| 2022 | 2023 | ||||||
| Price: | 6.40 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 208 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 1,330 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 750 | EBIT | 0 | 0 | |||
| TEV (in $M): | 2,080 | TEV/EBIT | 0 | 0 | |||
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MIR is the industrial leader in detection and measurement technologies for ionizing radiation, with its key end markets being medical/labs, nuclear power and defense. It operates in markets with steady, if lumpy, demand and is a leader in most of its key markets. Having run headfirst into the Ukraine invasion and supply chain issues since becoming public last year, it is likely undervalued just on the basis of a reversion back to normal operating trends. What makes the story more compelling is that they are in a unique position to benefit from a possible decade+ nuclear power renaissance which has been ignited by global energy concerns and a political about-face regarding the “greenness” of nuclear. MIR’s history doesn’t automatically signal that they are a great company, but they should be at least a decent-to-good company that is about to be in the right place at the right time.
The Baird and Jefferies conference presentations provide a good current overview of the company:
Furthermore, while the SPAC acquisition announcement is characteristically overblown, it nevertheless provides useful historical background:
https://www.sec.gov/Archives/edgar/data/1809987/000119312521192713/d169554dex992.htm
Please also see two prior VIC writeups for more information, with the second making some thoughtful points about the business.
Investment Pros:
When it comes to “busted IPOs,” investors focus on the tangible negatives of current results, but give little credit to the underlying business trends. There is a lot to like here:
Dominant market position in niche markets - Owing to the niche and specialized nature of its products, MIR has 40-60% market share in most of the markets in which it participates. They generate good margins and has slowly improved them over time until recent issues.
Secular nuclear power growth - Pro-nuclear countries such as China, India, UK, France, etc. have continued to invest in nuclear power plants, while there has been a massive about-face in parts of the world that have in the past decade have been subject to anti-nuclear sentiment: Germany, Japan, and the US (to a lesser extent). The re-acknowledgement that nuclear is a clean and economical energy source is a shift that has only taken root in the past year after many years of negative public opinion and political flogging:
https://www.cbc.ca/news/world/japan-nuclear-returns-1.6676635
https://news.gallup.com/poll/392831/americans-divided-nuclear-energy.aspx
https://www.world-nuclear-news.org/Articles/Wide-public-support-for-keeping-German-reactors-on
https://www.aa.com.tr/en/asia-pacific/south-korea-s-27th-nuclear-reactor-begins-operations/2763440
Acyclical demand into a possible recession - While order patterns (particularly in the industrial segment) tend to be irregular and result in lumpy revenues that Wall Street dislikes, there is ultimately stable demand in its end markets given the mission critical nature of its products. It has grown through the GFC and COVID periods. We will find out if they can exert pricing power despite an environment in which many industrial peers will begin to see margin reversion - I believe they can hold or even improve margins, particularly if growth ramps.
Nuclear event optionality - While unpleasant to consider , the reality is that nuclear accidents and nuclear aggressions do happen. Fukushima for example generated a surge in 2011-2012 orders. In addition to a negative correlation with nuclear fears which might otherwise drag down financial markets, MIR should already benefit from heightened defense spending for the next several years.
Investment Cons:
Each of these negative factors is likely weighing on MIR shares, yet each is either fixable or temporary so long as MIR is growing. To the extent MIR rights the ship on these issues, it should lead to a rerating in shares.
Supply chain constraints - MIR has been battered by component shortages which have caused quarterly misses and led them to build incremental working capital, dramatically reducing their capital efficiency.
Lumpy Industrial revenues, nuclear project overrruns, cancellations, political risk - The largest segment of MIR’s revenues has an irregular profile owing to the vagaries of nuclear power plant construction and to a lesser extent, defense order cycles.
Hanhikivi in Finland for example was canceled on account of the Ukraine invasion, accounting for approximately 10% of MIR’s backlog at the time. Nuclear is a contentious issue with many cross-border implications, on top of the typically over-budget and over-schedule deliveries of completed plants. (On the other hand, it illustrates how large individual nuclear construction programs can be for MIR.)
https://www.world-nuclear-news.org/Articles/Fennovoima-cancels-Hanhikivi-1-contract-with-Russi
High leverage - MIR has 4.8x leverage currently, with the majority of its debt at a floating rate (L+275 to +400). They have swapped “30%” of debt for a fixed rate. This crimps their M&A ambitions, but a recovery in EBITDA and cash flows should improve investor optics and allow them to resume integrating more businesses over time.
Rollup - MIR was built through M&A under PE ownership and has paid multiples that are above where they currently trade. Subsidiaries are not tightly integrated and appear to remain somewhat silo’d, which may contribute to MIR’s uneven forecasting and execution (though arguably much is due to the nature of their business and circumstances).
Former SPAC - MIR was formerly a Charterhouse portfolio company, and the PE sponsor still maintains a large holding which they will eventually seek to exit. As far as positives go, Goldman SPACs have more shareholder friendly warrant terms and the other Goldman SPAC has performed well, suggesting a higher degree of quality than the typical SPAC garbage.
Financial Drivers:
MIR has historically been a mid-single digit organic grower, supplemented into HSD/LDD territory using bolt-on M&A. In its current state, MIR will be not be running an extensive M&A program, yet there is a compelling case that it can CAGR at a HSD/LDD growth purely on an organic basis over the next several years. Once supply chain issues calm and working capital requirements fall, MIR will generate a healthy FCF profile which will provide it with balance sheet and M&A optionality.
MIR’s largest end markets has shown outsized order growth this year. Medical has shown order growth of 20%+, while Industrial Nuclear order have grown 37%. This has translated into +8% backlog since the beginning of the year, as backlog covers 4-5 years of orders and more than half of orders are short-cycle revenues burned in the current quarter. Backlog has also had a headwind from fx translation due to the stronger dollar. Notably, backlog contains only fully funded orders and historically has experienced few cancellations. However, timing of backlog conversion can be low visibility, given the choppy nature of nuclear development timelines.
While both the Medical and Industrial segments have historically exhibited MSD market growth and MIR continues to indicate as much in its presentations, there are signs that we may see faster growth at least in the next several years. Whether trends revert to historical patterns in the long run remains to be seen, and I suspect management themselves cannot know the long run algorithm for certain.
Medical segment revenues have grown +10% to +20% YoY organically in each quarter of 2022. The high end of this growth pace is less likely to be achievable in 2023 as it likely represents some post-COVID catchup in in-person activities, but LDD growth is very possible due to continued demand growth, pricing actions, and order deferrals for supply constraints. Given rapid turnover in medical orders, pricing actions flow through relatively quickly in the segment.
In 2022YTD, Industrial revenue shrunk vs. the prior year, even accounting for supply chain and the Russian embargo. Management attributes this to longer “order cycle times,” which between the lines seems to originate from two factors: a.) MIR pulled in revenues in 2021 to look good during its sale process and b.) the general lumpiness of customer ordering patterns. For 2023, growth of the Nuclear Power should swing back to at least MSD-HSD, if not LDD, based on backlog conversion and a gradual flow through of pricing actions (+4-5% increases).
The elevated order book reflects incremental orders from existing customers as the political winds in the West have shifted toward “extend” rather than “decommission.” It is likely that this shift is only in its early stages, as many of the policy decisions have yet to see full implementation given slow lead times. This segment may have further unreflected growth if the nuclear politics further moves toward “build,” as MIR has not booked any large power plant construction orders, each one of which would represent a substantial opportunity. I view any revival in power plant construction in Western countries, Japan or elsewhere, ranging from more conventional nuclear to more speculative small reactors (though far, far in the future), etc. as option value for MIR. Again, it is very hard to come up with forecast, but clearly option value exists which could stairstep growth.
On the defense side, MIR equips 17 NATO armies. They have a number of 7- and 8-digit military orders which they had expected to have shipped already but have been delayed due to typically slow government funding processes. If/when these orders ship, they will provide an initial bump in revenue followed by a replenishment tail. These revenues could be very beneficial to the Industrial segment with some level of persistence, though they are not necessarily thesis changing for the long term story in the absence of continued heightened nuclear vigilance.
EBITDA margins have been compromised by supply chain inflation/shortages and the weak Industrial segment from the mid-20’s range down to the the low 20’s or high teens. A reasonably conservative assumption post-supply chain reversion would be back in the 25% range, while I believe they could achieve higher margins with improving operating leverage if orders continue to grow in the future. Management guides to 1% EBITDA improvement for every 5% revenue growth, implying yearly profitability gains.
MIR makes some EBITDA adjustments that aren't ideal. They will take $30 million in cash non-operating expenses as adjustments this year. As can be viewed in quarterly filings, these figures relate primarily to one-time public company costs, M&A/integration, and a large one-time ERP investment. Management has committed to lowering this to $10-$15 million on a go-forward basis, with further reductions over time.
Valuation:
In terms of a normalized 2023, base case revenue could reasonably come in around $770 million (implies 10% growth). EBITDA margin in the 25% range = $193 mm. This estimate wouldn’t be too far from consensus of $740 mm revenue and $185 mm EBITDA, but would mark an improvement in execution and should spur some rerating from the current 11x EV/EBITDA multiple. I don't believe MIR needs to crush estimates so much as demonstrate they can guide and execute well here.
There is also reasonable basis for higher growth into the teens+ in 2023, but lack of revenue visibility and supply chain reversion makes it harder to underwrite. However, the opportunity is clearly there, if not on a one-year basis, on a multi-year basis.
FCF is likely to improve substantially next year, though unlikely to approach management’s 50% EBITDA conversion target. MIR faces higher interest costs and unknown WC requirements depending on the supply chain improvement/worsening. FCF is going to be hard to forecast, but assuming they generate $75 mm+ vs. guidance of adjusted FCF of $30-$45 this year, that’s in the ballpark of a 5% levered yield. Notably, management’s original adjusted FCF guide for 2022 was $90 - $110 million, prior to supply chain and Russia issues hitting them hard. Over time, we may see MIR return to more normalized FCF levels which should put a floor on valuation.
In order for MIR to work out moderately as an investment, one would need to believe that:
Their poor execution and forecasting in 2022 is not reflective of their normalized business quality
Supply chain issues will be resolved sooner than later
MIR’s leadership position is indicative of attractive market characteristics for its niche
Nuclear detection and measurement demand is a persistent, acyclical market that is growing
Interest rates will not spiral out of control
MIR’s SPAC provenance, poor execution and its terrible public market performance has led investors to trade it like a low quality industrial business. In the near-term, we are looking for a better execution to rerateshares. There is high torque due to the debt, and investor valuations will be highly subjective as well, but MIR’s acyclicality, market position and margins argue for a better multiple.
While a clear peer set is hard to fit, there are various industrials that can point the way to how MIR could be valued over time if it executes well. FTV, BMI, TMO trade in ranges from 15x to 25x EV/EBITDA. Operating as it does today, MIR should aspire to meet at least the low end of the group. Illustratively, 2-3x turns of EV/EBITDA improvement puts them at $8-$9/share (25% to 40% upside), which I believe is reasonably conservative solely on decent execution. Depending on how well they execute, there is potential for them to achieve the middle to high end of compounding industrial multiples even without high mid-term growth. Getting to a 15x multiple results in $10/share (55% upside) Many of the near-peers demonstrate MSD growth and similar EBITDA margins, with investors rewarding them for consistency and reasonable ROIC expectations.
The larger opportunity, though, is that MIR offers direct exposure to the nuclear cycle without the inherent uranium price risks or EPC exposure risks that most nuclear-related investments entail. There is a real home run scenario here which I believe represents substantial option value. While at this point qualitative in nature, rather than quantitative, I believe this is where the greatest upside exists. Will we see a lightning fast turn in narrative in 2023? Hard to say, but over the next several years, there is real potential to see a sustained inflection in Industrial orders (the missing "lumps" in their lumpy business), which investors are likely to front-run to the extent they foresee a decade-long nuclear trend. What’s an appropriate growth rate? I don’t really know, but it is likely higher than LDD and it should come with significant margin expansion given the operating leverage. Just as a hypothetical, valuing them up 20x-25x EV/EBITDA (high end of industrial near-peers with lower growth) on what would now be a sandbagged 2023 EBITDA puts them in the mid-teens+ share price range, even accounting for warrant dilution which are not in my numbers.
Risks:
Thus far as a public company, MIR management has demonstrated poor forecasting skills and executed poorly. SPAC and rollup history are negative circumstantial factors. While poor results are arguably caused by circumstances outside of their control, this is a “show me” story.
MIR has been slow to take price despite its market position, so inflation and conservative inventory management may continue to dampen operating leverage into 2023.
Regardless of execution potential, MIR may guide conservatively for 2023 as well given how much they screwed up setting expectations in 2022.
The nature of supply chain problems for MIR (irregular decommits of esoteric but critical parts) makes forecasting the timing of a return of normal operations challenging.
Interest rates continue to rise and weigh on borrowing costs. High debt levels torque the stock in both directions.
Multiples may fall across all industrials in a recession, but MIR should relatively outperform.
Supply chain normalization
Execution
Nuclear power revitalization/build cycle
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