Description

Executive Summary

• Major corporate turnaround completed under new management team

• Company refocused on core business, restructured balance sheet, and growth opportunities

• Gaining momentum in market with TAM of $28B over next 3 years

• ESG-centric company with solutions that help reduce carbon emissions

• Stock investors largely unaware of turnaround and growth set-up – as seen by the ridiculously low valuation and a shareholder stigma of being a disaster from the previous management and board regime

• Last week’s acquisition of a solar energy company should bolster thesis that company can grow its clean and renewable energy business through strategic acquisitions

• Stock should re-rate to more of a growth ESG energy play 

Babcock & Wilcox (BW): advancing energy and environmental solutions that bring power and progress to our world

Company Background

Babcock & Wilcox provides high-quality, innovative renewable, environmental, and thermal technologies and has served critical power generation and industrial applications for more than 150 years.  B&W is going through a transformation and executing on a robust growth turnaround after recovering from losses related to several expanded-scope projects and returning to its core technology and delivery model. The company is implementing a $137mm cost saving initiative and reducing total secured debt by $347mm in 2021, positioning the company for growth and the ability to support clean energy growth initiatives.

B&W's transformation is gaining momentum, with new branding and a global expansion underway to pursue more than $6 billion in identified project opportunities in high-growth markets over the next three years. B&W is pursuing a further expansion of its clean energy portfolio through innovation and acquisition. We believe BW has strong climate control/renewable/environmental tailwinds and, when coupled with its global expansion and strong pipeline of opportunities, is positioned for strong double-digit revenue growth, margin expansion, and profitability in the coming years.

This new focus has transformed BW from a company founded in 1867, as a designer and marketer of its patented water-tube boiler for steam powered generators to a company now with an addressable market of $28B over the next three years. The turnaround began in earnest 2018 and continued throughout 2020, when the new management team settled or closed out unprofitable contracts, reduced costs and restructured the balance sheet.

We believe BW has strong climate control / renewable / environmental tailwinds and, when coupled with its global expansion and strong pipeline of opportunities, is positioned for strong double-digit revenue growth, margin expansion, and profitability in the coming years.

Financials & Valuation

As of June 30, 2021, the TTM revenues were $645mm and adj EBITDA of $66mm. In 2019, the company did $859mm in revenues but only $45mm in adj ebitda. The adj ebitda margin nearly doubled from 5.2% in 2019 to 10.1% in 2021 on nearly $200mm less in revenue but $21mm more of adj EBITDA – a testament to the turnaround underway. 

The company is in various stages of ~$6B in projects over the next three years, which will drive double-digit annual growth through 2023. At the end of 2020, backlog stood at $535M, which grew 20% Y/Y and has expanded further in 2021. The backlog should continue to grow especially as delayed projects come back to the table.

BW recently guided to 2021 adj EBITDA of $70mm-$80mm and 2022 adj EBITDA of $95-$105mm. 

In 2021, the company restructured the balance sheet through common stock, preferred stock and a senior not offering that reduced secured debt by $347mm. The company currently has $217mm in debt, and $144mm in cash. The net debt of $73mm represents leverage of 1.1x. 

At $6.10 and with 85.8mm shares outstanding, BW has a current EV of $626mm and with the outlook for continued growth, and the turnaround complete, the risk-reward at this level is beyond compelling. Applying a per group multiple of 10x to expected 2022 EBITDA of $100MM, would yield an EV of $1B – providing a strong upside case for equity appreciation. 

During the Q2 conference call BW’s management announced they were in the due diligence process in the renewables sector and/or emerging technologies.  I assume that the announcement last week of the acquisition of Illinois based Fosler Construction, a solar installation company is what they were referring to.  This is another indication that BW has completed the turnaround and turning its attention to growth. 

Business Overview

BW generates more than 85% of its revenue from its vast installed base, through aftermarket upgrades and parts & services forming a sustainable base business. 60% of revenue are from the U.S., but the opportunity for future growth will come from international sources. 

BW’s new management team and board have a proven track record of creating shareholder value, are aligned with shareholders and have the full support of the largest shareholder - B. Riley Financial which owns 31.8% of the shares outstanding.

• BW’s directors are required to own 5x their annual base retainers in common stock

• BW actively reaches out to stockholders through an engagement program

• Kenny Young, the Chairman and CEO (before joining RILY) was the CEO of Lightbridge Communications Corp. (LCC), which was the largest independent telecom construction and services company in the world; under his leadership LCC’s revenues grew more than 200% and expanded its geographical presence into more than 50 countries; LCC was acquired by Tech Mahindra in November 2014

BW operates in three market segments:

B&W Thermal (60% of revenue): steam generation equipment, aftermarket parts, construction, maintenance, and field services for plants in the power generation, oil and gas and industrial sectors. BW has an extensive global base of installed equipment for utilities and general industrial applications, including refining, petrochemical, food processing, metals and others.

• More than 5,000 industrial water-tube package boilers installed in a variety of facilities, including refining, petrochemical, food processing, metals and mining composite and carbon fiber, carbon black and wood products

• ~110 GW of baseload power generation capacity through ~330 operating fossil fuel boiler units in the U.S.

• ~180 operating utility and industrial boiler units across 38 countries outside of North America (excluding waste-to-energy and biomass)

B&W Renewable (22% of revenue): cost-effective technologies for efficient and environmentally sustainable power and heat generation. BW’s leading technologies support a circular economy, diverting waste from landfills to use for power generation and replacing fossil fuels, and reducing emissions.

• 50+0 waste-to-energy and biomass-to-energy units at more than 300 facilities in more than 30 countries, serving a wide range of utility, waste management, municipality and investment firm customers.

• Combined installed capacity of WtE technology is more than 48mm tons of waste per year and more than 5 GW of electricity from BW’s BtE technology

• ~90 pulp and paper recovery boiler units in North America; at nearly 50%, the largest installed base among OEMs

B&W Environmental (18% of revenue): a full-suite of best-in-class emissions control  and environmental technology  solutions for utility, waste to energy, biomass, carbon black, and industrial steam generation applications around the world. BW’s broad experience includes systems for cooling, ash handling, particulate control, nitrogen oxides and sulfur dioxides removal, chemical looping for carbon control and mercury control.

• Patented ADIOX and MERCOX flue gas environmental technology installed at 120+ plants

• Large installed base of wet and dry scrubbers to meet environmental regulations and technologies to improve ESP performance at a wide range of utility and industrial installations.

• Nearly 2,000 cooling system units (7,000 + cells) across the globe

All  three of BW segments are expected to grow for the foreseeable future, however, given the growing market for renewable and environmental energy and industrial solutions, the company expects the Renewable and Environmental segments to grow their share of overall revenue—likely driving a higher valuation, considering the ESG nature of these services.

Catalyst

Re-rating of stock to renewable energy / ESG multiples

Valuation 

Restucturing complete - market awareness