|Shares Out. (in M):||100||P/E||0||0|
|Market Cap (in $M):||3,293||P/FCF||0||0|
|Net Debt (in $M):||1,792||EBIT||0||0|
CBI is an EPC company focused on fixed price contracts. Currently, about 70% of the company’s backlog is fixed price, compared to 30%~40% at other EPC companies. The company is domestically focused with 80% of backlog in the US. The company is vertically integrated and self performs most of its contract work.
The company has four segments: Engineering and Construction, Fabrication Services, and Capital Services. The E&C segment (60% of revenue, 56% of backlog) provides EPC services for major energy infrastructure projects, such as LNG liquefaction plants, regasification terminals, electric power plants, refineries and petrochemical facilities. The Fabrication Services business (19% of revenue, 12% of backlog) makes steel plate structures, piping systems and engineered products for the oil and gas, petrochemical, power generation, water and wastewater, and mining industries. The Technology business (3% of revenue, 5% of backlog) provides licensed process technologies and catalysts for use in petrochemical facilities and oil refineries, and offers process planning and project development services. The Capital Services business (19% of revenue, 28% of backlog) provides maintenance services, environmental engineering and remediation, construction services, program management, and disaster response and recovery for public and private sector clients.
Both the E&C and the Fabrication businesses have sizeable exposures to the construction of LNG facilities. About ¼ of the company’s total backlog is related to LNG.
All segments, other than the Capital Services segment, focus on fixed price contracts. Capital Services is roughly ¾ cost reimbursable and ¼ fixed price.
The Technology business has the highest EBIT margin in the 30% to 40% range due to the possession of proprietary know-hows and catalysts. E&C has EBIT margins around 8%, which is 300~400 bps higher than comps. CBI gives up a more predictable profit model (cost plus) and gets a higher but potentially more volatile margin in return. Fabrication Services’ margin is a little higher at around 10%, and Capital Services has the lowest margin of 3~4%.
I think the stock presents an attractive risk/reward profile at these levels and outline my reasons below.
1. Valuation is compelling.
Currently, the stock is trading at 6.8x this year’s EPS guidance, 5x this year’s operating cash flow (OCF), and 5.9x this year’s free cash flow. EV/EBITDA (Q3 2016 annualized) is only 5.6x.
Other EPC companies trade at 14~15x P/E multiples, and 10~11x EBITDA multiples.
In the last 10 years, CBI on average traded at 12x next year’s earnings.
2. CBI is generating cash to deleverage and repurchase stock.
Management is frustrated with the stock’s multiple, and has outlined their playbook to increase shareholder value at last year’s analyst day. Importantly, they are focusing on generating operating cash flows equal or above net income, and use the ample free cash flow to reduce debt and buy back shares.
The company has executed on its promise to generate strong operating cash flow. In each of the three quarters of 2016, CBI’s OCF is at least 1.3x of net income. This compares to -0.2x in 2013, 0.4x in 2014, and -0.1x in 2015. CBI achieved this through better management of working capital, which has become much easier after the divestment of the nuclear business. Importantly, CBI’s strong cash flow this year was not driven by advance payments from customers (billings in excess of costs and estimated earnings), but by getting paid for the work it does (when CBI performs work and doesn’t get paid, costs and estimated earnings in excess of billings increase). In fact, in the first nine months of 2016, billings in excess of costs/earnings declined by $700M, while costs/earnings in excess of billings decreased $1.4B.
In the first nine months of 2016, the company bought back $200M of shares, reducing share count from 107M to 100M, and paid down $200M of debt.
The company’s credit facility agreement restricts share repurchases to $250M on a trailing 12 months basis, if leverage ratio (calculated using total debt) is more than 1.5x (currently: 2.45x). Having already maxed out this amount, we won’t likely see share repurchases until the end of 2017. So in 2017, I think the company will aggressively pay down debt. Management’s leverage goal is 1.5x in 2018, which happens to be the threshold below which CBI is free to buy back as much stock as it wants.
3. Operations have stabilized following a decline in LNG awards, and there are new LNG contracts on the horizon.
Following a decade of worldwide LNG liquefaction facilities construction boom and resulting over-supply, new projects/awards dried up following the oil price collapse since LNG prices are typically index to oil. CBI’s E&C segment, which is most exposed to LNG, saw its backlog collapse from $19B at the end of 2013 to $12B currently.
However, CBI’s LNG business is not dead. CBI was awarded a contract (through a JV in which CBI has ⅓ stake)
to build 2 trains for Anadarko in Mozambique. This project is expected to receive Final Investment Decision (FID) in late 2017, and CBI’s share of the contract value is worth at least $2B.
In addition, Eni will select a contractor this year to build two trains in Mozambique. CBI, through another JV which it owns ⅓, is bidding. If they win the contract, CBI’s share of contract value is worth at least $2.5B.
As for potential new awards, management is confident that the Rio Grande LNG project in Texas and Goldboro LNG project in Nova Scotia, Canada will move forward this year. Rio Grande is a six-train project and will likely cost >$10B, and Goldboro is estimated to cost between $8~$10B Canadian Dollars.
Currently, CBI’s total backlog is $20B. It is booking about $11B of revenue a year, and guides new awards of $8 to $10B this year. So the market is obviously concerned that the company burning its backlog. But I think even if the company burns $3B of backlog a year, it has almost 7 years of backlog left and currently you are paying 6x FCF. And if CBI wins any of the opportunities described above, it will be able to materially increase its backlog.
And while we wait for a turn in LNG, CBI is diligently improving the business and looking for new opportunities. In Q3 2016, the E&C segment recorded a historic high EBIT margin of 8.1%. CBI is also actively pursuing opportunities for the Technology segment, and thinks this segment can grow to $200M EBIT in the next 2 years (currently $120M). Awards are picking up too - book to bill ratio improved to 1.0x compared to 0.7x in Q2 2016 and 0.5x in Q1 2016.
4. Westinghouse dispute is an overhang, but based on available information I think CBI will prevail.
In 2015, CBI sold its Stone & Webster nuclear construction business to Westinghouse with no payment at closing. Post closing, CBI expects to receive $229M of contingent payments related to project completion milestones and CBI’s continued supply of goods and services to Stone & Wester. Stone & Webster was acquired as part of CBI’s acquisition of Shaw Group in 2013. After numerous delays and cost overruns in nuclear projects in Georgia and South Carolina on which Westinghouse was a partner, CBI wanted to get rid of the nuclear business.
The transaction is subject to a post-closing working capital true-up. If at closing working capital of Stone & Webster is greater than Target Net Working Capital of $1,174M, then Westinghouse would pay CBI the difference. In contrast, if working capital at closing is less than the target, then CBI would pay Westinghouse the difference.
The Purchase Agreement defines net working capital as consolidated current assets minus consolidated current liabilities, calculated in accordance to GAAP.
At closing, CBI calculated working capital to be $1.6B ($428M greater than the target) while Westinghouse calculated it to be NEGATIVE $977M ($2.2B less than the target). As a result, Westinghouse is seeking CBI to pay them $2.2B. CBI subsequently filed a lawsuit against Westinghouse and the two parties went to court in November 2016. The judge’s opinion memo published in December 2016 shed further light on why the two parties have such different figures:
The wide gap stemmed from four changes that the Buyer made to the Seller’s
Closing Payment Statement. First, the Buyer reduced by 30% an outstanding receivable on
the Company’s balance sheet called the “claim cost.” The claim cost asset represented
“costs incurred and paid for by the Company for items that would be presented for recovery
from either the project owners or the Buyer as a matter of contractual entitlement or as
claims for overruns for which the Company was not responsible.” Compl. ¶ 29. The Buyer
asserted that the Seller’s estimate of “100 percent collectability” violated GAAP.
Second, the Buyer adjusted the claim cost receivable to reflect the cost of the design
changes that were mandated during regulatory review. The Buyer established a reserve for
these costs and deducted the amount of the reserve from the Seller’s Closing Payment
Third, the Buyer increased by 30% the estimates of the cost to complete the projects.
The Buyer made this adjustment because it believed that the projects would cost $3.2
billion more to complete than the Seller had initially predicted.
Fourth, the Buyer claimed that the Seller had violated GAAP by omitting a liability
of $432 million that related to the Seller’s acquisition of the Company. The Buyer deducted
In response to CBI's lawsuit, Westinghouse argued that CBI’s calculation was not GAAP compliant. The judge ruled that the companies should let an Independent Auditor decide the GAAP compliance of their figures.
It is worth noting that after the dispute arose, Westinghouse wanted to go through the Independent Auditor route. When the judge asked CBI why it was against using an audit review if it thought Westinghouse’s maneuvers would be obvious to the auditor, CBI said that Westinghouse’s actions were based on fraud claims that should be addressed in a court. CBI was also concerned that a compromise-minded auditor would recommend an unacceptable middle ground.
I am far from a legal expert and hope those who are could chip in here, but my opinion is that Westinghouse is the one distorting accounting rules. The purchase agreement says that both parties’ calculations of working capital have to comply with Agreed Principles and GAAP, and “Agreed Principles” means the “accounting principles, policies, methodologies, categorizations, definitions, practices, estimation techniques, assumptions and procedures set forth on Schedule 11.1(a) hereto.” To me, this means that CBI’s working capital calculation should have already budgeted in cost overruns in a way that the two parties previously agreed to, and Westinghouse shouldn’t adjust it to extract payments from the seller. .
Assuming no net benefit/liability from the Westinghouse dispute, I think it is appropriate to value the company on an EV/EBITDA basis given the deleveraging story. Assuming 1.0x FCF conversion in the next 3 years, the company will generate about $1.5B of FCF. I assume the company pays down $1B of debt, which will put its leverage ratio just below 1.5x, and repurchase $500M of stock (roughly 15M shares at current prices). So in 3 years, the company will have $800M of net debt and 85M shares. Valuing the stock at a conservative 8x EBITDA, we get $7.3B of EV and $6.5B of equity value, or $76/share. This is more than a double from the current price. On a EPS basis, the company will earn about $485M this year. Pro forma for the $40M of interest expense savings ($32M after-tax), the company will earn $6.1/share. My $76 price target implies a 12.4x P/E, which seems reasonable.
2017 debt repayments and resumption of share repurchases at the end of 2017
Awards of material LNG contracts
Removal of Westinghouse dispute overhang
Predominantly fixed price backlog
Adverse outcome from dispute arbitration
Currently run by the same management team that got into the Webster & Stone mess through the Shaw acquisition
2017 debt repayments and resumption of share repurchases at the end of 2017
Awards of material LNG contracts
Resolution of Westinghouse dispute
|Entry||02/07/2017 08:53 AM|
not to hijack wolfowl's thread, but check out the toshiba thread for some more discussion on WH/Stone & Webster. here are a couple of general comments. In general I agree CBI seems more 'in the right.' The issue is there is a huge degree of variability based upon exactly when CBI/S&W provisioned for cost overruns. Since CBI basically dumped this business for nothing, just to remove the overrun risk, if Tosh can prove even partially that CBI didn't provision adequately for costs accrued up to and before the acquisition (for example, by not haircutting receivables, etc) then there is potentially a case to be made that working capital at close was over-stated and thus CBI may owe something. Both of these companies - CBI and Toshiba - seem to be fairly aggressive in their accounting so it is tough to analyze who did what to whom without seeing a full timeline of cost accruals versus how far behind the projects were at the hand-over date. Clearly this is unknowable to the public.
In answer more directly to banjo - whatever CBI's liability is, it is not going to be more than what Westinghouse claims ($2.2bn) and in reality I think it gets negotiated somewhere between what CBI says they are owed and what WH says. I believe the arbitration proceeding - to which this claim has been directed - actually encourages this.
I am no expert on CBI but if I was valuing the stock today I would use something like a $1bn plug for additional debt incurred by a potential settlement of the WH issue. This would really complicate capital returns, etc in the medium-term as would blow covenants and maybe (according to some sell-siders) lead to a potential equity issuance. Wolfowl can comment on if/how this affects the return profile but clearly it is a large chunk of the market cap (and EV) today.
|Entry||06/07/2017 11:54 AM|
Any views on Macquarie's note on intro-quarter debt and SOTP valuation?
|Entry||06/28/2017 11:10 AM|
Wolfowl - what are your thoughts on the stock here post the Westinghouse ruling? thanks
|Entry||08/10/2017 11:44 AM|
wolfowl - what do i need to do to get an update here? clearly a lot of moving pieces, would appreciate a response from the original poster as this seems to have evolved significantly in the last few months
|Subject||CBI catalyst coming. May be worth 40% more here quickly? Thoughts?|
|Entry||12/11/2017 10:41 AM|
While CBI qualifies for clear dumpster diving, it seems to me that this could be an interesting name if a few things go its way. At least for a trade for sure. CBI has had to weather cost overruns, lawsuits and a poor bidding environment driven by lower oil/gas/LNG commodity prices. It has had to suspend its dividend, sell its best assets (sale of Capital Services closed in June for $650 mm net proceeds and Tech sale should close in January 2018) and get waivers on its debt covenants. The street hates it. But there may be a light at the end of this dark tunnel..or at least a temporary flashlight for the faint of heart.
The company is in the midst of selling its (very high margin) technology division and there seems to be plenty of interest. CBI has narrowed down the list to a few bidders and according to an 8k filed a couple days ago, has until Dec 18 to announce it (that timeline was extended due to more active bidding).Here is what CBI said on October 31 on its 3Q17 cc:
“Moving now to strategic initiatives. Last quarter, we announced that we are implementing a comprehensive corporate and operating cost reduction program. This includes non-personnel and discretionary cost reductions, as well as personnel-related reductions. The program is well-underway with annualized savings of more than $100 million now crystallized and being implemented.
As a recap, CBI has 101 mm shares /$1.8 bb mkt cap. It has $1.8 bb in net debt as well. The street believes that it will get slightly >$2 bb for its tech business and that will wipe out its debt. Assuming there are no more negative cost overruns I think the price could be higher. The company has endorsed 10-15x EBITDA (2017E EBITDA for this biz is $220-230 mm as per mgmt) and people expect a lower end price given the forced seller nature of the sale, short time frame and desire to have an ongoing relationship with the buyer on potential feeder projects. As interest rates have stayed low, tax rate reform looks near & assets in industrial land are going for very good prices (see recent BGC auction, EMR offer for ROK, etc.), I think that this could go for 12.5x EBITDA which would equate to $2.812 bb in gross proceeds. In speaking to the company, they told me that the tax base is $700-800 mm and that they have federal NOLs to cover $2 bb of gains. State taxes could eat up $140 mm and deal fees/debt waiver costs another $25-50 mm so assume about $2.6 bb in net proceeds under that scenario. If that's the case, the EV of the remainco is 3x-4x EBITDA depending on what you think 2018E EBITDA will be. Estimates vary from $350-470 mm on revs of $5.8-6.8 bb. Pick your #. In any case, while there are liabilities still on the b/s that can eat up more cash (they have to complete problem jobs), this will give them breathing room assuming nothing else big goes wrong. Big IF when you deal with fixed price E&C contractors but again, let's walk through this.
CBI is almost done with its $100 mm cost cutting and its CEO has been in the job (he was an insider before getting promoted) for nearly 6 months and seems a lot better than its last CEO who was very aggressive transactionally (did the disasterous Shaw Group Deal) and financially (with leverage and accounting). There is also the possibility that it gets back as much as $200 mm from Sempra Energy with regard to unapproved change orders on its Cameron LNG plant. We should know that when they next report.
It seems that they have no more risk (besides $50-70 mm of residual nuclear exposure) on Westinghouse after the appeal reversals this July so that is out of the way.
What should it trade at? E/C's with EPS and FCF trade at 7.5x-12X EV/EBITDA today. If we say this should be 6x 2018E of $400 mm and add in just $200 mm of net cash (when they may have 3x-4x more under the rosy scenario), the stock is worth 41% more than today's price or $25.75 p/s. Every $100 mm of cash is $1 p/s. And 25% of the float is short and the sell side is stuck waiting for the red/white & blues of CBI's eyes before it even thinks about going positive here given its past misses, so it could come fairly quickly. And I have to believe that the envronment for bidding will be better in its end mkts the next 2-3 years than it has been the last 3 years (when oil/gas capex was down 50-60%) so people may have some faith that 2019 will be better than 2018.
I'm sure I am leaving bad things out that others will point out (mgmt hates puppies & kittens?) - especially that after this, they have no more trophy assets to sell if they screw up - but I wanted to get this idea out there to see what others have to say about the potential for an outsized move here. All thoughts welcome. Have at it.
|Subject||CBI update; deadline today|
|Entry||12/18/2017 01:27 PM|
No news out on the sale, although WR Grace (GRA) bought ALB's catalyst business for 12.8x on Friday, 12/15, offering up a decent comp. Grace is/was rumored to be one of the potential buyers of this business either in total or in part. They still could be and were a bit cryptic on their cc when they said in response to their interest in "another transaction" that they are "still busy".
However, iIt seems strange to me that you have an entire weekend to get this news out and finalize a deal and you have no news out Monday morning. I suspect they say something after the close but I doubt its a sale at this point. My bet is that they delay it with waivers from debt holders again into the new year. Maybe b/c more late interest and higher prices, maybe complications related to tax deal and/or strategic ongoing relationship. The binary nature of this trade is tough. If they sell for decent price (12.5x or upwards), the stock has good upside (of course it also depends on what else the company says on new awards, sempra negotiations on the $200 mm in unapproved change orders, cost overruns, capital allocation, etc. but unless horrible still has upside). if they can't sell for some reason and found some more cost overruns, stock has material downside.
I moved to sidelines as I don't have the stomach for this in the last 2 weeks of the year if it's bad (which likely means it's gonna be good). Will wait for the news and re-assess.