Data Center And Energy Transition Risks May Eventually Support A Modest Recovery

Catalysts

About TIC Solutions

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

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

• Although hyperscaler data center build outs and AI driven digital infrastructure demand are more than doubling TIC Solutions data center revenue and expanding international opportunities, the business is still only a low single digit portion of total sales. As a result, any slowdown in cloud capital spending could limit the mix shift needed to lift consolidated revenue growth and adjusted EBITDA margins.
• Despite multiyear investment needs in grid modernization and energy transition projects that align well with TIC Solutions inspection, engineering and geospatial capabilities, delays in large capital programs or permitting could stretch project timing and keep segment revenue growth closer to the low single digits. This could constrain operating leverage and margin expansion.
• While aging infrastructure and rising regulatory complexity create a structural need for recurring run and maintain services, ongoing weakness in certain process industries such as chemicals and gaps between LNG construction cycles may continue to pressure utilization and pricing power. This would weigh on Inspection and Mitigation revenue and segment net margins.
• Although the NV5 integration unlocks higher value cross sell offerings such as Digital Twins, laser scanning and rope access solutions that can support higher gross margins over time, execution risk around systems consolidation and back office rationalization could defer the realization of the full 25 million cost synergy target. That could slow near term EBITDA and free cash flow improvement.
• While TIC Solutions has the scale and balance sheet flexibility to pursue accretive tuck in acquisitions across its three segments, overreliance on M&A to access fast growing niches such as renewables and advanced manufacturing could increase integration complexity and restructuring costs. This may dampen earnings growth and delay progress toward the long term leverage target below 3 times.

Assumptions

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

• The bearish analysts are assuming TIC Solutions's revenue will grow by 31.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -4.3% today to 6.5% in 3 years time.
• The bearish analysts expect earnings to reach $192.0 million (and earnings per share of $0.85) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 20.8x on those 2028 earnings, up from -39.9x today. This future PE is lower than the current PE for the US Professional Services industry at 24.5x.
• The bearish 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 8.56%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Secular growth in hyperscaler and AI driven data center spending currently represents only about a low single digit portion of TIC Solutions total revenue. Any moderation in cloud or digital infrastructure capex would limit the contribution from one of the highest growth niches and could leave overall revenue growth closer to low single digits, constraining earnings expansion.
• Long-term infrastructure renewal and energy transition projects depend heavily on public budgets and permitting. Even temporary delays from government shutdowns or project deferrals could slow grid modernization, renewables and utility programs, pressuring revenue growth and limiting operating leverage driven margin improvement.
• Persistent weakness in chemicals and other process industries, combined with timing gaps in LNG and large capital projects, could extend the current pattern of softer project work and smaller sustaining capital programs. This could reduce utilization in the Inspection and Mitigation segment and weigh on consolidated net margins and earnings.
• The multi year integration of NV5, with a cost synergy target of $25 million by mid 2027 and higher SG&A intensity, carries execution risk. Systems consolidation, real estate optimization and back office reductions could take longer or cost more than planned, which would compress adjusted EBITDA margins and slow deleveraging.
• A balance sheet with roughly $1.6 billion of term loan debt and over $100 million of annual cash interest, even after an equity raise, leaves the company exposed to higher-for-longer interest rates or slower free cash flow generation. This could constrain reinvestment and acquisitions and dampen long-term earnings and equity value growth.

Valuation

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

• The assumed bearish price target for TIC Solutions is $11.5, which represents up to two standard deviations below 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 more bearish 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 bearish analyst cohort, you'd need to believe that by 2028, revenues will be $2.9 billion, earnings will come to $192.0 million, and it would be trading on a PE ratio of 20.8x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of $10.01, the analyst price target of $11.5 is 13.0% 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.