BWNB - Babcock & Wilcox Has Good Growth Prospects

Summary

• In the near term, the company should benefit from the strong order backlog and healthy demand in the end markets.
• Over the next three years, the company should benefit from the $7.5 bn pipeline of identified global project opportunities.
• The valuation is reasonable.

Investment Thesis

Babcock & Wilcox’s ( BW ) end markets remain strong given the increased capital investment for the energy transition from natural gas to renewable and clean energy. The company is taking advantage of this opportunity through its ClimateBright Technologies and innovation. The order backlog level for the company remains strong at the end of Q2 FY22, which should support revenue growth in 2H FY22 and 2023. The company has a pipeline of identified project opportunities for $7.5 bn which should support the bookings over the next three years. The company's adjusted EBITDA margin should benefit from the seasonality and healthy backlog levels in 2H FY22.

Babcock & Wilcox Revenue Outlook

The company is experiencing strong demand for its technological solutions as companies worldwide have increased investments in energy transformation to reduce their dependency on natural gas post the Russia-Ukraine war. The bookings in Q2 FY22 increased by 46% Y/Y to $245 mn and the ending backlog increased by 46% Y/Y to $731 mn. The B&W Renewable segment’s backlog increased 34.1% Y/Y to $59 mn. The B&W Environmental segment’s backlog increased 29.6% Y/Y to $35 mn, whereas the B&W Thermal segment’s backlog increased 55.7% Y/Y to $151 mn. The company has won several projects that are yet to enter its backlog. It is expected that approximately $100 mn worth of projects should enter the backlog over the next six to nine months. The pipeline of projects remains robust at $7.5 bn and the company is converting its global pipeline of identified project opportunities into bookings.

The company is working on its ClimateBright decarbonization platform and BrightLoop decarbonization, hydrogen, and syngas production technologies. Within the ClimateBright decarbonization platform, the company’s partnership with Kiewit Industrial to support Fidelis New Energy’s planned 200-megawatt biomass power plant is in progress. Fidelis announced another project at the same site, and it will be using B&W’s biomass and BrightLoop Technologies for the project. Even though this project is not within the company’s backlog yet, it is expected to be booked into the order book by the end of 2022. B&W’s BrightLoop technology should benefit the company in expanding its business geographically as well as in other end markets, increasing its total addressable market.

The demand for projects related to solar remains strong as the company won a $20 mn project in July, in addition to a 240-megawatt utility project in Western Ohio. B&W is well positioned to provide solar installation services for both community and utility-scale solar projects. Additionally, in June, the Biden administration paused the tariffs on solar panels, which should bring a lot of investment dollars back to the U.S. around solar energy, providing opportunities for B&W. In Europe, the company is seeing increased investment capital going into new waste-to-energy plants and newer technologies as an immediate response to reducing its dependency on Russian natural gas.

Looking forward, I believe the recent bookings and healthy order backlog levels position the company for a strong 2H FY22 and 2023. The company should witness strong multiyear growth given the $7.5 bn of identified global project opportunities. The company is positioning itself to capitalize on these opportunities by developing its decarbonization technology and innovations in clean energy. To tackle the ongoing supply chain constraints and inflationary pressures, the company has purchased some of its inventory early. B&W is moving forward with its acquisition opportunities for both mature and emerging technologies, investments in clean energy, and the conversion of the significant global pipeline of identified projects. Additionally, the company should also benefit from the Inflation Reduction Act, which has allocated $370 bn to deal with the climate change crisis.

Margins

The adjusted EBITDA margin in Q2 FY22 improved sequentially as well as Y/Y due to higher revenue volume on new build projects and the mix of projects. Looking forward, the adjusted EBITDA margin is expected to improve due to the higher backlog levels and seasonality of the business in 2H FY22.

Valuation & Conclusion

The company’s EPS is expected to post healthy growth over the next couple of years and the stock is currently trading at 18.48x FY23 consensus EPS estimate of $0.40.

The company’s revenue should benefit from the healthy backlog levels, demand in the end market, and pipeline of identified project opportunities. The adjusted EBITDA margin should benefit from the seasonality of the business in 2H FY22 and a higher backlog level. Given the good near-term prospects and long-term secular growth story given the company’s exposure to attractive end markets, I have a buy rating on the stock.

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