To All: Analyst Upgrade--great review
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solicitation of an offer to buy the securities mentioned in it. The information contained herein has been obtained or derived from
sources believed by us to be reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such.
During the past three years, Hoak breedlove wesneski & co. has served as a co-manager of a public securities offering for the shaw group inc.
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The Shaw Group Inc. (SGR - $20 7/8) November 17, 1997
Rating: Strong Buy Analyst: (972) 960-4867 EPS: 1996 A: 1997 A: 1998 E:
Industry: Industrial Trading: (800) 893-5759 1Q: $0.11 $0.31 $0.35
FY End: Aug. Exchange: NYSE 2Q: $0.20 $0.31 $0.43
Market Cap. (mil) $259 Shares Out: 12.40 3Q: $0.19 $0.29 $0.50
Book Value / Share: $10.70 Debt to Capital: 27% 4Q: $0.19 $0.30 $0.60
Institutional Ownership: 37.2% Year End: $0.69 $1.21 $1.88
P/E 30.3 17.3 11.1
RATING RAISED TO STRONG BUY -- $15.8 MILLION ACQUISITION
On November 14, 1997, The Shaw Group completed the purchase of the principal operating assets of Prospect Industries
(PPI-LSE) of Derby, United Kingdom for $15.8 million in cash. The purchase will be financed through SGR's revolving
line of credit. The transaction has already been cleared with the Department of Justice. Important assets acquired in the
transaction include Connex Pipe Systems, a piping systems fabricator located in Troutville, Virginia, CBP Engineering
Corporation, an abrasion and corrosion resistant pipe systems operation, Aiton Australia, a piping systems and project
management company located in Sydney and selected assets of Prospect Engineering Limited (PEL), a turnkey piping
system operation located in Derby, United Kingdom. Connex Pipe Systems was an important competitor of Shaw Group's
power segment. Because of Prospect's weak financial condition, we are assuming that SGR's profit margins in the power
segment were being restrained by Connex's aggressive bidding for projects. The acquisition of PEL gives SGR an
important presence on the European continent where it now can qualify for European-financed projects in the power
generation and process markets. While the combined sales of Prospect were $151 million for the year ended September 30,
1996, we are assuming total sales to be moderately less than that level at the time of SGR's acquisition.
We view the Prospect purchase as very bullish for SGR shareholders. First, the acquisition makes The Shaw Group the
dominant piping systems fabricator worldwide, possessing the industry's best technology. Remember that SGR recently
acquired the assets of Cojafex, the manufacturer of SGR's technologically superior pipe bending machinery. Second, it
increases SGR's potential for power and processing fabrication in the European market where it subcontracted out much of
its business to a U.K. fabricator. Third, it broadens SGR's vertical integration in the pipe fabrication and construction
markets. Boiler refurbishment and boiler steam leak detection represent new products and services for SGR. Fourth, the
acquisition will serve to reinforce SGR's alliance agreements with many of the engineering and construction companies it
does business with as the "preferred provider" of piping systems solutions.
While we do not have any details as yet of the transaction, we would not expect Prospect to be accretive to SGR in fiscal
1998. Given its weak operating results, we assume that Prospect may have significant low margin business that needs to be
worked through its operation. As a result, we are not adjusting our $1.88 forecast for fiscal 1998. Second, given SGR's
attention to strengthening its balance sheet, we would anticipate SGR's management to take an aggressive approach to asset
management. However, given the low price paid for Prospect's assets, we would not be surprised if The Shaw Group
H B W
generates negative goodwill from the assets purchased. Although we do not have an estimate for fiscal 1999, Prospect's
assets are likely to be accretive. Based upon an assumption that Prospect generates $140 million in revenue and operates
at a margin of 6.5%, below Shaw's level of the past two years, the acquisition of Prospect could add between $0.25-$0.40
per share to SGR's 1999 income statement.
INVESTMENT RECOMMENDATION
At the end of August we raised our target price to $32.00 from $22.00 based upon a strong conclusion to SGR's fiscal year
and a buildup of the company's backlog throughout fiscal 1998. Year-end backlog levels combined with the company's
recent power project announcement indicates the backlog continues to grow across its product segments. The purchase of
Prospect Industries' principal operating assets serves as reinforcement of our price target. This purchase at a "value" price
of $15.8 million is consistent with SGR's strategy of buying distressed properties and within a short period of time
significantly improving those acquired operating results. SGR's purchase ten years ago of B.F. Shaw, a boarded up
fabrication facility started the value acquisition, the 1994 purchase of Word, a money losing pipe fabricator at the time of
purchase, which has contributed to SGR's results in a rather short period of time are examples of SGR's successful
acquisition program. NAPtech, acquired as a money losing operation, is now contributing to SGR's bottom line.
More than a year ago The Shaw Group's common stock sold at an all time high in the mid-30's based upon investor
projections of strong infrastructure spending internationally, particularly from the power segment. Since that time, the
company has changed significantly for the better. It has broadened its products and services. As a result, the company
today is in a much stronger position to deliver on the expectations investors had for The Shaw Group Inc. a year ago. As a
result, we are raising our investment rating to STRONG BUY with a conservative price target of $32. |
