argan inc. final - orangevaluefund.com · argan, inc. ("argan"), formally known as...

ORANGE VALUE FUND – FOR INTERNAL USE ONLY

Argan Inc.: (NYSE:AGX) THE ORANGE VALUE FUND

1

Argan Inc. Construction & Engineering Industry March 16th, 2015 Argan Inc. Exchange: NYSE Security Ticker: AGX

Coverage Andres Emmett Diz | Senior Analyst [email protected]

Business Description Argan Inc. (AGX), founded in 1961, currently operates through two segments: Power Industry Services and Telecommunications Infrastructure Services. Argan acts as a holding company currently holding Gemma Power Systems & Southern Maryland Cable. Recommendation We recommend buying Argan Inc. equity at $30. This is roughly $3.00 below the current market price. This price will provide a margin in safety by lowering the company’s P/B to its historical low of around 1.5x, around their average, and would be a 25.1% discount to the company’s going concern value.

Investment Thesis

1) Argan Inc. has a strong balance sheet with $0 in debt and $361 million in cash. This opens the door for future purchases when prices deflate.

2) Gemma Power System’s management is very experianced within their field and will provide growth for the company as they build more power plants.

3) The company is trading 16.7% below their going concern value. 4) The company has paid special dividends since 2011 that have provided a 2% yield.

Buy AGX Equity AGX Statistics as of 1/27/2015

15

20

25

30

35

40

45

10/1

4/20

1310

/28/

2013

11/1

1/20

1311

/25/

2013

12/9

/201

312

/23/

2013

1/6/

2014

1/20

/201

42/

3/20

142/

17/2

014

3/3/

2014

3/17

/201

43/

31/2

014

4/14

/201

44/

28/2

014

5/12

/201

45/

26/2

014

6/9/

2014

6/23

/201

47/

7/20

147/

21/2

014

8/4/

2014

8/18

/201

49/

1/20

149/

15/2

014

9/29

/201

410

/13/

2014

Argan Inc. (NYSE: AGX)12 Month Price Chart

Price as of 3/16/2015 $33.39Target Price $41.0052-Week Range $26.09-$40.99Market Cap $470.8M314 LTM Revenue $340.3M2014 LTM Net Income $33.6M2014 LTM EBITDA $65.8MEnterprise Value $120.4MP/BV 2.62xP/E 13.97xEV/EBITDA 1.8xTotal Debt/EBITDA -



2

Argan Inc. ................................................................................................................................................. 3

Business Overview ......................................................................................................................................... 3

Gemma Power Systems .......................................................................................................................... 3

Industry .............................................................................................................................................. 4

Southern Maryland Cable ...................................................................................................................... 5

Acquisitions ..................................................................................................................................................... 6

Management .................................................................................................................................................... 7

Liquidity ........................................................................................................................................................... 9

Valuation .................................................................................................................................................. 9

Safe Issuer ........................................................................................................................................................ 9

Cheap ................................................................................................................................................................ 10

DCF Analysis ........................................................................................................................................... 11

Comparable Analysis .............................................................................................................................. 11

Wealth Creation Analysis ....................................................................................................................... 12

Negatives .......................................................................................................................................................... 13

Catalysts ............................................................................................................................................................ 14

Appendix .................................................................................................................................................. 15



3

BUSINESS OVERVIEW

Argan, Inc. ("Argan"), formally known as Puroflow Inc., conducts operations through its wholly- owned subsidiaries, Gemma Power Systems, LLC and affiliates ("GPS") and Southern Maryland Cable, Inc. ("SMC”) Gemma Power Sys t ems , LLC Affiliates- Gemma Power Systems Hartford, LLC & Gemma Power Systems California, Inc. (Gemma Renewable Power – Formed in 2008) Provides a full range of development, consulting, engineering, procurement, construction, commissioning, operations and maintenance services to the power generation and renewable energy markets for a variety of customers including public utilities, independent power project owners, municipalities, public institutions and private industry. The extensive design, construction, start- up and operating experience of our power industry services business has grown with the completion of projects for more than 75 facilities representing over 10,000 megawatts ("MW") of power- generating capacity.

Type of System Number of Projects Total MWs Average MWs per System TypeCombined Cycle 10 5006 501Peaking of Simple Cycle 13 4618 355Pollution Control 2 1065 533Ethanol 1 100 100Bio-Diesel 3 250 83Biomass 1 50 50Wind 4 224 56Solar 3 18 6

Projects

History

• Joel Canino and William Griffin founded the company in 1996. o Joel Canino was the vice chairman of Gemma Power until his death in 2009.

• By 2002 they had 125 permanent employees and had revenue of $250 million • In 2006 Argan Inc. acquired the company.

Customers



4

The table below shows Gemma’s customers since 2009. A majority of their customers are energy production firms.

Plant Type MW Location Stage Customer Year

Complete Customer Description

Panda Liberty Combined Cycle

800 Bedford, PA Under Construction

Panda Liberty LLC

N/A

Panda Patriot Combined Cycle

800 Lycoming County, PA

Under Construction

Panda Patriot LLC

N/A

ETEC Woodville Renew able Pow er Project Sold Fuel 50 Woodville, TX Complete East Te 2014

Private non-for-profit electric cooperative in East Texas since 1987

Dartmouth Solar Energy Project Solar 6 Dartmouth, MA Complete

Beaumont Solar Co. 2014

Full-service engineering, procurement and construction (EPC) company providing complete energy management solutions

Ravenbrook Landfill Solar Project Solar 6 Carver, MA Complete

SSRE Ravenbrook 2013

Builds and operates solar pow er facilities in tw o sizes: utility-scale facilities producing ten megaw atts of electricity or more, and sub-utility scale facilities producing betw een five and ten

megaw atts of electricity.

CPV Sentinel Energy ProjectPeaking of

Simple Cycle

800Desert Hot

Springs, CA CompleteCompetitive

Power Ventures

2013Electric pow er generation development and asset

management company headquartered in Silver Spring, Maryland

How ard Wind Farm Expansion Wind 4.1Steuben

County, NY CompleteEverPower

Wind Holdings, Inc.

2012Developer, ow ner and operator of utility grade w ind projects since 2002. EverPow er currently has six operational w ind

facilities w ith a nameplate capacity of approximately 512 MW.

Patton Wind Farm Wind 30 Patton, PA CompleteEverPower

Wind Holdings, Inc.

2012Developer, ow ner and operator of utility grade w ind projects since 2002. EverPow er currently has six operational w ind

facilities w ith a nameplate capacity of approximately 512 MW.

Canton Solar Energy Facility Solar 6 Canton, MA Complete SSRE Canton 2012

Builds and operates solar pow er facilities in tw o sizes: utility-scale facilities producing ten megaw atts of electricity or more, and sub-utility scale facilities producing betw een five and ten

megaw atts of electricity.

Bishop Hill Wind Energy CenterCombined

Cycle 200 Henry Count, IL CompleteInvenergy

Wind 2012

Develops, ow ns, and operates pow er generation and energy storage facilities in North America and Europe. Invenergy has developed more than 8,000 MW of utility-scale renew able and

natural gas-fueled pow er generation and energy storage facilities.

Middletow n Repow ering Project

Peaking of Simple Cycle

200 Middletow n, CT CompleteGenConn

Middletown LLC

2011

GenConn Middletow n LLC operates as a subsidiary of GenConn Energy LLC. GenConn Energy LLC provides pow er generation services. It builds and operates pow er generation

plants.

Colusa Generating StationCombined

Cycle 660 Maxw ell, CA CompletePacific Gas &

Electric Company

2010

PG&E Corporation is an energy-based holding company headquartered in San Francisco. It is the parent company of

Pacif ic Gas and Electric Company. PG&E Corporation subsidiaries provide customers w ith public utility services,

and services relating to the generation of energy, transmission of electricity and natural gas, generation of

electricity, and the distribution of energy.

Vantage Wind Energy Project Wind 90 Vantage, WA CompleteInvenergy

Wind 2010



Grand Ridge Wind Energy Center Wind 100

LaSalle County, IL Complete

Invenergy Wind 2009



Port Neches Project Bio-Diesel 180Port Neches,

TX CompleteRenewable

BioFuels 2009

RBF ow ns and operates the BQ9000 certif ied, multi-feedstock RBF Port Neches Facility - the largest biodiesel production facility in North America, RBF is a w ell-capitalized biofuel

processor w ith an experienced staff of professionals. RBF has been serving w holesale biodiesel customers for over six

years.

Argan Customers

A subsidiary of Panda Energy International. This f irm focuses on constructing, maintaining and operation environmentally

friendly pow er plants. The fund raised around $420 million in their f irst private equity outreach in 2011. They are currently w orking on 6 project w ithin the U.S and have only f inished 1

solar project since their inception in 2010. All 6 current projects are natural gas based.



5

Backlog Contract backlog represents the total accumulated value of projects awarded less the amounts of revenues recognized to date on contracts at a specific point in time. Contract backlog is an indicator of future revenues and earnings potential. Although contract backlog reflects business that Argan consider to be firm, cancellations or reductions may occur and may reduce contract backlog and the future revenues of GPS

Argan gives no insight on the amount of backlog that was obtained.

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Net Revenue 63.69 82.619 74.486 57.84 46.648 57.864 63.452 59.491 51.191 102.03 127.564 Pow er Industry Services 57.728 78.109 70.527 54.963 43.769 55.52 61.103 58.257 49.824 100.418 125.66Backlog Starting 415 358 286 236 180 517 465 832 790 742 643 Ending 358 286 236 180 517 465 832 790 742 643 520

Decrease in Backlog 57 72 50 56 -337 52 -367 42 48 99 123% of Revenue from Backlog 99% 92% 71% 102% 94% 72% 96% 99% 98%

Average 91%

201420132012Backlog Conversion Rate

* the 102% seems to be an error on the company documents. They reduced backlog by $56 million but stated revenue for that segment as only $54 million. Within the last three years, excluding quarters when they added a significant amounts of backlog, their average conversation

of backlog to revenue is 91%.

2010 2011 2012 2013Backlog - Beginning 456 300 291 415

Backlog - Ending

300 291 415 790

Difference -156 -9 124 375

Gemma Pow er's Backlog

The chart above shows Gemma’s historic backlog. On average, Gemma has had around $365 million worth of backlog annually. This year (starting backlog of around $790 million) should be considered an outlier.

Year 2010 2011 2012 2013Backlog (Average) 365 365 365 365Revenue 218.33$ 182.59$ 278.64$ 227.46$ Percent Converted 59.82% 50.03% 76.34% 62.32%Average Converted 62.12%

Yearly Projected Conversion of Backlog

Using the average backlog per year (stated above) and dividing each year’s historic total revenues (including small amounts of revenue from Southern Maryland Cable) we can determine the average amount converted on a yearly basis. According to our

calculations, Argan converts 62% of their total backlog within the year to revenue.



6

Industry

According to the U.S Energy Information Administration (EIA), electricity demand will grow by 29% (0.9%/year), from 3,826

billion kilowatt-hours (kWh) in 2012 to 4,954 billion kWh in 2040.

The EIA predicts that 70% of all new capacity will come from natural gas, making natural gas surpass coal as the leader in

electrical generation.



7

Southern Mary land Cable , Inc .

Southern Maryland Cable provides inside premise wiring services to the federal government as part of the federal government commitment to Homeland Security improvements. In addition to the growing premise wiring services, Southern Maryland Cable also provides underground and aerial construction services and splicing to major telecommunications and utilities customers.

Year Revenue Gross Profit Margin EBIT EBIT Margin2007 9.7$ 1.2$ 12% 0.3$ 3%2008 8.6$ 1.4$ 17% (1.2)$ -14%2009 8.5$ 1.9$ 22% 0.2$ 2%2010 7.7$ 1.2$ 15% (0.4)$ -5%2011 9.3$ 1.8$ 19% 0.2$ 2%2012 17.3$ 3.6$ 21% 2.0$ 12%2013 8.8$ 2.0$ 23% 0.7$ 8%

Southern Maryland Cable - Financials

History

Puroflow Incorporated, now Argan group, purchased Southern Maryland Cable, Inc. on July 17, 2003. They paid $4 million for the company, which had $8.8 million in revenue as of fiscal year 2002.

Argan still holds Southern Maryland Cable. They have provided 6.2% and 6.6% of revenues in 2013 and 2012.

ACQUISITIONS

Southern Mary land Cable , Inc . (SMC) Provides communication infrastructure installation services to commercial customer and agencies of the United States federal government

On April 29th, 2003, Argan Inc. made a secondary offering of 1,303,974 shares of common stock at $7.75 per share raising $10,106,000. Argan would use $3.6 million of the proceeds to acquire Southern Maryland Cable (“SMC”) on July 17th, 2003. Southern Maryland Cable has generated approximately $10 million in revenue over the past 12 months.

Southern Maryland Cable provides inside premise wiring services to the federal government as part of the federal government commitment to Homeland Security improvements. In addition to the growing premise wiring services, Southern Maryland Cable also provides underground and aerial construction services and splicing to major telecommunications and utilities customers.

Southern Maryland Cable was acquired on July 17th, 2003 through the purchase of all their common stock valued at approximately $4 million in cash, plus the assumption of approximately $971,000 in debt. Argan suffered an impairment loss of $1,942,000 after a customer contract terminated due to the acquisition. The customer historically provided positive margins and cash flows. Also, Southern Maryland Cable had revenue levels lower with their highest fixed price contract customer.

Vitar i ch Laborator i e s (VLI) Distributor of premium nutritional supplements, whole- food dietary supplements and personal care products August 31, 2004 The company was acquired, by merger, on August 31, 2004. The idea of the purchase was to acquire long- standing exclusive customer relationships, its proprietary formulations, its certified good manufacturing practices and its well established position in the fast growing global nutrition industry.



8

1. Argan initially paid 5.5 times 2003 EBITDA for VLI ($6.7 million in cash and 825,000 shares of the company totaling $4,950,000. This makes VLI’s EBITA from fiscal year 2003 around $2.12 million). They also assumed $1.6 million debt from the company. 2. The additional consideration was $275,000 in cash, $2.7 million in a subordinated note to Kevin Thomas and approximately 348,000 shares of AI common stock with a fair value of $2.1 million or $6.00 per share utilizing the quoted market price on February 28, 2005. Kevin Thomas was the majority shareholder of Vitarich at the time of the sale. Once Argan bought him out he owned 44% of Argan’s common. In January 2007, Thomas ceased to own more than 5% of the company (4.64%). He sold most of these shares through a private transaction. During 2006 they recorded a goodwill impairment charge of $5,810,000 relating to this purchase. This is due to: VLI experienced revenue levels well below expectations due to weaker than anticipated sales of products utilizing its adaptogen inventory raw material. In addition, VLI had gross margins that were lower than VLI's historical experience. The decline was due to VLI's slow reaction to passing along price increases for increased costs of non-nutritional components of its products caused by the spike in oil prices. VLI also experienced increased costs due to outsourcing of the manufacture of certain products at levels greater than anticipated.

On March 13, 2011 Argan sold all assets of Vitarich Laboratories to NBTY Florida, Inc. There was an initial payment of $800,000 and $2.3 million put into an escrow account to be obtained by June 30, 2011. Argan only received $1,728,000 from the escrow account making the full selling price for VLI $2,528,000. They paid $11.65 million and assumed $1.6 million in debt when purchasing company, while only receiving $2.53 million by year-end 2011.

Gemma Power Systems (GPS) On December 8, 2006 (Closing Date) Argan acquired Gemma Power Systems for an acquisition purchase price of $31.1 million, consisting of $10.9 million in cash and $20.2 million from the issuance of 3,666,667 shares of AI common stock, with a fair market value at the closing date, of $5.50 per share (The Company used a $3.75 per share value in negotiating the purchase price with the former owners of GPS). A new $8.0 million secured 4- year term loan, which carries an interest rate of LIBOR plus 3.25%, funded the purchase. In addition, the Company raised $10.7 million through the private offering of 2,853,335 shares of AI common stock at a purchase price of $3.75 per share. Pursuant to the acquisition agreement $12.0 million was deposited into an escrow account. Of this amount, $10.0 million secures a letter of credit to support the issuance of bonding, and the remaining amount for the payment of up to $2.0 million of additional purchase price payable if, for the twelve months ended December 31, 2007, the earnings of GPS before interest, taxes, depreciation and amortization (“EBITDA”) adjusted for AI’s corporate overhead charge, is more than $12.0 million.

Year Revenue Gross Profit Margin EBIT EBIT Margin2004 6.8$ 2.0$ 30% 0.3$ 5%2005 17.7$ 3.9$ 22% (7.2)$ -40%2006 20.8$ 4.3$ 21% (0.6)$ -3%2007 16.7$ 2.0$ 12% (8.8)$ -53%2008 10.1$ (1.8)$ -18% (6.9)$ -68%2009 14.0$ 0.8$ 5% (2.2)$ -15%

Vitarich Laboratories - Financials



9

MANAGEMENT & BOARD OF DIRECTORS

Name Age PositionRainer H. Bosselmann 71 Chairman of the BoardHenry A. Crumpton 57 DirectorCynthia A. Flanders 59 DirectorWilliam F. Griffin, Jr. 59 DirectorWilliam F. Leimkuhler 62 DirectorW.G. Champion Mitchell 67 DirectorJames W. Quinn 56 DirectorBrian R. Sherras 56 Director

Board of Directors

Each non-employee on the board receives $20,000 plus $300 for each formal Board or committee meeting they attend. They also have options to purchase $64,000 worth of shares.

Rainer H. Bosselmann (CEO – Argan Inc.) – Has been the CEO and President of Argan Inc. since October 2003 and has been its Chairman since May 2003. Mr. Bosselmann is an Advisor at Main Street Resources. He has served as a Principal of Holding Capital Group Inc. since 1996. He has acquired and operated dozens of companies over decades creating tremendous value generally in the small-cap consolidation area. Mr. Bosselmann served as Chief Executive Officer at Arguss from October 1966 to 2002 and as its President from May 1997 to 2002. He served as the President of Arguss Communications Inc., a subsidiary of Arguss since May 1997, Chief Executive Officer and Chairman of the Board since October 1996. From 1991 to 1995, he served as the President of Jupiter National Inc. He served as Chairman of Arguss from October 1966 to 2002. He served as Vice Chairman of the Board of Argan Inc. from January 2, 2003 to May 2003 and has been its Director since January 2, 2003. He has been a Director of TBM Holdings Inc., since June 15, 1999. Mr. Bosselmann has been a Director of Long Reach Inc., a subsidiary of TBM Holdings Inc. since January 5, 2000. He served as a Director of Arguss Communications Inc. since October 1996.

Cynthia A. Flanders (CFO – Argan Inc.) – Has been the CFO and Senior Vice President of Argan, Inc., since January 2015. Ms. Flanders served as a Commercial Market Executive at Bank of America from 2000 to 2008. Ms. Flanders led twelve client management teams covering middle market clients and prospects throughout the Washington, DC metropolitan area. Ms. Flanders is employed at Manage Fearlessly. She held a series of positions of increasing responsibility with Bank of America and its predecessor organizations from 1975 to 2009. She served as the Global Commercial Banking Executive for Bank of America's Mid-Atlantic region overseeing eight commercial banking markets and over 80 client teams delivering a full array of financial services to over 6,000 small, middle market and micro cap clients in South/Central New Jersey, Pennsylvania, Delaware, Maryland, Virginia and the District of Columbia. She spent over 20 years in commercial banking. Ms. Flanders worked in the consumer banking, operations and finance organizations of Bank of America. She serves as a Director of Congressional Bank. She has been an Independent Director of Argan, Inc. since April 7, 2009.



10

Name Shares Owned Share Options Shares Beneficially Owned Beneficial Ownership PercentageWilliam F. Griffin, Jr. (1) 704,993 10,000 714,993 5.00%Rainer H. Bosselmann (2) 307,901 120,000 427,901 2.97%James W. Quinn 89,570 20,000 109,570 0.00%Daniel L. Martin -‐ 95,000 95,000 0.00%Arthur F. Trudel 10,000 75,000 85,000 0.00%William F. Leimkuhler 24,000 25,000 49,000 0.00%Henry A. Crumpton 25,000 15,000 40,000 0.00%Cythia A. Flanders 10,000 30,000 40,000 0.00%W.G. Champion Mitchell 7,500 20,000 27,500 0.00%Brian R. Sherras -‐ 25,000 25,000 0.00%Officers and Directors (10 Persons) 1,178,964 435,000 1,613,964 10.96%Richard L. Scott 965,255 6.76%Blackrock, Inc. 882,827 6.18%John W. Blackburn 817,106 5.72%

Holdings of Directors and Executive Officers

(1) CEO of Gemma Power Systems

(2) CEO of Argan Inc. Shares Outstanding (12/04/2014): 14,531,201

(Increase from before due to option redemption)

LIQUIDITY

Amount (Millions)0.18$ 0.18$ 0.18$ 0.09$ 0.09$ 0.08$

20182019

Thereafter

Lease Payment as of January 31, 2014Year201520162017

Lease payments include payments for office buildings

They have a revolving credit facility with a borrowing amount of $4.25 million. This is available until May 31, 2015, with interest at LIBOR plus 2.25%. There is no balance on this revolver.

SAFE ISSUER

1. They have a strong balance sheet

a. The company has no long-term debt.

b. Their cash position has been steadily increasing. They currently have $361 million in cash on their balance sheet and have seen positive free cash flow for the past three years, with $189.1 million of cash flow in 2013.

i. Argan states that a significant portion of the cash is invested in a high-quality money market fund with at least 80% of the net assets invested in U.S Treasuries

ii. As of October 31, 2014 $209.9 million in cash was held by joint venture entities



11

2010 2011 2012 2013 AverageRevenue 218.30$ 182.60$ 141.60$ 227.50$ Cash Increase from Ops 19.30$ 78.70$ 31.60$ 99.00$ Change in Unearned Revenue 8.00$ 58.10$ 5.40$ 61.40$ Total Cash from Construction 41.5% 73.8% 17.1% 62.0% 48.6%Cash from Gemma Operations out of total 3.7% 31.8% 3.8% 27.0% 16.6%

Cash From Pow er Plant Construction

iii. The change in unearned revenue correlates with the construction of projects and the progress of the projects. As shown in the chart above, the cash additions from the construction of the projects amounts to, on average, 48.6% of the revenue throughout the year and, on average, 16.6% of the total cash from operations.

1. Last year, GPS assigned the EPC Contracts (both Panda Projects) to two separate joint ventures that were formed in order to perform the work for the applicable project and to spread the bonding risk of each project. The joint venture partner for both projects is a large, heavy civil contracting firm. The joint venture agreements provide that GPS has the majority interest in any profits, losses, assets and liabilities that may result from the performance of the EPC Contracts.

2. Gemma’s management team is highly experienced within the industry

Name Position Years in IndustryWilliam F. Griff in Jr. CEO 37Daniel L. Martin President 32William G. Carter CDO 30+Joel W. Canino Sr VP 25+Bruce M. Davis Sr VP 35John S. Gorzkow ski Jr. Sr VP 30Ronald W. Polaske Sr VP 30+Christopher J. Kollmer VP 30

Gemma Board of Directors

a. William F. Griffin is the Vice Chairman and CEO of Gemma Power Systems. He was the co-founder of Gemma and has over 35 year of experience within the industry. He is also on the board of directors of Argan.

b. On October 22, 2014 they finished the Woodville Renewable Power Project three months ahead of schedule. East Texas Electric Cooperative, the owner of the plant, said only great things about their experience with the company.



12

CHEAP

1. Based on our DCF analysis, Argan Inc.’s common is selling at a 16.7% discount to their going concern value, when assuming a 0% EBITDA growth and unlevered cost of equity of 12%. The data and results of the DCF analysis are shown below: (Based on EOD 1/27/2015 price. $31.61)

a. Cash return on internal capital is at a rate of 32.64%, which suggests the common stock is undervalued.

2. Argan is trading slightly above their low price per share ($27.38) on a comparable basis, but below their high of $58.84.

3. Argan is currently trading at around 2.60x their price to book. This implies that the price of their equity is overvalued compared to their net asset value.

a. When taking out Costs and Estimated Earnings in Excess of Billings, a current asset, and Billings in Excess of Cost and Estimated Earnings, a current liability, which are GAPP accounting measures as a result of Agran’s percentage completion revenue recognition, the price to book of Argan at fiscal year-end 2013 was around 1.4x. This is close to the low historical multiple for the company of 1.2x. \

Discounted Cash Flow

CAPEX + NWC 2.10$ D&A 0.80$ Sales 222.65$ EBITDA 42.3$ EBIT 65.00$

Ajusted LT Debt -$ LT Debt -$

Surplus Cash 361.0$ Mkt Cap 484.2$

EV 123.2$ Interest -$

Annual Rent -$ Capitalized Leases -$ EBITDAR Analysis? No(Ebitda -‐ Capex)/EV 32.64%

WACC

LTM (October 31, 2014)

EBITDA*xMultiple for n periods (Term I) 2.19xPV of Terminal Multiple (Term II) 3.02xLeverage Multiple (Term III) 0.00xEstimated Multiple: M_ed 5.20xPrice per share at M_ed (GC): 15.18$ Surplus Cash per share (RC): 24.90$ Total value per share 40.08$ Discount (Premium) 16.7%

Number of growth years 5Unlevered cost of equity 12.00%Input Growth in EBITDA 0.00%

Estimated Multiple based on Growth and Unlevered cost of equity assumptions below

Assuming that this year (2014) is an outlier for Argan’s normal business we adjusted the sales and EBITDA within the simplified DCF. Using the average backlog amount calculated above ($365 millions), the average conversation rate (61%) and Argan’s EBITDA margin (19%) we calculated revenue of $222.65 million and EBITDA of $42.30.



13

Comparable Analysis

EV / Revenues EV / EBITDA EV / EBIT P/E MasTec, Inc. 0.6x 6.7x 10.5x 11.4xPrimoris Services Corporation 0.7x 7.8x 11.0x 19.3xChicago Bridge & Iron Company 0.5x 5.7x 6.8x 6.9xArgan Inc. 0.4x 2.0x 2.0x 13.5x

High 0.7x 7.8x 11.0x 19.3xLow 0.6x 6.7x 10.5x 11.4x

Median 0.6x 7.2x 10.7x 12.5xMean 0.5x 5.5x 7.6x 15.4x

Share Price Based on Median Multiple 37.75$ 50.00$ 58.84$ 27.38$

High 58.84$ Low 27.38$ Current 31.61$

Comparable Analysis

Wealth Creation

Year Book va lue Dividends BV GrowthBV+Div Growth

BVPSBVPS

GrowthBVPS + Div Growth

Price/shShare Price

GrowthDiv/Sh

Sh+Div Growth

P/B Shares OUT

2007 41.9 -‐$ 3.8$ 11.34$ 3.0x 11.42008 79.1 -‐$ 89% 89% 5.9$ 56.58% 57% 11.24$ -0.9% -$ -0.9% 1.9x 13.42009 88.4 -‐$ 12% 12% 6.5$ 10.11% 10% 14.20$ 26.3% -$ 26.3% 2.2x 13.62010 97.6 -‐$ 10% 10% 7.2$ 10.41% 10% 9.27$ -34.7% -$ -34.7% 1.3x 13.62011 101.3 6.80$ 4% 11% 7.4$ 3.03% 10% 14.50$ 56.4% 0.50$ 61.8% 2.0x 13.72012 120.9 8.40$ 19% 28% 8.6$ 16.79% 25% 18.80$ 29.7% 0.60$ 33.8% 2.2x 142013 156.3 10.60$ 29% 38% 10.9$ 26.57% 35% 28.41$ 51.1% 0.74$ 55.1% 2.6x 14.3

Average 2.16x

ACGR 14.59% 19.22% 13.11% 17.68% 20.38% 22.58%TR 97.60% 85.16% 152.76% 169.11%

2008 2009 2010 2011 2012 2013EOY CE 79$ 156$ 60$ 139$ OIAIT 6$ 10$ 7$ 24$ 39$

DIVs Paid in -$ -$ (7)$ (8)$ (11)$ #N/ATotal Wealth Retained Wealth

86$ GC 60$ 17$ RC 17$

103$ TOTAL 77$

Argan Inc.



14

Year Book va lue Dividends BV GrowthBV+Div Growth

BVPSBVPS

GrowthBVPS + Div Growth

Price/shShare Price

GrowthDiv/Sh

Sh+Div Growth

P/B Shares OUT

2007 93.96 -‐$ 3.8$ 11.34$ 3.0x 11.42008 77.87 -‐$ -17% -17% 5.8$ 54.14% 54% 11.24$ -0.9% -$ -0.9% 1.9x 13.42009 77.31 -‐$ -1% -1% 5.7$ -2.18% -2% 14.20$ 26.3% -$ 26.3% 2.5x 13.62010 106.12 -‐$ 37% 37% 7.8$ 37.27% 37% 9.27$ -34.7% -$ -34.7% 1.2x 13.62011 166.48 6.80$ 57% 63% 12.2$ 55.73% 62% 14.50$ 56.4% 0.50$ 61.8% 1.2x 13.72012 193.08 8.40$ 16% 21% 13.8$ 13.49% 18% 18.80$ 29.7% 0.60$ 33.8% 1.4x 142013 290.52 10.60$ 50% 56% 20.3$ 47.31% 53% 28.41$ 51.1% 0.74$ 55.1% 1.4x 14.3

Average 1.80x

ACGR 30.12% 33.24% 28.44% 31.52% 20.38% 22.58%TR 273.08% 249.60% 152.76% 169.11%

2008 2009 2010 2011 2012 2013EOY CE 78$ 291$ 60$ 138$ OIAIT 6$ 10$ 7$ 24$ 39$

DIVs Paid in -$ -$ (7)$ (8)$ (11)$ #N/ATotal Wealth Retained Wealth

86$ GC 60$ 153$ RC 153$ 238$ TOTAL 213$

Argan Inc. (Minus Cost/Billings in Excess)

NEGATIVES

1. There is a chance that the company could “go dark”

a. As of January 31, 2014 they only had 119 holders of record

i. Company management and board members have an incentive to keep the company listed. The board and officers of the company own around 10.96% of the total dilutive shares outstanding.

b. They do not hold quarterly calls on their earnings.

2. Management’s deal making ability:

a. After purchasing Southern Maryland Cable and Vitarich, they had to record a $1,942,000 and $5,810,000 impairment losses from the acquisitions.

3. Potentially dilutive company as they have issued shares to acquire companies.

a. Southern Maryland Cable (SMC): 1,303,974 shares of common stock at $7.75 per share.

b. Vitarich Laboratories (VLI): 825,000 shares and issued another 760,000 to pay Kevin Thomas, owner of VLI, on a subordinated note.

c. Gemma Power Systems (GPS): 3,666,667 shares of common stock at $5.50 per share and issued 2,853,335 shares privately to raise the cash funds for the transaction.

i. We believe they will slow down the issuing of shares for companies because the board and executives own 10.96% of shares outstanding and the company has a large cash position.

4. Gemma is limited on the number of projects they can work on.

a. They are a small company and have always had a backlog of fewer than six projects. Their current backlog consists of three projects. The two Panda projects consist of more than 90% of their current backlog.



15

i. Contract backlog represents the total accumulated value of projects awarded less the amounts of revenues recognized to date on contracts at a specific point in time. Contract backlog is an indicator of future revenues and earnings potential. Although contract backlog reflects business that Argan consider to be firm, cancellations or reductions may occur and may reduce contract backlog and the future revenues of GPS

ii. They are already in contract to construct a 900MW gas fired power plant. They have loaned Moxie Freedom LLC $6 million to cover the project’s development costs. The loan bears interest to Gemma Power and grants GPS the exclusive rights to provide engineering, procurement and construction services for the project.

5. With the introduction of a new Financial Accounting Standard, “ASU 2014-09”, Gemma will have to follow new revenue recognition standards that will refine their revenue reporting and the way they allocate percentage of completion. This standard does not go into effect until December 15, 2016, but could affect how future revenues will be reported (Explanation discussed in Appendix).

a. If within the agreed EPC contract the costs are not allocated to specific activities, Gemma will have to use one of three methods to determine the appropriate allocated revenues: market approach, expected plus margin approach, or the residual approach.

i. They currently use the percentage completion method within their two types of revenue agreements: fixed price & cost-plus fee.

6. There is an outstanding litigation against the company.

a. The Altra Matters case is a lawsuit that Gemma filed against ALTRA Nebraska to obtain money from the portion of the project that they completed before Altra went bankrupt. This lawsuit began in 2008 and has included many other subcontractors who believe they deserve payment. There are now many subcontractors in the litigation that believe they deserve payment. Most of these payments would be quite insignificant to Argan’s current cash position. The trial looks to be ending very soon.

7. Two-thirds of their cash on hand is within joint ventures. This money is used to cover construction costs and equity distributions to the joint venture partners. No equity distributions were made to either joint venture partner during the nine months ended October 31, 2014.

8. They are a small cap company.

CATALYSTS

1. The Panda Liberty and Panda Patriot projects are large 800MW combined cycle generating systems that account for $770 million of the company’s backlog. These two projects are expected to be complete in middle and early 2016.

2. Argan has paid special dividends of $.50, $.60, and $.75 in 2011, 2012 and 2013. The recently announced a $.70 dividend payable to holders of record as of October 15th.

3. The company’s strategy is “To make additional acquisitions and/or investments by identifying companies with significant potential for profitable growth.” With so much cash on hand, management can execute this strategy once prices start to deflate.

4. Both Panda Projects are expected to be complete in 2016. Around that time, Moxie Freedom is expected to complete the development of their 900 MW, which Gemma Power has exclusive rights to work on.



16

Appendix

Company Timeline May 1961 – Incorporation in Delaware 1961 – 2003 - provides a broad range of products for original equipment manufacturers, foreign and domestic military users, government direct, automotive and aviation aftermarket users as well as a number of commercial and industrial applications. These applications include military, commercial and general aviation fixed wing and rotary wing vehicles, rockets, launch vehicles, satellites, surface and subsurface vessels, automotive airbag, launch complex installations, and liquid gas manufacturers, to name a few. April 2003 - Rainer Bosselmann becomes CEO (replacing Michael H. Figoff) July 2003 – Southern Maryland Cable (SMC) was acquired October 2003 - Shareholders approved plan to change structure of company to a holding company. Their one company, Puroflow Incorporated got transferred to a subsidiary. They changed their name to Argan Group. Puroflow was sold to Western Filter Corporation. • New business plan – “We intend to have more than one industrial focus and to identify those companies that are in industries with significant potential to grow profitably both internally and through acquisitions. We expect that companies acquired in each of these industrial groups will be held in separate subsidiaries that will be operated in a manner that best provides cash flow and value for the Company.” August 2004 – Argan Inc. acquired Vitrarich Laboratories Inc. by way of merger for $6.1 million in cash and issuance of 825,000 shares (valued at $5,132,000). With the merger, Argan assumed $1.6 million of Vitarich’s debt. January 2006 – Argan Inc. recognized goodwill impairment from the acquisition of Vitarich of $6,497,000 May 2006 – Argan Inc. privately sold 760,000 shares at $2.50 per share ($1.9 million in proceeds) to pay off the debt acquired from the Vitarich merger. December 2006 – Argan Inc. acquired Gemma Power Services (“GPS”) for $31.1 million (10.9 million in cash, $20.2 million from the issuance of 3,666,667 shares of common stock issued at $5.50 per share). Goodwill amounted to $18.5 million, $12.3 million of which is amortizable of 15 years leaving $6.2 million not amortizable for income tax reporting purposes. Additionally, Argan raised $10.7 million through the private sale of 2,853,335 shares at $3.75 per share. December 2009 – Gemma Power Services acquired 50% of the outstanding membership interests of Gemma Renewable Power, LLC (“GRP”) from Invenergy for $3,394,000. The acquisition was made to have the right to pursue wind-farm construction projects. January 2010 – GPS acquired the other 50% of GRP for $3,183,000 making GRP a wholly-owned subsidiary of GPS. March 2011 – Argan Inc. sold Vitarich Laboratories Inc. to NBTY Florida in an agreement of an initial closing payment of $800,000 and $2.3 million placed in escrow. October 2011 – Argan Inc. issued a special cash dividend of $0.50 per share due to GPS’s strong performance. September 2012 – Argan Inc. issued a special cash dividend of $0.60 per share due to GPS’s continued strong performance. September 2013 – Argan Inc. issued a special cash dividend of $0.75 per share after successfully winning the rights to the “Panda Projects” in association with Moxie Liberty, LLC. (“Moxie”) May 2014 - FASB introduced “ASU 2014-09” changing how Argan Inc. will be recognizing revenues in the future. The new accounting standard will go into effect December 15, 2016. (Reference negatives for more information) October 2014 – Argan Inc. issued a special cash dividend of $0.70 per share after the “Panda Projects” were successfully commenced.

Financial Accounting Standard ASU “2014-09”

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract.



17

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. Step 4: Allocate the Transaction Price to the Performance Obligations in the Contract For a contract that has more than one performance obligation, an entity should allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each performance obligation. To allocate an appropriate amount of consideration to each performance obligation, an entity must determine the standalone selling price at contract inception of the distinct goods or services underlying each performance obligation and would typically allocate the transaction price on a relative standalone selling price basis. If a standalone selling price is not observable, an entity must estimate it. Sometimes, the transaction price includes a discount or 5 variable considerations that relates entirely to one of the performance obligations in a contract. The requirements specify when an entity should allocate the discount or variable consideration to one (or some) performance obligation(s) rather than to all performance obligations in the contract. An entity should allocate to the performance obligations in the contract any subsequent changes in the transaction price on the same basis as at contract inception. Amounts allocated to a satisfied performance obligation should be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price changes. Step 5: Recognize Revenue When (or As) the Entity Satisfies a Performance Obligation An entity should recognize revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service. For each performance obligation, an entity should determine whether the entity satisfies the performance obligation over time by transferring control of a good or service over time. If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time. An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time if one of the following criteria is met: 1. The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs. 2.The entity’s performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced. 3.The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date. If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in time. To determine the point in time at which a customer obtains control of a promised asset and an entity satisfies a performance obligation, the entity would consider indicators of the transfer of control, which include, but are not limited to, the following: 1.The entity has a present right to payment for the asset. 2.The customer has legal title to the asset. 3.The entity has transferred physical possession of the asset. 4.The customer has the significant risks and rewards of ownership of the asset. 5.The customer has accepted the asset. For each performance obligation that an entity satisfies over time, an entity shall recognize revenue over time by consistently applying a method of measuring the progress toward complete satisfaction of that performance obligation. Appropriate methods of measuring progress include output methods and input methods. As circumstances change over time, an entity should update its measure of progress to depict the entity’s performance completed to date.

argan inc. final - orangevaluefund.com · argan, inc. ("argan"), formally known as...

Documents