Shands And RFK Bridge Projects Will Drive Future Progress

Key Takeaways

• A substantial backlog and new core projects are set to drive revenue growth and enhance margin profiles as they mature.
  
• Expansion into alternative delivery projects and infrastructure funding creates opportunities for improved revenue and margins amid a solid financial environment.
  
• Ongoing financial challenges, driven by rising net losses, increasing interest expenses, and underperformance in key segments, threaten Southland's profitability and investor confidence.

Catalysts

Engages in specialty infrastructure construction business in North America.

• Southland Holdings is poised to benefit from a substantial backlog of $2.57 billion, with 39% expected to be realized in 2025, suggesting potential growth in revenue and earnings.
  
• The company is expanding into alternative delivery projects with approximately $750 million in pending contracts, which can enhance revenue and net margins due to the efficient allocation of resources and budget control associated with such projects.
  
• New core projects worth $2.3 billion are ramping up, including significant endeavors like the Shands Bridge and the Robert F. Kennedy Bridge rehab, which could positively impact revenue and margin profiles as they mature.
  
• The ongoing strong infrastructure funding environment, bolstered by the Infrastructure Investment and Jobs Act, provides a tailwind for future revenue growth, particularly in key markets like Texas and Florida, where infrastructure investment is robust.
  
• Strategic financial initiatives, such as converting promissory notes into common stock, have reinforced the company's balance sheet, potentially lowering interest expenses and improving net earnings over time.

Southland Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Southland Holdings's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -10.7% today to 1.3% in 3 years time.
• Analysts expect earnings to reach $16.2 million (and earnings per share of $0.3) by about May 2028, up from $-105.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.4x on those 2028 earnings, up from -1.7x today. This future PE is greater than the current PE for the US Construction industry at 22.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Southland Holdings Future Earnings Per Share Growth

Risks

• Southland's recent financial performance has shown significant challenges, with fourth-quarter revenue down by $49 million and gross profit margin declining from 6.7% in 2023 to 3% in 2024. Continued unfavorable financial results could negatively impact future earnings and investor confidence.
  
• The company's net loss for the fourth quarter was $4 million, and for the full year 2024, it was $105 million, more than five times the net loss in 2023. Persisting net losses could strain Southland's financial health and diminish net margins.
  
• Interest expenses have increased by $3.9 million in the fourth quarter compared to 2023, attributed to higher debt balances and borrowing costs. This ongoing pressure from interest expenses could further reduce net earnings.
  
• Southland's Transportation segment experienced a gross loss of $80 million for 2024, worsening from $16 million in 2023. Continued underperformance in this segment could affect the company's overall profitability.
  
• The presence of $163 million in M&P backlog and $83 million in non-M&P legacy work, which have negatively impacted recent financial performance, suggests a lingering risk to gross margins until these issues are resolved.

Valuation

• The analysts have a consensus price target of $4.5 for Southland Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $5.0, and the most bearish reporting a price target of just $4.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $16.2 million, and it would be trading on a PE ratio of 25.4x, assuming you use a discount rate of 11.4%.
• Given the current share price of $3.3, the analyst price target of $4.5 is 26.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.