GVA - IPO Update: Shimmick Corporation Proposes Terms For $50 Million IPO

2023-10-24 16:39:29 ET

Summary

• Shimmick Corporation has filed proposed terms to raise approximately $50 million in an IPO to sell its common stock.
• The company provides construction services for water and related infrastructure projects in the U.S.
• The firm's revenue growth is slowing, and it is generating very high operating cash burn.
• I'm Neutral [Hold] on the Shimmick Corporation IPO.

A Quick Take On Shimmick Corporation

Shimmick Corporation ( SHIM ) has filed proposed terms to raise approximately $50 million in gross proceeds from the sale of its common stock in an IPO, according to an amended SEC registration statement .

The company provides construction services for water and related infrastructure projects throughout the United States.

I previously wrote about the firm's initial IPO filing here .

The SHIM IPO appears reasonably priced, but I have concerns about the firm's slowing revenue growth and extremely high cash burn.

My opinion on the Shimmick Corporation IPO is Neutral [Hold].

Shimmick Overview

Irvine, California-based Shimmick Corporation was founded in 1990. It was acquired in 2017 by AECOM and separated from AECOM in 2021. The company provides a range of water infrastructure construction and repair services nationwide.

Management is headed by Chief Executive Officer Steven E. Richards, who has been with the firm since March 2020 and was previously SVP, Operations Civil Construction & Mining Group at AECOM and has held a number of senior positions in the infrastructure industry.

The company’s primary capabilities include the following:

• Water treatment infrastructure

• Water resources

• Other critical infrastructure.

As of June 30, 2023, Shimmick has booked fair market value investment of $4.6 million from investors, including GOHO, LLC.

Shimmick Customer Acquisition

The firm generates revenue primarily from placing bids on public and private water-related and critical infrastructure projects in California and elsewhere, and its customers include municipal, state and federal agencies in addition to private companies.

In 2022, more than half of its revenues were generated from projects in California, and management says its 2022 revenue was

"less than 10% of the total California water market, indicating ample opportunity for us to grow our market share in California, where we believe we possess significant competitive advantages."

Selling, G&A expenses as a percentage of total revenue have trended lower as revenues have increased, as the figures below indicate:

(Source - SEC.)

The Selling, G&A efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A expense, fell to 0.8x in the most recent reporting period, as shown in the table below:

(Source - SEC.)

Shimmick’s Market & Competition

According to a 2023 market research report by Grand View Research, the worldwide market for water treatment systems was an estimated $23.1 billion in 2022 and is forecasted to reach $69.7 billion by 2030.

This represents a forecast CAGR of 14.8% from 2023 to 2030.

The primary reasons for this expected growth are a growing need to reduce contamination and an increasing demand for virus-free water.

Also, the chart below shows the historical and projected future growth trajectory of the U.S. water treatment systems market through 2030:

The company operates in other water infrastructure markets with substantial addressable market sizes.

Major competitive or other industry participants across the firm’s major business segments include the following:

• Barnard Construction Company

• Ames Construction

• Dragados USA

• Flatiron Construction Corp.

• Fluor Corporation

• Michels Corporation

• Granite Construction

• Kiewit Corporation

• Skanska USA

• Traylor Bros.

• Walsh Construction Group

• C. Overaa & Co.

• Pacific Hydrotech Corporation

• J.F. Shea Co.

• Western Weather Constructors

• Steve P. Rados, Inc.

• Myers and Sons Construction

• Anvil Builders.

Shimmick Corporation Financial Performance

The company’s recent financial results can be summarized as follows:

• Declining top line revenue growth

• Variable gross profit and gross margin

• A swing to operating loss

• High cash used in operations.

Below are relevant financial results derived from the firm’s registration statement:

(Source - SEC.)

As of June 30, 2023, Shimmick had $61.3 million in cash and $410.7 million in total liabilities.

Free cash flow during the twelve months ending June 30, 2023, was negative ($48 million).

Shimmick’s IPO Details

SHIM intends to sell 4.55 million shares of common stock at a proposed midpoint price of $11.00 per share for gross proceeds of approximately $50 million, not including the sale of customary underwriter options.

No existing or potentially new shareholders have indicated an interest in purchasing shares at the IPO price.

The company’s enterprise value at IPO (excluding underwriter options) will approximate $260 million.

The float to outstanding shares ratio (excluding underwriter options) will be approximately 15.01%.

Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:

... we currently intend to use the net proceeds of this offering to repay all outstanding borrowings under our Revolving Credit Facility, with the remaining amounts for working capital and other general corporate purposes, including the potential funding of future opportunistic acquisitions.

(Source - SEC.)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management says that any current legal claims would not have a material adverse effect on its operations or financial condition.

Listed underwriters of the IPO are Roth Capital Partners and Craig-Hallum Capital Group.

Valuation Metrics For Shimmick

Below is a table of the firm’s relevant capitalization and valuation metrics at IPO:

(Source - SEC.)

As a reference, a potential public comparable would be Granite Construction ( GVA ); shown below is a comparison of their primary valuation metrics:

(Source - SEC and Seeking Alpha.)

Commentary About Shimmick’s IPO

SHIM is seeking U.S. public capital market investment to pay down debt and fund its working capital needs.

The firm’s financials have shown dropping topline revenue growth, fluctuating gross profit and gross margin, a swing to operating loss and substantial cash used in operations.

Free cash flow for the twelve months ending June 30, 2023, was negative ($48 million).

Selling, G&A expenses as a percentage of total revenue have trended lower as revenue has increased; its Selling, G&A efficiency multiple fell to 0.8x in the most recent reporting period.

The firm currently plans to pay no dividends and to retain any future earnings for reinvestment back into the firm's growth initiatives and working capital requirements.

SHIM’s recent capital spending history indicates it has continued to spend on capital expenditures despite its negative operating cash flow.

The market opportunity for providing water infrastructure services is large and growing. It may continue to expand under the Infrastructure Investment and Jobs Act passed in 2021 that provided $55 billion for water infrastructure.

Business risks to the company’s outlook as a public company include the high risk of project bidding and execution in an inflationary environment and the current and projected availability of qualified personnel.

Management is seeking an Enterprise Value / Revenue multiple of 0.38x, which is below partial competitor Granite Construction’s EV/Revenue multiple of 0.51x.

Shimmick has also produced growth where Granite has not; however, Granite is profitable, and Shimmick has produced uneven profitability.

My two concerns are Shimmick Corporation’s high use of cash in operations with a current run rate of $121 million amid materially slowing revenue growth.

While the IPO appears reasonably priced, my concerns about the company's financial trends lead me to have a Neutral [Hold] opinion for the IPO.

Expected IPO Pricing Date: To be announced

For further details see: