Quick Value #275 - Babcock & Wilcox (BW)
Power gen E&C turnaround at 6.4x EBITDA just cut debt by 43%
Today’s post:
Shares down 40% YTD
Over $500m in divestiture proceeds since 2019
Restructuring balance sheet via bond exchanges and tender offers
Bookings +11% YoY, backlog +47% YoY, and EBITDA +12% CAGR since 2022
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Quick Value
Babcock & Wilcox (BW)
Ticker: BW
Price: $1.05
Shares: 100m
Market cap: $105m
Valuation: 6.4x EBITDABabcock & Wilcox looks like an incredible asymmetric bet today and the thesis is pretty simple: the company is moving from distressed to solvent. At the same time, most of the “problems” live below the EBIT line which is quickly getting resolved.
What they do…
Babcock & Wilcox (BW), founded in 1867, is an engineering & construction (E&C) firm focused on utility and industrial customers. Revenue comes from a mix of parts, service, and construction projects.
There are 3 segments: renewable, environmental, and thermal:
Thermal is the profitable workhorse of the business with consistent revenue and segment EBITDA. Renewable and environmental segments have had ups and downs, but are each profitable at the segment level over the past 6+ years.
Unsold discontinued operations include a solar business
Why it’s interesting…
This is a classic turnaround and it’s a long story on how they arrived at the current financial situation. Here’s a brief timeline of events to quickly bring you up to speed:
2015 — BWX Technologies (BWXT) spun off their E&C division which became BW… post-spin shares started around $10
2016-2018 — Botched underwriting on several large renewable projects (combined losses were >$1.2bn during this 3-year stretch)… shares went from $10 to $3 during this stretch
2018-2020 — Rescue financing, rights offering, reverse split, completed delivery of loss projects… full blown survival mode, shares from $3 to $0.50
2021-2024 — Recovery in revenue, backlog, and operating income… but working capital, expensive debt, and discontinued ops eat into cash flow
July 2024 sold Denmark renewable energy parts business for $87m
October 2024 sold Italian and Swedish businesses for $40m
2025 — Asset sales, divestitures of whole divisions, bond exchanges, bond buybacks below par, equity raise
May 2025 sold the Volund business for $20m
May 2025 exchanged $131.8m senior notes due 2026 for $100.8m second lien notes due 2030
June 2025 sold Diamond Power business for $177m
June 2025 tender offer ($70m) for 2026 senior notes at 80% and 64% of par
(The “liquidity and capital resources” section of the K and Q is a must read for this business.)
1) Let’s start with the bad news
This is a distressed turnaround with an ugly historical financial picture. Let’s lay out all the negatives before talking about what’s going right…
High leverage — Total debt at 1Q25 was $464m with $45m interest expense against ~$69m adjusted EBITDA (generously adjusted too) = 6.7x gross leverage. Outstanding loans are $123m ABL and $344m senior notes.
Maturity wall — The ABL matures in November 2025 and senior notes (baby bonds) mature in Feb 2026 and Dec 2026.
No cash flow — B&W hasn’t had positive operating cash flow since 2015. (Maybe that alone makes this uninvestable?)
Earnings — Adjusted EBITDA is messy with several questionable add-backs: product development costs, advisory fees, acquisition “pursuit,” and a large “other” bucket.
Other liabilities — Unfunded pensions total $190m, preferred stock outstanding is $191.7m, and discontinued operations have more liabilities than assets ($10m).
Letter of credit — E&C firms typically post surety bonds or letters of credit as performance guarantees on project completions. Most of the time, no cash collateral is required and this is “off balance sheet” financing (i.e. insurance-like). But if you’re in distress, then you borrow money and post 100% cash collateral like B&W… this LC borrowings are ~$78m and cost $7m annually with non-earning cash collateral in restricted cash. Ouch.
Still with me?
2) What about the good news?
From the timeline above, you can spot the flurry of activity in late 2024 / 1H25.
Reducing leverage — With the 3 actions listed below, I have pro-forma gross debt at $302m (down from $464m). And if you exclude the LC collateral, it’s more like $224m (down from $389m, a 43% reduction!).
Bond exchanges reduced total debt outstanding by $30m and extended maturities on $100.8m outstanding (2030), it also reduced interest expense
The pending $70m tender offer for baby bonds is at a discount to par… I’m assuming this $70m cash outlay reduces debt by another $90m or so if fully tendered
Repaying $45m LOC balance with Diamond Power proceeds.
Letter of credit usage is declining… in 1Q25, LC fees fell 47% YoY to $1.2m ($4.8m run-rate)
Extending time to execute — Once the remaining 2026 senior notes are repaid or refinanced, debt maturities move to 2027 and 2030 leaving plenty of execution runway. The ABL technically matures in January 2027 so long as the baby bonds are refinanced or extended… I’m estimating $122m 2026 senior notes remaining as of today
Asset sales — Since 2018, total divestitures are >$500m (including the announced Diamond Power sale for $177m). Several of these businesses had negative equity or operating losses. Diamond Power had $110m trailing revenue and is selling for $177m, an impressive 1.6x sales while B&W trades at ~0.7x EV/sales. Highlights the potential value in the portfolio.
Growth — The (remaining) core businesses are closely tied to power generation. Increasing demand for electricity is pushing utilities to delay or withdraw coal plant retirements. B&W should see continued growth for years.
Revenue is steadily growing (even with divestitures) from $609m in 2022 to $734m TTM.
Bookings in the thermal segment grew 75% in 2024 and were up 17% in Q1.
Backlog grew 47% in Q1 and stands at $526.8m.
Adjusted EBITDA grew from $55.6m in 2022 to $68.9m in 2024 and $72m TTM, that’s a 12% CAGR over 3+ years (note: adj. EBITDA excludes BrightLoop development costs of $9-10m per year)
Cash flow — Management expects positive cash flow in 2025. Q1 operating cash flow (including disc. ops) was an $8.5m outflow. Excluding disc. ops it was a $5.7m operating cash inflow (and that wasn’t solely from working capital benefits). Hmm… maybe performance is finally turning a corner?
BrightLoop — BrightLoop is an early stage hydrogen production technology set to begin commercial production in mid-2026. Every 1 ton of daily production should add $2-4m annual revenue at 25% gross margins. The first plant is expected to produce 5 tons per day (i.e. $10-20m revenue / $2.5-5m gross profit) in 2026 with medium sized projects (10-15 tons/day) coming online in 2028. Even with lower green hydrogen prices, this has potential to be a large revenue contributor in a few years.
Here is commentary from CEO Kenny Young on the 1Q25 earnings call:
Main takeaway?
Lots of positive business momentum and action on the balance sheet. They aren’t completely out of the woods, but they’re several steps closer to self sufficiency (and solvency).
3) A pro-forma look
Let’s recap…
$1.05 share price x 100m shares outstanding = $105m market cap. Add $160m net debt and $192m preferred = $461m EV. I’m excluding LC debt and the restricted cash collateral from EV which total $78m or so, but I’m still including the fees as part of interest expense.
Trailing EBITDA = $72m or 6.4x EV/EBITDA.
It’s pretty clear that most problems are below the EBITDA line here. And with the balance sheet clean-up, it’s likely they’ll start generating real cash flow pretty soon. I’ve largely ignored the preferred stock despite the $14.8m annual dividend. The preferreds trade at $10 (40% of par) so it’s closer to $77m market value vs. $192m carrying value. I wouldn’t be surprised if they converted to common and/or repurchased these within 12-18 months.
What’s a fair value?
E&C firms are trading at 9-11x EBITDA (or higher). B&W doesn’t deserve that sort of multiple just yet. A potentially conservative scenario might be $80m EBITDA within 12-18 months, at 7x = $560m EV. Assuming no change in capital structure, subtract $352m net debt + preferred = $208m equity value or ~$2 per share.
Long-term upside looks significantly higher. Downside is zero to the common/preferreds with recovery potential for senior notes. The baby bonds at $20 and $16 are potentially the better investment here.
Summing it up…
There are a lot of moving parts here. Most of which are positive for shareholders, yet the stock is down ~40% YTD and baby bonds are down 10-20% YTD.
It’s still a challenge to triangulate near-term and long-term earnings/FCF so I understand why shares trade like a call option. Plus, BrightLoop is totally unproven at this point.
The combination of debt reduction, bookings/backlog growth, and a return to “positive cash flow” are enough for me to take a small equity position and slightly larger position in the senior notes.
My guess is management sells the company within 1-2 years as commercial production ramps at BrightLoop. Perhaps an outright separation of the power gen and hydrogen production businesses are in the cards too?
Disclosure: I own BW common, both baby bond issues, and have open orders on call spreads.
Resources:
Also have $193 mil pension deficit
very nice analysis