Fiscal 3Q2021 (June) results fall short of expectations due to gas & oil transmission weakness. Compared to the June 2020 quarter and our expectations, the June 2021 quarter was weak despite the December 2020 acquisition of West Virginia Pipeline (WVP). Gross profit of $2.7 million was down slightly, but adjusted EBITDA of $0.7 million was almost half of last year's EBITDA of $1.4 million. Revenue was down due to gas & oil transmission weakness and EBITDA was also burdened by higher G&A expense.Adjusting 2021 EBITDA estimate to reflect FY3Q2021 operating results. Given that operating results were below expectations and costs are likely to remain higher, we are lowering FY2021 EBITDA to $5.3 million from $8.0 million. The backlog increased to $73.1 million from $61.2 million and general construction contracts of $13.0 million have been awarded this quarter, which supports our positive outlook. While President and CEO Doug Reynolds stated recently that the electrical and water/sewer businesses were positives, the languishing natural gas business dragged down quarterly revenue.PPP loan forgiveness positively impacts financial position. Preferred stock redemption set for September 1st. Total debt was $12.7 million in 3Q2021, down from $23.2 million in 2Q2021, mainly due to PPP loan forgiveness of $9.8 million and debt amortization payments. While cash also dropped by $3.8 million, net debt was $6.6 million lower at $10.5 million. Since the preferred shares are in the money, we expect all preferred shares to convert into equity.Maintaining Outperform rating, but lowering price target to $2.70/share from $3.05/share. While the stock is up 144% since the end of FY2020 (Sept), including a 96% gain this year, the stock is down 14% this quarter and the outlook remains favorable. Moves, like the WVP and Revolt Energy acquisitions and the SQP startup, should create more consistency in the business model and help the enterprise value multiple expand. Also, the preferred share redemption could help improve trading liquidity. Currently, ESOA is trading at an enterprise value multiple of 7.5x FY2021E EBITDA, compared to an average multiple of ~11x for a universe of larger E&C comps. While we believe that the current discount should narrow, our lower EBITDA estimate warrants a lower price target. Read More >>