CONRAD INDUSTRIES INC CNRD
December 29, 2017 - 10:43am EST by
blackstone
2017 2018
Price: 16.75 EPS 0 0
Shares Out. (in M): 5 P/E 0 0
Market Cap (in $M): 85 P/FCF 0 0
Net Debt (in $M): 11 EBIT 0 0
TEV ($): 74 TEV/EBIT 0 0

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Description

This guy ain’t no ______ MC
I know everything he’s ‘bout to say against me
I am white, I am a ____ bum
I do live in a trailer with my mom
My boy Future is an Uncle Tom
I do got a dumb friend named Cheddar Bob
Who shoots himself in his leg with his own gun
I did get jumped by all six of you chumps
And Wink did ___ my girl
I’m still standing here screaming, “___ the Free World!”
Eminem in 8 Mile
 
Segue…….Conrad Industries is an illiquid, family controlled company trading on the pinks, operating in a
depressed environment with few immediate signs that the worm has turned. And yet, we believe that for
patient value investors the current share price embeds a comfortable margin of safety. As always, we don’t
endeavor to answer the question of when we might get paid but believe the enterprise is worth substantially
in excess of current trading levels and, for us, that is enough.
 
Company Description from latest annual report
We specialize in the construction, repair and conversion of a wide variety of steel and aluminum marine
vessels for commercial and governmental customers. Through our subsidiaries, we operate five shipyards: one
in Morgan City, Louisiana, three in Amelia, Louisiana and one in Orange, Texas. Our Company was founded in
1948 and commenced operations at our shipyard in Morgan City. From 1996 through 2003, we acquired and
expanded our Conrad Amelia yard, our Conrad Orange yard and our second yard in Amelia, Conrad
Deepwater.
 
Current situation overview
The past few years have been challenging for the company, in some ways historically so. Hitherto, the
company was the beneficiary of the shale boom—constructing inland barges—and that business dried up. This
is a large fixed cost business and when backlog was chewed through, there was a negative absorption effect at
play. At the same time, vessel repair business has slowed to a crawl as capex dollars got slashed across the
industry and vessels were laid up rather than repaired.
 
 
 
 
Oh, That LNG contract
 
In speaking with industry participants, it is clear that Conrad has a stellar reputation for product quality and
on-time delivery. Oftentimes, customers will ask for product specifications that Conrad is happy to deliver on.
Insofar as a shipyard can be entrepreneurial, Conrad has a history of product innovation; cognizant of their
fixed costs, they have willingly adapted to market conditions and learned to construct various types of vessels
should they see an opportunity for meaningful revenue. In the past this has led to losses as the company has
moved up the learning curve and essentially treated early new vessels as loss leaders. In 2015 they
announced that they would be constructing the first LNG bunker barge in the United States
https://maritime-executive.com/pressrelease/conrad-receives-order-for-lng-bunker-barge.
 
While we anticipated a steeper learning curve than in the past, the size of the losses and the duration have
been unpleasant surprises. The running tally is:
 
2015: (4mm)
2016: (13.2mm)
2017 9mo: (5.5mm)
 
It is probably too generous to back out all of the losses since the work did absorb some overhead, but we are
mentally adding back about half of them to arrive at run-rate profitability for the business. As such, the
current valuation currently looks like:
 
Valuation metrics
Shares outstanding: 5.057mm
Market cap at 16.75: 85mm
Net cash: 11mm
Tangible book value: $22.95
P/TBV: 73%
YTD reported EBITDA: 7.8
Annualized EBITDA: 10.4
Annualized EBITDA ex LNG barge losses : 13.7
EV/Annualized EBITDA ex losses: 5.4x
 
 
We think given where we are in the cycle, the above metrics are undemanding, and auger well for future
returns. The LNG vessel has been an expensive lesson but we do think there’s a first mover advantage and
potentially meaningful business to be won in the years to come.
 
We have found that reversion to the mean is as powerful a concept as there is in investing. As with most
cyclicals, the strong should, in theory, not only survive, but thrive. The competitive landscape has been
decimated during this energy downturn-shipyards have gone out of business, some have consolidated, and
Conrad has taken the opportunity to modernize many of their processes. We can envision a day when
business returns (albeit not from the same customers) and the incremental revenue dollar flows through the
p&l at increased margins. In the meantime, we are content to wait it out with this management team and this
balance sheet.
 
 
 
Recent Financials