Overlooked Growth
Overview
Perma Pipe International is a manufacturer of highly engineered piping systems and cable leak systems that are used in many industries including Oil and Gas, District Cooling and Heating, etc. They have operations in North America, Middle East, and Africa. Specifically, they have facilities in the US, Canada, Saudi Arabia, UAE, Qatar, and Egypt. The nature of the business is such that it is dependent on economic conditions on each of the operating countries and geopolitical conditions as they have a big operation in the Middle East and Africa. A large portion of their revenue comes from Oil and Gas customers, so when oil prices are depressed, so is their business as their customers reduce capital spending. They also serve the district cooling and heating market, which depends on infrastructure spending. For example, a big catalyst for Perma Pipe is the continued investment into Saudi Arabia’s infrastructure spending plan for 2030. Perma Pipe’s competitive advantage is in their history of experience and comprehensive product line, and their ability to custom the pipes to the customers requirement instead of just supplying the pipe. Perma Pipe has years and years of experience and has gained trust from its customers, and they have participated in the largest piping systems installed in the world. (India). Perma Pipe also has its locations strategically located close to their customers as they claim that having the facilities as close as possible from their customers becomes an advantage. This makes sense for their Oil and Gas customers. For example, they relocated their UAE facility to Abu Dhabi because it was closer to their Oil and Gas customers.
Expansion and Growth
Perma Pipe was previously named MFRI Inc. They were not only in the piping business but also were in the filtrations business. However, in 2016 this business was sold, and a lot of organizational changes started to take place when the current CEO, David J. Mansfield took over the company. A turnaround plan commenced when David took the helm as he saw the piping business had potential to grow, so they decided to focus solely on the piping business. As soon as he came in, he implemented changes in the Middle East, replacing the former management team because they were not following corporate policy as they were supposed to. You could say the MENA region was mismanaged until he took charge. Since then, margins have expanded as the CEO took cost-saving initiatives, reducing unnecessary overhead. This has caused gross margins to grow from 21.8% in 2015 to 27% in 2023 on $24m revenue growth. It is also worth mentioning that operations have been improving consistently since David took charge, especially with expansions in the Middle East.
Since his appointment, the company has initiated expansion into Qatar where they were able to be introduced to the Tawteen Program, opened a new facility in Canada, relocated a facility to Abu Dhabi, and initiated a JV with GIG to penetrate into the district cooling market in Saudi Arabia in support of their 2030 development plan.
In the last FY, backlog has nearly doubled going from $39.5m at the beginning of the year to $73m at Q3 of FY23. I believe this backlog will be realized to tremendous growth in the coming FY and I expect revenue levels to remain consistent due to oil prices and continued infrastructure spending in the Middle East. Perma Pipe is a market leader, especially in these Middle Eastern countries where they have scale in comparison to smaller players and a good management team at the helm.
The initiated expansion to Qatar has helped the company enter the Tawteen Program, which will help them break into the Qatar 2030 national vision and the QatarEnergy expansion of its LNG production capacity from 77m mtpa to 126m mtpa by 2026. The Tawteen program was designed to establish competitive in-country suppliers to serve the Qatari energy market, to fulfill the 2030 national vision, and to expand Qatar outside of the energy market. All of these middle east countries have one thing in common, they want to spend like crazy to expand their economy. Perma Pipe is well positioned to grab a share of that spending for its business units.
The opening of the new Canadian facility will help Perma Pipe serve the eastern Canada market. Brings them closer to current and prospective customers. Plenty of production capacity in Canada.
The relocation of the facility to Abu Dhabi in U.A.E will help Perma Pipe move closer to customers and will serve as a logistical advantage to its Oil and Gas customers. The facility is 6 hectares, it is big. This facility is going to be able to fulfill the growing demand in the Middle East and Africa, in both the oil and gas industry and the district cooling market. This positions them at the forefront of clean energy, with vast production capacity to serve those sectors and the proposed capital spending these Middle Eastern countries are aspiring to make.
The continued expansion into Saudi Arabia stems from the country’s ambitious $1T+ spending program. Perma Pipe partnered with GIG to form a JV to grab a share of that spending. They also outlined that the JV will result in expansion to Kuwait and Bahrain. The GIG JV will target mainly the district cooling market as the demand for cleaner energy grows, and the use of central plants in the Middle East increases.
Perma Pipe is well positioned to increase its revenues mainly from the Middle East. The capital spendings for these countries are substantial and Perma Pipe has the capacity and market recognition to help realize those goals. Not only do they have capacity, but they also have relationships in all these countries where it might make it harder for foreign players to enter the market and take market share. In these countries, relationships are important. These expansions will help the company increase its output and reach economies of scale and improve margins. They have nearly doubled their backlog over the past 3 quarters, and I expect continued growth as the markets in these countries expand as spending continues in an upward trend. I believe Perma Pipe is an attractive investment due to its current valuation. The company is very small at a current market cap of $63m, trading at 5x EV/EBITDA with tailwinds consisting of Middle East expansion, district cooling systems market expansion, and a growing backlog. And what’s best is that there is zero analyst coverage and the last article published about this company on Seeking Alpha was in 2014 and in VIC was in 2017.
