Limbach: 6x EBITDA, Huge Discount vs. Peers – 64% Near-Term Upside by Eric Gomberg, Dane Capital
- Direction: Long
- Timeframe: 1 – 12 months
- Expected Gain: 91%
Limbach, a company with a 115-year operating history, trades at 6x EV/EBITDA, a 3+ EBITDA turns discount to its sector. Peer multiples imply a share price of $15, 64% upside.
The company expects revenue and EBITDA to grow 20%+ and 30%+, respectively, in 2016, and has excellent visibility for substantial growth in 2017. It also has double-digit FCF yield.
Accretive bolt-on M&A at 3-5x EBITDA and new service offerings, in MEP, can further accelerate growth. Near-term catalysts should drive shares higher.
We recognize reasons for the mispricing: micro-cap, public via SPAC, no coverage, bulletin board. There’s a logical reason they pursued a SPAC and the sponsors have a strong track record.
This is a durable, asset-light business, with a top-flight CEO who previously ran Bovis, a $3bn+ general contractor. We expect shares to trade higher over the next several quarters.
We believe that Limbach (OTCQB:LMBH) is a company whose price is detached from its business fundamentals. The company provides a single source for the design, installation, service, maintenance, repair, retrofit, and energy efficient optimization of nonresidential mechanical and HVAC systems.
Its peer group trades at 8x-10x CY16 EV/EBITDA, with a mean of 9.1x, while Limbach trades at just 6x, despite growth at, or above, peers, a diversified, top-tier customer base, terrific growth visibility into 2017 (and likely sustainable beyond), and an asset-light business model. At a peer multiple, Limbach would trade at $15-64% upside. At the high end of peers, shares would approach $18, almost a double from current prices.
We expect shares to quickly move to fair value, with multiple near-term catalysts that we discuss at length below. We expect revenue to increase from $331 million in 2015 to $410 million in 2016, ~23% y/y growth, and EBITDA to increase from $13 million in 2015 to $17 million in 2016, 31% y/y growth (per management’s recently increased guidance), and to $22 million in 2017, 29% y/y growth. We expect at least $7 million of free cash flow for 2016, implying a 13% FCF yield on equity (we expect excess free cash flow to pay down $13 million in high interest sub-debt). As of the end of March, 47% of budgeted revenue for 2017 was covered by bookings, considerably ahead of the typical 66% coverage seen in November/December. Clearly, 2017 looks great. In sum, this is a stock that is cheap on absolute and relative terms, has a diversified, tier-1 customer base (more on that below), and if it were trading at $15 instead of $9, we don’t think anyone would blink (or be inclined to short it). This is a highly asymmetric opportunity, with little risk of the company missing near-term numbers, many potential incremental buyers of this essentially unknown company (in public markets, not in their industry), and the potential for outsized returns.
To be clear at the outset, this is not your typical bulletin-board listed micro-cap stock (it has been trading several hundred thousand dollars of stock in recent days, so it is buyable, as are its warrants TSFCW). What we think makes Limbach unique, particularly for a bulletin-board listed security is:
- 115-year operating history.
- World class customer base that includes: Abbott Labs (NYSE:ABT), Amgen (NASDAQ:AMGN), Disney (NYSE:DIS), Honda (NYSE:HMC), Hospital Corporation of America (NYSE:HCA), University of Michigan, Tyco (NYSE:TYC) and numerous others.
- No noteworthy customer concentration.
- 14 offices nationally, with no geographic concentration.
- Enough scale to pursue, and benefit from, accretive M&A (at 3x-5x EBITDA).
- High insider ownership – by our calculations, approximately 80% of shares outstanding (possibly more) – with significant lock-ups.
- Insider buying – in recent weeks Limbach Director Gordon Pratt purchased 100,000 warrants in the open market, in multiple transactions.
- Excellent visibility. Projects are booked well in advance of construction activity. TFSC had 47% backlog coverage for 2017, as of the end of 1Q 2016. The company typically has 66% of following year’s budget booked by November/December.
- Exceptional leadership team. The company’s CEO is Charlie Bacon who, since college 33 years ago, has worked for just 2 companies, Bovis (acquired by Lendlease), where he became CEO of North and South America, which generated over $3bn in annual revenue, and Limbach since 2004.
- Low capital intensity at approximately 1% of revenue – likely $3-$4 million in 2016.
- Why this opportunity exists
- Company background
- Why the SPAC route
- Industry background
- Risk factors
Why this opportunity exists
With any investment we ask ourselves: why does this opportunity exist? What do we believe we understand that the market or the counterparty selling us shares does not. Sometimes these answers are not obvious. In the case of Limbach, we feel they are very clear. We think several of these issues will quickly go away, and expect shares to rapidly trade to fair value, and, given the company’s growth trajectory, towards the high-end of comps.
- Limbach is a micro-cap security with a $55 million market cap making it interesting to only a small number of institutional investors. We expect shares to move significantly higher – a doubling (or more) in 12 months is reasonable in our view. With a move higher, there could be an exercise of several million warrants (dilution is accounted for in our valuation, and strike prices vary from $11.50-$15.00). In addition, we’d anticipate M&A over the next 12 months, which could also increase the share count. In aggregate, with share price appreciation (we like), and increased share count (we don’t like, but is factored into our projections) this could easily be a $150-$200 million equity value security, which would mean that it’s still a smallish small-cap, but one that’s ownable by a wide swath of institutions that focus on small caps, and garner inclusion in various Russell indices.
- Limbach is currently listed on the OTC bulletin board. We, like many institutional investors, typically don’t touch bulletin board stocks with a 10-foot pole – too many have dubious stories. However, in this case we are comfortable because 1) we have no doubt this is a legitimate company and 2) it should be uplisted to NASDAQ in 60-90 days. Limbach simply doesn’t meet the 300 shareholder requirement at the moment. Taking the contrarian view, we think it’s an opportunity to buy a high-quality, but bulletin board listed security ahead of an uplisting, which could potentially be a catalyst to take shares higher.
- Limbach has no research coverage. We note that on May 6, 2016 Craig-Hallum was engagedas non-exclusive financial advisor to the company. That, of course, does not require Craig-Hallum to pick up coverage, but it certainly would make sense. In fact, given the strong growth story, well-defined industry sector, and M&A story (potentially of interest to investment banks), it would make sense that many analysts would pick up coverage or invite the company to their conferences, non-deal road shows, etc.
4a. Limbach came public via a SPAC (Special Purpose Acquisition Company or “blank check” company). Despite the many SPACs that have been formed over the past few years, they still have a fairly awful reputation among most investors – their day 1 funding likely reflects the fact that day 1 SPAC investors are guaranteed all of their money back. This reputation appears well deserved: data shows that SPACs, on average, have underperformed the market (keep in mind, on average).