Login

GULF ISLAND FABRICATION INC GIFI
April 24, 2018 - 5:03pm EST by
engrm842
2018 2019
Price: 9.50 EPS na na
Shares Out. (in M): 15 P/E na na
Market Cap (in $M): 144 P/FCF na na
Net Debt (in $M): -9 EBIT 0 0
TEV (in $M): 135 TEV/EBIT na na

Sign up for free guest access to view investment idea with a 45 days delay.

  • None found
 

Description

Below is a quick summary of Gulf Island Fabrication (Ticker: GIFI) which we believe has little to no intrinsic value downside with a reasonable path to a 2x and potentially higher over the next 1-2 years.  This is a catalyst rich, earnings recovery story enhanced by material pending sales of non-core assets. A couple of headline items:
  • Pro-forma for assets sales and insurance recoveries an investor is paying less than $50MM for this business today (current stated EV is ~$135MM)
  • Considering cash presumed from asset sales – we think investors are paying roughly 1.0X 2020 EBITDA
  • A combination of recently booked project awards (largest in company history) and substantial pending awards (even larger) will transition GIFI from its presently impaired financial profile to a much higher level of Revenue and EBITDA
  • At $9.50 the stock is trading near 20-year lows but we see a path to a high-teens stock with mid-20s possible in a couple of years (for most of history the stock has traded between $10 and $30)
  • We note that GIFI is reporting earnings soon - we don’t expect anything promising in near term numbers. Investors need to look to 2019 for the picture to improve.
 
What does Gulf Island do? Mostly two things:
 
1. Fabrication - primarily of oil and gas and petrochemical infrastructure. They build structures at their dockside yards (large open spaces utilizing welders and cranes). They are then shipped for final installation topically as part of offshore E&P platforms or at onshore petchem facilities.
 
The Fabrication Division has VERY little work right now and is the primary source of earnings challenges and overall company weakness. Basically, new investment in offshore E&P infrastructure is currently quite limited and GIFI management does not anticipate a near-term uptick. Their best hope is to further expand into fabrication of onshore modules (more on this in a moment – they have a potential “company maker” in the wings)
 
2. Shipbuilding – this division builds offshore supply vessels, research vessels, Navy vessels, tugs, icebreakers, etc. From a margin/optics perspective things are not great at this division either.  They have been in a dispute with a customer (highly levered GOM client) over some E&P vessels and this has killed margins and created legal overhang. Further, GIFI has accepted recent work at very low margins just to keep workers occupied. Despite poor near term earnings, looking into 2019 and once they work through transitory issues, we see Shipbuilding gaining momentum with improved earnings power (will explain more in a moment).
 
 
Assessment of Business Quality?
 
Business quality is mediocre at best and this is clear from GIFI’s inability to generate long term growth in shareholder value. Historically though, on the back of accelerating EBITDA, the stock traded much higher and we believe it will again. The stock has dipped below $10 a number of times in the past – but, it has also bounced above $30 many times as well. The business quality may be suspect – but, the stock will perform under the right circumstances.
 
What will transpire in 2018 that could set the stock up for gains? There are three big things:
 
1. Asset sales and insurance recoveries will result substantial net cash, lowering the Enterprise Value without impacting earnings power (note that the current stated EV is about $135MM). GIFI has two excess pieces of land – one which was just sold a few days ago for net proceeds of $53MM. GIFI is marketing a second piece of land where we also believe there is significant interest at around $25MM. Due to offsets from operating losses and basis in the land, there should be very little tax leakage in these sales. In addition, GIFI has $5-$15MM in excess equipment to sell (mostly cranes). Finally, we believe GIFI can still collect $5-$10MM in Hurricane Harvey related damages from their insurance companies. All told we see in excess of $85MM in cash hitting the balance sheet this year implying a pro-forma enterprise value of roughly $50MM.
 
2. Shipbuilding will improve materially in 2019 (based on already booked awards)
  • Current/poor contracts come off the books (resolve legal with E&P Services customer)
  • GIFI commences work on recently announced vessels including tugs, research vessels for Oregon State University, and an icebreaker
  • Most importantly, GIFI will start work on the largest contract win in Company’s history – the US Navy T-TATS contract (Ocean Tugs). The entire contract value is in excess of $500MM with the first vessel being $63.5MM (all told the contract should result in approximately $100MM of revs per year for five years)
  • The range of total Shipbuilding Revenues for 2019 is somewhat wide – likely in the $125MM to $175MM range. EBTIDA should be in the 6% to 8% range.
 
3. The Fabrication division is on the cusp of a transformative deal with a private venture called SeaOne. Management has talked about this opportunity on conference calls and we expect an announcement and contract sometime in 2018.
 
SeaOne is a multi-billion dollar project to export hydrocarbons from the GOM to other nations (Caribbean / LATAM). Land has been secured, transport vessels specified and ordered, and SeaOne is now purportedly working with a large NY investment bank and some of the largest P/E firms and Sovereigns in the world on financing.
 
There is a fair amount of reading investors can do on SeaOne. Given how much time and effort has already been invested – we believe there is a pretty good chance (75%) that this project will proceed. GIFI is part way through a lengthy contract with SeaOne and believes they will ultimately recognize $2.0BN of work over a three year period. Importantly, it would fill their fabrication capacity.
 
Simply put, we believe that if the SeaOne project proceeds – GIFI will get a huge award (most of the entire EPC contract) which will blend out at 5-7% EBITDA margins (our interpretation of Mgt. comments). SeaOne alone will equate to $30-$35MM+ of annual EBITDA (perhaps well more). Note that this award will only be the first phase of the SeaOne project with multiple billions of additional orders possible in coming years.
 
 
In conclusion, with a revived Shipbuilding Division and SeaOne materially altering the trajectory of Fabrication, we think GIFI can earn $50MM+ in EBITDA.
 
If GIFI spends $25MM in gearing up for the SeaOne contract and is left with $50MM net cash – and they can make $50MM in EBITDA in 2020 at a valuation of 6X – that would be a $350MM Enterprise value or $24/share.
 
On the downside –we struggle to see how this company is worth less than our pro-forma EV of $50MM. We recognize it may take a number of quarters for the numbers to improve substantially. As well, after doing their own research on SeaOne other investors may come to a different conclusion about the probability of this project proceeding.
 
From our perspective, we see a chance for the stock to double (with potential for a two-year triple) with limited (if any) intrinsic value downside - sufficiently compelling asymmetry to hold an investment and see if catalysts play out as we expect.
 
 
 
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

 - Asset sales

 - Shipbuilding improvement

 - Seaone

    show   sort by    
      Back to top