2023-05-16 15:44:17 ET
Summary
- Orion Group finally has a $36 million signed P&S for its East West Jones Property in Houston. They will receive most of the after tax proceeds, after transaction fees.
- The company has a $1.1 billion backlog, its highest in ages.
- The company is very close to finalizing a refinancing of its July 2023 credit facility, with a new $38 million term loan and $65 million revolver.
On May 8, 2023, after the bell, Orion Group Holdings, Inc. ( ORN ) reported its Q1 FY 2023 results. The next morning, Orion hosted its conference call . Remarkably, yet at the same time unsurprisingly in this algo driven/ day trading marketplace of small caps and micro-caps, Orion announced a few major catalysts. However, because Orion's actual Q1 FY 2023 results were really weak, the algos completely missed the good news!
The four big catalysts are as follows:
- Orion, finally, signed a P&S to sell its East West Jones real estate for $36 million. This is a 304 acre piece of land that is located on the Houston Shipping Channel. It has been for sale for a long time, and they finally got it across the finish line. After transaction costs, and Orion has tax loss carried forward that will be used to offset the would be associated tax gains, net proceeds, will be significant. Perhaps, $32 to $33 million, based on the subtext of management's commentary. This is transformative to Orion's balance sheet and de-risks the equity.
- As of March 31, 2023, Orion had $40 million outstanding on its Credit Facility that is set to mature on July 31, 2023. In this very tricky lending environment, especially for a micro-cap company has debt that is current (less than a year is considered current debt), many market participants get nervous or can't buy an equity that had net debt that was current. On the Q1 FY 2023 conference call (held on May 9, 2023), Orion said they should have the new three-year credit facility finalized very soon. It will consist of a $38 million term loan and a $65 million revolver. This will resolve a major overhang and enable new and fence sitting equity buyers to get long the stock.
- The company's backlog now stands at approximately $1.1 billion, after the $450 million win, in Hawaii, in the Marine segment. This is a significant backlog and a huge positive for the equity.
- On the Q1 FY 2023 conference call, the new management team stated that they think, eventually, Adj. EBITDA margins can get to the high single digits for the Concrete segment and low double digits for the Marine segment.
For perspective, on SA's free site, on March 23, 2022, I wrote a fairly detailed initial piece on Orion Group. Since then, and notwithstanding a short-lived move to over $3, that took place during last August 2022 to early September 2022 timeframe, when ORN shares traded as high as $3.35, ORN shares have been stuck in the middle to upper $2s.
As the famous phrases goes: If a tree falls in the forest, does it make a sound? If you look at the volume and price action, since Orion Group has reported its Q1 FY 2023 results and hosted its Q1 FY 2023 conference call, it is crystal clear that the algos completely missed the four catalysts described above.
Secondly, it is equally clear that there are so few people that actually do real fundamental work on micro-cap companies. If they did, and if people were actually paying attention here, I would argue Orion Group shares should already being trading north of $3 per share.
Let's face it, circa May 2023, very few people do real fundamental, old school, bottoms up research, especially not in the micro-cap patch. Sadly, we live in a supercharged algo world, a what have you down for me lately world, and a how does the stock chart look world. So much of the money run today is via passive ETFs and algos. And micro-cap /small cap investors get whipsawed by the crazy inflows and outflows of those ETF flows under currents. Although I'm only 42 years old, I'm one of the few hanger-on's, clingers to the past, pursuers of the art form type of analysts. Sadly, it is just me and a small number of people left in the herd that haven't been culled. We are trying to hold onto the sacred tradition and be keepers of the value investing flame. And let me tell you - boy it is exhausting, constantly moving about and usually only seeing the algos and day traders in your travels.
The Jumping Up And Down Strong Buy (At $2.50-ish) Thesis
As of quarter end Q1 FY 2023 Orion has $38 million of net debt. As of May 15, 2023, Orion has a $78 million market capitalization ($2.45 per share x 32 million diluted shares), which equates to a $116 million enterprise value. On a full year basis, the company has posted positive Adj. EBITDA ($22.9 million in FY 2022 and $17.2 million in 2021, and $54.3 million in 2020 ), but it has been lumpy and inconsistent. The company's return on assets and return on equity ratios have been abysmal. Moreover, because of the capital intensity, of this industry, where you need to spend a lot of maintenance CAPEX, including buying equipment to run your business, the D&A is a real expense, notably over the full cycle. To put it nicely, in my opinion, the prior CEO was a terrible allocator of capital and a poor underwriter of gross margins and project risk. As operating performance continued to slip, Orion's board of directors parted ways with him. During the second half of 2022, the board brought in some new talent, to the CEO and CFO roles, to reinvigorate the business and offer a new way forward.
The Thesis
The thesis is simple here. The company has a $36 million signed P&S to sell its East West Jones property.
See here:
In April, we signed a $36 million sales contract for our East West Jones property, which is 341 acres adjacent to the Houston shipping chain that we formerly used as a dredge placement area. We expect to close this transaction in the third quarter and we will use the proceeds to reduce debt and for general corporate purposes.
(Source: Orion Group Q1 FY 2023 Conference Call)
Most of the proceeds, net of transaction costs, will be realized due to loss carry forwards, as an offset.
See here:
Secondly, the company is very close to finalizing a new credit facility.
As Travis mentioned, we have reached final agreement on terms and signature pages are in escrow, while we work to complete the final loan documentation. The close of this facility will provide us with a term loan of $38 million and a revolving credit facility up to $65 million. We expect to have further news to report on this in the near future.
(Source: Orion Group Q1 FY 2023 Conference Call)
So, if you think about it, a $36 million sale leaseback (that should net at least $32 million to $33 million) combined with a new credit facility, means all of a sudden the risk of a default or negative credit event is removed. The balance sheet will get cleaned up. That is really good for the equity and gives the management team ample working capital to fund the massive backlog.
And speaking of backlog, it is now $1.1 billion.
Total backlog at March 31, 2023 was $467.4 million, compared to $448.8 million at December 31, 2022 and $604.1 million at March 31, 2022. Backlog for the Marine segment was $187.0 million, compared to $216.7 million at December 31, 2022 and $317.4 million at March 31, 2022. Backlog for the Concrete segment was $280.4 million, compared to $232.1 million at December 31, 2022 and $286.7 million at March 31, 2022. In addition, the Company has been awarded $624 million in new project work not included in backlog at the end of the quarter.
(Source: Orion Group Q1 FY 2023 Conference Call)
Q1 FY 2023 Results Were Marred By One Time Events
This was a kitchen sink quarter. Management took most of the associated pain (ate the losses) of closing out the money losing concrete jobs in Central, Texas. This combined with weather delays and project timing slippages, as they ramp up to meet the backlog, dinged the quarter.
First quarter gross profit was $5.8 million or 3.7% of revenue compared to $12.8 million or 7.3% in the prior year period. Approximately half of this decrease was due to the impact of weather in Texas driving lower revenue and lower labor and equipment utilization. The rest of the decrease related to cleanup of problem projects driving write-downs in our business. This was partly offset by actions to manage costs during project delays by reallocating equipment, reducing the size of the fleet and reducing headcount, as well as the realization of margin improvements in the concrete business as a result of our margin improvement initiatives.
(Source: Orion Group Q1 FY 2023 Conference Call)
Importantly, look at how emphatic management was that Q1 FY 2023 was the trough, and it is blue skies ahead.
See here:
While we still have some project cleanup to complete, based on our current backlog, we anticipate that the second quarter will significantly improve over this quarter and in the back half of the year, we'll see some major acceleration. Until then, we're carefully managing expenses and running the business as efficiently as possible. We are executing our plan and all indications are that by September will be cranking. Above all, we certainly don't think the first quarter is indicative of what we can do for the full year. Scott will go into more detail on first quarter performance.
(Source: Orion Group Q1 FY 2023 Conference Call)
Moving along, management goes onto to say, they are moving the company towards a goal of these Adj. EBITDA margins:
Once we've restored the business to its historical margins, our second goal is to do much better, continuously improving delivered margins by managing our business more efficiently and productively. When the business is operating well, we believe that the concrete segment should be generating EBITDA margins in the high single-digits, and the marine segment should deliver low double-digit EBITDA margins.
(Source: Orion Group Q1 FY 2023 Conference Call)
On the Q&A section of the call, the always folksy Poe Fratt (remember, I've been in the weeds here, as in listening very closely to all these calls, for at least fifteen months). In typical Dr. Columbo fashion, Poe asked another eight-part question.
That said, he did get management to tip its hand that its $450 million Hawaii (2.5-year project that kicks off in the summer of 2023) will have at least a 10% margin.
Putting It All Together
I will spare readers the excruciating details, as the Orion Group thesis is super simple and super compelling. And yes, of course, I'm in the weeds, but I'm moving away from writing 3,000 word pieces. Candidly, I just don't think it is good use of my bandwidth, and I've seen little appetite, from the broader readership, that they want to read 3,00 word pieces.
The Orion Group thesis, at $2.50 per share, is really simple. The balance sheet is soon to be fixed by the $36 million sale of East West Jones and a new credit facility that is over $100 million. This amount of capital gives Orion ample working capital / liquidity to execute its $1.1 billion backlog. Q1 FY 2023 was a terrible quarter, I grant you, and it threw the algos off the scent . Let's face it, a decent Q1 2023 and news of the East West Jones sale, and we should've been up, up and away and back on the right side of $3. Perhaps, even approaching the upper $3s. Again, though, no one does fundamental/ old school research anymore. So they missed it! Perhaps, they were too busy looking at stock charts.
Let's keep our eyes on the prize here. Management's new-found religion on stress testing and better front end project scoping/ risk assessment should lead to much better gross margins, in its new backlog. That said, there is lag here, as the better bid jobs haven't bubbled up to the surface yet. Therefore, Orion is still chewing through the lower margin and legacy problematic jobs. This marred Q1 FY 2023 results and masks the turnaround, which is afoot, if people are actually paying attention. Alas, they are clearly not, as I covered in this piece. Therefore, the numbers still look lousy. Yet, if you are thinking like an old school, bottoms up and fundamental analyst, it could be all rainbows and unicorns, starting in the 2nd half of FY 2023, after this prolonged, violent, and drawn-out stretch of thunder and lightning.
Let's face it, if people were actually paying attention here, it doesn't take a rocket scientist to work out a middle single digit Adj. EBITDA margin, say 5% to 6%, on a $700 million to $800 million block of revenue translates into $40 million plus of Adj. EBITDA. The backlog is in place, and a lot of that backlog should be better underwritten.
In closing, Orion Group's stock is stupidly mis-priced at $2.50 That said, this is an investment. If you're watching stock price three times a day per day, then you shouldn't be long Orion shares. This is a buy it and put it in a drawer type of bet.
For further details see:
Orion Group: The Big Catalysts The Algos Missed