Perma-Fix Environmental: Strengthening Core Business And DOE Pencils TBI Into Budget

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Summary

  • Core business is improving, strong implied guidance for Q3.
  • Entry into the commercial decomissioning market is an exciting long term opportunity.
  • We are closer to the TCC and the TBI is still a DOE priority.
  • An already strong risk/reward keeps getting better.

Rather than rehash prior information I would encourage readers to look at my original article (Perma-Fix Environmental Services: An Intriguing Risk-Reward) and my Q1 follow-up (Bullish Thesis Remains Intact At Perma-Fix, Near-Term Catalysts Could Drive Stock Materially Higher) for background on our favorite name. As I predicted after Q1, Q2 is a solid step in the right direction and the implied guidance for Q3 is very exciting for shareholders.

First, lets take a quick look at Q2, revenue of $17.1 million is up 29% year over year and 46% sequentially. For a company that has struggled to generate consistent growth it was certainly a welcome sight. We would've liked to see adjusted EBITDA a little higher than the $1 million that was generated, but we think Q3 will show a marked improvement. We suspect that there were some start-up expenses with the new service contracts, but they were not outlined in the discussion. On the call, management mentioned that they hadn't seen the full effects of the previously announced service wins and guided Q3 service revenue to be up another $2 to $3 million higher than Q2. The company also mentioned that they had some delays on the treatment side that should come through in the third quarter. Taken together this implies that revenues should be in the $20.5 to $21 million range in Q3, up another 20% sequentially and 71% year over year! Furthermore, the Q2 revenues are at inflection points where the fixed costs are absorbed and the incremental revenues in Q3 should flow through nicely to the bottom line. We would not be surprised if the company exceeded $2.2 million in adjusted EBITDA if they reach those revenue levels. Increased bidding activity bodes well for the company's ability to sustain these results in Q4 and in 2020 as they drive towards their $100 million revenue goal.

A key part of that effort may be the entry into the commercial decommisioning market. While they have not had any successes yet, it is an exciting revenue stream and could be a very lucrative new business line if they can successfully enter this new vertical. I look forward to hearing more about this strategy and whom they are partnering with to drive this initiative. The progress of the GeoMelt partnership with Veolia (OTCPK:VEOEY) is also encouraging and it was nice to hear of the quite healthy backlog the company has for that project. This news was especially welcome as Veolia has stated they want to grow through acquisitions and would seem to be one of several natural suitors for PESI when the time is right.

The company reached another key milestone after the end of the quarter as the closure of M&EC was finally approved and $5 million was released from the sinking fund. While clearly the sinking fund is needed to maintain the company's bonding for its daily operations, we do think that the asset ($11 million in restricted cash) is overlooked by most investors and are optimistic that the impending improvement in the Q3 balance sheet will highlight that "hidden" asset.

Lastly a note about the lottery tickets. While we were very disappointed to hear the TCC contract award would be delayed, it seems clear from the language in the reports that it is a short term delay and that it should be awarded in the coming months. As a reminder, we believe the contract should be worth at least $5 million in EBITDA to PESI and could be considerably more. Unsurprisingly politics seems to be driving the TBI process and the pulling of the permit seems to highlight that fact. That said there is plenty of public information that shows the opportunity is still very much in play and is in fact a priority at DOE. An article in the industry's dominant trade magazine indicates that the process is still very important to the DOE, "...the federal agency still considers the project a priority." (Exchange Monitor, DOE Balks at some State Proposals for Hanford Waste, 7/19/2019) More importantly, we also found an interesting link outlining the 2021 Office of River Protection budget "priorities". On page 3 there is a line item that says "Low Level Waste Offsite Disposal ("TBI") and then allocates $32.9-40.2 million for a tank side cesium removal unit for "Test Bed Initiative Phase 3". Almost at the end of the document there is a line for "Low Level Waste Offsite (Treatment/Disposal)" that then calls for $90 to $110 million for "treatment and disposal of grouted waste offsite." That sure sounds like the rest of TBI Phase 3, half of which would apply to Perma-Fix. If we are correct, that matches with the high end of our estimate in our first article and could mean $15-20 million+ in EBITDA for Perma-Fix IF the budget is approved and IF politics do not get in the way. As a reminder, a successful Phase 3 should lead to a commercial contract that could be worth anywhere from $45 to $135 million a year in EBITDA for 20+ years. As I mentioned in my first article scalability does not seem to be an issue, it seems to be political will and that tide appears to be turning. It is our hope that as the public's tolerance of kicking the can down the road wanes, the support for this program will continue to grow.

In summary, the core business is improving and should get to $5.5 to $6 million in EBITDA in 2019, the balance sheet will reflect the receipt of the $5 million released from the sinking fund in Q3, Q3 will also show substantial YOY and sequential growth in both revenues and EBITDA, and the two lottery ticket items are still very much in play. We remain convinced that PESI is VERY undervalued and is increasingly attractive as a takeover target. We do not feel the current equity value gives any chance of winning the TCC, let alone the company changing prospects of the TBI.

This article was written by

Micro Magnate profile picture
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We have 20 years of experience in small and micro-cap focused hedge funds. We try to ferret out under-followed and under appreciated names before the rest of Wall Street.
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Disclosure: I am/we are long PESI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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