Monday, April 29, 2013

Conrad Industries Releases 2012 Annual Report ($CNRD)

Conrad Industries released its 2012 Annual Report [pdf] on Good Friday, so two competitors have beaten me to the punch. Alpha Vulture is long and takes note of the record 2012 results and currently high backlog. Also, a Seeking Alpha author reviews the results and sees significant share price upside. Here are the other highlights that I see:

  • In 2012, we achieved revenues of $233.6 million, net income of $20.8 million, EBITDA of $35.6 million and earnings per diluted share of $3.46. [At $27, it's 8x earnings, but there's $9.4 in cash not counting potential BP settlement which makes it 5.1x ex-cash.]
  • During 2012 we derived our revenue from 176 customers compared to 171 in 2011, and in 2012 no customer accounted for 10% or more of our total revenue [...] 16.2% of total revenue was energy related, 76.1% was other commercial and 7.7% was government. This compares to 7.0% energy, 75.7% other commercial and 17.3% government in 2011.
  • Our backlog was $120.7 million at December 31, 2012 as compared to $47.1 million at December 31, 2011. Subsequent to year end, as of March 22, 2013, we had signed contracts totaling $51.4 million, which includes the sales of three stock barges and four stock tow boats that were in progress at December 31, 2012. [That's signing contracts at an annualized rate of $225 million, plus the $120 million backlog at year end, which should mean that they easily beat last year's revenues, and at a higher margin.]
  • During the past five years, we have made, in the aggregate, approximately $33.1 million of capital expenditures to add capacity and improve the efficiency of our shipyards. This includes $15.3 million in 2012, which was primarily capital additions at our four locations to increase capacity and operational efficiencies, and to replace leased equipment with Company owned equipment. Our Board of Directors has approved a $22.0 million capital expenditure program for 2013.
  • In December 2012 and February 2013, the Company submitted claims to the BP Settlement Fund in accordance with the Deepwater Horizon Court-Supervised Settlement Program, which was approved by the court on December 21, 2012, totaling $22.6 million. Based on the current pace of the review process, the Company anticipates a response in the second or third quarter of 2013.
  • Because a large percentage of our repair work is derived from the Gulf of Mexico oil and gas industry, conditions in that industry affect our repair segment. In 2012 we experienced a slightly higher gross profit in the repair segment resulting from an increase in production hours and a few more profitable jobs as compared to 2011, when we incurred losses on a few jobs.
  • Our backlog as of December 31, 2012 consisted of 42 vessels: 2 Liquefied Petroleum Gas (LPG) barges, 33 30,000 BBL tank barges, 2 lift boats, a deck barge, a crane barge, and 3 mid-body extensions. 
  • 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. During this time, vessel owners and operators tend to repair or modify their vessels as a result of or in anticipation of work during the warmer months in the Gulf of Mexico.
  • A significant portion of our backlog, approximately 68.3% at December 31, 2012, is related to the construction of tank barges for use by customers transporting petroleum products resulting from the use of horizontal drilling in conjunction with hydraulic fracturing...
  • "[W]e currently intend to retain any earnings to meet our working capital needs and to finance the growth of our business."
  • In 2012, we purchased 50 acres of property adjoining our Conrad Deepwater facility for $5.6 million. During the fourth quarter, we renovated the existing office building at the new location and relocated our engineering department. Our current plans are to add one new construction site and upgrade the existing building for manufacturing. The expansion was approved by the board and is currently in progress. We plan to start operations at this site in June 2013.
  • What is driving the capital allocation decisions? What is the rate of return on the new capex? A rational management should only spend money on expanding capacity if the IRR of the new capacity exceeds the IRR of share buybacks. Share buybacks should have a 25 percent cash flow yield, based on the current enterprise value and trailing five year average EBITDA. Is IRR for capital used in the expansion of the Deepwater facility going to exceed that? Let's assume that $20 million of the 2013 capex will go toward the expansion. We would need to believe that this will result in a $5 million increase in annual EBITDA (25%). Conrad's five year average EBITDA margin has been 16%, so this expansion would need to increase revenue by $31 million given the same margin (although margins have risen significantly especially in the repair segment. Conrad currently has 4 shipyards comprising 91 acres, so this could be looked at as a 55% expansion, although the amount of water frontage is probably the more important metric. Alternately, if this ends up creating about one additional shipyard, that's a 25% expansion. Either way, it would only require a 13% increase over last year's revenue - at the five year average EBITDA margin - for this expansion to beat share buybacks. That does not strain credibility.
  • However, the expansion and share buybacks are not mutually exclusive. During February 2013, the board approved an increase in the stock repurchase program of $10 million. The company did not repurchase shares in the fourth quarter 2012 and judging by the amount of repurchase authority available as of the annual report filing, the company did not repurchase any shares in the first quarter of 2013. Why haven't they been more aggressive at buying back shares?
  • Going forward, e.g. after the expansion in 2013, what does the company expect capital expenditures to be? Will there be any significant expansion or maintenance capex? The seeking alpha article suggests that maintenance capex is around $5 million.
At the current share price, and not counting first quarter 2013 earnings, the enterprise value is roughly $120 million. Depending on your assumptions, it could be as high as $150 million (no BP settlement and high working capital needs) or as low as about $100 million (full BP settlement plus lower working capital plus earnings from the first quarter). So the EBITDA yield based on trailing five year results is between 20 and 30 percent, depending on the enterprise value assumption.

However, the bullish case is that earnings over the next two years will be much higher than in years previous. This would be driven by both increased revenue [see the annualized rate of bookings and backlog from above] plus higher margins.

If revenue is up 25% and margins are up 400 bps, then EBITDA and earnings should both be up 25%. Thus, EBITDA could come in between $40 and $45 million. That would mean the current EBITDA yield on enterprise value is between 27 and 45%.

Let's look at a back of envelope calculation. 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.

Mid $30s per share is a valuation that many people reach using different approaches. It's 25% upside from the current price. Potential catalysts are: earnings momentum, good Q1 results, good bookings, and share buybacks.


John said...

Great post. Interesting thoughts on incremental ROE.

Did you notice the last comment by tw1010 on the SA post?

So many positive Black Swans and optionality are in play here. Amazing.

CP said...

You mean these two points?:

First, "the Coast Guard last month quietly sent to the White House's Office of Management and Budget a proposal to allow the barging of fracking wastewater. If the plan is pushed forward, it would become a proposed rule open for public comment and could be finalized sometime in the near future." This has huge potential to increase demand for double hulled barges (CNRD's specialty) in the near/medium term.

Second, offshore drilling in the gulf of Mexico is bouncing back back from its lows (as shown in CNRD's financials - the breakdown of sales to the oil industry).

John said...

Yeah, mainly on the point about fracking waste water which I was not aware of.

CP said...

I think the most neglected factor is that the tank barges have just been tiding them over, while GOM oil services repair work is less competitive and should have much higher margins.

CP said...

And the GOM repair work is basically just now picking up after the ban.

P.S. Did anyone notice that they did $12mm EBITDA in Q4? What if they do close to $300mm revenue this year?

John said...

Definitely. The single figure that I paid most attention to in their last few financials is the margin from the repairing work.

Anyway, I'm just amazed there are additional icing on the cake that I've never dreamed of. When they come free, we won't complain, will we? :-)

CP said...

If you figure that the capex will be ~ paid for by the BP settlement and some existing cash on hand, and the working capital needs won't increase, then there should be a fairly substantial amount of cash available for distribution/buybacks this year. $40mm in EBITDA would be enough for a $4 dividend (after tax), or enough to buy back a million shares (shrink by 17%!).

Olmsted said...

"the tank barges have just been tiding them over"

Nice pun