Hightex: A niche construction company with plenty of upside?

Hightex Group (LON:HTIG) specialises in the design, manufacturing and installation of polymer membrane structures such as this image, or the Wimbledon retractable roof (very bottom of article).These polymer membranes are also really quite clever. For instance they have photovoltaic cell technology (PV Flexibles), which can be applied to their membrane structures. Furthermore their membranes can have a ‘Low-E’ coating. This will prevent heat and greenhouse effects in such structures. This was important to the New Bangkok International Airport construction. I seem to recall the company telling me that the airport had to renege on a prior contract at some cost in order to then use Hightex; they did this due to large, but undisclosed, savings on heating.

Other than these efficiencies which may well drive sales of their products there is also the issue of security. Again from a company meeting (almost 2 years ago now) I seem to recall the company saying that they were in high level meetings with figures from US Security as membranes have a huge advantage over glass or Perspex in as much that they do not shatter but merely flap in the event of any explosion.

As you will have gathered I met the company a while back when they were raising money. I did not invest at the time due to the lumpy nature of the profits but more importantly their working capital position at the time. Their financing arrangements would not allow them to take on too much work at any one time. This however has now changed with their agreement with Coface. The financing arrangements that are now in place should greatly enhance their ability to take on more and more large scale high margin projects.

The share price has been a bit depressed in the last few months. This, it would appear, is due to the fact that there is no new news on contracts. In the last interim results investors were primed for two major contract announcements before the end of the year. Sadly that date has passed and the only contract announced was a EUR2 mil contract for an artistic sculpture. Though I take some solace in that projects such as this help enhance the profile and credibility of the company and should hopefully assist in the winning of new contracts.

I am also very encouraged by the latest interim statement issued last Friday (14/1/11). Despite warning that profits for 2010 would be slightly lower due to increased depreciation and marketing spend there was no news of delays due to inclement weather. This was a potential risk highlighted in the Interim Results which looked likely as I saw the snow falling outside my office window. In the absence of such delays we should not see any significant problem with 2010 results and no setbacks to 2011 contracts.

2011 revenue estimates are currently standing at EUR40 mil; EUR 17.3mil of that is already secured. This leaves a remaining EUR 22.7 mil to be secured.

Source – WorldStadia .com

Looking at the above there are plenty of pipeline opportunities for Hightex. With the Brazil World Cup 2014 looming there could well be significant contract wins soon.

Bear in mind that the Kiev, Ukraine Stadium contract won by hightex has a value of EUR 18.9mil. Two contracts from this non-exhaustive list could easily see Hightex beating estimates.

Hightex have a historic conversion rate of 30% on projects less that 9mil and 50% for those with a greater value. As such I do not believe that securing two or three of these stadia would be unlikely for Hightex.

Furthermore there are plenty of other opportunities for Hightex. Bangkok International Airport has a further stage of development. With Hightex’s track record and the savings they have already made for the airport I would consider it likely that this is a contract that they will win.

Hightex are also tendering the ‘King Abdullah’s International Gardens’ contract in Saudi Arabia potentially worth EUR25-40mil. It would appear, however, that this has been negotiated over a long period of time as when I met the company this was a project mentioned and still nothing has materialised. Though it would appear that it is still potentially on the cards.

Back in 2007 the Architects Data File ran a story on the Gardens and said this:

“The vision of the project is to produce a space with a translucent white unified effect that will mainly diffuse daylight in the space and allow a small amount of sky to be visible. The most suitable material found in the market and guaranteed for the specific project, is manufactured by HIGHTEX. The focus is on two membranes: the PTFE- coated glass fabric to form the translucent white roof membrane and the transparent ETFE to form the clear openings and access of direct sunlight.”

And according to the Saudi Gazette the project is due for completion in 2013

So if we start putting these potential contracts together and try and come up with an estimate what do we get? I’ve put together some ‘back of an Excel packet’ numbers…

Forecast Assumptions

 

Implied P/Es vs. Actual

 

I think that the absolute bear case very unlikely. With their past conversion rate, with the extra spend on marketing and with the potential clients, including stadia which require updating/renovating/constructing for quadrennial events – I would consider it very likely that they will secure at least one more significant contract.

Currently they are on a PE of about 28. So I reckon a re-rating to 8 also to be very unlikely. It would take some very bad news to justify that.

Thus I reckon on 2010 earnings there is at least 33% worth of upside. However it is very feasible that 2011 & 2012 revenues could exceed analysts’ expectations. This is due to the fact that these estimates were made before the Coface financing deal was in place. With this now secure the company are able to take on more work and the Blue Sky scenarios do not seem unrealistic at all.

 Of course the problem with this share is that the price is based on news flow. The real driver for the share price will be determined by news, or lack thereof, of any new contracts. With thin volumes the price can be moved be fairly small trades - so with last friday's last minute purchase of 1mil shares - there could be some near term upside.

In interest of full disclosure: I do have a small position in this stock.