tag:blogger.com,1999:blog-2080506270244832638.post7993149009246429189..comments2024-03-28T07:17:13.573-05:00Comments on Clark Street Value: Technip Energies: FTI Spinoff, Forced Selling, Asset-Lite BusinessMDChttp://www.blogger.com/profile/10679835609782815537noreply@blogger.comBlogger21125tag:blogger.com,1999:blog-2080506270244832638.post-70774635509187401582021-09-15T09:00:10.858-05:002021-09-15T09:00:10.858-05:00I think so, from what I can glean the business is ...I think so, from what I can glean the business is performing better than they laid out initially, thesis intact, just taking a little time to play out.MDChttps://www.blogger.com/profile/10679835609782815537noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-62131700120368780892021-09-14T16:58:15.159-05:002021-09-14T16:58:15.159-05:00FTI has continued selling down their stake and the...FTI has continued selling down their stake and the overhang could clear. Is the valuation / business thesis still on track?InvestingIdeasOnlyhttps://www.blogger.com/profile/17759317903624486815noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-57439837971800881932021-03-02T20:49:35.231-06:002021-03-02T20:49:35.231-06:00Thanks Jim for your perspective, appreciate the in...Thanks Jim for your perspective, appreciate the insights. Yeah, maybe this is a shorter term special situation trade and don't confuse it with a long term hold that exposes you to all the business risk.MDChttps://www.blogger.com/profile/10679835609782815537noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-74531241841029812282021-03-02T19:36:27.146-06:002021-03-02T19:36:27.146-06:00PS. Forgot to add there is a nasty little thing c...PS. Forgot to add there is a nasty little thing called retention. It is 10% and is not payable until the owner has filed a notice of completion and then paid days thereafter. As most profits turn out to be less than 10%, there will be a time where profit is fully recognized but the cash flow related to that profit is not received yet. Now factor that in for 100's of projects. The house CF scenario was too simplistic.Jimhttps://www.blogger.com/profile/06973763424450222215noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-56191542727402476322021-03-02T19:28:56.862-06:002021-03-02T19:28:56.862-06:00I mostly agree. I was the CFO for a construction ...I mostly agree. I was the CFO for a construction firm for nearly 40 years. Percentage of completion accounting for fixed price contracts is so full of estimates that rarely, if ever, prove to be true when a project is completed. Just estimating the percentage completed is an exercise in guesstimating letting alone figuring profits for a 5 year project into the future. There are two types of forecasters - those that don't know and those who don't know they don't know. I am gradually talking myself out of this holding for other than a quick profit turnaround as it and the parent were clearly indiscriminately sold on the spinoff.Jimhttps://www.blogger.com/profile/06973763424450222215noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-82033455286199796342021-03-02T12:56:14.202-06:002021-03-02T12:56:14.202-06:00Thanks Colin, very thoughtful comment, enjoyed the...Thanks Colin, very thoughtful comment, enjoyed the example. While I agree with the example, the complication comes when you have 100s of projects at various stages, but you're probably right, best to completely offset the cash and treated it as restricted cash or as you put it, the clients.<br /><br />Fixed price contracts for a business like this is very risky, I mentioned it briefly in my write-up but probably should have emphasized it more. To use your house example, when doing a rehab project how many times does the estimate come down when you rip open the walls or floors? Almost never.MDChttps://www.blogger.com/profile/10679835609782815537noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-34083901366938447692021-03-02T11:16:31.692-06:002021-03-02T11:16:31.692-06:00Two comments:
1/ you have to factor in the value ...Two comments: <br />1/ you have to factor in the value of Technip Energies that was "carved out" of the FTI market cap upon the spin (technically they only carved out 51.1% of the value). But there is probably some forced selling now that FTI is no longer in the S&P 500.<br /><br />2/ The subsea market currently has too much capacity, so competitors are locking in multi-year projects today at low margins (sub-10% EBITDA margins). Many think that FTI will continue to earn ~10% EBITDA margins for the next few years as a result. You can see the reverse of this in 2017 when the company's margins last peaked in the mid- to high-teens because they were working through a final year of lucrative contracts struck at the peak of the oil boom in early 2014, when oil was >$100/bbl. Furthermore, FCF conversion from EBITDA is very poor due to corporate overhead, interest on debt, and the asset-intensive nature of this business. <br /><br />I've spent a lot of time looking at FTI (the parent), and whether the stock is cheap truly comes down to whether you see the subsea market tightening sooner rather than later. I really don't know.Colin Mhttps://www.blogger.com/profile/06512144253220060405noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-71511776638636766292021-03-02T11:10:27.549-06:002021-03-02T11:10:27.549-06:00Here are my two cents on the calculation of net de...Here are my two cents on the calculation of net debt: one should assume that Technip is in a net debt position to be conservative. THNPY has a €2.6bn net contract liability (NCL) (€3bn contract liabilities less €0.4bn contract assets), €2.9bn in cash, and €0.75bn in debt. The calculation of net debt is thus €2.6bn NCL + €0.75bn debt - €2.9bn cash = €450m net debt.<br /><br />However, the NCL includes Technip's future profit from contracts for which the customer has paid an advance (which creates the contract liability in the first place). Assuming a company-average 15% gross margin on the €3bn of future revenues to be recognized from the contract liability, then roughly €450mn of profit is "baked into" the contract liability on the balance sheet. Some analysts choose to count some or all of this €450mn as Technip’s cash. As I'll show below, including anything less than the entire gross contract liability in the calculation of enterprise value is effectively "double counting" profits. The reason is simple: if you assume that future profits are ours today to subtract from net debt, then you cannot capitalize these same profits with a multiple of EBITDA later.<br /><br />As others have pointed out, E&C companies are paid up front by clients for each stage of a project. Built into that up-front payment is the company's estimated profit on the project. Estimated is the key word here because the project revenue is often fixed (many of THNPY's contracts are fixed price), but costs are not. And cost overruns in this business are common.<br /><br />Here's a simple example: I agree to build you a house for $100k, and you agree to pay me $50k on day one and $50k on day 181, with the house expected to be complete on day 360. I, as the contractor, estimate that I will earn a $10k profit on the job assuming that lumber prices, wage rates, and the number of labor hours needed to complete the project come in at or below my estimates.<br /><br />On day one, my balance sheet will show $50k of cash and an offsetting $50k contract liability. The "net worth" of my venture is still $0 as I have recognized no revenue or profit because I have yet to start building. Technically, my net worth could be $10k in the future (my baked-in profit on the project), but this is by no means guaranteed.<br /><br />I will recognize revenue ratably over the 360-day contract term or in chunks based on certain easily-observable milestones, e.g., the foundation is poured, the house is framed, the sheet rock is hung, etc. I will expense my costs as they are incurred, and any difference between the revenue recognized in a period, say, a quarter, and the costs recognized in that same period becomes my profit or loss for the period.<br /><br />My cash flow statement will be quite different. I will have two large cash inflows: $50k on day one and $50k on day 181. If I have estimated the project well, I will never be in a negative cash position on the project, i.e., my costs in the first 180 days will not exceed the $50k cash advance from you, my client. However, the cash is never really mine. It belongs to the client until day 360, when whatever is left in the project bank account is mine to take.<br /><br />So how do we value my project or a portfolio of similar projects? If we assume a positive net worth of $10k on day one (my estimated future profit based on the terms of the contract) AND we capitalize the future "flows" of the project - my $10k profit, recognized over the period - then we are double counting my profit: once in the calculation of initial net worth and again in valuing the flows from my portfolio of similar projects.<br /><br />If you read sell-side notes on THNPY and other E&Cs you'll see that the calculation of net debt for valuation purposes is somewhat of a debate in the industry. There is no right answer. It's just a matter of exercising your own judgement when valuing one of these businesses.<br />Colin Mhttps://www.blogger.com/profile/06512144253220060405noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-48170918499182646522021-03-01T12:08:41.073-06:002021-03-01T12:08:41.073-06:00After spinnoff, the parent's company shares (F...After spinnoff, the parent's company shares (FTI) hv been in alot of pressure too. Anyopinion on the valuation of parents company which still has almost half of spinoff hellopiyushhttps://www.blogger.com/profile/18300043166436506405noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-83021158536738487432021-03-01T11:57:16.537-06:002021-03-01T11:57:16.537-06:00good analysis ..even sell side analyst are divided...good analysis ..even sell side analyst are divided on this this with BoFA being too sell rating if i remember. what is not clear is the original motives for first merging and then this spinoff. If the business is really capital light and carries neg working capital, it should hv helped the parent's balance sheet as i suppose that the subsea activity should be cyclicalhellopiyushhttps://www.blogger.com/profile/18300043166436506405noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-75447841412240427232021-02-27T17:03:37.020-06:002021-02-27T17:03:37.020-06:001) I think I agree with you in spirit, its somewhe...1) I think I agree with you in spirit, its somewhere in between and I'm not sure where, but by going with $0 net debt, I'm giving them credit for 750MM of 3B Euro cash balance. I think that's fair for a going concern with a growing backlog?<br /><br />2) I don't think I would. Euro is the reporting currency, but roughly half of their cash (and maybe their revenue?) is USD.MDChttps://www.blogger.com/profile/10679835609782815537noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-88814478912003894992021-02-27T14:47:39.798-06:002021-02-27T14:47:39.798-06:001) Project management companies typically hold lar...1) Project management companies typically hold large cash balances (think Fluor (FLR) for example) and significant 'net cash' positions. I really don't see why but I consider all this cash is restricted and can't be used in debt extinguishment. It's likely debt is covered by project cash flows which makes the company dependant on its customers. In other words, TNHPY may even default if customers delay their payments significantly (and customer concentration is high). In that case 750 mln in debt is a serious risk + it must be excluded from FCFE. Any thoughts on that matter?<br />2) ADRs correlate with EUR/USD rate and EUR is on the high end of its 5-y range. Should we correct PT by currency risk?Atonnoreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-88111580075572142962021-02-26T16:42:20.620-06:002021-02-26T16:42:20.620-06:00Thanks, yeah I made a mistake and stated '21 e...Thanks, yeah I made a mistake and stated '21 estimates in my valuation math when I quoted their '20 numbers. '21 revenue guidance is 6.5-7.0B euros.MDChttps://www.blogger.com/profile/10679835609782815537noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-34680322049250120762021-02-26T12:55:23.813-06:002021-02-26T12:55:23.813-06:00New report out today. Appears some of my assumpti...New report out today. Appears some of my assumptions were on the conservative side. Minimum PT = $19-21.Jimhttps://www.blogger.com/profile/06973763424450222215noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-80951402058802473502021-02-25T20:13:03.817-06:002021-02-25T20:13:03.817-06:00Glad to se someone with essentially the same analy...Glad to se someone with essentially the same analysis. Good thorough analysis. The European accounting threw me off for a bit. I was a CFO at a firm that used % of completion accounting - there are offsetting assets and liabilities when employed correctly. any way I appreciate your work here.Jimhttps://www.blogger.com/profile/06973763424450222215noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-61689978351251367782021-02-25T13:45:20.653-06:002021-02-25T13:45:20.653-06:00I think if FTI intended for this to be a garbage b...I think if FTI intended for this to be a garbage barge it would have been structured differently as you suggest, a lot of spins will be loaded with debt, but here FTI retained equity to later sell. Wouldn't do that if you expected the business to quickly fall off a cliff.MDChttps://www.blogger.com/profile/10679835609782815537noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-6097989149903460702021-02-25T13:01:12.637-06:002021-02-25T13:01:12.637-06:00Management evidently thinks they need to keep the ...Management evidently thinks they need to keep the cash. In past years from the prospectus its free cash flow was mostly sent up to the parent Technip/FMC. It's interesting that unlike other spinoffs (e.g. Oxy/California Resources) the parent did not extract a lot of cash on the spinoff, in fact it looks like it didn't take any. So both the parent and spin seem to agree the cash is needed on the balance sheet. I did a rough calculation of operating cash flow minus payments to its Yamal partners for 2017 through 6/30/2020 and got roughly 1.20 euros/year in cash flow (which is almost all free cash). Technip Energies also works on some hydrogen production projects so this could be one of Cathy Wood's disruptive technologies (somebody send her an email). <br /> R Rayhttps://www.blogger.com/profile/12439059656818809412noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-6407748791188976612021-02-25T09:02:45.987-06:002021-02-25T09:02:45.987-06:00I haven't, but sounds interesting, I'll ta...I haven't, but sounds interesting, I'll take a look thanks.MDChttps://www.blogger.com/profile/10679835609782815537noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-78186275761088772082021-02-25T08:41:25.965-06:002021-02-25T08:41:25.965-06:00Thanks for writing up this idea. Have you happened...Thanks for writing up this idea. Have you happened to see FRTT? Much smaller, but similar dynamics (spin-off on the OTC, parent was in the Russell 2000 but FRTT is not). The spin actually happened back in December, but the shares only started trading on Friday.timidbidhttps://www.blogger.com/profile/11606303869402287925noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-78740057113244664702021-02-25T08:07:23.196-06:002021-02-25T08:07:23.196-06:00Thanks for the thoughtful comments.
1) Yes, they ...Thanks for the thoughtful comments.<br /><br />1) Yes, they will have some interest expense but at the same time they'll have some interest income on the asset side, think this largely evens out. And yeah, more of a back of the envelope calculation, didn't run a big DCF on this business.<br /><br />2) I don't have a good sense of FCF in the near term, I share a lot of your reservations around the analyst day and some wish washy comments from the CFO. The NCL is fairly short lived versus say insurance float, so I'm guessing you need to build in some cash cushion in case of overruns on their fixed price contracts, etc. The company probably wants to over reserve in the early years of a big contract like their recently announced win in Qatar when the uncertainty is the highest.<br /><br />But you could be right, maybe this could be shortened to just a forced selling thesis and play the quick bounce, avoid all the business risk that comes with it.MDChttps://www.blogger.com/profile/10679835609782815537noreply@blogger.comtag:blogger.com,1999:blog-2080506270244832638.post-852512292917846492021-02-24T20:21:22.741-06:002021-02-24T20:21:22.741-06:00Thanks for the great writeup. I agree this looks ...Thanks for the great writeup. I agree this looks cheap, though I happened to be looking at SNC-Lavalin today and it's a great example of this business model (big, long-term infrastructure construction projects) going bad.<br /><br />A couple of questions on your FCFe model:<br /><br />1) I believe they are going to have $750 million in debt (bridge facility to be taken out by a bond offering), so in addition to taxes and CapEx, there will be some interest expense between EBITDA and FCFe.<br /><br />2) I understand you're doing a back-of-the-envelope, steady-state FCFe model in which NCL essentially stays flat. But do you have a sense of how the actual FCF is going to be over the next few years? From looking at the January 2021 investor day presentation and reading the transcript, I got the impression that the next few years may be a bit light on FCF as, among other things, the big Yamal project closes out. In addition, the analysts tried to get at this issue a few different ways, but management refused to answer it directly. See pages 60, 63, 65 here: https://investors.technipenergies.com/static-files/eeb0d958-6c7b-4e24-8014-37784cd19c66 <br /><br />My concern about medium-term cash flows was also heightened by management's repeated statements during the presentation that their medium-term plan was to dividend out 30% of profits and retain the rest to, among other things, "strengthen the balance sheet." If NCL is actually float that will be replenished by new contracts as older ones roll off, and you already have 2.9 billion in cash against only 750 million in debt, then why do you need to further "strengthen the balance sheet"? Indeed, the whole discussion of capital allocation was a big concerning, though this is all may be somewhat irrelevant if the point here is simply that spin dynamics have pushed this down too far.<br /><br />--KJPKJPnoreply@blogger.com