Hexagon sent out an update some weeks ago where they stated that some non-recurring items would impact 4Q earnings due to warranty issues and inventory adjustments. In addition they announced on 16 January that the Devold division had been sold for approx. 115 million NOK in cash.
I won't rehash all of the information in the presentation material, but I want to highlight two slides from the 4Q presentation and provide some commentary as to why I see these as particularly significant.
49% Revenue Growth (YoY) for Hexagon Group
Hexagon Composites grew revenue by 49% in 2013. This is an impressive figure, especially when taking into account that this is not a start-up company, but a leading player in an established, albeit rapidly expanding industry.
Source: Hexagon Composites
The 2013 figures for EBITDA, EBIT and net profit are also impressive, but here we have to bear in mind that 2012 was a year where Ragasco (LPG division) in particular incurred a lot of expenses as it restructured and positioned itself for more profitable operations in the future.
Operating Income for High-Pressure Cylinders up by More Than 70% YoY
Source: Hexagon Composites
The slide above does a very good job of illustrating just how quickly the high-pressure cylinder division is growing, despite the ISX12 G natural gas engine only hitting full production from 3Q 2013 onwards and the CNG tank segment for passenger cars (Hexagon Raufoss) operating at a loss in 2013. During the first half of 2013 Hexagon management stated that the company was set for exponential growth going forward, and they have so far certainly delivered on this promise.
Pluses and Minuses
For me the 4Q presentation resulted in very few positive or negative surprises. The warranty and inventory issues are of course annoying, but these issues were already known and I unfortunately think such issues are hard to avoid when optimizing production lines and producing at breakneck utilization levels. It doesn't mean that such issues are acceptable. They not only cost money, but can also have a detrimental impact on reputation and market share, but I am sure management will be working very hard to ensure such issues won't happen again.
Hexagon's CEO made the comment that the majority of the ISX12 G engines are ending up with a CNG configuration, but that it is currently difficult to estimate accurately what the split is going to be between CNG and LNG going forward as estimates range from a majority to a significant majority of heavy duty trucks ending up with a CNG configuration. For those of you following the on going CNG vs LNG discussion here on Seeking Alpha this is a significant bit of information from one of the leading companies in the North American NGV industry
In the table below I have summarized the biggest take-away for me from today's presentation. The information in the table is in itself not new, as we can all see that the trend has been developing for some time, but today was the first time that I took some time to reflect on what the steady cash accumulation and reduced leverage ratio is likely to mean going forward. Please note that I am showing the table in $ million and not in NOK which is the reporting currency for Hexagon.
It is always prudent for a company to have a cash cushion, especially if the market outlook is uncertain and a lot of investments have to be made. For Hexagon we know that this is not the case as the market outlook is bright and both phases of Lincoln's production capacity expansion have already been fully financed, so ending up with a NIBD/EBITDA ratio of close to zero does not strike me as the best way of utilizing a balance sheet. It is of course impossible to speculate whether Hexagon has got any M&A aspirations in mind, but assuming they haven't got any such plans for the next 6-12 months, I can't see any other use for the rapidly growing mountain of cash than to start paying out sizeable dividends. Hexagon's CEO said that a dividend is highly likely, the only remaining question is how large.
Outlook for 2014 and 2015
I intend to publish a separate article in the not too distant future about the 2014 and 2015 outlook for Hexagon. Until then, my brief comments would be that the growth guidance for the high-pressure division is as expected very strong, with negative guidance for the passenger car segment being offset by a buoyant European bus sector (once the Euro 6 timing issue has run its course).
Gas distribution products (TITAN and SMARTSTORE) seem to be on a steady course and I am personally pretty excited about the market potential for these products in Russia. The final bit of good news is that demand for Ragasco's LPG tanks seems to be improving both in Europe and in other regions. The usually conservative Hexagon Board summarizes the outlook for Hexagon Composites well by using the following sentence: "The Board considers the Group's outlook to be bright". Enough said.
I continue to receive questions from people here on Seeking Alpha about my opinion of companies such as Clean Energy Fuels (CLNE), Westport Innovations (WPRT) and Quantum Fuel Systems (QTWW), as the future of these companies is closely linked to the rapidly evolving NGV industry in North America.
Without commenting on each company individually, I thought I would provide some high level general remarks. There is no doubt that the booming North American NGV market offers terrific opportunities; unfortunately there are not that many companies that are pure NGV plays and that are cash flow positive. I only know of one such company and that is Hexagon Composites. The table below summarizes the four companies I have already mentioned.
A number of you will undoubtedly comment that CLNE, WPRT and QTWW are better investment cases than Hexagon Composites, that they provide a much greater upside and that now is the time to get on board before the train leaves the station. I would seriously question such statements, but let's leave such a discussion aside until these companies can show positive cash flow and a strong and clean balance sheet, as they are currently in a different risk category compared to being a Hexagon shareholder.
In summary Hexagon Composites is in the enviable position of having a rock solid balance sheet, being the undisputed leader in a market with exponential growth and generating surplus cash that can both support organic growth and feed a regular dividend stream. What more could you ask from an investment?