EMS Acquisition Plans Put Wind in Tower Tech's Sales

by: Dominic Brault

One of our top buys, Tower Tech (TWRT) (our green energy play), rallied to $11.30 Monday, an increase of nearly 20% on its intention to acquire Energy Maintenance Service LLC ["EMS"]. EMS offers construction, operations, and maintenance and component repair services to the wind power industry.

We view this acquisition very favorably. Not only does it expand Tower Tech's offerings, it adds key North American wind power customers to the existing portfolio, which should provide tremendous cross-selling opportunities in the future, and more management depth.

With over 170 employees, EMS provides operation services including construction and engineering, training, and wind farm management. Importantly, EMS offers repair and retrofit services, including gear box, blade and other component repairs. Unfortunately no financial details, such as purchase price, sales, profit, etc. were disclosed in the press release. The terms of the deal will be disclosed in an 8-K.

Assuming the same revenue per head as exhibited by TWRT, we estimate EMS has around $15 to 20 million in revenue (versus and estimated $80 to $90 million for TWRT). Depending on its business mix (OE vs. maintenance, repair and overhaul or MRO), EMS' profit margins could be significantly higher than TWRT's. Specifically, MRO's work generally garners much higher margins than OE business. In other industries, MRO's gross margins range from 60% to 80% versus low teens on the OE side.

Overall, the EMS acquisition is in line with our current thesis on the shares: continued organic growth in wind turbine, and bolt-on acquisitions, will drive Tower Tech's shares to new highs. This acquisition brings TWRT total revenue to around $100 million (highly estimated) which implies a sales multiple of around 7x. While this multiple seems rich, we believe TWRT will grow into this valuation through more deals and strong base business growth.

Disclosure: author has no position in TWRT.