September 03, 2012 - 11:49pm EST by
2012 2013
Price: 3.96 EPS $0.32 $0.00
Shares Out. (in M): 6 P/E 12.4x 0.0x
Market Cap (in $M): 25 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 4 0
TEV ($): 9 TEV/EBIT 2.4x 0.0x

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  • HVAC
  • Nano Cap
  • Buybacks
  • Potential Acquisition Target
  • Dividend yield


KSW is a microcap HVAC and mechanical building contractor operating in New York City and the surrounding area. Due to liquidity this is suitable for smaller accounts only, but it appears to be a solid deep value investment without a lot of unwanted "hair" or moving parts. Shares have yet to fully react to a series of significant new project awards over the past several months; with over $2.66 per share in cash and marketable securities and an EV/EBITDA of just 2.4, interested microcap value investors stand to enjoy very significant upside should past earnings return to anywhere near historical levels, and will get paid a greater than 5% dividend yield while you wait with the protection of a solid balance sheet.

Balance Sheet

Taking the firm’s $44.1MM of current assets net of $24MM in total liabilities, net current asset value comes to $20.1 million, roughly four fifths of the $25 million market cap. There is an additional $2.615 million in cash at a 50%-owned unconsolidated joint venture managing the chiller plant installation at the new World Trade Center site, which is currently not recorded on the balance sheet but could result in further cash distributions to KSW as the project nears completion. The firm additionally owns a 14 thousand square foot office and industrial building in the Bronx, which alone likely is worth more than the $2.4MM in depreciated PP&E on the balance sheet.

Earnings and Backlog

On May 21st, the company announced that it was awarded two significant new projects totaling $26 million. The backlog as of the 8/14/12 10-Q stood at $74.6MM, and the company was awarded another $10 million high-rise residential contract after the quarter’s close bringing the current total to $84.6MM, which appears close to the highest in recent history (backlogs came to $86.3MM at FYE 2011 and $64MM at FYE 2010 just before two profitable years).

Management has highlighted that their ability to perform value-added HVAC engineering and design services and act as the mechanical trade manager for complex projects has allowed them to build long-term working relationships with a number of NYC-area commercial and residential developers, several of whom are planning significant new projects this year, while also remaining well positioned to win larger public and institutional construction contracts (hospitals, schools, government buildings) which are often among the only jobs active during an economic downturn. While the firm remained solidly profitable throughout the 2009 downturn, earnings remain far from their historical peak; KSW earned net income of $0.68 and $0.59 respectively during the 2008 and 2007 fiscal years. With the backlog continuing to grow and the trailing 12-month EV/EBITDA ratio already in the low 2s thanks to accumulation of balance sheet net cash, any further recovery in earnings toward historical levels could quickly see KSW earning close to its enterprise value in EBIT per year -- both depreciation and maintenance capex needs have been minimal, and EBIT reached $6.1MM and $6.8MM in '07 and '08 respectively.

Management, Catalysts and Risk

As always, risks include possible use of net cash for acquisitions, however management appears to have had a decent track record, compensation has been reasonable, and CEO Floyd Warkol owns a 10.1% block of the common providing alignment with outside shareholders. KSW recently declared a cash dividend of $0.20/share representing over a 5.1% yield at current prices; and paid recent cash dividends of $0.15 in 2011 and $0.17 in 2010. The Board approved a $1 million stock buyback program at year-end 2008, with $860k currently remaining on the authorization. Shareholders would certainly benefit from the Board either becoming much more aggressive with the buyback or beginning to explore "strategic alternatives". KSW’s $17 million in cash and marketable securities could buy back over 70% of the firm at current levels, and the firm could easily support enough debt for a buyout significantly above today’s market price. Any going-private transaction would create substantial further per-share savings on public company compliance costs given its microscopic valuation of just 0.11 times enterprise value relative to sales. There seems no real need for KSW to remain public, and as cash continues to pile up the firm is likely to become an irresistable target for an outside strategic buyer or eventually be taken private by management.


Continued recovery in private-sector construction
Dividend yield
Resumption of buybacks
Accumulation of balance sheet cash
Possible buyout / going private
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