/
 
 
 
There is also a large valuation gap, not just between HCCI and its larger peer, CLH, but between their
sector and the large solid waste companies, which do have much higher EBITDA margins but still the
valuation gap seems excessive. We would not be surprised to see some of the larger solid waste haulers
buy out specialty environmental services companies like HCCI and CLH.
 
 
Source: Bloomberg Intelligence, 6/30/22
 
 
 
We are long Heritage-Crystal Clean Inc. and may buy or sell additional shares at any time. This is not a
recommendation to buy or sell securities.
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

controlling shareholder, Heritage Group Inc. (Fred Fehsenfeld Jr., 71 years old), which owns 20.6% of the HCCI shares outstanding, registered their shares for sale last year.  maybe meaningless but might signify an openness or preparation for potential sale.

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