|Shares Out. (in M):||21||P/E||0||0|
|Market Cap (in $M):||160||P/FCF||0||0|
|Net Debt (in $M):||73||EBIT||0||0|
Buy LAYN convertible bonds. The issue sizes are small and the paper is relatively illiquid but if you can find them, I believe that both LAYN convertible bonds offer excellent risk adjusted returns. The high yield market is on edge at the moment and some of this type of off-the-run paper could be put up for sale, perhaps a lot lower in price. The recently issued 8.0% second lien converts sit at the very top of the capital structure and currently trade close to par. While the yield is not overly juicy, the asset coverage on the bond is exceptional and investors can get a cheap/free call option (via its $11.70/sh conversion price) on the Company’s turnaround. The 4.25% unsecured converts in the mid to high 70s offer a mid single digit current yield and a YTM in the low teens. I believe this yield is attractive for a relatively short dated paper that creates the assets at less than $100mm.
The equity with a market cap of $160mm is interesting but given what has happened to the small/midcap universe in recent months, I think there’s probably even better situations elsewhere. Having said that, there’s quite a bit of operating leverage in the assets here and if management continues to execute like it has been recently, there could be plenty of upside in the stock 18 – 24 months out when EBITDA could potentially exceed $45mm. Nobody, including myself, is expecting much of anything from its problem segments, which are essentially low priced options for equity holders. It’s worth noting that insiders appear to be bullish on the Company’s prospects having recently purchased over $1mm worth of stock at an average stock price of $8.32, ~11% higher than current levels.
LAYN is a global water management, construction and drilling company providing solutions for various water, mineral and energy challenges. For a smallish enterprise, it operates in quite a few segments and many would argue that they are in too many different businesses and perhaps the lack of focus is what got them into trouble in the past. Currently, the Company’s segments include Water Resources, Inliner, Heavy Civil, Geoconstruction, Mineral Services and Energy Services. Note that the Geoconstruction segment is currently under an LOI and will be divested shortly and so there will be one less segment to worry about. The two segments that matter, in a positive way, with regards to the investment thesis are Water Resources and Inliner. On the flip side, the key segment that could negatively impact the investment thesis is Heavy Civil. Mineral Services and Energy Services segments appear to be neutral to the thesis given what we know about them today.
A very quick and basic overview of the go-forward segments:
While the Company started off as a water well driller, it now provides solutions for every aspect of the water infrastructure system, from discovery to disposal. This includes water supply system development and technology solutions, including hydrologic design and construction, source of supply exploration, well and intake construction and well and pump rehabilitation. The Company also engineers and constructs water and wastewater treatment systems that decontaminate regulated and nuisance and volatile compounds. Finally, it engineers and installs disposal wells. The initial drilling of wells puts the Company in a position to win follow-up rehabilitation business, which generates higher margins and is periodically required during the life of a well, as groundwater may contain contaminants and screen openings may become blocked, reducing the capacity and productivity of the well.
As the second largest cured-in-place pipe lining company in the U.S., this segment offers a wide range of process, sanitary and storm water rehabilitation solutions to municipalities and industrial businesses dealing with aging infrastructure needs. The Company’s technology rehabilitates aging and deteriorated infrastructure and provides structural rebuilding as well as infiltration and inflow reduction. Because the product is trenchless, it reduces rehabilitation costs, minimizes environmental impact and reduces or eliminates surface and social disruption. The Company has installed more than 19mm feet of cured-in-place pipe lining throughout the U.S.
This segment oversees the design and construction of water and wastewater treatment plants and pipeline installation. Additionally, the Company builds radial collector wells, surface water intakes, pumping stations, hard rock tunnels and marine construction services. Beyond water solutions, the Company designs and constructs biogas facilities for the purpose of generating and capturing methane gas.
This segment serves mining companies, mostly gold and copper miners, who retain the Company to extract rock and soil samples from their sites that they analyze for mineral content and grade before investing heavily in development to extract these minerals. The Company conducts both greenfield drilling to determine if there is a minable mineral deposit on the site and also brownfield drilling to assess whether it would be economical to mine and to assist in mapping the mine layout. This segment operates throughout Africa, North America and Australia but given the global commodity slowdown, the Company has been shifting assets to focus on the Americas.
This segment focuses on providing water management solutions to E&P clients who are increasingly dealing with water related challenges. The water demands of the energy industry are substantial and the Company will look to capitalize on this growth by managing every phase of the water cycle for conventional and unconventional oil and gas companies. The Company provides hydrogeological assessments, feasibility evaluations, potential capacity determinations, which lead to appropriate well designs for developing local groundwater supplies. Additionally, it provides transfer services that include various no-leak solutions for surface and subsurface transfer, pit-to-pit transfers, surface transfers, fluids infrastructure design and construction and other high-volume fluids handling capabilities. Moreover, the Company provides construction services for retaining ponds for frac water, flowback fluids and produced water.
The Company has three debt instruments in its cap structure. There’s a $120mm ABL facility that is currently undrawn and has $33mm in LCs drawn against it; as of Q1, the borrowing base was $94.7mm resulting in excess availability of $61.7mm. In March 2015, the Company issued $100mm of 8.0% convertible notes. Approximately half of this amount was issued at par to holders who held $55.5mm of its existing 4.25% convertible notes pursuant to an exchange transaction. As a result, the Company raised ~$45mm of new cash from the offering of which $18.2mm was used to pay off the balance on the ABL facility. The Company had total debt of $169.5mm and cash of $56.6mm at the end of Q1; total liquidity was a very healthy $118.3mm.
In May 2015, LAYN agreed to sell its Geoconstruction business for $34.5mm plus the value of its working capital at closing, currently estimated to be $5.0mm. This sale is expected to close in Q2 and will increase the pro forma cash and liquidity to $96.1mm and $157.8mm, respectively.
The 4.25s are senior unsecured obligations of LAYN. They mature on November 15, 2018. The conversion rate is 43.6072 shares of common stock per $1,000 principal amount (equivalent to a conversion price of $22.93 per share of common stock). The 8s are senior secured obligations of LAYN. They are secured by a lien on substantially all of the assets of LAYN and the subsidiary guarantors. These liens on the assets are junior in priority to the liens under the ABL facility. The bonds will mature on May 1, 2019, however, if the Company has not dealt with the 4.25s by August 15, 2018, the maturity on the 8s will accelerate to August 15, 2018. The conversion rate is 85.4701 shares of common stock per $1,000 principal amount (equivalent to an conversion price of $11.70 per share of common stock).
Until very recently, LAYN fundamentals have deteriorated significantly since FY12. Total revenues are down by a quarter and the Company operated on an EBITDA breakeven basis in FY15, down from $95mm in FY12. The Company has burnt through almost $100mm in cash over the last three years and leverage has increased by $78mm. With a new management team in place with a well thought out turnaround plan, business has somewhat stabilized over the last several quarters but the Company is still expected to incur a cash burn over the next several quarters.
So, why bother with a Company that is burning cash and barely EBITDA positive? Well because the consolidated financials do not reflect the intrinsic value of several businesses within LAYN that are perfor