Analyst: Spencer Rolfe. Assumptions

Transcription

1 LONG Primoris Services Corporation (PRIM) Basic Data Scenario Analysis Price (6/12/15) $19.70 Bear Case 2 Bear Case Base Case Bull Case 3- Month Avg. Vol. 315,902 Market Cap $1.02B Equity Value per Share $11 $17 $25 $37 Enterprise Value $1.4B Upside / Downside - 43% - 14% 27% 88% Capital Structure Considerations $204M of long- term debt and 0.36 capital ratio in a heavily financed & capital- intensive industry. Investment Thesis Primoris Services is an attractive small- cap opportunity trading at a 27% discount to intrinsic value due to irrational market sentiment and limited Street visibility with hidden fundamental and macro tailwinds protecting against downside scenarios. Variant Opinion Misunderstood cash flow: Management consistently reinvests FCF into the company and on a normalized basis has the ability to compound FCF/share by a base case 27% through Unappreciated operational efficiency: The market has priced PRIM as a dying contractor when the company has been an industry leader in pricing power, growth potential, growing backlog and remaining unleveraged through the O&G downturn. Government reliance: Contractors with transportation infrastructure exposure are discounted due to short- term uncertainty regarding Federal infrastructure spending; however, over the long- term it is reasonably certain spending will increase. Key Sensitivities Scenario Details Revenue CAGR Bear Case 2 Bear Case Base Case Bull Case 5% 7% 9% 5.4x $19.67 $21.52 $23.45 EV/EBITDA 5.1x 5.4x 6.4x 7.1x EV/EBITDA 6.4x $23.21 $25.43 $27.65 Revenue CAGR 0% 5% 7% 9% 7.4x $26.76 $29.24 $31.84 Margin Expansion 0bps 50bps 110bps 230bps EV/EBITDA 5.4x 6.4x 7.4x 7.6% $22.58 $26.61 $30.65 WACC 8.6% $21.56 $25.43 $ % $20.60 $24.30 $28.00 Assumptions Depreciation & amortization assumed to be a % of historical sales Capital expenditures are assumed to be normalized maintenance expenditures as a % of EBITDA No acquisitions are assumed to be made over the projected period Risks Capex ramp- up: PRIM pays for all of their equipment with cash, and their cash position could be impaired due to an unforeseen ramp in capital expenditures. Government reliance: Increases in TX and LA State infrastructure spending protect against key- State reliance risk while the broader industry still experiences short- term headwinds. Increased energy prices: A return to $80- $90 bbl could erode supplier power as O&G customers shift back to quantity over quality. Financials ($#in#millions) Analyst1Estimates Consensus Difference E 2016P 2015E 2016P 2015E 2016P Revenues , , , , , , , , % 311% COGS , , , , , , , , % 311% Gross;profit % 317% Gross;margin 13.0% 12.7% 12.5% 13.2% 11.3% 11.5% 11.5% 11.7% 12.3% 32% 36% Net;income % 323% Profit;margin 3.6% 4% 3.7% 3.6% 3% 3% 3% 3% 3.5% 1% 313% Earnings;per;share $0.72 $1.14 $1.10 $1.35 $1.22 $1.04 $1.21 $1.23 $ % 323% Rolfe.spencer@gmail.com Page 1

2 Why Does This Opportunity Exist? Low street visibility: PRIM does not issue formal guidance and does not have any bulge bracket coverage, as a result, covering analysts have overreacted to recent poor earnings and isolated company events. Government reliance: Overall market sentiment for the transportation infrastructure industry is over concentrated on short- term headwinds despite long- term certainty that increased spending will provide macro tailwinds. Supply chain position: The downturn in oil prices has had a longer- term drag on suppliers higher up in the supply chain as O&G companies have delayed start dates for contractors and have been slow in reintroducing capex to the market. Debunking the Bear Case Acquisitions over- reach core competence: PRIM retains the management teams of acquired companies and does not try to fool themselves into thinking they know more about new industries than the existing veteran leadership. Recent problems expose deeper operational issues: The WV job was an isolated incident and management has been active in adopting new, low- cost technologies that will prevent future operational setbacks that have plagued competitors. Market share loss to mainstream contractors such as Quanta and Kiewit: Because PRIM s average contract size is between $20- $50 million this puts the majority of the company s business outside the range of profitability of larger competitors. Over reliance on energy sector: None of their O&G backlog has been cancelled through the energy downturn, and conversations with management show their transportation business is poised to begin comprising the majority of the company s business. Management is disengaged from the company: PRIM management collectively owns 23% of the company boasting a combined 450 years of industry experience, and is incentivized to grow a successful business. Continued transportation headwinds: Short- term headwinds are mitigated by State self- funding and industry footprint is well positioned to take advantage of future macro tailwinds. Valuation ($#in#millions) 2015E 2016P 2017P 2018P 2019P EBITA Taxes Depreciation Capex Δ3working3capital Unlevered2free2cash2flow Terminal3EV/EBITDA 6.4x Terminal3value 1,891.2 Total ,920.0 Enterprise3value 1,413.2 (2)3Net3debt 98.7 Equity2value 1,314.5 Shares3outstanding 51.7 Share2price $25.43 Comparables Source:(Yahoo!(Finance Company Ticker Mkt.1Cap EV Fwd1 EV/EBITDA Quanta&Services PWR $6.3B $6.29B 7.1 Tutor&Perini&Corp TPC $1.17B $1.9B 7 MasTec,&Inc.& MTZ $1.6B $2.6B 7.2 Chicago&Bridge&&&Iron&Co. CBI $5.8B $7.7B 6.3 Willbros&Group&Inc.& WG $111M $300.4M 12 Granite&Construction&Inc.& GVA $1.45B $1.26B 9.7 Flour&Corporation FLR $8.1B $7.1B 5.1 Sterling&Construction&Inc.& STRL $71.5M $88.8M 24 Average 7.5 Primoris&Services&Corp.& PRIM $1.02B $1.13B 5.4 Adj.1Average 6.4 Gross1Margin1 (TTM) Profit1Margin1 (TTM) 15.2% 3.7% 10.6% 2.1% 14.0% 2.9% 11.6% 4.4% 8.3% R3.4% 11.6% 1.6% 6.5% 2.4% 2.7% R4.1% 10.1% 1.2% 11.2% 2.7% Scenario)Bridge) $3.58% $37.48% $2.32% $6.25% $4.37% $25.43% ($3.02)% $19.70% $1.36% ($2.67)% ($2.09)% $16.68% $11.00% ($0.92)% Bear%Case%2% Headwinds% Mkt.%Share%Loss% PM%ContracDon% Bear%Case% StagnaDon% Current%Price% Rev.%CAGR% StabilizaDon% Base%Case% PM%Expansion% Rev.%CAGR% Tailwinds% Bull%Case% Rolfe.spencer@gmail.com Page 2

3 Appendix I: Thesis and Risk Details 1. Misunderstood Cash Flow On the surface, Primoris cash flow does not appear to be anything special. Versus EBITDA ranging between $92 and $174 million from 2010 to 2014 the company would appear to be destroying value by posting negative amounts of free cash flow between - $2 and - $64 million over the same period. However, this quick look at the company s cash flow ignores the fact that over the same four year period the company has returned $142 million to shareholders via acquisitions at a conservative rate of paying between 4.5x 6.5x EBITDA of the target company. Due to the capital- intensive nature of the contracting industry, the company also posts large amounts of cash spent for the purchase of constructive equipment and machinery spending on average $30 million per year. This expenditure has been ramped over the previous two years to $88 million as a result of a new equipment purchasing cycle, and conversations with industry contacts confirm that this increased spending is an isolated event that is not indicative of future short- term cash spending behavior. To determine the true cash flow generating powers of Primoris I model a scenario where the company does not make any acquisitions, and equipment spending is normalized as a % of EBITDA. As a result, Primoris should be able to grow free cash flow from $18 million in 2015 to $48.5 million in 2019, compounding FCF/share by 27% over the period, giving the company the ability to return value to shareholders through future acquisitions and dividends. ($#in#millions) EBITA Taxes Depreciation Capex Change5working5capital Adj./FCF FCF/share 2015E 2016P 2017P 2018P 2019P B40.15 B54.15 B64.15 B78.75 B B35.85 B46.15 B54.25 B65.55 B71.75 B53.15 B61.35 B70.55 B81.15 B CAGR $0.36 $0.55 $0.67 $0.86 $ % 2. Unappreciated Operational Efficiency Primoris recent performance can be explained by two causes: 1) the energy downturn has caused O&G customers to delay the start dates of contract work, not cancel them, and 2) poor weather over the past year has simply prevented the company from getting much work done. Over this period, Primoris has been able to increase the growth of their backlog, retain critical middle management employees, and remain unleveraged while many of their competitors have not. Conversations with Federal procurement employees reveal that through the near future procurement processes will be placing an increased emphasis on companies that have the most experienced workforce able to get the job done in conjunction with lost- cost advantages, which Primoris stands to benefit from greatly. Additionally, management has taken this slow down in workflow as an opportunity to install low- cost technologies to drill systems that prevent multi- quarter, work stopping accidents. Primoris has added simple, forward facing TV technology to their drillers that would prevent such accidents from occurring. For an example of a competing contractor that has 1) failed to grow their backlog, 2) gone through a management change, 3) failed to deliver on existing contracting work, 4) issued equity so as not to breach debt covenants, 5) has experienced a flight of middle management employees and 6) is trading at a higher forward P/E than Primoris through the energy downturn, look no further than Willbros Group Inc. WG - 86% YoY Rolfe.spencer@gmail.com Page 3

4 June 12th, 2015 Analyst: Spencer Rolfe Primoris acquisition strategy has focused on acquiring businesses that expand the company s exposure into new, high margin businesses such as power and transportation infrastructure, but also on strategically overlapping the geographic reach of their various end markets. This strategy allows PRIM to expand existing businesses into new geographic locations. It also allows cost advantages to be realized as much of the company s equipment for O&G, for example, is also compatible with power and fiber optic operations. This allows the company to save money by simply transferring equipment rather than purchasing or leasing for new projects. Additionally, the company is able to keep their work force, which relocates to the site of the work, consistently working in the event of a shut down of one project by reassigning the force to work on live projects in close by areas. Research into competitors has revealed that the cost of paying hourly work forces during the energy downturn when there has been less live work has been a primary source of losses. Primoris can also transfer their O&G exposure to their Power infrastructure exposure, which, as power generations shifts toward natural gas reliance, is expected to grow at a 9% CAGR according to the C3 group. In February 2015 Primoris acquired Aevenia, Inc. a company that specializes in underground installment of fiber optic lines for $23 million, or 3.8x EBITDA. The acquisition of Aevenia allows Primoris to resume work in the upper Midwest regions and closed a gap in the geographic overlap of that area, which were previously only covered by the underground gas operations of Rockford and Q3C. Gap closed by Aevenia acquisition Rolfe.spencer@gmail.com Page 4

5 3. Government Reliance Contractors with exposure to the transportation infrastructure spending are facing work shortages and secular headwinds as Federal infrastructure spending as reached an all time low. The US Federal Highway Trust Fund, which is designed to support spending on road construction, maintanence, and mass transit projects across States cannot support the need for capital at its current balance. Current Level With the need for capital and increased spending apparent in both the public and private sectors, we can be more or less certain that over a long- term time horizon of 3-5 years there will be a boost in infrastructure spending. Currently, the strategy has just been to kick the can down the road and implement extensions to the Highway Trust Fund, and this cannot go on forever. America needs to address its decaying infrastructure. That may be one of the few things that all of our politicians can agree on. Paul Varello, CEO Sterling Construction Rolfe.spencer@gmail.com Page 5

6 Primoris has been able to mitigate the short- term headwinds caused by decreased federal infrastructure spending by strategically locating the majority of their exposure to this market in Texas and Louisiana. These two states have implemented their own infrastructure programs to recent 2015 budgets. Texas: Louisiana: The outlay of capital from these two states should provide Primoris with the capacity to contine work within their transportation infrastructure business, with Texas program stretching through 2019, until long- term Federal infrastructure spending can be addressed. Page 6

7 June 12th, 2015 Analyst: Spencer Rolfe Appendix II: Management Overview Primoris is managed by an experienced group of capital allocators whos incentives are alligned with shareholders interests. Collectively, management has a total of over 450 years industry experience, and CFO Peter Morebeek brought experience in a previous construction rollup where he held President and COO positions. Management s compensation structure is unique in that it allows for shares repurchased with their bonuses to be purchased at a 20% discount to the current market price. Historically, management has been very disciplined with their insider transactions by buying at record lows in the companies stock. Earlier in May members of Primoris executive committee, including CEO Brian Pratt, bought acquired a total of 11,383 shares at a discounted price of $ This increased the total amount of the company owned by management to 23%, 22% belonging to CEO Brian Pratt. (Chart excludes recent purchases on 5/4/15) Appendix III: Historical Stock Performance PRIM - 36% YoY Rolfe.spencer@gmail.com Page 7

8 Appendix IV: Financials ($#in#millions,#except#per#share#values) E 2016P 2017P 2018P 2019P Revenues Cost*of*revenues , , , , , , , , , , , , , ,908.6 Gross1profit Selling,*general*and*admin*expenses Operating*income Interest*income Interest*expense G6.2* G5.4* G3.6* G5.9* G6.4* G6.4 G6.4* G6.4* G6.4* G6.4* Income*before*taxes Provision*for*income*taxes G22.1* G38.2* G33.8* G44.9* G38.6* G34.4* G39.9* G43.0* G48.4* G49.3* Net1income Diluted:* Earnings1per1share Shares*outstanding Gross*Margin Profit*Margin 33.6 $ % 3.6% 58.6 $ % 4.0% 56.8 $ % 3.7% 69.7 $ % 3.6% 63.2 $ % 3.0% 53.8 $ % 3.0% $1.21 $1.30 $1.46 $ % 11.5% 12.0% 12.0% 3.1% 3.2% 3.6% 3.6% Page 8

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