December 11, 2017 - 3:16pm EST by
2017 2018
Price: 9.05 EPS 0 0
Shares Out. (in M): 8 P/E 0 0
Market Cap (in $M): 70 P/FCF 0 0
Net Debt (in $M): 8 EBIT 0 0
TEV ($): 78 TEV/EBIT 0 0

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  • dingleberries


Until early 2017, Perma-Pipe International was known as MFRI Inc. There are no analysts covering the stock. The average daily dollar volume is microscopic. The company isn’t especially interesting or differentiated but it does happen to be a pretty good investment at the moment given pretty solid downside protection and pretty solid upside potential.


The company makes specialty pipes which have coatings and linings for various harsh-condition transportation of oil, chemicals, and water. End markets are oil/gas, chemical, and infrastructure. Business, as you might imagine, has been slow, and today’s revenues of about $100 million are about 40% off from peak. They have eight worldwide location, with three in the US, one in Canada, two in the Middle East and two in India. They are basically a service provider, and they use standard pipes and apply their own coatings and linings. For North American business, they don’t take possession of the pipes, it’s just a fee-for-service business. For their international business which is mostly in Saudi Arabia handling large infrastructure projects (mostly water) they unfortunately do have to buy the pipes which makes it relatively capital-intense. The business is highly competitive and Perma-Pipe can’t earn a respectable return without focusing more on international business. In Canada, Shawcor is enormous and structurally advantaged. Shawcor tried to buy Perma-Pipe’s plant in Canada years ago but it was blocked on anti-competitive grounds which in retrospect seems a silly. They used to have a money-losing industrial filter business which they sold in the beginning of 2016 to become focused on the pipe business.


The downside protection is mostly in the form of BVPS of $7.22, which is almost all tangible and a mix of working capital and PP&E. I think BV is understated in this case because their plants are mature and have been significantly depreciated under GAAP. If you include the valuation allowance of $18 million, BVPS is $9.50 and the stock trades below BVPS, but I admit I’m not convinced this should be included.


The upside, ignoring a recovery in a cyclical business, comes from a mega project they have bid on in East Africa. This is a 1,400-mile pipeline which would be the world’s longest electrically-heated pipeline. It needs to be electrically-heated because the oil is very waxy. I am encouraged about Perma-Pipe’s ability to win this contract for several reasons. First, they helped build what is currently the world’s longest electrically-treated pipeline in India in 2008ish, so they have a strong record of building these in 3rd world nations. Second, I like recent management changes. In March, David Mansfield was hired to replace the last remaining founding family member at the company. I’m not saying David is a superstar CEO who has some six-sigma ninja crap, but I am certain that he is absolutely the right person for this job. He has spent the last 20 years bidding on projects in the Middle East and Africa. Then they hired another guy who also specializes in this kind of work recently, and I don’t think these people would join unless they saw some opportunities. They have formed a JV with a company called Logstor who has deeper pockets. This was probably needed in order to win to bid, since Perma-Pipe has the assets and expertise, but not the balance sheet. The construction would take three years to complete and Perma-Pipe has said it would be the largest contract in the history of the company. It’s a little tough to figure out what a win would add to Perma-Pipe’s bottom line. Based on prior work in India, and my conversations with management, I estimate that a win would allow the company to generate somewhere between $1.25-2.00 in EPS for each of the next three years. (You could drive a truck through that range but there are many unknowns.) This would send the stock quite a bit higher if you look at how it’s reacted to large projects in the past. The contract is supposed to be awarded sometime in the first quarter, though work does seem to be ticking up a bit elsewhere…not necessary enough to make this a great investment, but enough to provide some comfort in the downside.


The company’s history and shareholder base are encouraging. Perpa-Pipe was founded by two guys, one from the Mautner family and one from the Unger family. Until David Mansfield was hired, someone from either family had run the company. Right now, the Unger family has no one at the company, while only one person from the Mautner family (Brad Mautner, former CEO who David Mansfield took over for) has a board seat. The company laid off one of the Mautner family members in the last year or two, a guy who was doing IT stuff…no other family members are involved. But the Mautner family still owns 5.2% of the company while the Unger family owns 6.3%. I believe the families want to wrap this whole thing up relatively soon, and brought in David Mansfield to do whatever was necessary to get the company a better stock price in order to sell it. And they will probably try to sell the company even if Perma-Pipe doesn’t win this big pipeline contract. I also find it interesting that Karl Schmidt has been the CFO since early 2013 but only got an employment contract with change-in-control language three months after David Mansfield was hired. Awkwardly-timed employment contracts are usually decent breadcrumbs.


There is a shareholder named Carl Dinger (“The Dingleberry”) who has a 13D and has been pressuring the company to do a number of things like have a share buyback or just sell the company. The Dingleberry owns 2% of the company which is kind of pathetic but I guess it is helpful to see some pressure on the board. There are a few other rabble-rousers who own the stock, including Cannell, Ancora, and Strategic Value Partners (I have no idea why they own this given their size) who I will assume would put similar pressure on the board to sell the company in the not-too-distant future. It would not surprise me if their JV partner, Logstor, was interested in acquiring Perma-Pipe if they win the Africa contract. The company’s chairman is a guy named David Barrie, who is an investment banker by background and was added to the board in late 2015, and my understanding is that the board specifically wanted someone with M&A experience. Another board member, Mark Zorko, who was interim CFO and senior advisor to Landauer, which was recently acquired. Yet another board member, Jerome Walker, was/is a manager of Dresser-Rand, which was acquired in 2015. In total, I think there are enough hints here that Perma-Pipe will be sold at some point. Acquisition multiples are typically about 1x sales, so if Perma-Pipe can return to peak sales from this big contract, the stock will be worth about $22.


Perma-Pipe is generating about $100 million in revenues, with low gross margins (11%) and burning $0-5 million in cash per year in the current business environment. There are reasons to be encouraged by this because this might very well be as bad as it gets for them. The balance sheet is going in the wrong direction with $9 million in cash and $16 million in debt. I’m normally extremely hesitant to get involved with companies that seem stuck in cash burn mode, but I think there are enough offsetting elements here (modest burn, balance sheet flexibility, large business opportunities, incentives to sell, tangible book value) to give me comfort. I think this is a good trade worth a modest position size and I view it more as an option than an investment in a real business. In the era where everyone is looking for compounders, this is but a mere rental.

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


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