|Shares Out. (in M):||26||P/E||0||0|
|Market Cap (in $M):||78||P/FCF||0||0|
|Net Debt (in $M):||33||EBIT||0||0|
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Williams Industrial has been through a multi-year restructuring under it's controlling shareholder, Nelson Obus of Wynnefield Capital, who served as Williams COB until very recently. Capital intense, money-losing, and eventually bankrupt Global Power Equipment Company is now shut down. Capital light Williams Industrial Services that provides trained and credentialed personnel primarily (89% of revenue) on a cost plus basis to do work for highly regulated nuclear power plants remains. VIC member blackstone noted the restructuring completion and recommend the stock as a deep value play at the time of a $10 million rights offering at $1.30 a share in February 2020. Following that rights offering, the company has refinanced their debt at modestly improved terms, relisted their shares on the NYSE, and reported continued growth in revenue. Momentum investors drove the stock as high as $6.50 in 2021. Trouble in the most recent quarterly report has the momentum investors getting out selling the stock down below $3. Insiders oversubscribed in the $1.30 rights offering in 2020, and they're back now buying in the $3.20 to $3.60 range. Before the trouble insiders purchased at $4.03 and $5.78 in June and August. I participated in the rights offering myself and just bought back some shares at $3 sold in the run up too. The thesis is no longer deep value, but rather growth of an asset light business with many costs fixed so incremental revenue drops to the operating profit line. Tax net operating loss carryforwards of $200 million, thanks to the divested Global Power Equipment business, leverages up the after tax line too.
The business has been growing in recent years, with revenues the last five years running 187, 188.9, 245.8, 269.1, and 305 million (2021 estimate). The reason revenue is likely to contine to grow centers around the number 50. Many nuclear power plants were built in the 1970's under licenses typically permitting operation for the design life of the plant at 50 years. Those licenses are expiring in the current decade. In fact, there's 94 nuclear power plants in the USA with 47 of them more than 40 years old. All but 3 power plants are at least 30 years old. Canada also has aged nuclear power plants particularly in the Toronto area. Nuclear power plants must perform serious refurbishment to extend their license beyond 50 years or shut down. Whether refurbishment or shut down of these aged plants is chosen, Williams is lined up for signficant work. Refurbishment takes years including work in one of William's areas of expertise, updating the reactor sensors, electronics, and controls from analog to digital. Closing down the plant takes 10 years including work in another William's specialty, handling and transporting nuclear waste at the site to more permanent storage locations. The Indian Trails nuclear plant in New York that shut down in April 2020 added around $200 million to Williams backlog with work starting in Q3 2021. As the largest, best known, and the only company offering a comprehensive suite of nuclear services, Williams is positioned well to capture their share of both refurbishment and decommissioning work. Williams strategic plan includes growth to $500 million in revenues in the shorter term.
Opportunities for growth in their nuclear services business in the short term include:
1. Two more nuclear power plants are slated for shut down in 2022. Through a partnership with Holtec's decommissioning segment, Comprehensive Decommissioning Incorporated, Williams is very likely to receive ten year contracts for services similar to the Indian Trails decommissioning work. Along with Indian Trails decommissioning that started in Q3 2021, Williams is likely to be averaging $50-$60 million in decommissioning work the next ten years from these three plants. More plants are likely to be added to the decommissioning business in coming years.
2. Maintenance services for nuclear power plants typically run about $25 million per reactor. Williams used to provide maitenance services to Southern Company's eight reactors. Financial distress from Global Power Equipments losses forced Southern to switch to a financially stronger partner for this work some years ago. However, Williams maintains a strong relationship with Southern. In fact, Williams has participated heavily in Southern's construction of the Vogtle 3 and Vogtle 4 reactors, the last two traditional design nuclear reactors to be built in North America. Completion is expected in Q1, 2022. Now that Williams is financially strong again, Williams will seek to win the maintenance contracts for the new reactors but also the rest of Southern's fleet when they come up for bid in 2023. Ceo Tracy Pagliara noted in a phone call that other large maintenance contracts priced at $25 million per reactor are also up for bid soon. Entergy with five reactors and TVA with five or six reactors come up for bid in 2022. Florida Power with five reactors comes up for bid in 2023.
3. Expiring licenses at nuclear reactors will drive either refurbishment actions to extend licenses or decommissioning work in the coming years. The status of the U.S. nuclear fleet is summarized at this site. Five have announced early closure, four have approved plans for refurbishment to extend their license, fifteen have applied or will apply by year-end 2021 for license extensions, three will be forced to close by 2030 and haven't yet applied for extension. These plants are a potential pipeline of new business for Williams in the coming decade.
4. Canada also has nuclear power plants facing license expiration. Bruce Power in Ontario is extending the life of their reactors through 2064. Refurbishment work was planned to begin in 2020 but has been delayed because of Covid. Canada was more aggressive in curtailing activities than the U.S., but work here is likely to begin shortly. Williams established an office in Ontario and started doing some work with Bruce Power to be in position to win a piece of this $13 billion Canadian refurbishment work on Bruce Power's six reactors. The Pickering nuclear power plant operated by Ontario Power is one of the oldest in the world and slated for shut down in 2024. There's a political push to extend the life. Either way work will be up for bid to decommission or refurbish. Ontario Powers Darlington plant will be refurbished also, originally planned for completion in 2025 at a cost of $12.8 billion Canadian, but likely extended by Covid delays.
5. Williams is completing construction of the last two traditional design nuclear reactors in the U.S. in Q1 2022 (Vogtle 3&4 in Georgia). However, small modular reactors have been under development for some years by NuScale (newly public via SPAC), TerraPower (backed by Gates and Buffet), and others. Pilot power stations are slated for construction in 2024. When I asked, Williams ceo Tracy Pagliara was quick to point out that Williams is the only company with all the capabilities and licenses to build new nuclear plants. Williams is heavily involved with the SMR companies and the planning for the construction of the pilot plants. If SMR's gain acceptance, Williams is in the front seat building them out. There's enough traditional nuclear plant work for a Williams investment to work out, but this is a longer term option that could pay off big. Bill gates Natrium plant in Wyoming will take 7 years to build, however, so it's definitely a longer-term option.
Non-nuclear industrial work is a small part of Williams business. Their competitive position may not be as strong as in nuclear. The U.S. is re-industrializing, however, and Williams is looking to get their part of the growth. Houston was a particular geograhical target according to Pagliari. Cheap natural gas is being used as a feedstock for chemical manufacturing rather than oil, and there's a lot of capital spending tied to that. Pagliari noted that it will take some time for the company to become known in the Houston area but they expect to grow there. The infrastructure bill included $125 billion in work for water and power grid development where Williams has capabilities. They expect to see some significant growth from it, although it will likely be late in 2022 before there's project awards.
The bad quarter just reported that sent the stock back to value levels had several issues. First, the company bids some fixed price contracts (about 15% of their business). They took a charge in the quarter on several of their fixed price contracts. The issue was that prices of some materials rose significantly between the time they bid the contract and the time it was awarded. Pagliari noted they've modified their procedures to avoid this inflation problem in the future. A second issue was that a customer was disputing a $1 million incentive payment so they couldn't recognize it as revenue. A third issue was that a large existing customer was slow to renew their contract. Pagliari confirmed that issue 2 and issue 3 are related. The customer slow to renew their contract is the same customer disputing the 1% incentive fee. Seems clear to Williams that they met the requirements for the incentive fee and perhaps the dispute is just a negotiating tactic on the contract renewal. Since I talked to Williams management team they, have said at the Sidoti conference that they were making progress with the contract renewal with this customer. The bear case is that gross margins run just 12% as they mark up employee costs slightly. Any little hiccup and your profitability is gone, and the company has had some hiccups this quarter and earlier with employees briefly unable to work because of Covid.
Leverage to the bottom line is an important part of the investment thesis. Gross margins typically around 12% on their $305 million of 2021 revenue produces a normalized $36.6 million in gross profit. SG&A eats up $23.0 million of it leaving $13.6 million falling to the ebitda line. Fortunately, there's no taxes due to NOL's but their interest expense remains high (almost $5 million on their $36 million in debt). SG&A expenses are relatively fixed and interest expense should fall as they pay down debt and reduce interest rates. If they grow to the strategic plan's $500 million in revenue at 12% gross margins with a modest increase in SG&A to $27 million, ebitda goes from $13.6 million to $33.0 million. Ebitda grows multiples faster than revenue. Pagliara notes that acquistions in the space are going for 12 times ebitda. That reflects acquisition premiums, but that multiple isn't crazy considering Williams doesn't pay income taxes leaving stockholders an 8.3% earnings yield. Twelve times ebitda at $500 million in revenue would put Williams stock price somewhere around $15 a share. That's the optimistic case, of course, but it illustrates the leverage that fixed SG&A with no taxes produces if they can grow revenue from the aging nuclear fleet.
The downside seems mitigated by a motivated control shareholder here that can take advantage of the 12 times ebitda M&A market if necessary. Williams would look more attractive to an acquirer that can take out some of the SG&A costs, particularly the costs of being publicly traded. There is some debt and the Vogtle 3&4 work will soon be completed and needs to be replaced to maintain revenue. My opinion is that there is some downside risk in the worst case, but the risk reward is attractive.
Aging of the N. American fleet of nuclear reactors requiring refurbishement or decommissioning work
Acceptance of small modular reactor technologies reviving nuclear plant construction in the USA
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