5/15/2011

Discount to normalized earnings: FIGI.PK: Fortress International Group

FIGI.PK: Current Price of $1.62 or 21.6 million market capitalization


Fortress reported an outstanding quarterly NI of 1.021 million or .08 per share on only 9.6 million in revenue. The NI was driven by the large jump in gross profit of 4.1 million. GP increased YOY 64% compared to the 2.5 million in the first quarter of 2010.

The gross margins moved higher but revenue was down significantly reporting 9.6 million compared to the prior period of 17.1 million. Gross margins were positively impacted by construction management project expenses recognized in the prior sequential Q4 2010 but associated revenue was realized this quarter. The lack of matching costs strongly impacted the GP% but the mix of new higher GP% revenue projects also contributed to a lesser extent. Management refused to provide details on how much of the 1.021 million in net income was associated with expense free revenue recognized this quarter. But management made it clear that the improved product mix was an important current and future driver in the higher GP and net income. They committed to positive EBITDA for the next 3 quarters based on the current backlog, pipeline and higher margin product mix.

But does the current quarterly reported earnings of .08 per share represent the true earnings power of the business? Management provided answers like “yes and no” but they were very optimistic on future earnings. The no part I believe was related to the outsized margins impacted by the carryover project revenue with expense realized last quarter. But they did emphasize several times the focus on higher margin projects with less emphasis on the top line. Construction management projects provide a much lower margin compared to the other 2 segments… technology consulting and facility management. Management was not shy to convey their confidence in the sustainability of the higher margin facility management and technology consulting divisions. I believe they made the point to justify the current quarter’s huge drop in revenue and backlog by using an example that a 20 million construction management job at a 3 to 4 percent fee would produce the same gross profit as a 2 million facility management or technology consulting assignment. If this is true the current but although significantly smaller at 27.7 million backlogs will be a highly profitable mix of business. So if that 20 million construction management work produces ~ 600k or 3 to 4 percent in gross profit and that would be equivalent to a 2 million facility management or technology consulting project it would put a GP% of 30%. That 30% estimate is important if you look at the 27.7 million backlogs and the break out discussed on the conference call.

With a fixed cost structure of 10 million (I believe management was referring to the next 12 months) and a run rate at or near the current quarterly results should push the stock price higher.

Maybe closer to 3 or 4 dollars per share…but I can’t know this!

I tend to agree with management’s upbeat comments on their new higher margin focus and supporting recent results based on the break down provided for the 27.7 million existing backlogs and optimistic pipeline.

The breakdown of the 27.7 million backlogs comprised of 10.6 million in technology consulting or 38% of the total 27.7 backlog, 12.4 million for facility management or 47.77% of the backlog, construction management of 4.7 million or 16% of the backlog. This new high gross profit service mix should help move the stock higher and represents an improved more profitable mix of business that was historically more weighted to construction management. So if we put a 30% gross margin on the 10.6 million (technology consulting) and the 12.4 million (facility management)and that generates ~ .30 GP% (.30)(10.60+12.40) = 6.90 million in gross profit just for those specific backlog items. Also credit should be recognized for the aggressive debt pay down over the past year. This should drive down interest expense. The total liability balance is 13.261million compares very favorably to last year’s 20.350 million. Working capital improved to 6.6 million from the prior year’s balance of 5.3 million.

Management also mentioned progress internationally by signing 3 new partners to help generate new international work. Philippines, Thailand were mentioned along with intention to move into the larger markets of Singapore and China.

Long FIGI.PK

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