Gulf Island Manufacturing: 3 catalysts for a successful 2022 (NASDAQ: GIFI)

I followed Gulf Island Fabrication (NASDAQ: IGIF) nearly two-year turnaround; my previous articles can be found here and here for reference. The company’s stock price is up about 50% since I first wrote about the turnaround, but there’s still significant upside potential ahead. GIFI has made tangible improvements to its business model and will benefit from high oil and gas prices in 2022. I expect GIFI’s operational performance to improve and I believe the market will begin to appreciate the work done by management to turn the company around. Three potential catalysts should drive performance in the year ahead:

The shipyard division will disappear

As I explained in my last article, GIFI sold the majority of its loss-making shipyard division in 2021. The company took a large non-cash impairment charge on the sale, but operating performance going forward will benefit the removal of this trail. . GIFI has retained a pair of contracts as part of the deal which they expect to finalize by Q3 2022. These ongoing contracts will continue to hurt performance; the shipyard’s remaining operations resulted in a loss of nearly $2 million in the third quarter of 2021. Once the contracts are fulfilled, quarterly operating profit is expected to increase by $1-2 million. It seems like only a small improvement, but GIFI’s market cap currently sits at $65 million; An additional $8 million in annual operating profit will have a significant impact on the company’s bottom line.

High energy prices will create new opportunities

GIFI derives most of its revenue from its “Manufacturing and Services” (F&S) division. The F&S division has historically served customers who operate offshore oil rigs in the Gulf of Mexico. GIFI is trying to develop in the field of refining and transportation of liquefied natural gas (LNG) on land. Oil and LNG prices have been in free fall since 2016, which has resulted in much weaker demand for GIFI’s manufacturing services. Oil and natural gas prices have risen sharply over the past 6-12 months, with crude oil now trading above $100 a barrel. It remains to be seen how long prices will remain high and how willing oil and gas companies will be to invest in additional infrastructure, but GIFI was already bidding on a number of LNG and petrochemical projects before oil prices spiked. energy. I’m disappointed that the company has yet to announce any new project agreements (management expected one or more agreements to be completed in the third quarter of 2021), but increased oil and gas activity in and around of the Gulf of Mexico means more opportunities for GIFI. Management expects to generate gross margins of 10% on its manufacturing projects (source); $150 million in manufacturing revenue would be enough to bring the company back to GAAP profitability.

GIFI solves its personnel problem

GIFI announced the acquisition of the services and industrial recruitment businesses of Dynamic Industries, Inc on December 1, 2021 (source). GIFI paid $8 million in cash to acquire these businesses, which generated about $2.7 million in operating profit the previous year. In addition to getting the companies at a bargain price, the acquisition doubles the size of GIFI’s workforce and expands the range of projects they can bid on. Management has made it clear that finding and retaining labor has been a challenge over the past few years, so I think it’s a great decision to increase the number of employees as they look to bidding on larger LNG projects. The acquisition also gives GIFI access to Dynamic’s existing customer base, opening the door to cross-selling opportunities. If the acquisition improves GIFI’s operating profit by $2-3 million a year, it will have a significant impact on the company’s overall profitability.

Thoughts on evaluation

GIFI is cheap, both relative to the value of its assets and its earning potential. On the asset side, GIFI had $73 million in cash at the end of the third quarter and retained most of its shipyard assets, with total property, plant and equipment worth approximately $30 million. dollars. Total assets were $140 million. GIFI had approximately $10 million of remaining working capital obligations related to the sale of its shipyard division and used $8 million in cash for its acquisition. Safeguarding these transactions puts the company’s cash position at approximately $50 million. Cash burn has dropped dramatically; the company broke even from a cash flow perspective in the third quarter and management has indicated that cash burn is expected to be minimal in the coming quarters. GIFI has total liabilities of $38 million and no long-term debt. Putting it all together, GIFI has a book value of over $100 million and trades at a market cap of just $65 million.

GIFI’s balance sheet is attractive and provides a sufficient margin of safety, but I’m more excited about the company’s potential profitability. Excluding the benefit of the cancellation of the PPP loan, GIFI is on track to lose approximately $12 million from continuing operations in 2021. If we assume the staff acquisition provides $3 million in revenue from annual operating and closing the shipyard saves $4 million in losses (half of $8 million in annual savings), then without any other changes I would expect GIFI to only lose $5 million from its operations in 2022. Using management’s 10% gross margin expectation for new manufacturing work, that means a single contract is worth at least $50 million. would be sufficient to bring the company to GAAP profitability. Management said the projects they are actively bidding on (and considering bidding on in the future) are between $50m and $100m (source), so one of these deals would be enough to achieve that objective. Two projects averaging $75 million each would result in approximately $15 million in incremental revenue and therefore $10 million in expected net revenue. I use a conservative earnings multiplier of 10-15 when valuing a cyclical company like GIFI; dividing the difference by 12.5 gives an expected market cap of about $125 million, or roughly double the current market cap.

Risks and Concerns

The optimistic earnings power projections in this article are based on management’s estimates and their ability to win tenders in the future. If GIFI fails to win significant new contracts at rates that allow for positive gross margins, then the operating business is not worth owning. The company’s manufacturing history is quite good, prior to the sharp drop in oil prices in 2016, but it will need to prove that it can operate profitably in the current environment. The company’s assets act as a reasonable safety margin against total ruin, but I wouldn’t own GIFI just for the value of its assets.

GIFIs present the usual risks associated with micro and nano cap companies. Trading volume is low and therefore volatility can be high. Less than $200,000 worth of stocks are traded daily on average, and the low volume can lead to price spikes and dips if there is a motivated buyer or seller.

Conclusion

2023 will be the first full year to benefit from GIFI’s turnaround, but the seeds for future success are sown in 2022. 2022 will still contain losses from the closure of the shipyard, and the bulk of revenue generated from all contracts signed in 2022 won’t be achieved for another 12-18 months. However, there is a very real possibility that the company will reach GAAP profitability by the third or fourth quarter of 2022 and the announcement of a major contract should be enough to send shares of the company higher. There’s likely still some short-term headwinds for GIFI investors, but I’m comfortable being early to the party for a chance to get in before the full effects of the turnaround are clear to the broader market. .