New Joint Venture, page-3

Just like the previous owner of this marine services business, namely Skilled Group, bought this marine business right at the very top of the cycle [*], one can be forgiven for feeling like PRG is now selling it at the bottom of the cycle.

([*] I recall SKE paying something like $80m for the business that PRG is now selling for an effective valuation of $59m (that's the Australia and New Zealand business), plus PRG is throwing in an international business (whatever that happens to be worth) for free.)


So many boards lack long-term vision; time and time again, they seem to get caught up in whatever the prevailing market mood happens to be. As a result, they invariably end up Buying-High and Selling-Low.

On a less gloomy note, I am sure the business being divested is not making any money at the moment and, as PRG still has a significant chunk of debt, following the SKE acquisition ($200m of it, with Net Det-to-EBITDA >2x and EBIT-to-Net Interest Cover of just 3.8x), any opportunity to reduce debt without foregoing any earnings should probably be taken.


Valuation-wise, prima facie, the stock looks decidedly cheap on a P/E multiple (@ 10x P/E), but the elevated levels of borrowings bloats the EV, leaving it merely mildly undervalued, I think, on an EV/EBITDA basis (@ around 6.2x) and on a Free Cash Flow yield on EV (~7.5%).

I think that - given the nature of the business and its less-than-exemplary financial pedigree - I would pay no more that 12x P/E , 7.5x EV/EBITDA, and I'd require a 10% FCF Yield.

Meaning that PRG's stock is probably 10% to 15% undervalued currently, depending on the valuation methodology one uses.

But it is not a great quality business, making it a risky investment.

And to be compensated for that elevated risk, I think one needs to be able to buy the sock at a discount of more than just 10%-or-so below fair value.