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Fiscal 3Q2021 Falls Short, But PPP Loan Forgiveness Positive

PPP Loan Forgiveness Announced

March Quarter Results Out and Virtual NDR Comments

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Industrials

Construction

Energy Services of America Corp.

Compared to the March 2020 quarter, the March 2021 quarter improved, in part due to the December 2020 acquisition of West Virginia Pipeline (WVP). As typical during the winter, EBITDA was negative at $0.8 million, but it was an improvement over the 2Q2020 EBITDA loss of $1.2 million due to higher revenue and gross profit, which more than offset higher G&amp;A expense. Compared to our estimate, revenue was slightly lower by $0.9 million and costs were slightly lower by $0.5 million so gross profit was $0.4 million lower than expected and EBITDA was $0.7 million lower than expected. 
Total revenue of $25.6 million was more than 25% higher than $18.1 million and gross profit of $1.9 million was well above $0.1 million. Operating loss of $2.0 million narrowed from $2.4 million, as higher gross profit of $1.8 million was partially higher G&amp;A expense of $1.5 million. Gross margin increased to 7.3% from 0.4% and operating margin narrowed by 191 basis points to negative 8.9% from negative 10.8%. 
The WVP acquisition was additive to operating results. WPV revenue of $1.2 million and gross profit of $0.4 million equated to gross margin of 32.8%. By our calculations, WVP was immediately accretive and added 120 basis points to gross margin since gross margin would have been 6.1% if WVP were excluded.
By segment, Gas &amp; Water Distribution (GWD) experienced the strongest revenue growth, followed by Electrical &amp; Mechanical (EM) and Gas &amp; Petroleum Transmission (GPT). EM revenue of $8.6 million increased $4.2 million, or close to 100%, EM revenue was $2.8 million higher, or 27%, and GPT revenue was up $0.5 million, or 13%. 
Adjusting 2021 EBITDA estimate to reflect FY2Q2021 operating results.
Given that operating results were slightly below expectations and costs are likely to remain higher, we are lowering FY2021 EBITDA to $8.0 million from $9.1 million. Our estimate is based on total revenue of $133.6 million and gross profit of $17.3 million. We estimate that gross margin will approximate 12.9% with EBITDA margin of 6.0%. Even though it has dropped from $63.8 million at the end of September 2020, the current backlog of $61.2 million supports our positive outlook.
Virtual non-deal roadshow (VNDR) last week covered broad themes of recovery from COVID-19, growth through acquisition and maintaining solid financials.
President and CEO Doug Reynolds stated that the electrical and water/sewer businesses are positive and more than offset the languishing natural gas business. The waning of COVID-19 restrictions has helped move projects forward and stimulus legislation has boosted funding. The natural gas business hasn&#8217;t fully recovered, and the outlook is a bit murky due to environmental and regulatory issues hindering project approvals.
Doug Reynolds highlighted that acquisitions and other moves should enhance business lines and expand geographic reach. Customers appear to be a good source for acquisition leads, especially for some of the smaller ones.
WVP, which was acquired for $6.5 million at the end of 1Q2021 has been fully integrated and is performing well. On April 30th, Nitro acquired Revolt Energy, a solar installation company located in Nitro, West Virginia, for $150k. Revolt was founded in 2019 and is a leader in residential solar projects in West Virginia that is expanding into the commercial and industrial markets. Revolt is currently installing a solar energy system at Nitro&#8217;s office and manufacturing plant. There should be synergies with Nitro&#8217;s current electrical capabilities, such as grid tie-ins.
Also, a new sub, SQP Construction, was formed in March to enter the general construction market. The decision was spurred by the availability of someone with extensive experience to head up the effort. At the same time, Nitro has not had as much success as expected working with general contractors and SQP Construction should results in some new business.
Maintaining a solid financial position remains a goal. PPP loan forgiveness&nbsp;is possible. 
Total debt was $23.2 million in 2Q2021, up from $21.6 million in 1Q2021, which consists of short-term debt of $10.5 million and long-term debt of $12.7 million. Short-term debt increased $2.3 million in 2Q2021 due to insurance premium financing of $2.2 million. Every year, insurance premiums are financed in December and paid off prior to September. 
Long-term debt dropped $0.9 million from 1Q2021 due to debt amortization payments. The main components of long-term debt are a six-year note of $3.0 million that financed the WPV acquisition and the Paycheck Protection Program (PPP) loan of $9.8 million. ESOA is asking for the PPP loan to be forgiven, and the process is underway. The lender approved the PPP loan forgiveness application and forwarded it to the Small Business Administration (SBA) in early March. The SBA will review the application and required certification that economic uncertainty made the PPP loan request necessary to support ongoing operations. The SBA has stated that it will audit larger PPP loan forgiveness applications above a set limit and it appears that the ESOA application might be audited. 
While the SBA has up to 90 days to reach a decision on forgiveness, the timeline is not certain due to the backlog at the SBA. Doug Reynolds stated that the PPP loan was used to maintain employment at CJ Hughes, and the criterion for forgiveness should be satisfied. In the 1Q2021 10-Q filing, ESOA stated that it believed that the SBA&#8217;s certification requirement has been met based on the weakening business environment, limited access to capital markets and low public market value, including common shares that do not trade on a national exchange. Whatever portion of the PPP loan is not forgiven will be converted into a five year note at an interest rate of 1%.&nbsp; If the majority of the PPP loan is forgiven, capital allocation could become a more prominent issue in fiscal year 2021. It is worth noting that the recent acquisition is the first in many years and likely indicates that growth has become a higher priority.
One upcoming issue is the expiration of the revolver of $15.0 million at the end of June. The revolver was extended last June for one year, but hopefully a more permanent solution will be found. The borrowing base is calculated using eligible accounts receivable. The current balance is $3.5 and the borrowing base is $11.1 million so availability is $7.8 million.
The VNDR also covered questions about the preferred shares and litigation. The convertible preferred shares were also discussed since the stock is trading above the conversion price. The preferred shares are callable and conversion into shares would probably boost the public market float over time. The long-standing litigation of $10 million could move forward once the court system begins hearing cases again. The case is at the front of the line so a trial could happen before the end of the fiscal end in September. While the court mandated mediation process was not fruitful, a settlement is still possible once there is more visibility on the timing and a trial date is set.
Maintaining Outperform rating and price target of $2.58/share. While the stock is up 106% this year, recent performance has been mixed with a 7% gain in April offset by a 6% loss in May. Given recent moves to expand, like the WVP acquisition, and improve operating visibility, we believe that the shift toward a more sustainable business model should help the multiple expand. Currently, ESOA is trading at an enterprise value multiple of 5.8x FY2021E EBITDA, compared to an average multiple of ~11x for a universe of larger E&amp;C comps, and we believe that the current discount of about 50% should narrow into the 35%-40% range. 
Figure 1: Stock Price Performance (January 2016 &#8211; Present)
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/ESOApriceperform.jpg" style="width: 440px;height: 245px" />&nbsp;
Source: Yahoo Finance.

Energy Services of America Corp. (ESOA)

March Quarter Results Out and Virtual NDR Comments

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Dropping Research Coverage (ESOA)

Fiscal 3Q2021 Falls Short, But PPP Loan Forgiveness Positive (ESOA)

PPP Loan Forgiveness Announced (ESOA)

March Quarter Results Out and Virtual NDR Comments (ESOA)

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