Description

Left for dead, Team, Inc. is making a resurgence. With the benefit of new management who implemented cost cuts and operational improvements, EBITDA increased from $17 million in 2022 to $43 million in 2023 to an expected $63 million at the midpoint of 2024 guidance. Targets are even higher in future years. Despite recent appreciation, Team shares remain attractive as enterprise value should continue to grow and accrete to a small equity stub.

Team was last posted 7 years ago at $13.45 compared to today's price of $17.19. However, the company announced a 10-1 reverse share split in late 2022 and sold its Quest Integrity segment to Baker Hughes for $279 million. As a result of the reverse split, the share count is only 4.4 million so the recent upward move represents only a small increase to enterprise value. The potential torque here is significant as a 1x turn in EV/EBITDA adds $10+/share in equity value. Add in EBITDA improvement from margin goals and you can get to a multibagger. As a bonus, I see two additional catalysts - a refinancing of high interest debt and a potential sale (more on that later).

In terms of the book report piece (see 1Q presentation on website), the underlying business of "specialty industrial services" is not great with target margins of 10% (vs 6.5%-8% today). The suite of services includes mechanical, heat-treating and inspection to ensure safety, reliability and efficiency while maintaining a constant presence at customer's sites. Demand is split between turnarounds and project services (25%), call-outs (40%) and nested or run-and-maintain services (35%). The call-out and emergency business is the highest margin and Team has a leading franchise in emergency leak repair and hot tapping. Turnaround and nested business is more predictable and tied to routine maintenance mostly driven by regulatory and safety requirements.

The business is broken down into two segments (50%-50% revenue split) - Inspection and Heat Treating (IHT) and Mechanical Services (MS). This is mostly a US business (72%) with Canada (10%), Europe (9%) and rest of world (9%) comprising the balance. End markets include chemical & petrochemicals (30%), refining (25%), power & energy (18%), manufacturing & processing (16%), pipeline & storage (7%) and aerospace, defense and other (4%).

IHT provides engineering and condition assessment and non-destructive testing for the process, pipeline and power sectors, pipeline integrity and field heat treating services. These services can be provided when facilities are on-stream, during turnarounds or brownfield expansions. Team is a top 3 player. Additionally, IHT provides non-destructive testing and metallurgical and chemical processing services to the aerospace industry. This is a small piece now but with a new facility, this unit is expected to grow strongly.

MS provides onstream custom engineered services including leak, repair and composite solutions, emissions control and compliance, hot tapping and line stopping and online valve insertion services. Solutions provided during asset shutdowns can be planned during turnarounds or unplanned during breakdowns. These services are intended to minimize downtime and consist of field machining, bolted-joint integrity, barrier plug testing and valve management.

The capital structure is debt-laden and consists of rescue type financings at high rates and PIKs. This is part of the opportunity. As a result of improving performance, the company should be able to facilitate a global refinancing. At the very least, a refinancing of near-term indebtedness is in progress. When speaking to companies I keep hearing about private credit willing to offer better terms than public markets. This is certainly a candidate. The growth in EBITDA should take leverage below 5x, offering the company an opportunity to refi cheaper in either the public or private markets.

Appointed in March 2022, the CEO, Keith Tucker has done a solid job cutting costs ($30 million annualized) and improving operations. Specifically, corporate costs were reduced, a more decentralized operational model which empowered field technicians was employed, and underperforming operations were cut. Management is focused on regaining core call out & emergency market share and driving additional margin gains. Another potential growth avenue is a $20 million investment in a Cincinnati facility to grow its aerospace inspection franchise.

Going forward, Team is targeting mid-to-high single digit growth in core markets and expansion into adjacent markets, specifically aerospace and renewables. Profitability goals are 10%+ EBITDA margins. If we roll forward to 2025 and assume modest growth and 8% EBITDA margins, I calculate $69 million of EBITDA (after stripping out stock compensation) or 5.6x EV/EBITDA. At the company's target rate of 10%, EBITDA hits the high 80s (4.3x EV/EBITDA). This is an asset light business - 2024 capex is only $9-$11 million. 

Per the prior VIC report, Team historically traded at 11x EBITDA. That ship has probably sailed. Mistras trades at 6.6x EBITDA and Applus Services trades at 7.4x (post a takeover bid). Previously, Quanta purchased Stronghold at ~9x EBITDA, whereas HydroChem was purchased at nearly ~9-10x (first by PSC) and then the combined business was bought by Clean Harbors for 10.9x (or 8.1x after synergies). A 7x multiple on $69 million gets me a low-$30s share price. An 8x multiple on mid-80s EBITDA is a 4 bagger. This is before capturing any value for the $138 million and $211 MM of federal and state NOLs.

Lastly, when I revisited this name, I noticed the Chairman and a board member were involved as CEO and CFO of Layne Christensen. Layne was cleaned up and sold. My view along with several others was that it was sold too cheaply as management was incentivized by change of control payments. With that said, the buyer (Granite Construction) told me they ended up taking writedowns on several of Layne segments so perhaps it wasn't a bad sale. In any event, I could see a similar outcome here. A buyer should be able to extract synergies on the corporate side, but more importantly refinance the debt at far lower rates.

Catalyst

-Continued margin improvement

-Refinancing

-Sale