valuation / research / etc etc etc!

Hello HYRO / HC people - hope you don't mind me posting here - I do prefer the quiet threads!

Have had a bit if a break this week, and have stopped to read back through a pile of HC posts on HYRO. Thanks for all the data and opinion etc - have been reading for some weeks now.

Along with ASX - the HC posters have given me a lot to ponder in regards to HYRO.

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Disclosure / interest in HYRO ... I bought a portion of the company a little after they announced the possible "offer" in late 2011. Did a limited amount of research on the company - but considered HYRO fairly low risk given previous trading range and improved conditions that it has found itself in - even though fairly illiquid - so jumped in.

Cannot help but notice (as has been noted by GANDA) that although small trades in value - the buyers have seemingly gnawed away at everything around the 50 cent range in recent days.

Next stop, 12 month highs with 70 cent bracket in range?

Will be interested in what is offered at lower prices for sale next week.

Would also imagine that some sort of update is due from HYRO soon? It is dragging on a bit.

So have sat down to try and understand HYRO better.

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Struggling to place a valuation of this - as is always my trouble with tech / IP / bio type stocks.

Looked through the MEDIA section of ASX listed companies one by one.

Apart from the giants (broadcaster types) HYRO seems to stand out as a quality company, with trusting/faithful/quality customers - and still with a low market cap.

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Positives I can see (a lot generic - and promises form HYP updates etc)...

1) Survived GFC

2) Survived Lehman Bros trouble (while they were tied to them) - and they even seemed to have been tangled up with OPUS PRIME!!!???

3) ATO debt gone (although caused some dilution?)

4) Seems to be self sustaining now with positive cash flow at last (early days admitted!)

5) Fresh CEO looking to impress, ready to focus on sales with debt issues in the past

6) Very decent cash flow during last 2 years - despite debt issues

7) Debt being gone now - would allow them to appear more stable to larger prospective clients?

8) Impressive list of vendors/partners (IBM, CA, Oracel, Novell...) emphasizing quality over quantity

9) HYRO still managed to get/maintain some very decent contracts and cash flow despite GFC and debt issues - reflecting confidence in their abilities (AFL, Work Health, VICRoads, ABC, Bank of Thailand, ANZ Bank, Agility
Interactive, Aboriginal Affairs Victoria, The Buzz Insurance
and The Victorian Department of Education...........)

10) HYRO is well placed in a rapidly growing market and lucrative market at that - without looking like a "fly-by-nighter", with it 15 years history

11) Interest by market/holders with recent rights issue over-subscribed by 49% (about $2 million)

12) Directors seem to be buying fairly recently (and last published Top 20 looking OK - i have not bothered to chase for a new Top 20 - as HYRO seem to be very busy at present to be able to answer correspondence - I am at their mercy on this front... not ideal!)

13) Are a listed company - providing security for their clients

14) 12 month trading range is not too far from Fridays finish

15) Given that profit is not always a good thing, HYRO may consider returning some profits to holders, so as to minimize tax and improve SP? Very hopeful on that one!!!!

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PAST QUARTERLY TURNOVERS....

Turnovers for last 9 quarters as follows (though profit not always a factor by any means!)...

JAN 2010 - $7.6 million
MAY 2010 - $5.2 million
JULY 2010 - $7.4 million
OCT 2010 - $8.2 million

JAN 2011 - $7.2 million
MAY 2011 - $4.8 million
JULY 2011 - $7.7 million
OCT 2011 - $5.4 million

JAN 2011 - $4.7 million

AVERAGE turnover for 9 quarters is $58.3 million / 9

= $6.5 million per quarter

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If we can hope and pray for profit in a similar percentage to the most recent JAN 2012 quarter ($600K from $4.7milion turnover) - that's not a bad return at about 12.5%

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FUTURE EARNINGS....????

With our average quarter of $6.5 million, and 12.5% profit that's $812K per quarter - or $3.25 million per year (all assumed of course!).

Would get very interesting if the same profitability per "dollar turned over" remains - if they can pick up some bigger $$$ contracts - which looks to be the target for HYRO. More turnover may equal more profit?

(NOTE: I only went back through about 2 years of 4c's, as I believe HYRO have said that before 2010 they also had a hardware sales division which increased annual turnover - but was not profitable - so they axed it???)

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CURRENT HYRO/HYO standing.....

HYRO say they have $1.8 million cash

Friday finishing price (VWAP = 52.518)

Market cap = 0.52518 x 26,323,372 shares = $13,824,508

Less cash = $12 million for company business, assets and IP?

If they can sustain my "magical figure" of $3.25 million profit per year - this would be looking very tidy indeed - takeover or no takeover?! Yes - i understand that the burn rate has been high in the past. Hope that new CEO will reign this in.

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Basic back of envelope calcs...

$12 million market cap
- (3 year profit at 3 x $3.25 million = $9.75 million)
= $2.25 million for the rest of HYO business, IP, assets...

I am not sure - but if the IDAPTIVE tech is all its cracked up to be (and it IS being utilized by some decent names), then the prospective buyer may be happy to pay more.

As it has been previously reported by HYO - it cost HYRO $10 million to develop the IDAPTIVE system (see link below for what I believe refers to development cost of IDAPTIVE)

http://www.asx.com.au/asxpdf/20110907/pdf/420y6dz46ptznf.pdf

Not sure another entity could develop and test such a package in the real world with real customers, for the same price.

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SUM OF PARTS VALUATION (assuming HYRO directors do not want to sell the business for peanuts - given HYRO now has the potential to be profitable, and they can prove the value of IDAPTIVE to buyers)

$10 million - for past IDAPTIVE development costs

$3.5 million - profit for bothering to develop IDAPTIVE

$2.0 million - cash (assuming this has grown a little since last reported balance)

$0.5 million for assets

$16.25 million - hopeful "next 5 year profit"(perhaps realistic given recent higher $$$ contracts won and sold along with all the customer links and "goodwill")

=

$32.25 million (or $1.23 per share - seems to be limited dilution???).

Very hopeful target, yes - but not sure to far out of this world - given takeover of OOH etc in recent ASX history (though different sector)???

And would return value to long suffering holders - and perhaps a even a profit for the troubles through GFC etc.

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All the best to holders next week!

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Please feel free to pull this to bits - as I would be very interested in any feedback on my thinking/research.

All above is just my ramblings and assumptions - so please DYOR and form your own opinions!

My HC Sentiment is HOLD - as this is all very risky - and the stock is currently quite illiquid.

Regards

bsh