Argan, Inc. is a holding company that conducts operations through its wholly-owned subsidiaries, GPS, APC, SMC and TRC.
Through GPS and APC, Argan provides a full range of engineering, procurement, construction, commissioning, operations management, maintenance, development, technical and consulting services to the power generation and renewable energy markets for a wide range of customers including independent power project owners, public utilities, power plant equipment suppliers and global energy plant construction firms.
Through TRC, the industrial fabrication and field services segment produces, delivers and installs fabricated steel components specializing in pressure vessels, heat exchangers and piping for industrial plants primarily located in the southern United States.
Through SMC, the telecommunications infrastructure services segment provides project management, construction, installation and maintenance services to commercial, local government and federal government customers primarily in the mid-Atlantic region.
Financial Overview
For the three and six months ended July 31, 2016, Argan report the strongest overall financial performance in its history.
Revenues increased 66.8% to $162.5 million for the three months ended July 31, 2016 as compared to $97.4 million for the corresponding prior year period. For the six-month period ended July 31, 2016, revenues increased 60.1% to $292.8 million as compared to $182.9 million for the corresponding prior year period.
Gross profit percentages remained robust at 27.1% and 24.7% for the three and six months ended July 31, 2016, respectively.
Net Income
Net income attributable to the stockholders of Argan increased 74% to $19.7 million for the three months ended July 31, 2016 as compared to $11.3 million for the comparable prior year period. For the six-month period ended July 31, 2016, net income attributable to its stockholders increased 70% to $31.9 million as compared to $18.8 million for the comparable prior year period.
EBITDA
EBITDA attributable to the stockholders of Argan increased 66% to $32.1 million for the three months ended July 31, 2016 as compared to $19.4 million for the corresponding prior year period. For the six-month period ended July 31, 2016, EBITDA attributable to the stockholders of Argan increased 64% to $52.3 million as compared to $31.9 million for the six months ended July 31, 2015.
Highlights
- Tangible net worth(1), increased 24% to $212.5 million as of July 31, 2016 from $171.8 million as of January 31, 2016.
- Liquidity, or working capital(2), increased 23% to $200.2 million as of July 31, 2016 from $162.9 million as of January 31, 2016.
- Contract backlog increased 15% to $1.3 billion as of July 31, 2016 as compared to $1.1 billion as of January 31, 2016.
(1) Tangible net worth is defined as its total stockholders’ equity less goodwill and intangible assets, net.
(2) Working capital is defined as its total current assets less its total current liabilities.
The company also achieved substantial completion on the Panda Liberty and Panda Patriot projects in April and June 2016, respectively.
During the six months ended July 31, 2016, Argan continued to ramp up work on five gas-fired power plant projects which are all expected to be completed during the fiscal year ending January 31, 2019.
When discussing the results the company stated, “These results could not have been achieved without the operational excellence of our employees. Their dedication to finish out projects and overcome hurdles was especially reflected in our reaching substantial completion on both Panda power plant projects, which were the most significant drivers of our financial results for the current year periods.
Specifically, during the six months ended July 31, 2016, in addition to reaching substantial completion, Argan reached a settlement related to the potential payment of scheduled liquidated damages, which are no longer outstanding.
These achievements eliminated a number of significant risks and the related estimated costs associated with them, resulting in increased gross margins.”
Argan’s overall power industry services business continues to represent the largest part of the company, providing 86% of consolidated revenues for the six months ended July 31, 2016.
Despite its record performance for the current periods, Argan has encountered certain challenges at its two newly acquired companies, APC and TRC.
Considering the current adverse financial effects of the suspension of work by APC’s largest current customer and the expectation of near term challenges and based on its valuation analysis, the company recorded an estimated impairment loss related to the goodwill of APC in the amount of $2.0 million during the three months ended July 31, 2016, or 49% of the goodwill balance established last year at the time of the acquisition.
This interim test will not replace the more extensive impairment testing that it intends to perform as of November 1st (its regular annual goodwill impairment testing date), which includes the preparation of a valuation report by an independent 3rd party business valuation firm.
Outlook
The demand for electric power in this country is expected to grow slowly but steadily over the long term. Increasing demands for electricity, the ample supply of natural gas, and the expected retirement of old coal, nuclear and oil-powered energy plants, should result in natural gas-fired and renewable energy plants, like wind, biomass and solar, representing the substantial majority of new power generation additions in the future and an increased share of the power generation mix.
Currently, the business environment has improved substantially due to a combination of an overall improved economy and the forward momentum of increasing the amount of electrical power generated in the United States from energy resources other than coal. In summary, the development of renewable and natural gas-fired power generation facilities should continue to provide construction opportunities for the company.
During the construction industry’s recovery from the recession, Argan has been successful in the effective and efficient completion of its engineering, procurement and construction services (“EPC”), EPC projects and the control of costs while is pursues new construction business opportunities.
Despite the intensely competitive business environment, Argan appears to be committed to the rational pursuit of new construction projects which may result in a decision to make investments in the ownership of new projects, at least during the corresponding development phase.
With a growing reputation as a low cost provider of EPC contracting services and with the proven ability to deliver completed power facilities, particularly combined-cycle, gas-fired power plants, Argan seems to be focused on expanding its position in the growing power markets where it expects investments to be made based on forecasts of increasing electricity demand covering decades into the future.
Moreover, the company believes that the EPC contract approach preferred by them, once considered an alternative delivery method for power plant construction, is now an accepted industry practice in the United States as a strategy that gives project owners an end-to-end solution by putting nearly all aspects and phases of a project under a single contract.
The company stated, “We believe that our expectations are reasonable and that our future plans continue to be based on reasonable assumptions. Our performance on current projects, including the five latest EPC projects awarded to us, should provide a stable base of business activity for the next few fiscal years.
We are looking forward to ramping up activities on the new projects and to being able to take advantage of new opportunities that should continue to emerge in the improved domestic business environment.”
Valuation
Argan currently has a market cap of $848 million. With cash exceeding debt by $383 million, that means the company has an Enterprise Value of $467 million. With operating earnings of $93 million that means Argan has an Acquirer’s Multiple of 5.02. But more importantly, is it’s free cashflow:
| Free Cashflow TTM | ||||
| (values in 000’s) | ||||
| 7/31/2016 | 4/30/2016 | 1/31/2016 | 10/31/2015 | |
| Net Operating Cashflow | $68,981 | $43,726 | $13,281 | -$17,792 |
| Capex | -$1,367 | -$245 | -$447 | -$168 |
| Free Cashflow | $67,614 | $43,481 | $12,834 | -$17,960 |
For the trailing twelve months (TTM), Argan has $108 million in cash flow from operations. When you subtract capex of $2 million, that leaves $106 million in free cashflow.
When you divide the free cashflow ($106 million) by the Enterprise Value ($467 million) that means your getting just over 20% FCF/EV. For me, that looks like a pretty good deal!
But there’s more…
Last week Argan announced that its Board of Directors declared a regular cash dividend in the amount of $0.70 per share of common stock and a special cash dividend in the amount of $0.30 per share of common stock, for a total cash dividend of $1.00 per share of common stock, payable October 28, 2016 to stockholders of record at the close of business on October 18, 2016 with an ex-dividend date of October 14, 2016.
Rainer Bosselmann, Chairman and Chief Executive Officer, commented, “Argan is pleased to announce the payment of a regular cash dividend of $0.70 per share of common stock for the fiscal year ending 2017. In addition, our success in finishing the Panda power plant projects in Pennsylvania over the last couple of quarters prompted the Board to declare an additional special dividend of $0.30 per share. We appreciate the continued support from our stockholders.”
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