UPDATE: Wunderlich Raises PT on Heritage-Crystal Clean on Productivity Prospects

In a report published Thursday, Wunderlich Securities analyst Brian Butler maintained a Buy rating on Heritage-Crystal Clean, Inc. HCCI, raising the price target from $20.00 to $25.00.

According to the report, “A secular change in the economics of used oil collection and sell thru to the RFO market should combine with better productivity by HCCI to take the delivered cost to the re-refinery down sufficiently to support a better long-term FCF growth outlook. Underlying this outlook is solid high single digit growth in the Environmental Services (ES) segment with a floor EBITDA margin of 25%.”

Some highlights from the report included:

-”We suspect that HCCI could draw on this shelf registration to fund the 25 million gallon capacity expansion due on-line by mid-summer 2014.”
-”Comparatively the per gallon delivered feedstock at a re-refinery is about $0.80
to $1.00 less than a virgin refinery using crude
-”If and when margins at Environmental Services expand, HCCI is likely to use that upside to invest back into ES for growth but not at the expense of pressing through the 25% margin floor.”
-”While the Environmental Services segment has a solid recurring revenue base with stable margins and a strong near-term growth profile, it is the volatility in the Used Oil segment that has the largest impact on future free cash flow and valuation.

HCCI closed Tuesday at $20.47.