Monday, April 6, 2020

Conrad Industries 2019 Results and Enterprise Valuation

At $8 per share, the market capitalization of Conrad Industries (see) is now only $40 million. They have $96 million of current assets and $41 million in total liabilities, for net current assets of $55 million. Shares are now at three-quarters of net current asset value. Book value of the shipyards is a further $57 million, so the shares are trading at 35% of book.

When we first wrote about Conrad in 2011, it was trading at $10 with net current assets per share of $7; not an NCAV discount. It was trading at 80% of book value then.

The big difference between 2011 and now is that it has almost $10 million of net income then. Now, Conrad's business is experiencing a bust. They had basically breakeven net income in 2018 and 2019.

Conrad's spending on capex has been much smaller than depreciation the past few years. Their EBITDA was $8 million each of the past two years and their EBITDA minus capex ("free cash flow") was around $6 million.

When a company is trading below net current assets, its enterprise valuation is arguably zero or negative.

However, if you assume that they need to maintain a current ratio of 2.0 (that is, you couldn't just dividend out all the cash because it is needed as working capital), that would make the enterprise value $15 million.

That would mean that the EV/EBITDA is about 2x. I'm not forecasting that Conrad's business is going to turn around soon, but we have a company at a NCAV discount and a very low EV/EBITDA multiple.

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