Wednesday, August 21, 2013

Conrad Industries Reports Q2 2013 Results ($CNRD)

Conrad Industries has posted its second quarter 2013 results [pdf]. Here are the highlights that I see:

  • Revenue was up 24% year over year, however gross profit was only up 5% as the gross profit margin fell from 17% to 15%. Apparently the company took on some lower margin jobs. Vessel construction revenue rose 21% but vessel gross profit actually fell. Repair and conversion revenue increased 60% and gross margin increased 65%. It was this strength that compensated for the apparent weakness in vessel construction.
  • EBIT was $8.7 million for the quarter and $16.8 million year to date, up 5% and 28% respectively. Quarterly EBITDA was $10.5 million and year to date was $20.4 million!
  • The new construction gross profit margin is down slightly year over year while the repair and conversion profit margin is up. The company said that the profit margin declined in Q2 "primarily due to the mix of jobs," a nice non-specific answer.
  • The capital expenditure budget for 2013 was projected to be $22 million. Year to date, they have spent $8.9 million (actually less than the $11.6 million through same period last year). For both years the capex was split roughly between newbuild and repair, although they don't break out the expansion capex and the maintenance capex. This report says that the expansion of the Deepwater facility has progressed enough that they have started operations there.
  • Offshore oil and gas related business is up, as we'd hoped: "during the first six months of 2013 and for the year ended December 31, 2012, we received approximately 27.0% and 16.2%, respectively, of our total revenues from customers in the offshore oil and gas industry."
  • The backlog was $181.8 million at June 30, 2013, which is 217.8% more than at June 30, 2012, and the backlog man-hours were 208.5% more than June 30, 2012.
  • Still no share buybacks! The last repurchases were in Q3 2012 at $15 per share, although the company did approve an increase in the repurchase program in February 2013.
  • Still no BP settlement! "As of June 2013, those claims have been in moratoria review, which is an automatic secondary review of the claims for certain types of industries (including shipyards), in order to ensure that the losses are related to the BP oil spill and not the federal government’s moratorium on offshore drilling which followed the BP oil spill. We believe that the support documentation establishes that Conrad’s claims are not related to the moratorium. Any award we receive will be subject to income taxes. Based on the current pace of the review process, the Company anticipates a response later this year or early next year. No amounts related to the claims have been recorded in our financial statements at December 31, 2012 or June 30, 2013."
  • They have said in the past "Our repair and conversion business tends to be seasonal, with increases in the colder months in the Gulf of Mexico during the latter part of our fourth quarter and beginning of our first quarter." 
  • Shareholder equity was up 11.8% over the trailing six months, or 25% annualized. As we've discussed before, the high ROE is a sign or management efficiency but also of understated book value. The carrying values of the shipyards and equipment (land at cost and depreciated equipment) are much lower than the market or replacement values.
  • Speaking of book value, it is worth noting that the company now trades at 1.6x book

Current Enterprise Valuation

Best estimate of the enterprise value situation right now. Note that this reflects a new, bigger (50%) discount to the BP settlement because of the uncertainty created by the unexpected delay. The confidence interval around the enterprise valuation is probably $130-140 million. This year's EBITDA looks like it will be around $40 million, so the EV multiple is about 3.4x, or a 29% EBITDA yield.

We have written in the past: "Say that the new normalized EBITDA after expansion is now $35 million [up from the trailing $30 million five year average that included the great recession] and it should trade at a 5x multiple and there is currently $25 million in excess cash. The market capitalization should be $200 million [$175 EV plus $25mm cash] which is $34."

Given that same assumption of $35 million normalized EBITDA and a 5x multiple, for a $175 million enterprise value, you would now add back ~$50 million excess cash to get a market capitalization of $225 million, which is $37.80 per share.

Above is a valuation table showing the per share price for pairs of EBITDA multiples and normalized EBITDA figures, assuming the same ~$59 million excess cash as in the calculation above.

A value in the mid to high $30s seems very reasonable.

  • Why the margin decline in new construction? What was the issue with the "mix of jobs"? Was that temporary or permanent?
  • What is the capex being spent on and what's the outlook for how much more will be spent? What will maintenance capex be going forward?
  • What are their thoughts now on share buybacks versus further dividends?

No comments: