Summary
- THR's revenues and earnings have begun to deplete since the downfall at the start of the year.
- The company claims that there are signs of recovery in the business, and expects revenue to pick back up over the next few quarters.
- However, the current state of cash flows and the balance sheet tells us that the company must begin to reposition the business and start generating more cash to meet financial needs.
Thermon Group Holdings, Inc (THR) have reently been hammered due to the COVID pandemic and OPEC+ price war, leading to reduced demand from a muted crude oil price, which resulted in a drop in revenues and a subsequent, and justifiable, drop in the stock price. The company looks to have signs of recovery, but further down the line, things may begin to turn sour as the company will need to begin generating higher cash flow, recover their revenues, and start paying off debts.
Company Overview
THR are one of the biggest providers of highly engineered industrial process and heating solutions for process industries, serving global markets in upstream, midstream and downstream O&G, chemical processing, power generation, and mining. The company is headquartered Austin, Texas, and have been trading publicly since 2011.
COVID Hit
Due to the slump in oil and COVID crisis, THR's stock price proceeded to drop 65% over several months and has been sat at $15 a share for some time now. The companies Q1 was pretty rough, but their Q2 was hit harder, with revenue dropping 35%, and adjusted EBITDA down 88%. On the other hand, April was the company's weakest month, and revenues have been improving every month since.
Revenues
As THR is an international business, revenue sources are somewhat geographically diverse. The revenue drop was mainly attributed to the company's North American operations. These previously sat at 44% of total revenues, but as of Q2-20, North American operations now only account for 32% of total revenues. This can be seen as a good sign as the company are beginning to reposition and focus on the Asian market, which they claim offsets the weakness of both Europe and North America. Revenue also dipped in Europe, but this was not as severe. What did hold up, however, was the Asian revenues, as claimed by THR, and emphasizes the market resilience. However, Asian revenues were still flat on the year, so there are no actual growth signs just yet, and the claim that it is offsetting European and North American operations is weak, as Asian revenues only account for approximately 17% of total sales. On the other hand, this has increased from 10% the year earlier, which is a sign that they can begin to leverage those operations.
THR also claim that they expect revenues to rebound and continue to recover over the following months, especially as their businesses are somewhat cyclical and seasonal. Therefore sales are expected to pick up. However, if we use bookings as a proxy, then the revenue scenario does not look so good. Bookings dropped 33% in July from the prior year, which translates to a lower revenue expected next month. Furthermore, backlogs have increased by 4% to $109.9 million as of June. While historically, the THR has not had many cancellations, I have a concern that cancellations may begin to increase over the following months if the economic environment worsens for the business.
