1 Main Capital, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A net return of 18.3% was delivered by the fund for the Q1 of 2021, ahead of its S&P 500 and Russell 2000 benchmark that delivered a 6.2% and 12.7% return respectively in the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
1 Main Capital, in their Q1 2021 investor letter, mentioned Limbach Holdings, Inc. (NASDAQ: LMB) and shared their insights on the company. Limbach Holdings, Inc. is a Pittsburgh, Pennsylvania-based construction engineering company that currently has a $107.2 million market capitalization. Since the beginning of the year, LMB delivered a -11.76% return, while its 12-month gains are up by 264.56%. As of April 26, 2021, the stock closed at $10.88 per share.
Here is what 1 Main Capital has to say about Limbach Holdings, Inc. in their Q1 2021 investor letter:
“Limbach Holdings (LMB) was the only one of our top holdings that was down in the first quarter. During the period, the company sought to raise equity to capitalize on the strong share price appreciation from the COVID lows and to solidify its balance sheet in preparation for an acceleration in M&A activity.
However, the way in which the raise was conducted is concerning. The first concern was that LMB decided $11.28 was a good price at which to raise equity. The company had a near net-cash balance sheet, yet still agreed to an offering at a ~25% discount to levels it was selling for pre-raise. At this price, the company was valued at less than 4x depressed 2020 EBITDA and a much lower level on normalized EBITDA.
Second, the size of the raise was quite large. LMB company sold 2.1m shares into the raise, representing ~25% of the then outstanding shares of the company at the discounted valuation noted above.
Third, given the size of the raise relative to the size of the company, LMB’s banker, Lake Street, suggested pre-marketing the deal by wall-crossing certain investors. However, Lake Street largely excluded the company’s existing shareholders from meetings, effectively preventing many of those who knew the business best from participating in the raise. Unfortunately, existing holders were materially diluted at a large discount while in my view LMB most certainly did not get anywhere near best execution from its banker.
Fourth, during the pre-marketing meetings, LMB narrowed full year revenue guidance downward but left full year EBITDA guidance unchanged. This type of revision is typically viewed by investors as a signal that full year EBITDA would be at the bottom of the range (given the revenue weakness), which implied disappointing Q4 profitability. Investors had to wait a full six weeks to learn that Q4 EBITDA was in fact solid. It is difficult for me to understand why EBITDA guidance was not narrowed with the raise.
Despite the above concerns, I do understand the desire to raise capital. LMB has had a volatile 5-year period since coming public. There were points at which margins and liquidity collapsed at the same time. A raise had the potential to ensure the company could play offense in the coming years. I get that. But the way this particular raise was executed upon and communicated to investors was suboptimal, and if you asked me to describe what a well-executed opportunistic raise looks like, this certainly would not be it.
Now, I am not usually one to play Monday morning quarterback with my investments. I have a background in private equity and understand very well that running a business is much more difficult than writing about it. I also strongly believe that CEO Charlie Bacon and his executive team are doing a great job managing the company on a day-to-day basis and have everyone’s best interest at heart. I have no doubt that this is the right team to lead the company to long-term success.
However, LMB shareholders have been given reason to question the board’s oversight and engagement as it relates to certain major strategic decisions that the company has undertaken since coming pubic in 2016.
The most glaring of these strategic mishaps was the pursuit of organic growth above all else, which led to LMB taking on projects requiring more labor than it had capacity to deliver. Of course, many of these projects went on to cause significant losses for the company. A push for growth above all else is irresponsible for this type of business and falls squarely within the board’s oversight, as does the raise.
There are several other issues including the previously inefficient working capital dynamics of the business that management has already addressed but that the board should have been on top of sooner.
This past November, I reached out to two of LMB’s board members to try to share my thoughts on several items. One ignored me completely. The other responded saying he would not take my call.
As a result, I (and some other large shareholders with whom I have spoken) have lost confidence that the entirety of the board is fully engaged and sufficiently qualified. Further, even if the board is having the right conversations, simply the uncertainty around its constitution is enough of a reason to add a fresh face or two. This is especially the case since the most recent addition to the board, who was appointed last year, was handpicked by the member he was replacing.
Last year, an investor that owned 20% of LMB aggressively sold his entire position at what appeared to be a discounted valuation. When I asked him why he was selling his stock at such a low valuation, his response was telling; he was selling because he felt his voice as a shareholder was not being heard by the company’s board.
Over the last few weeks, I have spoken to a handful of the company’s largest shareholders as well as former holders who have sold their shares. Many of them share similar concerns, which are clearly reflected in the company’s valuation. Since coming public in 2016, LMB is effectively flat while peers FIX, EME, IESC are up 135-235% over the same period. LMB sells for 4x EBITDA. Peers sell for 8-12x.
Lastly, I have recently uncovered some additional concerns that I am attempting to address with the company in private. In the meantime, I have asked them for a single board seat, as I believe my presence would alleviate some questions that outside shareholders have and that my insights would be valuable to the company.
To date, LMB has taken much more of my time and attention than the average investment in our portfolio. However, I think the effort is worthwhile, as LMB with the right strategic direction has the most upside potential of our holdings with a below average level of business risk. If I am right, we could make many multiples of our investment here. Let’s see how it plays out.”
Photo by Scott Blake on Unsplash
Our calculations show that Limbach Holdings, Inc. (NASDAQ: LMB) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Limbach Holdings, Inc. was in 7 hedge fund portfolios, compared to 4 funds in the third quarter. LMB delivered a -29.49% return in the past 3 months.
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Disclosure: None. This article is originally published at Insider Monkey.
