Small-cap companies have a lack of following and coverage. And that’s why value can be more easily found in small caps than in mid- or large-cap companies.
Tidewater Midstream & Infrastructure (TSX: TWM) is a small-cap company that may be a stranger to many. No doubt, the company’s market cap of roughly $360 million scares many investors away.
Tidewater has been expanding its value chain as a needed energy infrastructure company with the majority of its assets in Alberta. At the start of this month, it finished acquiring the Prince George light oil refinery, including light oil feedstock, line fill, and refined product in storage, from Husky Energy for $277 million. The news — arguably unfairly — dragged the small-cap stock 13% lower to $1 per share at the time.
Tidewater generates stable cash flows, maintains a low payout ratio, and has an eye on its debt levels to keep its dividend safe.
As of writing, Tidewater just reported its third-quarter results, leading to the stock trading about 5% higher. The small-cap stock is coming off from a very low valuation (and remains a tremendously cheap stock). So, there’s massive upside potential.
Recent results
For Q3, Tidewater’s revenue climbed 84% to $147 million against the comparable quarter in the prior year. Its adjusted EBITDA increased by 48% — 60% on a per-share basis. Distributable cash flow fell 4.5% to $12 million but remained steady on a per-share basis.
Year to date, the small-cap company’s revenue climbed 82% to $426 million year over year. Its adjusted EBITDA increased by 23% to more than $69 million; the growth rate was the same on a per-share basis.
Distributable cash flow fell 1.4% to $39 million but remained steady on a per-share basis. The payout ratio was 25% of distributable cash flow. Total assets increased by 45% to more than $1.5 billion.
Because of the Prince George acquisition, Tidewater’s 2020 net debt to adjusted EBITDA is expected to elevate to 3.9 times compared to Tidewater’s long-term goal of 2.5-3.0 times.
So, the near-term focus will be on integrating the refinery and reducing debt levels. Tidewater estimates the net debt to adjusted EBITDA to reduce to 3.5 times by the end of 2020.
Dividend safety
Tidewater’s cash flow generation should remain stable. It has about 75% of its cash flow from take-or-pay, area-dedication, or long-term commitments. Additionally, its payout ratio is only 25% of distributable cash flow.
Therefore, although we haven’t seen the stock experience a recession yet, I think the company can keep the dividend safe even when a recession hits.
At writing, it offers a yield of 3.7%.
The small-cap stock is still very cheap
The average 12-month price target on the small-cap stock, across 13 analysts, is $1.96, which represents 83% near-term upside potential.
This indicates that the stock is outrageously cheap! Value investors should consider small-cap Tidewater right away.
Stay hungry. Stay Foolish.
