If you want to learn about a broken IPO that will benefit from the long-term growth of the nuclear industry and has a 16% FCF yield read on.
Price - $5.99
Shs Out – 88.3 mil
Mkt. Cap - $529 mil
Cash - $59.9 mil
Debt - $576.7 mil
Net Debt - $516.8 mil
EV = $1,045 mil
Revs $1,800 $1,800
EBITDA $173 $180
Less Int Exp. $43 $43
Less Cap Ex $15 $15
Less Taxes $30 $31
FCF $85 $91
EV/EBITDA 6.0x 5.8x
FCF Yield 16% 17%
Energy Solutions is a provider of nuclear waste disposal and plant decommissioning and operation services. They have an incredibly unique asset in their Clive, UT disposal facility. It can accept Low Level Radioactive Waste (LLRW) and is one of only two facilities in the United States that can do this (American Ecology (ECOL) operates a small one that the state of Washington owns and Vahli (VHI) just got approval for one in Andrews County Texas that is not operational until Q3 2009 at the earliest and will only be able to accept 20% of their waste from outside Texas and Vermont). To give you an example of how hard it is to get one of these sites approved it took Vahli 12 years to do it. Vahli claims over $1 billion has been spent in Texas by various parties since 1980 trying to get a site approved. The Clive facility has a long life ahead of it with more than 20 years of capacity left.
Additionally, ES provides services to federal and corporate facilities both running and decommissioning them. They have a large cost + contract in the UK under which they run 10 nuclear sites. You can read all the details in their 10-Qs and Ks.
The segment profile looks like this:
2007 % of Revenue / % of EBITDA / EBITDA Margin
Federal Services - 14% / 27% / 21%
Corporate Services - 13% / 18% / 15%
Logistics Processing & Disposal - 24% / 106% / 46%
International - 49% / 7% / 1%
Corporate Overhead - N/A / (58%) / N/A
As you can see, their service contracts roughly offset their corporate overhead and the real money is made in the logistics, processing & disposal segment which is basically just charging people to dump waste at their Clive site.
The additional beauty of the business is an absolute lack of capital intensity. Capital spend has been $9 mil YTD and was $13 mil in 2007 and $23 mil in 2006. Non-financial working capital has also been consistent at around $35 million. This helps to make ES a total cash machine.
The thesis for ES then is fairly simple. They currently have a virtual monopoly (2 small competitors) on the LLRW disposal business in the United States and it is likely to stay that way for many years. The business is currently cheap. It is trading at 6.0x EBITDA and a 16% FCF Yield. Furthermore, the nuclear industry may grow for the first time in decades starting around 2015 and ES has additional international growth opportunities. The CEO has been buying significant tranches of stock as the stock has sold off so at the very least his incentives are aligned with stock holders. All of this should bode quite well for ES shareholders over time in my opinion.
Why has the stock been crushed?
First, as frequently happens with newly public companies (ES IPO’d December 2007), management set a bar that was too high during their IPO. In particular management baked in 2008/2009 disposal revenue from large components. These disposal deals were not approved in time so management had to lower their expectations for growth. However, I don’t think management’s long-term bullishness about their business has changed. Indeed, CEO Steve Creamer for instance has purchased more than $8 million worth of stock on the open market since September (2/3 at $15 and 1/3 at $4 roughly). A couple of board members and the CFO have also made smaller purchases.
Second, ES is highly levered. All kinds of companies with significant leverage have been crushed due to the closing of the credit markets and the fear associated with it. However, ES is the proverbial baby that has been thrown out with the bath water in this regard. Their debt is mostly in the form of a credit line that does not expire until June of 2013. Given, the stable nature of this business, ES should have no problem rolling this line of credit if the so choose. Furthermore, they will generate enough cash to pay off the vast majority of their debt by then if they so choose.
Third, energy in general has been crushed so the stock has sold off in sympathy.
Finally, I am sure some people think that Obama means the end of whatever growth was starting in the nuclear industry. However, I don’t think this is necessarily true. On the campaign trail he said nuclear needs to stay on the table as an option. Furthermore, Exelon was significant contributor to his campaign which gives me confidence that they don’t seem him as anti-nuclear. Finally, I think to deliver on the significant greenhouse gas reductions he has talked about, there is no other way to get there without using nuclear.
Why is the nuclear industry going to grow again?
I can’t say the trend will continue or that the capital will be available for it, but there were 5 applications for 8 new reactors in 2007 and 13 applications for 19 new units in 2008 according to the NRC. These are the first applications since 1978. These plants could be operating by 2016, so while it isn’t a near-term catalyst for ES it is a long-term one. Solar and wind power aren’t going to get the U.S. to “energy independence” any time soon. Only nuclear power can help make United States energy independent without producing lots of greenhouse gases. It makes sense that the U.S. will count on this proven and reliable means of energy production more in the future.
How else could ES grow?
ES has two avenues for growth. First, they have an opportunity to do numerous large component projects for existing customers. This is discussed in detail in their filings.
ES also has aspirations to develop and run a site like Clive in Europe. There is certainly nothing immediately on the horizon, but their Magnox business in the U.K. gives them a launchpad across the pond to pursue opportunities there.
Headline Risk: In 2008, Energy Solutions was in the headlines for trying to import Italian waste into the U.S. Essentially, ES was taking Italian waste into their Tennessee facility and incinerating it. They then planned to ship it to Utah as “U.S.” waste. Needless to say this loophole approach has ruffled a few feathers particularly in Utah. Despite all the headlines this Italain business and any international importing is pretty much immaterial to the financials. Nonetheless, any time anything controversial happens you can bet the Utah media is going to make a lot of noise about it and show ES in the least favorable light. It is a risk you take owning the stock.
Regulatory: This is a highly regulated business. That can lead to delays on projects and unexpected speed bumps (e.g. large component delays this year). The reality is that the U.S. has very few places to dispose of LLRW so it really needs ES and their Clive facility. I think in general that should make the regulators play nice. The management team has been running these assets for quite a while now and seems to have been able to manage the regulators effectively.
-Fear of companies with leverage subsides.
-Management executes and rebuilds credibility after having to cut guidance earlier this year.
-Some of these large component deals come through and growth resumes as a result.
-The growth of the nuclear industry becomes more assured as significant progress is made on moving forward with new plants.