Description

"The best hedges are the ones you would invest in anyway even if you didn't need the hedge. This fits that bill." - Bill Ackman

I think Aecom is a good hedge to Target Hospitality in a worst case and a multiplier on TH returns in a base/best case.

In the recent earnings call, TH management said these things:

“We remain pleased with the progress and anticipate additional contract specifications to be finalized later this year. In addition, Target has strategically partnered with another established government service provider and has jointly submitted several proposals supporting approximately $1 billion of cumulative capital deployment to create additional, highly customized and purpose-built ICP solutions for the United States government. Importantly, these proposed solutions span numerous geographic locations. Providing the U.S. government with maximum flexibility as they determine their desired location for new ICP sites. As a reminder, Target recently acquired strategic humanitarian assets in anticipation of this request from the U.S. government. These assets have been proposed as a viable solution to meet the government’s desired increase in ICEA capacity. Further, Target’s established presence, providing these critical and highly customized solutions to the U.S. government is an essential element, and we believe positions Target advantageously to pursue these additional ICF opportunities.”

“Look, I'm not going to go into names, again, open bid, right, still out there telling we're very excited about who we partner with very large government services firm. this bid really takes in -- it's much larger than what we're doing today, right? We're going after all of the bid. We've been on off facilities. Geography wise, it stretches much further than where we're at, still going and partnering with a firm like that really made sense.”

I believe this partner is Aecom. Why?

• We know there is one new partner for TH for the IDIQ process. Given TH is not a direct IDIQ bidder, TH’s partner has to be on the IDIQ award winner list.
• Aecom is the only large government services firm without a history of UC housing on the list of IDIQ award winners
  • Southwest Key, Rapid Deployment (Fort Bliss), and Deployed Services are the large contractors. However, they all have experience sourcing facilities and operating UC housing contracts. They most likely don’t need to partner with someone like TH.
  • The rest of the bidders are not large government service providers capable of multi-location wins.
• Aecom has demonstrated its interest in getting into this business in the past. It protested the sole-source award to Cherokee Nation for Carrizo Spring in 2022. Obviously Cherokee Nation could not get the Carrizo Spring facility ready (see previous posts) so it became a moot point.
• As a potential first time ICF operator, Aecom is unlikely to win the bolus of ICF awards by itself.
  • The government would need some kind of operating track record for contracts of this duration (10 years long) and size (potentially billions of dollars, thousands of children, thousands of staff).
  • This is just my view but the Emergency Intake Sites most likely served as a “trial run” for operators, which then surfaced a strong operator like TH/Endeavor that could operate a 1 year ICF. Successfully operating a one year ICF would be a good criteria for operating a 10 year agreement. Aecom would be able to leverage TH’s expertise to demonstrate credibility to the government.
• Aecom is the only one with operational heft to manage multiple large sites, which squares with TH’s comment that TH’s additional solutions (the new strategic assets acquired in April 2023) span numerous geographic locations. The rest of the players are too small or don’t have the experience/locations.
• Aecom has said it has partnered with others for ICFs.

If I’m right about Aecom and Aecom/TH win one or several ICFs, several hundred million of cash flow from multiple ICF awards on ~$1 billion of EBITDA or ~$580m of LTM FCF will be a big deal. It’s obviously impossible to say with precision right now given we don’t know yet how the economics will be split.

If I’m wrong about Aecom and it fails to win any awards, then this is an E&C that’s benefiting from infrastructure, sustainability/energy transition, supply chain transition, and increasing fiscal funding IIJA/IRA/Chips Act. This doesn’t have quite as much exposure as MTZ or PWR to the sexiest portions of E&C today but it still benefits from similar secular trends.

In the scenario Aecom wins a couple by itself but somehow TH loses all three IDIQ bids AND other ICF solutions, then the uplift in Aecom shares should offset the  probability of TH losses.

Limited downside, potential juicy upside in the next 1-2 months.

Catalyst

ICF task orders