2022: A Turning Point For Orbital Energy Group

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Summary

  • Orbital Energy stock has performed poorly in the past, parallel to its financial performance.
  • The company's accretive acquisitions and strategic M&A transactions in the previous periods are showing quantifiable results with over 1100% YoY revenue growth.
  • 2022 is poised to be a transformational year for the company with an almost 5 times expected revenue growth compared to 2021.
  • I am bullish on the stock because of its aggressive growth potential coupled with attractive valuation metrics.

Businessman draws increase arrow graph corporate future growth year 2021 to 2022. Development to success and motivation.

Galeanu Mihai/iStock via Getty Images

Investment Thesis

Orbital Energy Group, Inc. (OEG) stock is down over 70% in the previous 52 weeks compared to S&P 500's 5% decline and 57% compared to S&P 500's 17% decline.

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Data by YCharts

The company's rigid history of being non-profitable dampens any prospects of improvement in its share price based on positive news. However, its recent endeavors aren't merely bullish news but facts and figures observable in its MRQ financial results.

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Data by YCharts

2022 is expected to be a turning point for OEG, with positive results after years of deficits. It shows unprecedented growth, improvement in profitability, and stronger cash generation capabilities. Its accretive acquisitions have boosted its sustainable, recurring revenues over 12 times YoY, and its profitability margins have shown positive results for the first time in ages.

Despite its multiplying growth prospects, the company is trading at a discount to the industry median because of its tainted history, exposing an opportunity for retail investors looking for a stock with exceptional growth potential.

The Company

OEG is a diversified infrastructure service company divided into three segments: Electric Power, Telecommunications, and Renewables.

  • OEG acquired Front Line Power Construction LLC (FLP) in Q4 2021 for $218.4 million under synergetic rationale, forming its electric segment. FLP has multi-year agreements with electric utilities and telecommunication customers, adding to the group's recurring revenues, which are expected to exceed $300 million in 2022, more than tripling from 2021 annual revenue.
  • The company also acquired Gibson Technical Services (GTS) in April 2021 for $48 million to build its telecommunications segment, banking on its expertise in broadband and technical services, construction, distributive antennae systems, and wireless capabilities, etc.
  • Orbital Solar Services forms the renewables segment, providing engineering, procurement, and construction (EPC) services, supporting the development of renewable energy generation focused on utility-scale solar construction. Its projects include commercials, substations, solar farms, public utilities, etc.

OEG Revenue breakdown

OEG Investor Presentation

The company announced plans to exit its Integrated Energy Infrastructure Solutions and Services segment in December 2021 by disposing its Orbital Gas Systems' UK and North America subsidiaries. Subsequently, its UK subsidiary Orbital Gas Systems Ltd was sold to nZero Group on May 11th for GBP 3 million while retaining its proprietary VE Technology, licensed to nZero Group for European and Asian distribution. The North American subsidiary is expected to be sold in 2022.

2022: A Transformational Year

The company's prior year acquisitions have already started showing results, with its total revenues jumping almost 12 times from $5.6 million in Q1 2021 to $70.25 million in Q1 2022. This is attributable to the electric power segment's over 12 times YoY revenue growth from $3.2 million to $39.25 million, the solar segment's 6 times growth from $2.4 million to $14.5 million, and the telecom segment's $16 million revenue.

OEG Revenue breakdown

OEG 10-Q Filing

In 2022, the revenue is expected to increase almost fivefold from almost $83 million in 2021 to $400 million at the midpoint. Even if we assume a 20% quarterly revenue increase released from the synergies, we can expect annual revenue of about $377 million, an annual increase of 4.5 times. Supported by the Biden Administration's $2 trillion infrastructure plan, allocating over $300 billion for water infrastructure, broadband access, and electrical grids, the market outlook for the next decade seems strong.

The company's gross profit grew from a loss in Q1 2021 to a margin of 16.5% in the MRQ, while its operating margin loss shrank substantially from almost 3 times of revenue to 2.5%. Even though net loss significantly improved from over -300% to almost -54%, it was substantially affected by a one-time $25.3 million charge caused by financial instruments in loan modification pertaining to the Front Line Construction acquisition.

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Data by YCharts

The company's EBITDA has also shown significant improvement with a 9.8% margin, in line with the 2022 estimates of $40.5 million at the midpoint. After years of negative reporting, this positive figure is a deeply promising sign for the company's improving financials.

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Data by YCharts

This growth has been heavily fueled by increasing the company's leverage, with its total debt growing over 8 times YoY from $34.5 to $288.2 in the MRQ. The company has also raised cash to pay down its debt, with the most recent transaction resulting in net proceeds of around $20 million by issuing over 16 million shares.

The net effect has resulted in a negative 0.68 Altman Z score, a total debt-to-equity ratio of 467.5%, a negative book value of 2.09, and a negative 8 debt-to-FCF ratio. These figures paint an extremely bleak picture of a company, even putting the going concern into question.

However, the company's ability to generate cash along with its other metrics is rapidly improving to improve its financial position, with levered free cash flow improving from a deficit of 13.4 million and 10.5 million to a surplus of $2.6 million in the MRQ, YoY and QoQ, respectively. Similarly, its FCF per share deficit has been reduced 8 times YoY and 5.5 times sequentially from $0.32 and $0.22 to $0.04. After years of producing cash flow deficits, I expect the company to be cash-flow positive in 2022.

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Data by YCharts

The company is actively working towards paying off its liabilities through funds generated from operations and previously mentioned share issuance. Still, the risk remains that if the company is unable to do so, it will face going concern issues, leading to bankruptcy.

Valuation

The company is currently being traded at a share price of $0.94 and a market cap of around $90 million, making it extremely desirable at forward relative valuation metrics because of the inflated 2022 expected figures. With our previously assumed revenue of $377 million, the company is trading at a forward P/S multiple of 0.24x, substantially lower than the industry median of 1.25. Trading so far below its competitors screams for an investment opportunity for a company with an expected growth rate of over 100%.

Similarly, its EV-to-Sales and EV-to-EBITDA ratios are also materially lower than the industry median. Because of OEG's high leverage, the EV-based metrics are much more pertinent to the company.

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Data by YCharts

Company-Specific Risks

The company has shown impressive growth in the previous period, but the growth has come at a great cost. It has been achieved through heavy financing, leading to a weak balance sheet. The debt has resulted in a meteoritic rise in interest expense and financial leverage. OEG is issuing shares to deleverage itself, leading to share dilution.

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Data by YCharts

Its latest form, 10-Q, states the following:

As of March 31, 2022, the Company has an effective S-3 shelf registration statement with $112.0 million of aggregate offering value available for the issuance of various types of securities, including common stock, preferred stock, debt securities, and/or warrants. While management will look to continue funding future acquisitions, organic growth initiatives and continuing operations by raising additional capital from sources such as sales of its debt or equity securities or notes payable in order to meet operating cash requirements, there is no assurance that management's plans will be successful.

Due to the high leverage, the interest charge on the company's income statement has grown by more than 11 times YoY. An inability by the company to convert its topline growth into positive cash flows would result in interest expense payments not being covered.

Investors need to be vigilant about keeping an eye on the company's balance sheet. Even if it raises enough cash flows to make interest payments, the principal payments may be paid through either additional loans or share dilution, which directly impacts potential investment.

Conclusion

The company's strategic M&A transactions are showing aggressively positive results, with the MRQ being a testament to operational synergies. The first-time positive results should've boosted investor confidence with a share price hike resulting from a buying frenzy. A major reason that the market hasn't priced in the upside yet is that the growth has been financed by raising debt and issuing common stock, increasing leverage, and diluting shareholding.

OEG M&A Timeline

OEG Investor Presentation

One thing that boosts my confidence is the high percentage of insider ownership as the recent insider unplanned buys since the company's transformational activities have rocketed in the past 6 months, with the CEO owning 1,427,165, including 291,000 shares purchased in December 2021 at a market price of over $2.3 per share.

OEG Insider Buys

Fintel

OEG CEO share buys in Dec 2021

Fintel

Despite the risks, the company's risk-reward ratio is significantly favorable toward potential investors as it can be reasonably expected that once financial results start showing a move toward its set guidance, as I believe will occur, the market demand for the stock will drive its share price upward.

This article was written by

Fade The Market profile picture
2.4K Followers
"A fade is a contrarian investment strategy that involves trading against the prevailing trend."  We look at low-cap stocks that are not covered by mainstream investment firms in search of early opportunities spanning a variety of investment philosophies. The best opportunities are found when looking where others won't. Let us know if you want us to cover any specific tickers and we'll be sure to take a look! Formerly Moonshot Equity Analysis.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. Business relationship disclosure: This article was researched and written by Waleed M. Tariq.

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