Summary
- Civeo Corporation took a beating after announcing mixed financial results and forecasting a weak 2023 fiscal year.
- It's not surprising that shares of the firm would fall in response to this, but the market isn't valuing the company appropriately.
- Shares offer additional upside from here so long as operations don't worsen materially moving forward.
In this volatile and shaky market, it sadly is not enough for a company to outperform when it comes to expectations in just one respect. Often, the market demands outperformance on both the top and bottom lines in order for a company's stock to not pull back significantly. The latest example that we could point to of this occurring involves the niche accommodations business Civeo Corporation ( CVEO ). Although the company did exceed expectations on the top line when it announced financial results covering the final quarter of its 2022 fiscal year, the company missed badly on its bottom line. On top of this, management also announced guidance for the 2023 fiscal year that indicates some weakness for the company lies ahead. While I can appreciate the market being unhappy with these developments, I do also think that shares are cheap even after factoring in these lackluster expectations. Because of that, I've decided to keep the 'buy' rating I had on CVEO stock previously.
A sudden bit of pain
In early November of last year, I decided to reassess my bullish thesis regarding Civeo. Up to that point, compared to the time I had written about the company previously in early August of 2022, shares were outperforming the S&P 500 by 20.6%. Given this significant return disparity and in light of strong fundamental performance of the business, I felt it necessary to see whether or not upside still existed. Given the overall trajectory of the company, and after factoring in how cheap shares were, I felt as though the company still made for an attractive prospect at that time. This led me to keep the 'buy' rating I had on the stock previously, a rating that reflected my belief that shares should continue to outperform the broader market for the foreseeable future. Unfortunately, this was not exactly meant to be. Although the company was outperforming the market handily in the months since my most recent article , shares did take a plunge on February 28th, falling 21.8% after announcing financial results covering the final quarter of its 2022 fiscal year. As a result of this move lower, the stock is now down 23.1% compared to the 4% upside the S&P 500 has enjoyed.
It becomes pretty clear exactly why Civeo performed so poorly on February 28th. But first, we should start on the positive side. According to management, revenue in the final quarter of 2022 came in at $162.2 million. That's 1.5% higher than the $159.8 million reported only one year earlier. At first glance, such a modest increase in revenue may not seem all that impressive. But for context, analysts were actually anticipating revenue that was $16.2 million lower than what the company ultimately reported. The upside the company experienced was driven entirely by strength in its operations throughout Australia. Revenue there spiked 17.3% year over year, climbing from $62.3 million to $73.1 million. This move higher was driven in large part by a significant improvement in food and other services revenue. This, in turn, was aided by an 11.7% increase in the number of rooms billed, with some of that rise being offset by a drop in the company's average daily rate from $77 to $73.
There was some weakness on the top line. Revenue for the company's Canadian operations, for instance, fell from $92.2 million down to $88 million. Accommodation revenue was the hardest hit, with a drop in the average daily rate charged from $106 to $93 working against a 5.7% increase in the number of rooms billed. Revenue associated with its small amount of operations in the US also fell year over year, dropping from $5.3 million down to $1.1 million. It is worth noting that, on a constant currency basis, the company is Canadian operations reported a 3% year-over-year increase in sales during the quarter, while the constant currency increase for the firm's Australian operations would have been about 30%.
Although it's great to see revenue increase, the company's bottom line took a hit. Net income went from $9.8 million in the final quarter of 2021 to negative $13 million in the final quarter of 2022. In addition to decreasing, the company also reported that its earnings per share of negative $1.31 missed analysts' expectations by $0.70 per share. Costs for the company increased across the board. Inflationary pressures were definitely a factor here. But the company also suffered from impairment charges and, in the US, it was missing a $3.8 million gain on the sale of assets that it did have in the final quarter of 2021. Other profitability metrics largely followed this trajectory. It is true that operating cash flow rose from $25.3 million to $29.4 million. But if we adjust for changes in working capital, it would have fallen by more than half from $29.1 million to $13.4 million. Meanwhile, EBITDA for the business shrank from $34.5 million to $15.1 million.
Although the final quarter of 2022 was definitely a mixed bag, with the information revealed by management definitely tilting in the direction of a net negative, 2022 as a whole was rather robust. Revenue spiked from $594.5 million in 2021 to $697.1 million in 2022. The firm went from generating a net loss of roughly $0.6 million to reporting a gain of $2.2 million. Operating cash flow rose from $88.5 million to $91.8 million, while EBITDA increased from $97.3 million to $105.7 million. Also on the rise was EBITDA. According to the data provided, it rose from $109.1 million in 2021 to $112.8 million in 2022.
Given these developments, combined with the fact that the company was recently awarded two five-year contracts in Australia worth about A$937 million, you might think that the near-term outlook as management sees it would be positive. Unfortunately, that's not exactly the case. At present, management is expecting revenue for 2023 to come in here between $630 million and $650 million. Even in the most bullish case, this represents a significant decline compared to what the company reported for 2022. This drop will be driven by a couple of factors . Cost discipline amongst its clients in both Canada and Australia will likely lead to lower room rates and loss of a desire by customers to engage in expansionary projects. This seems to be especially the case in Canada where the company's mobile camp operations are expected to be significantly impacted. Part of this pain will also involve, in Canada, the completion of certain projects that will ultimately translate to the firm's services not being needed as much. They have said that if they cannot redeploy certain assets, they will consider selling them. This wouldn't be the first time the company sold off assets. In 2022 the company sold off some assets and used the proceeds to help fund the $45 million in share buybacks that management prioritized.
On the bottom line, the only real guidance that management gave was for EBITDA to be between $85 million and $95 million. If we assume a 21% tax rate and factor in current interest expense for the year, this would imply operating cash flow of $66.1 million. Based on these figures, shares of the company are still trading on the cheap. The forward price to adjusted operating cash flow multiple should be 5.1, while the EV to EBITDA multiple should come in at 6.2. As you can see in the chart above, this pricing is a bit loftier than if we were to use data from 2021 or 2022. But that makes sense when you consider the expectation that both sales and cash flows should decrease this year compared to last.
Takeaway
Based on the data provided, I must say that I understand why investors may have temporarily turned bearish on Civeo. The company definitely looks to be experiencing some pain for the year. On the whole, however, this is a company that has demonstrated that it has the ability to survive difficult times. Add on top of this just how cheap shares are and I do believe that it still warrants a solid 'buy' rating at this time.
For further details see:
Civeo Corp.: Opportunity Despite The Pain