Quick Updates On Two Portfolio Ideas
Latest updates on SMLP and PPSI
In this post, I want to quickly share brief updates on a couple of portfolio positions, SMLP and PPSI. Both updates are generally positive and suggest that the investment theses are intact.
Summit Midstream Partners (SMLP) — initial post here, last update here
For a quick recap of the investment thesis, SMLP is a natural gas gathering-focused MLP that has recently divested several of its non-core assets. Pro forma for the divestitures, the company is cheap, trading at only approximately 6x 2024E pro forma EBITDA compared to 8x+ multiples for peers and SMLP’s recent divestitures.
SMLP has recently formally announced the corporate reorganization whereby it will transition from an MLP to a C-Corp. As part of the reorganization, both SMLP’s common and preferred units will be exchanged into the new entity’s common and preferred stock, respectively. As stated by the company previously, the conversion will have to be approved by SMLP’s equity holders during the upcoming shareholder meeting. The meeting date has not been announced yet.
While none of this is new and has been known before, what attracted my attention is the updated ‘Risk Factors’ filing provided as part of the announced reorganization. The document contains some interesting language from the management, indicating that SMLP has been in discussions with other parties regarding “a range of strategic alternatives,” including a transaction whereby “the potential counterparty would acquire control of the Partnership.” See excerpt below:
We may enter into a range of strategic alternatives with potential counterparties that may be conditioned upon the consummation of the Corporate Reorganization.
We regularly evaluate a range of strategic alternatives and engage in discussions with unaffiliated third-parties. Those discussions have included and continue to include significant strategic transactions (a “Potential Transaction”) in which the potential counterparty would acquire control of the Partnership or, after the Corporate Reorganization, New Summit. The Corporate Reorganization is not contingent upon the entry into or consummation of a Potential Transaction and the board of directors of the General Partner (the “GP Board”) expects to proceed with the Corporate Reorganization regardless of the status of any Potential Transaction. However, we expect that any Potential Transaction would be contingent upon the consummation of the Corporate Reorganization. If the Corporate Reorganization is not consummated or the consummation of the Corporate Reorganization is delayed, our pursuit of strategic alternatives may be delayed or abandoned and we may not realize the anticipated benefits of any such strategic alternative.
While I am not sure if this is simply boilerplate language, it might indicate that 1) SMLP has received takeover interest, and 2) management could potentially be looking to shop the company. I have not highlighted a company sale among the catalysts, and I still think that arguing for a takeover is too speculative at this point. However, this document suggests that, aside from other catalysts (namely the C-Corp conversion and dividend reinstatement), investors in SMLP are also getting the optionality of a potential company sale. I’d expect any transaction to come at a significant premium to the current stock price levels, given that SMLP is currently trading at only 6.4x 2024E EBITDA guidance midpoint. Company’s recent investor presentation (see the slide below) shows that SMLP’s comparables have mostly been trading above 9x multiples, while comparable transactions have been completed above 10x EV/EBITDA. Given SMLP’s high leverage, even a minor 1-turn increase in the multiple would imply a share price target of $0 or a 50%+ upside.
While an additional potential catalyst (i.e., company takeover) is nice to have, I do not think that investors require it in order to win here, given the other catalysts, most notably the C-Corp conversion. As I discussed in my latest post on SMLP, the conversion is likely to lead to a significant share price re-rating, given that the current MLP structure limits the pool of potential investors and liquidity.
With the stock trading at a discount to peer/comparable transaction multiples and a clear near-term catalyst on the horizon, I continue to like this setup.
Pioneer Power Solutions (PPSI) — initial post here
Shifting gears to PPSI, an electrical power management product manufacturer, which presents a cheap way to bet on the expected EV infrastructure growth. The company is trading at a 12x P/E while displaying 48-51% revenue growth during 2022-2023, with a further 30% expected in 2024. Company’s key products include the mature, profitable e-Bloc product line (switchgear systems) and the still unprofitable e-Boost (portable fast-charging units for EVs).
There have been several recent updates from the company worth highlighting. Let’s start with the positive ones.
Over the last couple of days, PPSI announced several large orders for its e-Boost product:
Last week, PPSI revealed a $5m order for its e-Boost mobile EV charging units from a “major US metro transit authority.” The contract, which will include the purchase, installation, and maintenance of 4 e-Boost units, is expected to be delivered in Q4’24.
This week, the company made public another $7.1m order from “one of the largest US school districts” for 25 e-Boost mobile EV charging units that will power the district's electric school bus fleet. The company expects to deliver the systems throughout Q1’25.
PPSI’s management now expects to exceed the previous FY24 guidance of $10m in revenue from its mobile off-grid charging solutions segment (referred to as Critical Power, which includes revenues from e-Boost as well as related services). Meanwhile, 2025 segment revenues are now expected to exceed “2024 performance.” For reference, Critical Power segment revenues stood at $9.6m and $8.8m in FY22 and FY21, respectively ($8.4m through three quarters of FY23). So, while the company has not provided clear segment guidance for FY24/FY25, it seems that PPSI's second-largest product line and related services are expected to grow rapidly. While I initially flagged e-Boost's rather commoditized nature as one of the key risks, the new orders, which are expected to fuel further growth, confirm the product's quality and/or at least some differentiation from the competition.
Moving on to the mildly negative update.
On June 6, PPSI disclosed that its audit committee concluded that financial statements of the company published since Q1’22 contained revenue and cost recognition errors and therefore “should no longer be relied upon.” The issue primarily relates to the company incorrectly estimating labor hours required to complete customer contracts, based on which revenues for certain periods were recognized. PPSI intends to restate the financial reports.
It is difficult to draw any firm conclusions at the moment, as the potential impact on the previously reported revenues and costs has not been detailed. As pointed out in jack44’s comment under my post on PPSI, the company switched auditors back in 2022, appointing an audit firm charged by the SEC for “widespread quality control deficiencies.” So, there is a risk that company’s rapid growth in 2022-2023 might have been partially artificially boosted.
However, my understanding is that the restatement will simply redistribute revenues and costs across different periods (i.e., total revenues and costs over contract durations will remain the same). Given this, coupled with PPSI’s real and verifiable product and management’s large stake (the CEO owns 22%), I am inclined to give the company the benefit of the doubt and write this off as PPSI being a small company that has historically not been used to growth.
I will be awaiting further announcements from the company regarding the restatement of the financials and the delayed FY23 and Q1’24 financial reports. For now, I have maintained my position in PPSI.