MG - Willdan Group: Attractive Growth And A Nice Catalyst

2023-09-18 05:45:20 ET

Summary

• Rising global energy demand and the transition to renewable energy are driving the growth of the energy consulting services space.
• Willdan Group is a company that specializes in providing energy efficiency consulting and engineering services, primarily to utilities, private companies, and government agencies.
• WLDN has experienced volatility in its revenue and profits in the past, but it is currently seeing strong growth and improved financial performance.

Long gone are the days when companies would try to tackle everything in house. As companies have grown, they've come to specialize in their own core areas. Anything outside of this is often tackled by outside parties representing the company in question. Add on top of this the fact that the economy has only gotten more complex over the past century, and it should be no surprise that the consulting space in particular has done incredibly well. One area that many companies seem to struggle with involves energy. Rising energy costs, increased scarcity of resources, a growing population, government regulation aimed at promoting energy efficiency and a transition from old school energy generation to renewables, and pressure from shareholders to both increase margins and operate in a way that is more environmentally friendly all are responsible for the rise of the energy consulting services space. And one company in this market that investors should be aware of is Willdan Group ( WLDN ).

A niche energy play

Let us ignore, for a moment, the fact that governments across the globe are promoting more environmentally friendly energy policies and let us ignore pressure from shareholders and other stakeholders for companies to change how they operate. Instead, let's focus on one simple fact. And that relates to energy consumption. According to some forecasts , such as one provided by the EIA (Energy Information Administration), global energy demand is expected to rise by 47% from 2020 to 2050. Even by that point, fossil fuels will still make up the largest piece of the market, with liquid fuel in general totaling 28% of all demand. In fact, liquid fuel demand is expected to grow by 36% during this window of time. At the same time, however, renewable energy demand is going to soar through the roof, shooting up 165% to 27% of all consumption globally. Natural gas, nuclear, and even coal, will see increases in demand during this window of time.

Annual GDP growth of about 2.8% during this window of time, fueled by an increase in global population from 7.6 billion to 9.8 billion and by the global middle class growing to roughly 3 billion during this time, are primary drivers behind this growth in energy consumption. A transition from fossil fuel powered cars to those powered by electricity, will also be a major driver behind this transition. The reason why I bring all of this up is that, between companies aiming to reduce their costs and focusing on transitioning away from older energy sources to newer ones, the demand for specialists in this area is sure to grow. And that is what brings us to a company like Willdan Group.

The management team at Willdan Group describes the company as a provider of professional, technical, and consulting services that caters to utilities, private companies, and government agencies. Their efforts center around providing technical services for energy solutions, greenhouse gas reduction activities, and even government infrastructure. To best understand the company, however, it would be helpful to dig into each of its operating segments. The largest of these, accounting for 83% of revenue in 2022, is the Energy segment.

Through this unit, the company provides energy efficiency consulting and engineering services. Examples include the administration of energy audits and feasibility and policies, data management and reporting services, measurement and verification services, and even construction management activities. When it comes to utilities, the company helps to develop and implement energy efficiency plans and programs, including when it comes to topics involving the reduction of energy demand during peak consumption times, the reduction of greenhouse gas emissions, water conservation, and renewable energy planning. For customers who want it, the company can even provide turnkey facility and infrastructure activities.

The other segment, accounting for the remaining 17% of sales last year, is the Energy and Consulting Services unit. Management provides civil engineering related construction management, building and safety, city planning, geotechnical material testing, and other engineering consulting services to its customers. Projects that it works on are varied in nature, ranging from rail projects, to water projects, to mining activities, and more. It can even offer disaster recovery solutions when there are things like earthquakes, mud slides, and other natural disasters. But one thing that does typically apply in this segment is that the majority of the companies work comes from government entities.

Over the past few years, Willdan Group has experienced a meaningful degree of volatility on both its top and bottom lines. As you can see in the chart above, for instance, revenue between 2020 and 2022 did manage to rise from $391 million to $429.1 million. But in between there came a drop to $353.8 million. Most of the increase in sales that the company reported from 2021 to 2022 came from fixed price projects that were overwhelmingly government in nature. Under the Energy Segment, revenue grew the most, jumping $71.1 million thanks in large part to incremental revenues from new government construction management and design build projects. Additional revenue from a resumption of projects that were suspended because of the COVID-19 pandemic also helped the business.

Just like how the revenue for the company has been volatile, profits have also been all over the map. This much can be seen in the aforementioned chart. What's interesting to note, however, is that the current fiscal year is looking to be a particularly bright time for shareholders. Revenue in the first half of the year totaled $221.7 million. That's up nicely from the $194.5 million reported one year earlier. The great thing for shareholders is that overall sales for this year are forecasted to grow by between 9% and 10%. At the midpoint, that would imply overall sales of $469.9 million. Once again, strong demand from fixed price government contracts looks to be leading the charge higher.

On the bottom line, the picture for the company is also improving. Net profits of $1.3 million dwarfed the $8.1 million loss reported in the first half of 2022. Operating cash flow went from negative $3.6 million to positive $18.9 million. If we adjust for changes in working capital, we get a rise from $3.1 million to $13.4 million. Meanwhile, EBITDA managed to increase from $3.5 million to $18.1 million. What's really exciting is that management has been quite detailed in terms of what to expect on the bottom line. At the midpoint, net income should be around $18.2 million. Meanwhile, EBITDA for the company should be roughly $38 million to $40 million. No guidance was given when it came to adjusted operating cash flow. But by my estimates, that should be around $32 million.

Using these figures, I was able to value the company as shown in the chart above. Using the data from 2022, the company looks to be, at best, fairly valued. Though on a forward basis, matching expectations would make the company look fairly cheap. As part of my analysis, I also compared Willdan Group to five similar enterprises in the table below. Using both the price to operating cash flow approach and the EV to EBITDA approach, I found that three of the five enterprises were cheaper than it.

Takeaway

Energy is vital to our daily lives. And because of the factors that I mentioned earlier in this article, it will become ever more important for companies to increase their energy efficiency and to transition over from fossil fuels to alternative sources. The former case cannot happen soon enough, while the latter will take several decades to complete. But along the way, Willdan Group is offering a wide range of services with the goal of making these efforts easier. And between that and how well the company is currently doing, I believe that a soft 'buy' rating is appropriate at this time.

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