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Winston Capital Partners, LP was formed by Mike Winston, CFA after five years of successful arbitrage and event-driven investing at Millennium Partners. The fund is focused on event-driven and intrinsic value investing. Mr. Winston received an MBA in Finance and Economics from Columbia Business... More
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  • SAEX Solid 2Q13: 37.7% Upside With Limited Downside And 3:1 Reward/Risk 0 comments
    Aug 14, 2013 9:01 AM | about stocks: SAEX

    SAEX reported its first stand-alone quarter as a public company, and will release its 10Q filing on or before August 19th. It was an excellent quarter - we're getting a clearer picture of the earnings power and just how little we're paying for the underlying business. For a deep dive on the quality of the company see the prior posting on TRIO.


    1. Guidance was unchanged and EBITDA by my estimate is tracking at the high end of the full year range. Management reiterated its underlying business optimism for 2013 and beyond.
    2. Operating income was up 13% year over year in 1H2013 vs. 1H2012
    3. Backlog was up 41% to $285mm from $200mm in the prior year quarter
    4. $126mm of new contracts recorded in 2Q2013 in South America, North America and Southeast Asia - majority to begin in Q32013 and continue through Q12014
    5. The top line was down slightly year over year because of a one-time benefit in the prior year quarter.
    6. Given that Operating Income is on a $34mm run rate and that the D&A figure we have from 1Q13 annualizes to $15mm, the company is on pace to generate $49mm of EBITDA for the full year. That is the high end of the $46mm-$50mm guidance range and implies that the company is today trading on just under 4.4x 2013E EBITDA. Too cheap! We will get precise numbers later this week in the 10Q, or perhaps tomorrow on the conference call.
    7. This company has a market cap in the neighborhood of $146mm but can throw off $31mm/year in free cash when it slows capex, and has 1.4x Net Debt/EBITDA. That's remarkably cheap: a free cash flow multiple of $146/$31 = 4.7x. Below please see how I get to that free cash flow estimate.
    '13E EBIT(1-t) 22.1mm = 34mm x (1-35%) after tax EBIT
    Plus: D&A $15mm annualizing 1Q13A
    Less: CAPX <$5mm> maintenance capex
    Less: Net W/C <$1mm> high side to be conservative
    FCF Est. $31.1mm total

    8. Here is an updated valuation table:

    SAEX Low Mid High
    '13E EBITDA 49.0 49.0 49.0
    TEV/EBITDA 4.5 5.0 5.5
    Implied TEV 220.5 245.0 269.5
    Less: Net Debt 69.2 69.2 69.2
    =Equity Value 151.3 175.8 200.3
    Fully Diluted S/O 15.0 15.0 15.0
    Share Price $10.09 $11.72 $13.35
    % Up/Dn ($9.70) 4.0% 20.8% 37.7%

    If one puts the shares on say 4.0x '13E then the stock trades to $8.45, or 12.9% down - and 37.7% up (on 5.5x) to $13.35.

    Remember all the good things we like about SAEX (sound management, limited working capital and capex intensity, ability to deploy incremental capital at high rates of return, less seasonal, less sensitive to oil and gas prices, less geographically sensitive etc).

    The SPAC deal succeeded and the first stand-alone quarter looks good. The stock has a reward/risk approaching 3:1, limited downside, and a profitable growing franchise.

    Disclosure: I am long SAEX.

    Stocks: SAEX
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