Natural Gas Services Group, Inc.

NGS Details

Natural Gas Services Group, Inc. (NYSE: NGS) is engaged in manufacturing, renting, and marketing natural gas compressors, flare systems, and other allied equipment used in oil and natural gas production facilities. The company generates the majority of revenues from rental activities, with the contract's initial tenure of six to 24 months and can be exceeded to 60 months for larger horsepower (HP) units. As of March 31, 2021, NGS had 1,265 natural gas compressors with a total capacity of 287,914 HP rented to 80 customers. The company also fabricates and sells natural gas compressors to meet the tailor-made demand of its customers. As of June 04, 2021, the company’s market capitalization stood at USD 149.72 million.

Move into Higher HP Equipment: The company is moving to higher HP equipment to capture additional market opportunities. These potential market areas are adjacent to the company’s existing medium horsepower wellhead equipment markets. The move allows NGS to capture a greater percentage of the life of a well.

High HP Equipment Market (Source: Investor Presentation, FY20)

Closure of new Credit Facility: On May 11, 2021, the company announced the initial commitment of a USD 20 million revolving credit facility with Texas Capital Bank, which can be increased to the maximum commitment of USD 20 million, depending upon the availability of the collateral. The maturity date of the credit agreement is May 11, 2026. This credit facility provides a strong liquidity position to NGS to achieve its working capital and strategic initiative requirements.

Q1FY21 Results: The company reported a slight increase of 2.83% in total revenues to USD 18.39 million in Q1FY21 (ending March 31, 2021) compared to USD 17.89 million in Q1FY20 (ending March 31, 2020). The company’s rental income contributed 83.38% and sales income contributed 14.73% to the total revenues generated during the quarter, while the rest contributed by service and maintenance income. However, the company reported a loss of USD 0.39 million in Q1FY21 compared to the profit of USD 4.08 million in Q1FY20, primarily due to a one-time income tax benefit of USD 4.5 million in Q1FY20. As of March 31, 2021, the company stood at the cash and cash equivalents of USD 30.68 million and working capital of USD 63.20 million with no outstanding debt.

Key Risks: The company’s primary customer Occidental Permian, Ltd. (Oxy) amounted to 30% and 36% of the sales and rental income in FY20 and FY19, respectively. In addition, Oxy’s accounts receivable balances amounted to 35% in both FY20 and FY19. The concentration of business with one customer can potentially hurt the company’s financials.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Data Source: REFINITIV, Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

NGS Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: NGS’ stock price has decreased by 6.67% in the past six months and is currently trading at a higher end of the 52-week range of USD 5.63 to USD 12.23. The stock is currently trading above its 200 DMA levels. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 12.72. On the technical chart, the next support level is USD 9.95. Considering the decline in the stock price in the past six months, strong balance sheet, and associated risks, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 11.05, up by 0.45% as of June 04, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

Espey Mfg. & Electronics Corp.

ESP Details

Espey Mfg. & Electronics Corp. (NYSE: ESP) is engaged in designing, testing, and manufacturing electronics equipment used in military and industrial applications across the U.S. and other international locations. The company deals in various products such as power supplies, filters, power transformers, magnetic components, power distribution equipment, antennas, and high power radar systems. The company generated significant revenue from the U.S. and other foreign governments. As of June 04, 2021, the company’s market capitalization stood at USD 40.24 million.

Suspended quarterly dividends: On March 9, 2021, the company suspended its quarterly cash dividends payments. However, the company had been regularly paying a cash dividend of USD 0.25 per share per quarter up to Q2FY21. ESP’s board of directors mentioned it as a strategic move to maintain a strong liquidity position to fight against the global challenges caused by the Covid-19 pandemic. In addition, the company expects the product deliveries to be delayed due to events like the decline of the rail industry, the virtual collapse of the airline market, and a global shortage of electronic components.

Q3FY21 Results: The company reported a 5% decline in total revenues to USD 18.43 million during the 9MFY21 (ending March 31, 2020) compared to USD 19.40 million during the 9MFY20 (ending March 31, 2020), primarily due to a decline in power supply and magnetic sales. Sales also declined due to 10 days of unplanned facility closure, which occurred in March 2021, resulting from significant workforce Covid-19 exposure. As a result, the company reported a net loss of USD 1.06 million during 9MFY21 compared to the net profit of USD 0.20 million during 9MFY20. Net cash flow from operating activities was USD 2.18 million during the nine months as compared to USD 4.93 million in the year-ago period. However, the backlog increased to approximately USD 67.3 million on March 31, 2021, compared with USD 59.8 million on March 31, 2020.

Key Risks: ESP’s one significant customer contributed 33% and 27.70% of the company’s total sales for 3MFY20 and 9MFY20, respectively. Excessive dependence on one customer for sales can hamper the company’s financial strength in the future.

Outlook: The company expects the total revenues in FY21 to be lower than the revenues earned in the previous year. It projects the net income per share to be lower than the previous year. It is anticipated that a minimum of USD 12.80 million orders of the March 31, 2021 backlog will be filled during FY21. The expectations were largely driven by the sales backlog, inventory write-off incurred due to a canceled contract supporting the airline industry, and projected increased cost on various initiatives.

ESP Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: ESP’s share price has declined by 27.49% in the past six months and is currently trading in the lower band of the 52-week range of USD 14.49 to USD 23.00. The stock is currently trading below its 200 DMA levels. On the technical chart, the next support level is USD 13.80. Considering the decline in the stock price in the past six months, strategic moves to sustain liquidity, debt-free company, and associated risks, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 14.95, up by 0.42% as of June 04, 2021. The target price of USD 17.20 represents an EV/Sales multiple of 1.26x on LTM Sales USD 30.56 million.

* The reference data in this report has been partly sourced from REFINITIV. 

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.