Target Inks Permian Contract Ahead of M&A Close, Sweetening Deal for SPAC Investors
$200 Million Contract Includes Surprise Revenue That Should Boost 2019 Ebitda Another 6%
Target Lodging, a flexible-housing operator focused in the petroleum-rich Permian Basin, has landed a $200 million contract including $45 million of revenue that wasn’t part of internal forecasts, an early sign of successful synergies in an upcoming three-way merger.
The deal comes ahead of the formation of Target Hospitality, which will be created through the merger of Target Lodging, Signor Lodging, and Platinum Eagle Acquisition Corp (ticker: EAGL). The latter is a blank-check company, or SPAC, that raised money to find an investment and will see its shares automatically convert to Target Hospitality shares if the deal is approved in the first quarter. IPO Edge published a detailed analysis of the deal in a November article here.
The contract win bodes well for the merger because it demonstrates Target’s success in selling hospitality services such as gourmet catering to clients of Signor Lodging. While Target offers extensive hospitality services, Signor previously outsourced them, creating an opportunity to bring more business in house.
The hospitality services provide Target with an edge over many rivals who serve the staff of oil-and-gas companies in the Permian basin, where drilling opportunities abound but accommodation can be scarce. 24-hour dining, for instance, simply isn’t available to workers who wind up staying at motels in the area.
The deal extends the duration of four contracts by 27 months, beginning in January 2019, and adds Target’s full suite of rental accommodations along with culinary services. While specific pricing wasn’t disclosed, the terms improved for Target.
“Everyone agreed to price increases,” Target CEO Brad Archer said in an interview with IPO Edge.
What does it mean for investors? While the company didn’t provide updated guidance, a back-of-the envelope calculation indicates a healthy bump to 2019 profits. Assuming the $45 million is spread evenly across 27 months, the company’s 2019 revenue should be $20 million higher than previously forecast. With a 52.4% Ebitda margin, the company should enjoy $10.5 million more ebitda than expected. That translates to $176.4 million of Ebitda, a 6.3% increase from original estimates.
The additional profits add to an already-healthy pace of growth. The company previously pointed out it has generated 25% annualized Ebitda growth from 2016 to 2019.
For investors considering the shares at around $10 each, the stock looks even cheaper than it did in IPO Edge’s November analysis. The company’s enterprise value, adjusted for debt, is 7.9 times 2019 expected Ebitda, using the new assumptions. That compares with multiples of 10.7 times for Mobile Mini, a portable-storage provider, and 8.7 times for WillScot, which offers mobile office and storage products.
That is a reasonable valuation for Target, especially given its dominance in the Permian Basin, where more than 80% of its footprint lies. To ensure exploration remains profitable, companies in the region have focused on projects that work even at depressed oil prices. Target Hospitality’s clients have breakeven prices of West Texas Intermediate crude oil in the $30 to $40 range versus the latest price of $54.
True, some observers question whether the rapid growth in the Permian Basin is due for a halt. But any such slowdown looks likely to be temporary. For instance, there is currently a bottleneck caused by a shortage of pipelines. There are multiple pipeline projects due to open up in 2019 and Target Hospitality’s clients are top-tier firms most likely to gain quick access.
Investors shouldn’t be shocked to see growth pick up even more in coming months – from acquisitions. The combined company will have net debt equal to roughly two times 2019 projected Ebitda. With such a healthy balance sheet and predictable revenue, it could scoop up competitors in the Permian Basin or elsewhere while leaving the door open for dividends or share buybacks.
With signs that the merger is already delivering its promised benefits, investors should consider the shares before word begins to spread.
Contact:
John Jannarone, Editor-in-Chief
Twitter: @IPOEdge
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