- Forced selling by both index funds (FTI was dropped from the S&P 500 index earlier in February ahead of the spinoff) and U.S. domestic oriented managers that can't hold the Paris listed/headquartered Technip Energies. One data point around forced selling, the shares closed today at €11.26 in Paris, but $12.01 in the U.S. ADR.
- Complicated percentage of completion accounting that makes the business difficult to analyze that may lead to some valuation errors, or obscure the attractive economics of the business.
- Technip Energies is a surprisingly asset-lite "people business" despite the cyclicality of mega projects, their backlog (€13B) for the next several years is in place, they're guiding to mid-single revenue digit growth over the medium term and thus have no immediate concerns about growth trailing off, yet it trades for a ~15+% FCFE yield with what's essentially a zero net debt balance sheet.
Following the spinoff, TechnipFMC retained 49.9% of the ownership of Technip Energies with the intention to monetize that stake over the next 18 months to reduce debt and shore up the parent's balance sheet. While there will be some short term overhang, it also highlights that the parent didn't want to saddle the spin with debt as is typical lately in order to pay a dividend back to the parent -- FTI wants the spin to trade well to maximize the eventual sale proceeds.
- Building mega projects is an inherently difficult business, the work is often performed in remote areas, takes many years to complete and your clients tend to be politically exposed state run entities.
- Some of their contracts are fixed price, which means Technip Energies takes a significant amount of risk in the projects coming in under budget and on time.
- Client concentration is also high as you'd expect with projects of this size, 5 clients make up 73% of their backlog.
- With TechnipFMC retaining a significant ownership position in Technip Energies, there could be a share overhang, so we might be only be partially through two of the three forced selling events. First was the S&P 500 deletion pre-spin, then the ADR selling off from spin dynamics and U.S. mandate deletion, third will be when TechnipFMC fully exits their stake. TechnipFMC has pre-sold €200MM worth of Technip Energy shares to BPI based on an initial VWAP, an investor in the business already.