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CB&I's New CEO Adopts Measures to Restore Credibility

The no-moat engineering firm is still undervalued as we reduce our fair value estimate.

We are reducing our fair value estimate for no-moat

Adopting a significantly more conservative approach to analyzing project costs, Mullen recognized cost overruns on a host of projects totaling roughly $548 million pretax ($5.45 per share). This included a dismaying third round of sizable estimate increases on two nonstrategic power projects. Increased cost estimates on two strategic U.S. LNG export projects were less surprising, however, and management projected that both will remain profitable overall.

To unlock significant hidden value and boost competitiveness, CB&I plans to sell its crown jewel technology licensing business for gross proceeds of $2 billion (roughly $20 per share) or more, with net proceeds likely to exceed CB&I’s entire net debt of $1.5 billion.

Following the sale of the technology licensing unit, the remaining units of CB&I will feature large-scale engineering, procurement, and construction and fabrication capabilities with leading positions in petrochemical, refining, and liquefied natural gas end markets. We estimate current annual revenue of $6.5 billion-$7.0 billion, EBITDA of $400 million-$450 million, and a net debt-free balance sheet.

The main risk for investors would be a recurrence of poor execution or cost overruns in coming quarters that would damage the new leadership's credibility as it seeks to stabilize operations and renew confidence in its ability to grow and execute for the benefit of shareholders.

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About the Author

David Silver

Senior Equity Analyst

David Silver, CFA, CPA, is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers diversified industrials, including producers of industrial gases, engineering and construction services, electronic materials, pumps and valves, and professional staffing.

Before joining Morningstar in 2014, Silver spent approximately 20 years covering the chemicals sector as a sell-side analyst for Merrill Lynch, J.P. Morgan Securities, Credit Suisse, and Wertheim Schroder.

Silver holds a bachelor’s degree in accounting and finance from The Wharton School of the University of Pennsylvania and a master’s degree in business administration, with a major in finance, from the University of Chicago Booth School of Business. He also holds the Chartered Financial Analyst® designation and is a Certified Public Accountant.

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