Starboard aims to unlock the value of Fluor’s investment in nuclear tech company NuScale

Company: Fluor Corp (FLR)

Business: Fluorine is a holding company that provides engineering, procurement, construction, manufacturing and modularization and project management services. The company’s divisions include energy solutions, urban solutions and mission solutions. The energy solutions segment provides EPC services to traditional oil and gas markets, including manufacturing and fuels, chemicals, LNG and energy markets. Segment serves these industries with comprehensive project lifecycle services. The urban solutions segment provides EPC and project management services for advanced technologies and manufacturing, life sciences, mining and metals, infrastructure industries and professional staffing services. The mission solutions segment provides high-end technical solutions to the United States and other governments. These include the Department of Energy, Department of Defense, Federal Emergency Management Agency and intelligence agencies, among others. The segment also serves commercial nuclear customers.

Stock Market Value: $7.89 billion ($48.79 per share)

Activist: Flag Value

Ownership: Flag Value

Average Cost: no

Activist Comment: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. They are known for their excellent efforts and running many of the most successful campaigns. Starboard had previously launched activist campaigns at 18 industrial companies, and the average return on those cases was 50.55%, while the average return on the Russell 2000 during the same period was 11.73%. Starboard has run a total of 162 activist campaigns in its history, and the average return for the Russell 2000 over the same period was 21.13%, while the Russell 2000’s return was 14.24%.

what’s going on

On October 21, Starboard announced a ~5% position in Fluor and stated that it intends to realize value from its ~39% stake in the company. NuScale PowerThis represents more than 60% of the company’s market value, including a potential spin-off.

behind the scenes

Fluor provides integrated engineering, procurement, construction and project management services spanning a variety of end markets. Historically, the EPCM market has been a highly competitive environment where growth over discipline and profitability was often prioritized, leading to intense risk taking. For Fluor, as for much of the industry, this led management to aggressively increase its backlog of high-risk lump sum and guaranteed minimum contracts, leading to execution risks, low margins and cost overruns. Ultimately, this industry-wide shift caused many companies to reduce their construction efforts or even enter bankruptcy, and Fluor was no exception; The company’s share price fell below $4 in March 2020.

However, this began to change when the company appointed David Constable as CEO in early 2021. Under his leadership, Fluor immediately pivoted to lower-risk, reimbursable projects and increased its backlog from 45% to 80%; The exposure to loss-making legacy projects has fallen from $1.8 billion to $558 million today, significantly reducing the risk profile.

In addition, although largely associated with legacy energy projects, the company has diversified into faster-growing markets in the urban solutions segment; There is now 73% of the backlog, compared to 37% in fiscal 2021. As a result, despite this risky endeavor, Fluor was still able to maintain a stable backlog and achieve meaningful EBITDA growth at a compound annual growth rate of 14% from fiscal 2021 through fiscal 2024. analysts are projecting a CAGR of ~9% from fiscal 2024 to fiscal 2028.

Fluor’s operational turnaround, as most of the major construction and EPCM players exited the market, allowed it to come out on the other side of this turmoil; It currently operates as a duopoly of global end-to-end EPCM players with Bechtel, and the construction market has grown rapidly to now exceed $918 billion.

As a result of this successful operational overhaul, the market currently values ​​Fluor at 8.9 times its enterprise value based on calendar year 2027 estimates for consensus EBITDA, between EPCM (13x) and legacy construction peers (6x). So Fluor looks like a great business with a great management team operating dually in a growing industry that is highly valued with an enterprise value of $6.7 billion. However, Fluor also owns a 39% stake in small publicly traded modular nuclear reactor company NuScale.

Fluor invested in NuScale more than a decade ago, and its early investment of $30 million played a pivotal role in NuScale becoming the first SMR company listed in the US and the only company of its kind with US Nuclear Reactor Commission design approval.

As global energy demand continues to grow, especially with the data center boom, nuclear generation will be vital and SMRs will play a key role in providing the energy to meet this growth. As a result, Fluor’s investment in NuScale has been extremely profitable; Its value was approximately $4.3 billion ($3.4 billion after tax). That’s more than half of Fluor’s current enterprise value.

If you remove NuScale stock from Fluor’s valuation, Fluor’s enterprise value would drop to $3.3 billion, an extremely low discount of just 4.6 times where its peers are trading at between 6 and 13 times.

Starboard has acquired a nearly 5% position in Fluor and is calling on management to unlock the value of its NuScale holdings. Starboard believes Fluor has multiple ways to monetize its remaining NuScale stake. These options involve simply selling their positions through open market sales, an exchange offer, or a forced convertible note; proceeds potentially fund a major share buyback; This would be quite a boost to Fluor’s EPS, especially at the currently low valuation.

As an alternative, Starboard proposed a tax-free spinoff of Fluor’s NuScale position; This would give Fluor shareholders the option to preserve NuScale’s long-term potential while also triggering a similar rerating of its core business.

So assuming Fluor maintains its 8.9x EBITDA multiple, which could still be improved given its discount to EPCM peers, the rerating that could come from that split could add over 200% upside.

Starboard is a very experienced activist and has a history in this industry as well. In June 2019, Starboard signed on with another construction player, AECOM, and after a multi-year effort that followed, AECOM revamped its board, appointed a new CEO, exited self-performing construction and shed management services. This became one of Starboard’s most lucrative deals in its history, returning 147% on the 13D fill and 26% on the Russell 2000.

But more importantly, this was the first time they met David Constable. Constable is chairman of Fluor’s board of directors and was its CEO until February. Therefore, we expect the mutual respect between Starboard and Constable to lead to a friendly, constructive relationship and be beneficial to shareholders.

Ken Squire is the founder and president of 13D Monitor, a corporate research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of activist investments.