Williams Industrial: Ready To Ride The Nuclear Comeback Wave

Summary

• After a sharp rally in 2020 due to a successful restructuring, WLMS stock retraced from its highs.
• The company’s backlog sits at a record value of $664 million, an increase of 44% over the first quarter of 2021 alone.
• Insiders have been buying $390,000 worth of stock at the open market since June 2021.
• WLMS is poised to benefit from both expansion and decommissioning of nuclear plants.
• A share price of $8-$23 within the next 4 years seems possible, meaning upside of 80%-400%.

zhongguo/E+ via Getty Images

Introduction

I think every person can meanwhile agree with the statement that climate change is real. For the first time in human history there is a clear trend that we are about to leave “the anomaly”, that narrow corridor of stable global temperatures, which made human life possible and thriving. A sharp increase in bad weather events, rising sea levels, wildfires, etc., is already happening and will most probably be the new normal.

Finally, though, the fight against climate change has become mainstream. There is a multitude of measures that probably are necessary to be implemented, and one can only speculate about the implications this will bring with it. We will need to do a lot, and we will need to do it fast. I am no scientist, and I don’t have a crystal ball, so this is just an opinion, but I believe the next decade(s) will be all about the fight against climate change.

Green Energy, for example, is booming. Wind and solar energy are seeing record growth rates, while more and more coal and gas plants are being shut down, or at least are being scheduled to. This creates a certain problem, though. While slowly decreasing, the USA currently relies on coal-fired power plants for about 20% of its electricity generating capacity, according to the federal Energy Information Administration. Even if it were possible to quickly replace those fossil-fueled power plants with wind or solar power, the grids would simply be overwhelmed, even if modernized. Unlike the steady but dirty power generation of fossil-fueled power plants, the wind does not blow, and the sun does not shine 24 hours a day. So, until new technologies like for example nuclear fusion become commercially viable, there will still be the need for steady power generation. That is why nuclear power is suddenly in fashion again these days. And even more so, SMRs (small modular reactors).

This article was originally intended to highlight stocks which would benefit from the development of SMRs. And while I still believe SMRs are the future, during my research I realized that the timeframe until commercialization realistically is at least 10 years away from now. This is just too much time for my personal liking. Therefore, because I just cannot recommend companies I wouldn’t invest in myself, I decided to pull that article and focus on sectors and companies which have a decent chance of profiting right away from the renaissance of nuclear energy and the increased demand for electricity. And I believe I found what I had been looking for in the industrial construction sector. I focused on 3 different companies, Primoris Services Corporation (PRIM), MYR Group (MYRG) and Williams Industrial (NYSE:WLMS). While I think all 3 stocks potentially make for a great investment, I personally chose WLMS, a relatively unknown construction company in the energy sector, because I believe this company offers a perfect example of the classic “Heads, I win. Tails, I don’t lose much”-approach.

The company

Williams Industrial Services Group Inc., headquartered in Tucker, Georgia, was incorporated in 2001 under the name “Global Power Equipment Group Inc.”

After a restructuring of the company beginning in 2016, in which WLMS exited its product manufacturing business, and which was completed in 2018, WLMS changed its name to “Williams Industrial Services Group”, or simply “Williams”. In February 2021, the company’s common stock began trading on the NYSE after an uplisting from the OTC, according to WLMS as a final step in its restructuring process.

Williams provides a broad range of construction, maintenance, and support services to customers in energy, power, and industrial end markets throughout the U.S.A. and Canada.

Source: company presentation

As stated in their recent 10-K, Williams currently is moving away from providing construction and maintenance services related to the oil and gas industry, and the company believes this change will not adversely affect its future revenue stream.

It is also worth mentioning that the company is one of only a small number of contractors with a qualified and audited Nuclear Quality Assurance (“NQA-1”) Program, which is required to perform construction of “Safety” related systems in new nuclear power plants. This should function as a strong moat, in my opinion.

Key Figures

As per latest 10-Q, WLMS has 25.9 million fully diluted shares outstanding. Share count CAGR for the last 6 years stands at 8.1%, with stock-based compensation attributing to 2.7%, which is both a bit on the high side and needs to be monitored.

The company’s balance sheet, although steadily improving, still looks not perfect, with $7.71 million in cash, $35.71 million of debt and a debt/equity ratio of 1.06x. As it was covered in a previous article, in December 2020 WLMS announced a new credit facility with somewhat high, but manageable interest rates of LIBOR +8.5-9.0%. The company currently is paying down around 10% of this debt annually out of its cash flow.

Return on invested capital, or ROIC, hovers around 10% since the completion of the company’s restructuring, which is fine for a construction company. Also, looking back at the figures before 2019, one can clearly see that the restructuring indeed seems to have been successful and a smart decision.

	2016	2017	2018	2019	2020	TTM
ROIC	-23.2%	-44.7%	-29.7%	10.6%	8.6%	9.7%

Click to enlarge

Source: created by author using data from StockRover

Insider holdings stand at around 7.5%, with lots of recent insider buying by management. If you have read other articles written by me about smallcaps, I probably do not need to repeat that insider buying is in my opinion the single most important factor when considering investing in a relatively unknown company.

Source: openinsider

Investment Thesis

With a forward PE of around 17x, Williams Industrial surely isn’t a screaming value play anymore. Its stock has an impressive 1-year performance of an astounding 180%, so one could say that the easy money has already been made. While I must admit that I missed that move, I don’t really feel bad about it, since investing in turnarounds can be a tricky (yet often rewarding) strategy and usually isn’t really my cup of tea, since I like to invest in profitable companies. Now though, I believe there is much more fundamental visibility, and with the stock being down from its 2021 high of around $6, I think it offers a very appealing entry point with plenty of upside for the following reasons.

The nuclear renaissance

As already mentioned in the introduction, the boom in green energy generation and the general hunger for energy in the future due to the EV-boom lead to an at first glance paradoxical comeback of nuclear energy, with lots of hype these days for SMRs. I believe, WLMS can profit from this development twofold. First, let’s assume SMRs will not be the next best thing. In this case, WLMS might profit from the expansion and upgrading of conventional power plants.

In nuclear power generation, we are heavily involved in the construction of the only new nuclear reactors being built in the U.S., Plant Vogtle Units 3 and 4. In 2017, we formed a limited liability company with Bechtel Power Corporation, a global leader in EPC and project management, Richmond County Constructors, LLC (“RCC”). RCC operates as construction subcontractor to Bechtel Power Corporation, which has been selected as the prime construction contractor for the Plant Vogtle Units 3 and 4.

Source: 10-K 2020 annual report

Secondly, assuming SMRs WILL be the future, and maybe even faster than I personally think, or even assuming the opposite, namely that nuclear might NOT see a comeback, then Williams might profit anyway, because it is also heavily engaged in the decommissioning of nuclear plants. The company has strong ties with Holtec, a privately owned company which engages in the development of SMRs and also in the decommissioning of traditional nuclear plants. As CEO Tracy Pagliara said in the recent Q2 2021 earnings call:

As a reminder in April, the New York Public Services Commission approved the transfer of the Indian Point Energy Center to Holtec, including three nuclear reactors. Through our past work and reputation, we're proud to be considered part of team Holtec which was instrumental in securing additional decommissioning work in Indian Point.

Infrastructure spending

Williams also engages in non-energy generation fields, such as wastewater treatments and improving the electrical grids, both areas that in my opinion will see strong growth in the years ahead. The company is already seeing strong growth in water, mostly in Florida, and the implementation of the (reduced) infrastructure bill would very likely benefit WLMS as well.

Further deleveraging

The company currently pays down its debt at a rate of approximately 10% annually. Despite having renegotiated their loan agreement to more favorable terms than in the preceding years, it still pays about $1 million per quarter in interest, and with growth in its business it is safe to assume that this 10% reduction rate will only improve in the future. If the share price justifies it, although secondary offerings are mostly viewed as a negative, maybe in this case it might be advisable to do so in order to pay down debt even faster. Either way, there exists the potential to save around $4 million annually, or about $0.15 per share.

Projections

Source: company presentation

For the current FY 2021, Williams guided for revenues in the range of $310-$320 million and adjusted EBITDA of $16-$18 millions, which would translate to an (adjusted) EBITDA margin of roughly 5%. Their non-adjusted EBITDA margin currently sits at just shy below 3%, so in my projections I will use this amount for the lowest value.

The company’s backlog currently stands at an impressive $664 million, an increase of 44% over the first quarter of 2021 alone , so I will use $400 million of revenues as my lowest value for the next 4 years.

The table below assumes 10x EBITDA as terminal value (which is a big discount to their current EV/EBITDA of over 17.5x and the sector’s 14.6x, but also exclusive of debt, assuming it will be paid off in large parts), and a resulting share price.

Annual Revenues (in million $)	400	700	1500	2000
EBITDA margin
3%	4.63$	8.11$	17.37$	23.17$
4%	6.18$	10.81$	23.17$	30.89$
5%	7.72$	13.51$	28.96$	38.61$

Click to enlarge

Source: table created by Author

Sales in the construction business can be lumpy, so I will refrain here from putting exact price targets on the company’s stock. But with current industry tailwinds together with the company’s impressive backlog and successful deleveraging, I believe the lowest value of $4.63 can be seen as an absolute fundamental bottom for the next years ahead. Stripping out the highest values in my projections as a safety measure, I believe there exists a good chance that Williams Industrial’s stock has the potential to trade somewhere in the range of $8-$23 within the next 4 years, which would translate to an impressive 16%-50% CAGR.

2 further positive things I want to mention are the facts that the company emphasizes that its business is extremely CapEx light, and that as per 2020, 89% of their contracts were “cost-plus”, meaning that inflation does not pose a danger to the company’s business. The company also hinted in its recent conference call that this number is more likely to rise than to decline.

Risks

• Low gross margins in the construction sector: The notoriously low gross margins in the construction business do not leave much room for error. Any adverse events or a possible decline in revenues would pretty quickly translate into losses for the company. Therefore, I usually avoid investments into these kinds of companies and despite industry tailwinds and record backlog an investment in WLMS surely carries risk.
• Goodwill: The company still carries roughly 30% of its market cap in goodwill. While I personally view goodwill as a rearview figure, which only affects accounting and not real cash flows, a write-off could negatively affect the company’s EPS.
• Liquidity: This is a relatively unknown small cap. The average 3-month daily volume to date is around 74,000 shares. So, limit orders are mandatory, and Stop-losses not advised.
• High Stock-based compensation: As I mentioned above, stock-comp to date stands at around 2.7%. This is perfectly normal for a small cap stock but warrants to be highlighted.

Conclusion

I mentioned it above and I feel I should mention it again. The construction sector with its low gross margins can make for very volatile stock performances. To invest in companies like Williams Industrial one should have a pretty high conviction rate and some nerves. In the case of WLMS I admit of having the former, with the latter one being an “always in progress”. Insider buying though can help a lot in achieving conviction and calming nerves. Just in June and August of this year, company executives bought 81,700 shares at the open market for an average price of $4.78. This functions, amongst other factors pointed out in this article, as a strong margin of safety for me. Because, let’s face it, who else has more insight to a business that its own management?

Granted, WLMS’s stock already has an impressive performance behind it, and usually I am a bargain hunter, feeling like a kid in a candy shop when stocks are being punished for reasons I disagree with, and on the other hand extremely reluctant to buy after a rally. But I strongly believe in the comeback of nuclear energy and a prolonged period of infrastructure spending. And in my opinion Williams Industrial is perfectly positioned to benefit from both. I started my position in the low $4 range, and though currently it does not look like it, short term earnings disappointments or a correction of the overall markets could lead to a possible retracement of WLMS stock to the $3 area, where I would be an even more aggressive buyer.

While from a chartist perspective the risk always lies at least in the 52-week lows, fundamentally for the factors highlighted in this article I believe WLMS is a great example of the famous quote by Monish Pabrai: “Heads I win. Tails, I don’t lose much”.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of WLMS either through stock ownership, options, or other derivatives. 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.