TH - TARGET HOSPITALITY: MAKING A MARK IN THE HOSPITALITY SECTOR
TARGET HOSPITALITY: MAKING A MARK IN THE HOSPITALITY SECTOR
Target Hospitality Corp. (NASDAQ: TH) is one of North America’s largest providers of vertically-integrated modular accommodations and value-added hospitality services. The Company operates across the U.S., primarily in the Southwest and the Midwest.
The Company
Target Hospitality provides comprehensive turnkey solutions per the customer’s unique needs, from the initial planning stages to the entire development cycle and ongoing operations. They provide cost-effective and customized specialty rental accommodations, culinary services, and hospitality solutions, including site design, construction, operations, security, housekeeping, catering, concierge services, and health and recreation facilities.
Target Hospitality Corp. (NASDAQ: TH)
Market Cap: $1.60B; Current Share Price: $15.80
Data by YCharts
Target Hospitality has an extensive network of geographically relocatable specialty rental accommodation units with 16,830 beds across 27 communities. We will discuss three key factors which indicate a promising future for the Company.
- Diversified Business Model
Target Hospitality has a diversified business model – the Company services a diversified customer base, including Government and non-profits, supporting humanitarian aid efforts.
The Company initially won a large government sub-contract in 2014 based on its differentiated ability to develop and open a permanent large-scale facility on an accelerated timeline. This contract was renewed and extended in 2016 and 2020, demonstrating their successful execution and customer satisfaction.
The Company also has long-standing relationships with a diversified base of approximately 300 customers, including some of North America’s most important blue-chip, investment-grade natural resource development, and integrated infrastructure companies.
Target’s customers are willing to enter into multi-year committed contracts, and the Company’s historical client retainment rate stands at over 90% – this demonstrates the strength of these long-standing relationships and creates unique opportunities for the Company to accelerate value creation across multiple growth platforms.
Secondly, the Company efficiently utilizes distinct core competencies to provide a comprehensive suite of hospitality solutions. Benefits to customers include delivering high-quality food, rest, connection, wellness, community, and hospitality, which optimizes the customers’ workforce engagement, performance, safety, loyalty, and productivity during work hours. The Company provides all of the hospitality services at its sites, and as a result, they deliver more consistent and high-quality hospitality services in each community compared to peers. Thus, Target’s comprehensive hospitality service offerings and unique capabilities translate across various end markets to create multiple growth vectors and enhance value.
Thirdly, the Company’s assets are well-suited to support the entire lifecycle of development plans of natural resource development companies and United States Government contractors. Target can scale facility size to meet customers’ growing needs and is well-positioned to serve customers throughout the entire cycle of their projects, which typically last for several decades. Customers highly seek the Company’s integrated model as it reduces project timing and counterparty risks associated with projects. Due to this, Target can identify and pursue high-growth opportunities with limited infrastructure capital, thereby generating industry-leading returns on invested capital.
- Proven Track Record
The Company has transformed itself swiftly – in 2014, it provided turnkey specialty rental units to niche customers. Today, it is North America’s largest provider of complete turnkey hospitality solutions and holistic support services.
Back in 2014, Target mostly catered to upstream oil field services and select midstream customers – and its network scale consisted of 10 communities with about 5185 beds. Today, the Company caters to the growing government services end market and fully-integrated natural resource development customers, with a network scale of 27 communities and more than 14,740 beds.
The Company has consistently provided best-in-class communities and humanitarian solutions extending beyond party lines.
The Company’s stellar track record is also evident from its financial results. For FY22, the Company reported record revenue of $502 million, a YoY increase of 72%. The Government segment and the expanded humanitarian community primarily drove the increase in revenue.
Adjusted EBITDA for FY22 was $264.7 million for FY22, compared to $119.2 million for FY21, a 122% increase. Net income for the same period was $73.9 million compared to a net loss of $4.6 million in FY21.
At the end of FY22, the Company had optimum financial flexibility of over $307 million in total available liquidity and a net leverage ratio of 0.6 times. Target’s capital discipline is also evident from the fact that from 2020 through 2022, the Company has reduced the total cumulative debt by more than $225 million. And inclusive of the partial redemption of the Senior Notes, expected to occur on March 15, 2023, Target will have reduced total cumulative debt by more than $350 million since 2020.
Record revenue growth, along with focused capital discipline, has thus contributed to increasing the value of the Company.
- Long Term Revenue Visibility
The Company actively evaluates strategic growth opportunities and seeks to allocate over $500 million of net growth capital through 2027, which should help it maintain revenue momentum over the coming years.
Currently, the Company has long-standing customer relationships, where the weighted average contract duration stands at four years. These multi-year contracts also assure greater visibility on long-term revenue and cash flows.
So far as the Hospitality and Facilities Services (HFS) segment is concerned, the contract structure, including exclusivity, provides the foundation for increasing effective market share as commercial activity and demand increase. The Company has a multi-year history of over a 90% renewal rate in this segment, and the top 7 HFS customers’ average enterprise value is about ~$85 billion. In fact, due to the strength of this customer base, the Company expects about $90 million of minimum revenue commitments through 2026.
Additionally, Target’s legacy 2,400-bed government services contract was extended through 2026, which should secure about $265 million in minimum revenue commitments for the Company. Target also has an annualized minimum revenue contract of about $390 million to provide critical hospitality solutions for displaced persons. The Company has already secured about $800 million of minimum revenue commitments backed by the U.S. Government.
Target Hospitality’s highlight is its highly efficient operating structure and unique capabilities, which create a highly scalable business model – this provides the foundation to meet increasing customer demand with little incremental capital. Moreover, the Company has established high-quality contracts that support meaningful cash generation – this, coupled with minimal capital spending, results in industry-leading Return on Invested Capital.
The above attributes and projected near-term capital spending should continue to support solid returns for the Company. Thus, Target Hospitality is an exciting stock that should find a place on every serious investor’s watchlist.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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https://investors.targethospitality.com/news/news-details/2023/Target-Hospitality-Announces-Record-Setting-2022-Results-and-Achieves-Significant-Milestone-Towards-Multiyear-Contract-Award-for-Expanded-Humanitarian-Community/default.aspx