The no-moat engineering firm is still undervalued as we reduce our fair value estimate.
We are reducing our fair value estimate for no-moat Chicago Bridge & Iron
to $23 per share from $37. After the Aug. 9 close, new CEO Patrick Mullen announced a host of measures to address chronically poor project execution, strengthen the balance sheet, and improve efficiency. Our new fair value estimate significantly exceeds the current share price, though the "kitchen sink" tone of the measures announced means that investors may well remain wary absent concrete evidence of an operational and strategic turnaround.
David Silver, CFA, CPA, is a senior equity analyst for Morningstar.
Adopting a significantly more conservative approach to analyzing project costs, Mullen recognized cost overruns on a host of projects totaling roughly $548 million pretax ($5.45 per share). This included a dismaying third round of sizable estimate increases on two nonstrategic power projects. Increased cost estimates on two strategic U.S. LNG export projects were less surprising, however, and management projected that both will remain profitable overall.
To unlock significant hidden value and boost competitiveness, CB&I plans to sell its crown jewel technology licensing business for gross proceeds of $2 billion (roughly $20 per share) or more, with net proceeds likely to exceed CB&I’s entire net debt of $1.5 billion.
Following the sale of the technology licensing unit, the remaining units of CB&I will feature large-scale engineering, procurement, and construction and fabrication capabilities with leading positions in petrochemical, refining, and liquefied natural gas end markets. We estimate current annual revenue of $6.5 billion-$7.0 billion, EBITDA of $400 million-$450 million, and a net debt-free balance sheet.
The main risk for investors would be a recurrence of poor execution or cost overruns in coming quarters that would damage the new leadership's credibility as it seeks to stabilize operations and renew confidence in its ability to grow and execute for the benefit of shareholders.
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