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2006-11-18
WLDN – Willdan Group

WLDN, Willdan Group plans on offering 2.8 million shares at a range of $9-$11. 800k of the offering will be coming from selling insiders. Wedbush Morgan is the sole book-runner here. Wedbush Morgan has not led many offerings, although they co-managed the Baby Universe ipo and have placed small pieces of successful ipos such as crox/lend/ikan/ggxy/jmdt. Post-offering WLDN will have 6.7 million shares outstanding for a market cap of $67 million on a $10 pricing. Yes WLDN is a microcap ipo. Roughly 25% of ipo proceeds will be going to insiders as part of the conversion from an S Corporation, the remainder will be used for general corporate purposes.

Directors and executives will own approximately 25% of WLDN post-offering.

From the prospectus:

We are a leading provider of outsourced services to small and mid-sized public agencies in California and other western states.’

Well we’ve seen a number of Federal Defense outsourcing ipos this decade as well as a number of managed care Medicaid providers, why not a company that focuses on outsourcing at the county level. Actually the ipo WLDN most reminds me of in scope is the PRSC ipo, which came public in 2003 with a $92 million market cap. Today prsc totes a $320 million market cap. WLDN has a much different focus then PRSC, but each are small caps focusing on outsourced services at the state level and below.

WLDN’s, outsourcing services focus on civil engineering, building & safety services, geotechnical engineering, financial consulting, economic forecasting, disaster preparedness and homeland security.

WLDN is primarily an engineering outsource firm, as 85% of contract revenues are engineering based. The focus of WLDN’s engineering outsourcing operations are building out infrastructure, as well as the rehabilitation of aging structures, such as those related to aviation, bridges, dams, drinking water, energy (power), hazardous waste, navigable waterways, public parks/recreation, railroads, roads, schools, security, solid waste, transit, and wastewater.

The American Society of Civil Engineers(ASCE) estimates that 28 % of California’s bridges are structurally deficient or functionally obsolete, and 71% of the state’s major roads are in poor or mediocre condition. Additionally, the ASCE estimates that $17.5 billion will be needed over the next 20 years to meet the drinking water needs for the state. These are all part of WLDN’s core business focus.

In 12/05 President Bush signed the Safe, Accountable, Flexible, Efficient Transportation Equity Act. The act was signed in response to growing concern over the condition of the nation’s infrastructure.The act allocates more than $286 billion to infrastructure investment through 2009, a 40% increase over predecessor legislation. WLDN anticipates this act will filter down to greater city/county spending on infrastructure improvement.

WLDN, founded over 40 years ago has 20 offices throughout California(and other states) and a staff of just over 650. WLDN focuses on small to mid-size communities with populations of 10,000 – 300,000. The philosophy here is that since WLDN already has the infrastructure, they are able to utilize county dollars more efficiently as an outsource entity, then the smaller counties could by hiring staff, office, infrastructure etc. WLDN also focuses on these smaller counties as they feel they are underserved by the larger outsourcing agencies/companies.

WLDN provides services to approximately 60% of the 478 cities and over 60% of the 58 counties in California. 85% of revenues is derived from California municipalities.

WLDN is a direct play on local governments shifting to privatization in an attempt to accomplish more with finite resources. Factors driving this outsourcing/privatization trend include, 1) overall population growth without always a similar boost in county/city revenues; 2) sustained demand for services; 3) the creation of new municipalities, often in high growth suburban outlying areas; 4) Federal homeland security grants to local governments.

Financials

$2 a share in cash post-offering, negligible debt.

3 X’s book value at $10.

Less then 1 X’s 2006 expected revenues on a $10 pricing.

Revenues have grown steadily. $58 million in 2004 revenues grew 16% to $67 million in 2005. Through the first 9 months of 2006, WLDN is on track to grow revenues 16% to $80 million.

Expenses have been growing roughly at the same pace as revenues, eliminating any economies of scale. This is a thin margin business. Operating margins were 7% in 2004 and 2005 and are on track for 8% in 2006.

Net margins in 2005 were 4%-5%. Earnings per share were $0.45. On a pricing of $10, WLDN will be trading 22 X’s trailing earnings.

For 2006 WLDN appears on track for net margins of 5%, thanks in part to a strong 3rd quarter. Earnings per share appear on track for $0.60-$0.65 fully taxed. On a pricing of $10, WLDN would be trading 16X’s 2006 earnings.

Risk – the big risk here with the revenues concentrated in CA would be a severe economic downturn in the state. During the 1991-1992 economic downturn in California, WLDN experienced negative earnings and cash flow difficulties. Also outside of an economic downturn, budget cuts in CA would also negatively impact WLDN’s revenues and profitability. On the other hand, a natural disaster in the state would most likely benefit companies such as WLDN as greater federal monies would flow into the effected CA municipalities.

WLDN has steadily grown revenues and should continue assuming A) the population of California continues to grow and B) the economy of California remains strong. Also much of California’s infrastructure needs to be rebuilt and WLDN has worked with the majority of CA’s municipalities. I would like to see a bit stronger growth here, as well as stronger operating margins. However both are right on par for the government outsourcing sector. Solid micro-cap ipo. These smaller offerings can filter good news to the bottom line fast and hard. PRSC ipo’d with similar multiples and has more then tripled market cap in 3 years. If WLDN can continue growth curve and gain a solid new contract win or two annually, the stock should perform well over time. Recommend on an in range pricing.