Layne Christensen (LAYN) is a global water management, construction and drilling company. It delivers solutions for complex water, mineral and energy requirements.
The business is broken into 4 segments; Water Resources, Inliner, Heavy Civil and Mineral Services. Note on 02/2017 Layne agreed to sell its Heavy Civil business. This strategic sale enables Layne to focus and grow with its core water-related businesses. An approximate 10M non-cash loss will be recorded for the transaction.
Layne's Water Resources segment
offers products and services such as hydrologic design, construction,
exploration, well construction and pump rehabilitation. Further, this
segment provides water treatment equipment engineering services and
systems for the treatment of regulated contaminants. In addition, it
offers innovative closed loop water management solutions to hydraulic
fracturing companies.
The Inliner segment provides municipalities and industrial customers solutions
for storm, sanitary water rehabilitation, aging infrastructure, slip lining, traditional excavation, and manhole renewal.Lastly, Mineral Services performs above ground drilling, reverse circulation, dual tube, hammer, and other creative methods.An interesting example of Layne's innovative drilling solutions ("After
69 days underground, the Chilean miners were rescued through a joint
effort of Layne and Latin American affiliate Geotec.")
Investment Thesis Summary
-) A renewed focus on its largest, oldest, and most profitable segment, water. Layne's core competency is its water segment founded in 1882.The trailing twelve months of revenues for the water segment was 227M with a 60M backlog.
-) The Water segment/industry is near and long term highly attractive for growth and profits.
-) The current and future demand for Layne's water segment is partially driven by public entities (Federal, Municipal) and private industry (Agricultural, Fracking). Demand is derived from aging infrastructure, clean water act, municipal upgrades, USA requirements for new buried drinking water sources.
-) Future enhanced profitability was created by the strategic divestment in their Heavy Civil segment announced on 02/09/17.
-) Corporate and Divisional SGA expenses were aggressively reduced. A 40.25% SGA reduction from 2012 to the MRQ.(see table below).
-) Capital expenditure requirements dropped dramatically from 2012 =70.80M, 2013 = 75.80M to the TTM of 21.90M. These reduced capital requirements are favorable for increasing free cash flow margins and reducing depreciation expense.
-) The shareholder capital structure is managed favorably. Shares outstanding for 2010 = 19.40M, 2013 = 19.80M, 2015 = 20.10M and now just 19.80M for the most recent quarter. The enterprise value reduction from 536.60M at the end of 2013 to today's value of 244.50M is potentially mean reverting.
-) Insider buying 2015 to 2016, no insider sales
-) Value institutions holding shares as 12/31/2016; Van Den Berg Management (11.50% TSO), Wynnefield Capital (9.10% TSO), Royce (9.00% TSO) added 99,500 shares in the most recent report quarter, Rutabaga Capital (7.43% TSO) added 124,990 shares in the most recent report quarter,Gabelli Funds (2.62% TSO), Teton Advisors (1.40% TSO), Gamco (6.13% TSO)...
-) Declining short position, 3.75M shares short or 28.33% of float on November, 15,2016 was reduced to 3.08M or 15.55% of float on March 15, 2017.
-) Compelling valuation as the enterprise value trades for less than the sum of the remaining 3 segments (Water, Inliner, Mineral).
Current Valuation:
Barlcay's published a new report estimating the US Will Need $1trn Of Water Infrastructure Spending By 2030. Article by Rupert Hargreaves on March 23, 2017 http://bit.ly/2nwX3tJ
Below is an investor presentation slide breaking out the 3 remaining segments. This was presented at the Gabelli's 27th Annual Pump Valve and Water Systems Symposium Conference on 03/01/2017.
Risks:
March 20,2017 Layne Christensen reports preliminary Q4 results below expectation
http://bit.ly/2o4o35s
A recession will derail the turnaround and its heavy debt burden exacerbates an existing risky situation.
Final Thoughts:
The stock is not without risk from an economic recession coupled with its debt. But historically Layne is shareholder friendly proven by opportunistically reducing shares outstanding, aggressive expense and capital reductions and a renewed focus on its water segment. The water segment offers strong industry trends from both public legislation and industry awareness of access to quality water. Lastly, insider and value institutional friendly shareholders coupled with a reasonable estimate the sum of the parts is greater than the current enterprise value.
Long: LAYN
