Value Investors Club / CONRAD INDUSTRIES INC (CNRD)

Description

This guy ain’t no ______ MC

I know everything he’s ‘bout to say against me

I am white, I am a ____ bum

I do live in a trailer with my mom

My boy Future is an Uncle Tom

I do got a dumb friend named Cheddar Bob

Who shoots himself in his leg with his own gun

I did get jumped by all six of you chumps

And Wink did ___ my girl

I’m still standing here screaming, “___ the Free World!”

Eminem in 8 Mile

Segue…….Conrad Industries is an illiquid, family controlled company trading on the pinks, operating in a

depressed environment with few immediate signs that the worm has turned. And yet, we believe that for

patient value investors the current share price embeds a comfortable margin of safety. As always, we don’t

endeavor to answer the question of when we might get paid but believe the enterprise is worth substantially

in excess of current trading levels and, for us, that is enough.

Company Description from latest annual report

We specialize in the construction, repair and conversion of a wide variety of steel and aluminum marine

vessels for commercial and governmental customers. Through our subsidiaries, we operate five shipyards: one

in Morgan City, Louisiana, three in Amelia, Louisiana and one in Orange, Texas. Our Company was founded in

1948 and commenced operations at our shipyard in Morgan City. From 1996 through 2003, we acquired and

expanded our Conrad Amelia yard, our Conrad Orange yard and our second yard in Amelia, Conrad

Deepwater.

Current situation overview

The past few years have been challenging for the company, in some ways historically so. Hitherto, the

company was the beneficiary of the shale boom—constructing inland barges—and that business dried up. This

is a large fixed cost business and when backlog was chewed through, there was a negative absorption effect at

play. At the same time, vessel repair business has slowed to a crawl as capex dollars got slashed across the

industry and vessels were laid up rather than repaired.

Oh, That LNG contract

In speaking with industry participants, it is clear that Conrad has a stellar reputation for product quality and

on-time delivery. Oftentimes, customers will ask for product specifications that Conrad is happy to deliver on.

Insofar as a shipyard can be entrepreneurial, Conrad has a history of product innovation; cognizant of their

fixed costs, they have willingly adapted to market conditions and learned to construct various types of vessels

should they see an opportunity for meaningful revenue. In the past this has led to losses as the company has

moved up the learning curve and essentially treated early new vessels as loss leaders. In 2015 they

announced that they would be constructing the first LNG bunker barge in the United States

https://maritime-executive.com/pressrelease/conrad-receives-order-for-lng-bunker-barge.

While we anticipated a steeper learning curve than in the past, the size of the losses and the duration have

been unpleasant surprises. The running tally is:

2015: (4mm)

2016: (13.2mm)

2017 9mo: (5.5mm)

It is probably too generous to back out all of the losses since the work did absorb some overhead, but we are

mentally adding back about half of them to arrive at run-rate profitability for the business. As such, the

current valuation currently looks like:

Valuation metrics

Shares outstanding: 5.057mm

Market cap at 16.75: 85mm

Net cash: 11mm

Tangible book value: $22.95

P/TBV: 73%

YTD reported EBITDA: 7.8

Annualized EBITDA: 10.4

Annualized EBITDA ex LNG barge losses : 13.7

EV/Annualized EBITDA ex losses: 5.4x

We think given where we are in the cycle, the above metrics are undemanding, and auger well for future

returns. The LNG vessel has been an expensive lesson but we do think there’s a first mover advantage and

potentially meaningful business to be won in the years to come.

We have found that reversion to the mean is as powerful a concept as there is in investing. As with most

cyclicals, the strong should, in theory, not only survive, but thrive. The competitive landscape has been

decimated during this energy downturn-shipyards have gone out of business, some have consolidated, and

Conrad has taken the opportunity to modernize many of their processes. We can envision a day when

business returns (albeit not from the same customers) and the incremental revenue dollar flows through the

p&l at increased margins. In the meantime, we are content to wait it out with this management team and this

balance sheet.

Recent Financials

Stock Ownership

Beneficial Owner Number of Shares % of Total Outstanding

John Parker Conrad Family, LLC 1,043,267 20.5%

J. Parker Conrad 1 95,495 1.9%

John P. Conrad, Jr. 2 2,124,920 41.7%

Katherine C. Court 3 1,043,267 20.5%

Daniel T. Conrad 13,700 0.3%

Michael J. Harris 7,000 0.1%

Cecil A. Hernandez 50,968 1.0%

Ogden U. Thomas, Jr. 2,000

All Directors and Executive Officers as a group (7 persons) 2,198,588 43.2%

1 Represents shares held by The Conrad Family Foundation, of which Messrs. Conrad and Conrad, Jr., act as co-trustees.

2 Includes 374,216 shares held by the John P. Conard, Jr. Trust for which Mr. Conrad, Jr. exercises sole voting and investment control

as trustee for the trust. Also includes 95,495 shares held by the Conrad Family Foundation, of which Messrs. Conrad and Conrad,

Jr.act as co-trustees. Also includes 1,043,267 shares held by the John Parker Conrad Family, LLC, of which John P. Conrad, Jr. and

Katherine C. Court are the sole managers.

3 Represents 1,043,267 shares held by the John Parker Conrad Family, LLC, of which John P. Conrad, Jr. and Katherine C. Court are

the sole managers.

Earlier this year Parker Conrad, the patriarch, passed away. We are unsure as to the tax consequences for the

individual family members and what liquidity needs might result.

Share Buybacks

The company has aggressively repurchased shares throughout this cyclical downturn. Shares outstanding by

quarter:

1Q15 5,862,287

2Q15 5,741,132

3Q15 5,614,606

4Q15 5,358,144

1Q16 5,177,069

2Q16 5,164,114

3Q16 5,130,166

4Q16 5,112,511

1Q17 5,100,282

2Q17 5,093,541

3Q17 5,057,469

Conclusion

Conrad Industries, like several of the other opportunities we have found in the past couple of years, is a

depressed cyclical swimming upstream. Some investors believe the cycle will never turn and we are content to

take the other side so long as the balance sheet allows for significant runway. This is a family run company

that is proud of its role in the community and has been a responsible steward of capital for many years. We

think this cycle will turn and there will be fewer participants bidding for the increased work. We can buy into

this enterprise at a meaningful discount to tangible book value while the company continues to make a bit of

money. This has historically been a recipe for attractive returns.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

The cycle turns and the company capitalizes upon it
The family decides to sell the company

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			2017	2018
Price:	16.75	EPS	0	0
Shares Out. (in M):	5	P/E	0	0
Market Cap (in $M):	85	P/FCF	0	0
Net Debt (in $M):	11	EBIT	0	0
TEV (in $M):	74	TEV/EBIT	0	0