Limbach Holdings (LMB): Dane Capital Expects ‘70% Upside This Year’

Dane Capital Management, a New York-based hedge fund that focuses on value and special situations investments, is bullish on Limbach Holdings Inc (NASDAQ: LMB). The fund believes that “Limbach shares have 70% upside this year,” according to the fund’s latest investor letter. Let’s take a look at what Dane Capital said about the company in the letter.

In 2017 we suffered a modest loss in shares of Limbach, a top-2 holding (shares declined about 2% for the year) – a year in which they grew revenue and backlog, expanded margins, and took out high interest rate debt. If not for non-recurring 1-time charges the company would have grown EBITDA 17%. Limbach is an HVAC engineering, construction and service company which we have discussed in previous letters and write-ups.

In 1Q we lost an additional 11.6% on shares which we attribute to a single cause: the distribution of 1.356 million shares by FdG (see http://bit.ly/2HMYQpC). As noted in footnote 1 of the SEC filing: “The transactions reported represent pro rata distributions, and not purchases or sales of securities, by FdG Capital Partners LLC to its members without consideration.” This begs the questions of 1) why did FdG distribute the shares? And 2) why did it take about 2 weeks for the stock to collapse? The answer to the first question is that FdG, was in year 16 or so of its vintage, which is extremely long for a private equity firm so they distributed shares to their LPs. This was their last remaining holding. The answer to the second question is that it may have taken LPs some time to receive the stock, put it in their accounts, or even just notice. At such point they likely said, “What is this Limbach?” and started punting. We find it fairly shocking that FdG didn’t do a block sale or a small follow-on and distribute cash, but it is what it is.

All that being said, we think Limbach shares have 70% upside this year. Since February 1st, 1.75mn shares have traded. Certainly not all of them are from LPs, but we think we’re far closer to being finished with clearing out unwanted inventory than from the start. And as we illustrate in a different case below, when inventory clears, there can be a violent move higher. However, our 70% upside doesn’t merely come from wishful thinking, it comes from the profound multiple disparity between Limbach and its comps.

Limbach is now trading at a 5-multiple turns discount to peers despite the fastest expected EBITDA growth in the sector.

We also note that on September 1st, Limbach hired Matt Katz, who worked for FdG, to head the company’s M&A efforts. Katz and Limbach CEO Charlie Bacon have known each other since 2004. We don’t think Katz would have taken the position unless he believed the opportunity was significant. We think the company is very close to closing a transaction, and given Limbach’s small size, an acquisition could significantly move the needle and accelerate growth. We believe Limbach could quickly go from the low-multiple stock in the group to the stock with the premium multiple. That might sound preposterous, but NV5 (NVEE) went public through a 1.4 million unit offering at $6 through Roth (with warrants attached) and a market cap of $25 million. Many deals later, they have the premium multiple in the space and are a 10+ bagger in 5 years. We think that if Limbach can complete 1 or 2 transactions a year for the next few years, we’ll have a multi-bagger on our hands.

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Limbach Holdings Inc (NASDAQ: LMB) is an integrated building systems provider. The company manages all components of mechanical, electrical, plumbing and control systems, from system design and construction through performance and maintenance. It engineers, constructs and services the mechanical, plumbing, air conditioning, heating, building automation, electrical and control systems in both new and existing buildings.

For the first quarter of 2018, Limbach reported a 4.7% year-over-year increase in total revenues to $120.5 million. Net loss for the quarter was $2.4 million, versus $1.2 million for the same quarter last year. The company raised its 2018 revenue guidance by $10 million to a range from $520 million to $540 million.

Meanwhile, shares of Limbach have dropped more than 11% over the past three months. While the stock has plummeted 1.17% over the past 12 months. LMB has a consensus average recommendation of ‘BUY’ and a consensus average target price of $16.33. On Friday, the stock was closed at $11.79.