Dane Capital Management is a New York-based hedge fund focused on value and special situations investments. In its latest investor letter, the fund discussed Infrastructure & Energy Alternatives Inc (NASDAQ: IEA) and other companies – in this article we’re focusing on IEA while other companies will be discussed later. So, let’s take a look at what Dane Capital said about the infrastructure construction company.
We purchased shares of IEA, a leading E&C contractor to the renewables industry, because we thought at just under 4x estimated 2018 EV/EBITDA its valuation was completely disconnected to the broader E&C space, and it had an unjustifiable discount. This valuation disconnect was largely due to the fact that it was (and remains) under investors’ radar screen as it went public via SPAC.
We like that IEA competes in an oligopoly as just one of 3 major players in the utility-scale renewables space, has low capital intensity (less than 2% of revenue) and has the opportunity to consolidate the industry. In addition, there is a moat to the business as it is highly specialized and other larger players have tried, and failed, to enter the space (making IEA a wonderful long-term take-out candidate as they scale and execute). We’re also of the view that the renewables industry should have a decades-long runway as traditional energy sources such as coal plants are taken offline, and renewables become more cost competitive — we’re almost there without subsidies and tax incentives.
We purchased shares at $10.10, which we were comfortable with given our positive view of the company’s prospects and its extremely cheap valuation. The stock remained at those levels and, in fact, traded up to $10.25 on March 9th, with a vote for closure of the SPAC merger scheduled for March 12th. However, on Monday, March 12th, the company postponed its vote until March 15th. On March 15th, IEA postponed the vote again, this time until the 20th. On March 20th, the company announced a further one-day delay in the vote, and the stock closed the day at $9.67. It subsequently went into free-fall, albeit on light volume, bottoming at $8.25 on March 27th. Shares closed the quarter at $8.84, resulting in a loss for Dane of 12.5% during the quarter.
Fundamentally, we believe nothing has changed regarding the prospects of the company and if it were valued in-line with peers it would trade at $16-$20. We are optimistic that as the year progresses, the company will garner research coverage, and very likely make an accretive acquisition – they have a $100 million funding line with BAML – and we will do very well on this investment. Further, our sense from management (we most recently met with them on April 25th) is that requests for proposals are exceptionally robust, and if they win their fair share, 2019 could be a very big growth year, on top of the 60% revenue and EBITDA growth anticipated for 2018.
Infrastructure & Energy Alternatives Inc (NASDAQ: IEA) is engaged in providing infrastructure services to the renewable energy, traditional power and civil infrastructure industries. Primarily focused on the wind energy industry, the company specializes in engineering, procurement and construction services throughout the U.S. IEA has completed more than 190 wind and solar projects in 35 states.
For the first quarter of 2018, IEA’s revenue was $50.1 million, which represents a decrease of 4.1% when compared to the same period in 2017. IEA posted a loss of $3.1 million for the first quarter, compared to a profit of $8.1 million in the same period last year.
If we look at the share market, IEA has been performing well. Over the past three months, shares of Infrastructure & Energy Alternatives have gained nearly 8%, while the value of the company’s share price has jumped 2.54% over the past 12 months.