AI And Cloud Data Center Expansion Will Drive Powerful Long-Term Upside Potential

Catalysts

About TIC Solutions

TIC Solutions provides integrated testing, inspection, engineering and geospatial services that manage the full life cycle of critical infrastructure and industrial assets.

What are the underlying business or industry changes driving this perspective?

• Rapid cloud and AI build-outs are driving hyperscalers to double their data center work with TIC Solutions, expanding multi-service engagement per megawatt and supporting sustained double digit revenue growth and higher EBITDA from premium, specialized offerings.
• Large scale infrastructure renewal and grid modernization programs across North America are increasing demand for consulting engineering, geospatial and inspection capabilities, expanding the addressable project pipeline and supporting steady top line growth with mix driven margin uplift.
• Accelerating investment in energy transition, including renewables, LNG construction and emerging distributed generation, is deepening run and maintain and sustaining capital work, which should stabilize volumes, support recurring revenue and improve net margins as utilization rises.
• The unified platform created by combining inspection, mitigation, engineering and geospatial services is enabling higher value cross sell solutions such as Digital Twins, laser scanning and commissioning, which should increase revenue per client and drive EBITDA margin expansion.
• Disciplined integration execution, higher cost synergy targets of $25 million and continued tuck in M&A at attractive multiples are set to improve operating leverage, reduce SG&A as a percentage of sales and accelerate earnings growth and deleveraging.

Assumptions

This narrative explores a more optimistic perspective on TIC Solutions compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming TIC Solutions's revenue will grow by 32.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -4.3% today to 6.7% in 3 years time.
• The bullish analysts expect earnings to reach $198.3 million (and earnings per share of $0.88) by about December 2028, up from $-55.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 29.7x on those 2028 earnings, up from -42.2x today. This future PE is greater than the current PE for the US Professional Services industry at 24.2x.
• The bullish 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 8.51%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The bullish case assumes sustained double digit growth from AI and cloud data center build outs, but data centers currently contribute only a small low single digit percentage of revenue, so any slowdown in hyperscaler investment cycles, technology shifts reducing commissioning intensity or increased competition for these projects could limit the scale of this opportunity and cap long-term revenue growth.
• The Inspection and Mitigation segment is already seeing softness in chemicals and lower project work, and if prolonged weakness in process industries, deferred sustaining capital and gaps between large LNG construction projects persist, essential inspections may be delayed longer than expected, which would pressure segment revenue and constrain consolidated EBITDA margin expansion.
• The combined company carries approximately $1.6 billion of term loan debt and expects around $105 million of annual cash interest. If integration synergies are delayed, working capital proves less efficient than anticipated or organic growth tracks only at the low end of the 3 to 5 percent outlook, deleveraging could stall and higher interest costs could weigh on net earnings.
• The optimistic view relies heavily on capturing $25 million of cost synergies and unlocking revenue synergies from cross selling across Consulting Engineering, Geospatial and Inspection and Mitigation. Large scale integrations often face cultural friction, systems challenges and client disruption, and if these issues arise they could keep SG and A elevated and prevent the expected uplift in operating margins and earnings.
• A material portion of Geospatial and infrastructure work is tied to public sector and regulated spending, so long-term fiscal constraints, shifting government priorities, permit delays or recurring shutdown risks could slow program awards and renewals, which would dampen secular growth from infrastructure renewal and energy transition and limit improvement in both revenue and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for TIC Solutions is $17.0, which represents up to two standard deviations above the consensus price target of $13.9. This valuation is based on what can be assumed as the expectations of TIC Solutions's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $17.0, and the most bearish reporting a price target of just $11.5.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $3.0 billion, earnings will come to $198.3 million, and it would be trading on a PE ratio of 29.7x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $10.59, the analyst price target of $17.0 is 37.7% 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.