Description

Hill International (NYSE: HIL) was written up 8 months ago by gi03. The stock is still at $4.30 per share but a number of positive developments have taken place that we believe warrant a new write-up. Over the last 8 months, the following has taken place:

1.     The sale of the claims division closed on May 5, 2017 after a few months delay and a slight reduction in price. This sale was critical to de lever the business. Note that the Company still screens poorly because Hill has not yet filed its Q2 results so the sale is not reflected in the current financials and therefore the stock doesn’t screen well.

2.     On May 3, 2017, the Company announced that CEO David Richter was leaving the Company and being replaced by Paul Evans as interim CEO

3.     The Company is undergoing an aggressive cost-cutting program. We understand from the CEO that they have hired a cost consultant. We understand that this cost reduction program is well underway. For example, the corporate section of the website only includes 4 people when it used to include 7. We called the Company and asked to talk to the people who were no longer on the website and were told that these people were no longer with the Company. We understand that overhead is being reduced and some locations are being closed. We suspect the interim CEO will provide more information when they release Q2 numbers. We continue to believe this business should generate at least 10% EBITDA margin.

4.     On May 18, 2017, Ancora Advisors sent a letter to the Company suggesting it reviews strategic alternatives. Following this public letter, a number of shareholders (including us) have privately expressed the same view – that the company should run a parallel process of reviewing what the Company could be worth to third parties while concurrently doing a CEO search. The Richter family, which owns more than 20% of the Company, has also expressed public support for the Company. Article below.

5.     On July 18, 2017, Deal Reporter came out with an article that Hill had hired an investment bank to do a strategic review.

As background, Hill is an international project management firm with great reputation that has managed some of the largest projects in the world. The Company’s website gives a good overview of the business.

At $4.30 per share, the pro-forma enterprise value (considering the sale of the claims division) is around $220 million. That number is not precise because the company is trying to collect on receivables (and was paid some amount in Q2 I believe) but may have also lost some FCF during the quarter because of all the severances related to the cost reduction program. Guidance for 2017 for the project management business is $400 to $425 million in revenue. EBITDA this quarter or next is irrelevant in my opinion. Based on discussions with CEO and peers, we believe EBITDA margin should be north of 10% so at least $40 million. If that’s the case, we are buying the business at around 0.5x sales and 5.5x EBITDA.

Here are some peers to provide reference.

NV5 Global – Nasdaq: NVEE – 2017 Revenue 345 million; 43 million EBITDA – 12.4% EBITDA margin – trades at 1.5x revenue and 12x EBITDA

Tetra Tech – Nasdaq: TTEK - 2017 Revenue 2,017 million; 228 million EBITDA – 11.3% EBITDA margin – trades at 1.2x revenue and 11x EBITDA 

TRC Companies was taken over recently by a PE firm. – LTM Revenue 529 million; LTM million EBITDA – 49.1 million - 9.3% EBITDA margin – was taken over at 1.2x revenue and 13x EBITDA.

I think these numbers make it pretty obvious that HIL at 0.5x sales and 5.5x normalized EBITDA is a bargain. I expect that within the next 12 months the Company will be sold. It makes industrial sense. Why keep this small project management firm public given the amount of overhead? The industry is acquisitive and there are a number of logical buyers. I expect a sale to take place between 1 and 1.25x revenue or between $8 and $10 per share. If the Company doesn’t get sold and operates as a standalone enterprise, there is significant upside as well, although not as much as if a buyer comes in and pays us some of the synergies. Assuming $40 million of normalized EBITDA and using 9x EBITDA multiple (a discount to comps) would yield a stock price around $7 per share.

The Board is working for the shareholders. Chairman Craig Martin is the former CEO of Jacobs. He doesn’t need this and in my opinion has no other agenda but to do the right thing for shareholders. We feel the same way about a number of board members including David Sgro of Crescendo and Paul Evans, the interim CEO.

The stock has traded off lately because the Company has delayed its Q2 filings. From talking to management, we understand that this has to do with how to exactly account for the gain of the sales of the claims division and don’t believe this is significant. We expect filings in the next couple of weeks.

The valuation doesn’t take into account additional money tied into Libyan receivables. We don’t expect they will get paid but there is some optionality there.

Downside is limited given the valuation and the unlevered balance sheet.



Press article regarding former CEO David Richter's views about sale:  

Hill’s former CEO and top shareholder backs activist’s call for sale

24 May 2017 | 22:18 UTC

Hill International [NYSE:HIL] should not resist a recent activist call to explore a sale, the company’s top shareholder and former CEO David Richter told this news service.

Richter, who was Hill’s CEO before stepping down earlier this month, said the board should “do anything possible to try to sell,” including hiring a bank to solicit interest and engaging. Together with his father Irvin, Richter owns 20.4% of the company.

On 8 May, shortly after Richter’s departure, activist investor Ancora Advisors urged the board of the Pennsylvania-based construction company to initiate a strategic review, as its search for a new CEO progresses. In a letter, Ancora said Hill could fetch an more than USD 7 per share and attract significant strategic interest.

Richter agreed that an offer at that level would put significant pressure on the company to sell.

His stance has dramatically shifted from when he was at the helm of the company. Last year, he fended off an attempt by Bulldog Investors to push Hill into a sale, which triggered a proxy fight. The contest ended with a court settlement that gave each of Bulldog’s three director candidates a seat on the board. Bulldog did not have to agree to a standstill commitment as part of the settlement, according to an SEC filing.

Now, following Ancora’s fresh call for a sale, representatives from the investment firm are expected to start a dialogue with the company’s chairman, Craig Martin, later this week, a source familiar with the situation said. Ancora owns around 2% of the company, the source said.

In an announcement detailing the changes to Hill’s executive team, on 3 May, interim CEO Paul Evans said the company's focus going forward would be on “maintaining liquidity, improving internal controls, optimizing financial performance and returning to profitability”.

Richter said he believed Hill’s board, which is now made up with a majority of independent directors, is unwilling to sell.

Richter argued that the board, since its reshuffle, lacks the necessary vision to oversee the company as it is pushing forward an agenda too skewed toward cost-cutting. He said this approach could lead to losses in the talented senior management team and weigh on the business, especially at a time of “short-term macro pressure”, particularly in the Middle East.

Richter noted that Ancora’s thesis is likely to find broad support in the shareholder base, where event-driven hedge funds and activists are well represented.

Beyond Ancora and Bulldog, notable activist investors in Hill include Engine Capital, Crescendo Partners and Petrus Securities, according to this news service’s database.

With the CEO position up for grabs, an unlevered balance sheet and a simplified business after the sale of Construction Claims Group in December, Hill seems to offer a unique window of opportunity for buyers to engineer a deal, Richter said.

Aecom [NYSE:HIL] and Jacobs Engineering [NYSE:JEC] are logical domestic buyers, Richter said. Richter noted that Hill is strong in the project management area, where both companies would like to grow.

Hill's chairman, Martin, is a former CEO of Jacobs.

Companies in the engineering and construction (E&C) industry – especially public ones – are “always acquisitive”, Richter said. There are “20 other firms that could buy Hill,” he suggested, noting that financial sponsors with an E&C platform could also be interested.

“I would be surprised if this company was not sold within the next six to 12 months,” Richter said.

This is an “off-cycle” campaign for Ancora as the advance notice period for shareholders to make proposals has now closed ahead of the company’s 27 June AGM. Still, the activist appears to be determined to hold onto its position until next year’s AGM and run a proxy fight if the company pushes back, the source said.

Hill rebuffed a takeover approach from DC Capital Partners in 2015. The private equity firm made a USD 5.50-per-share and a subsequent USD 4.75-per-share offer, which were both rejected.

Hill and Ancora declined to comment.

Catalyst

Q2 results get filed

Q2 earnings call provides further details regarding margin potential of the business

Cost cutting implementation

Sale of the company