Limbach Holdings, Inc. (LMB): Dane Capital Expects ‘Significant Upside’ To Shares In 2018

Dane Capital Management recently published its Q4 investor letter in which the fund discussed its investment thesis on Limbach Holdings, Inc. (LMB), a $104-million market cap mechanical and electrical contractor. Dane Capital is optimistic about the company’s performance in 2018 and expects significant upside to shares this year. Let’s take a look at Dane Capital’s comments about Limbach Holdings Inc.

In 2017 we suffered a modest loss in shares of Limbach (shares declined about 2% for the year), a top-3 position for the Fund. However, we added to our position when shares dropped, so we were about even on the stock for the year. Shares declined first because of a delayed 10-K filing — the delay was just a few days and there were no restatements. The stock was also hit by a deceleration in backlog growth in 2Q (it reaccelerated in 3Q) and 3Q guidance that the company would achieve the low-end of annual EBITDA guidance of $18-$20mn (still up 7% y/y). The low-end of guidance includes unanticipated cost overruns (some of which should be recovered in 2018), and non-recurring public company expenses. Both expenses would have been adjusted out on a pro-forma basis by many companies. We wrote about this at length in November and noted that backing out these costs, the company’s organic EBITDA growth would have exceeded 30%. The company also eliminated the entirety of its high interest rate preferred, reducing its average borrowing costs.

If we simply assume that there are no cost overages and non-recurring charges don’t recur, and Limbach achieves a flat 2018, unlikely given 9.4% y/y backlog growth in 4Q and the recent announcement of a major data center win (the first they’ve won), then EBITDA should be $22mn, or $23mn assuming $1mn in overrun cost recoveries – or 28% y/y growth. Assuming 10% organic EBITDA growth, and an acquisition at 4-5x EBITDA, we believe EBITDA will be at least $30mn, or 66% y/y growth. In our view, stocks with that type of growth profile don’t trade at 6x EBITDA, a 4 EBITDA turns discount to comparables. We think there is significant upside to shares in 2018.