Greystone Capital recently released its Q2 2020 Investor Letter, a copy of which you can download here. Greystone is a privately held investment company. The investment firm seeks to simplify and add value by identifying opportunities in good and bad markets. You should check out Greystone Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.
In the said letter, Greystone Capital highlighted a few stocks and Hill International Inc. (NYSE:HIL) is one of them. Hill International Inc. (NYSE:HIL) operates as a construction consulting firm. Year-to-date, Hill International Inc. (NYSE:HIL) stock lost 52.1% and on August 17th it had a closing price of $1.48. Here is what Greystone Capital said:
“Outside of the pandemic related issues, no business turnaround is without its fair share of setbacks. With HIL, I feel confident they are doing what’s necessary to drive the business forward, generate cash and communicate the story, even if it looks as though we are taking two steps forward and one step back. COVID-19 has presented a step-back. This is unfortunate as things had been progressing nicely over the past few quarters.
Despite feeling an initial impact from the onset of COVID-19 and the related economic shutdown, HIL was very busy in the quarter, winning new business, negotiating contracts with current customers, furloughing employees, cutting costs, applying for PPP money, and negotiating lease deferrals. All-in cost savings through 2020 are expected to be $10mm in SG&A, bringing the run rate to $110mm (as opposed to previously guided $120mm). Numbers may come in lower depending on how long COVID-19 lockdowns continue, but I’m pleased with the swift and decisive actions taken by a management team facing nearterm uncertainty. The biggest COVID related impacts came from projects scheduled to be awarded being deferred instead, and the collection of accounts receivables (since returned to normal in April). New bookings, which drive 20-30% of consulting fee revenue were down QoQ, with backlog taking a 7% dive from the prior quarter. $20-30mm of that backlog was made up of project cancellations, but the company hasn’t seen any pricing pressure or unfavorable negotiated terms due to the pandemic. This is a positive.
Diving into some recent operating results, Q1 2020 marked the fifth straight quarter of positive adjusted EBITDA (Adjusted EBITDA was $3.2mm for the quarter on the back of -$1.2mm EBITDA before unrealized FX gains), an increase of 36% YoY. Another positive, but still a far cry from my projected $30mm+ run rate EBITDA at 10% CF EBITDA margins.
So where does that leave us as shareholders? Clearly, the market is not believing in the turnaround. The share price reflects a business in decline, assuming A/R and cash collection will be difficult, and new business will continue to decrease. I’d argue that once we return to some normalized business environment, investors should see the share price rebound in line with improved operating results. As a sanity check, HIL continues to win new business despite project deferments and the current difficult environment (this includes $30m in new bookings during one week of Q2 alone).
As a further sanity check, here’s a brief highlight of the negative issues most likely being projected out to 2021 and responsible for the large share price decline, followed by mitigants:
Business is in decline, new bookings will continue to suffer – HIL generated $30m in new bookings last week alone, which probably wouldn’t happen for a business in decline, also set to benefit from any infrastructure bill announcement or spending in that category
Can’t collect receivables – collection activity returned to normal as soon as April (once governments realized the world wasn’t ending)
Can’t sustain a prolonged downturn – HIL has $23mm in liquidity with cash + term loan availability, has cut costs by $10mm, will most likely receive some stimulus money, and still has their Libya receivable to collect. In addition, global infrastructure makes up the largest portion of their business, which will hopefully see a boost from new bill announcements, or see airports/aviation sector take advantage of this reduced period of demand by undergoing maintenance capex projects and facility upgrades (happened following both 9/11 and 2008).
Price of oil will continue to impact operating results – While energy is in a strange place, and the Middle East segment makes up 30% of their business, HIL has seen minimal disruptions in that segment (95% of billable workforce is working) given most projects are tied to infrastructure and facility management.
Management/insiders are dumping shares – we’ve seen no evidence of large holders dumping stock, and in fact during Q2 the largest shareholder purchased another 50,000 shares at the current price level
Thinking through the above, I don’t believe the current valuation is warranted. If HIL sold their entire business for 0.5x revenues, that would value the entire company above $2.50/share. That’s 0.5x revenues. The amount of M&A in the space is rampant, and even sub-scale deals are taking place at higher prices.
As we’ve spoken about before, this situation was going to require some patience. We’ve built/added to our position in the $1.60 – $3.00 range and may be purchasing more shares should the price fall further. A return to a more normalized business environment, growth in backlog/bookings and continued cash collection should bode well for the share price. We have the insider buying and cheap valuation, what’s left is the market’s recognition of value.”
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In Q1 2020, the number of bullish hedge fund positions on Hill International Inc. (NYSE:HIL) stock decreased by about 23% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with Hill International’s growth potential. Our calculations showed that Hill International Inc. (NYSE:HIL) isn’t ranked among the 30 most popular stocks among hedge funds.
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Disclosure: None. This article is originally published at Insider Monkey.
