Below is a quick summary of Gulf Island Fabrication (Ticker: GIFI) which we believe has little to no intrinsic value downside with a reasonable path to a 2x and potentially higher over the next 1-2 years. This is a catalyst rich, earnings recovery story enhanced by material pending sales of non-core assets. A couple of headline items:
- Pro-forma for assets sales and insurance recoveries an investor is paying less than $50MM for this business today (current stated EV is ~$135MM)
- Considering cash presumed from asset sales – we think investors are paying roughly 1.0X 2020 EBITDA
- A combination of recently booked project awards (largest in company history) and substantial pending awards (even larger) will transition GIFI from its presently impaired financial profile to a much higher level of Revenue and EBITDA
- At $9.50 the stock is trading near 20-year lows but we see a path to a high-teens stock with mid-20s possible in a couple of years (for most of history the stock has traded between $10 and $30)
- We note that GIFI is reporting earnings soon - we don’t expect anything promising in near term numbers. Investors need to look to 2019 for the picture to improve.
What does Gulf Island do? Mostly two things:
1. Fabrication - primarily of oil and gas and petrochemical infrastructure. They build structures at their dockside yards (large open spaces utilizing welders and cranes). They are then shipped for final installation topically as part of offshore E&P platforms or at onshore petchem facilities.
The Fabrication Division has VERY little work right now and is the primary source of earnings challenges and overall company weakness. Basically, new investment in offshore E&P infrastructure is currently quite limited and GIFI management does not anticipate a near-term uptick. Their best hope is to further expand into fabrication of onshore modules (more on this in a moment – they have a potential “company maker” in the wings)
2. Shipbuilding – this division builds offshore supply vessels, research vessels, Navy vessels, tugs, icebreakers, etc. From a margin/optics perspective things are not great at this division either. They have been in a dispute with a customer (highly levered GOM client) over some E&P vessels and this has killed margins and created legal overhang. Further, GIFI has accepted recent work at very low margins just to keep workers occupied. Despite poor near term earnings, looking into 2019 and once they work through transitory issues, we see Shipbuilding gaining momentum with improved earnings power (will explain more in a moment).
Assessment of Business Quality?
Business quality is mediocre at best and this is clear from GIFI’s inability to generate long term growth in shareholder value. Historically though, on the back of accelerating EBITDA, the stock traded much higher and we believe it will again. The stock has dipped below $10 a number of times in the past – but, it has also bounced above $30 many times as well. The business quality may be suspect – but, the stock will perform under the right circumstances.