Morningstar | KBR Updated Forecasts and Estimates from 15 Nov 2018
No-moat engineering and construction firm KBR posted strong 24% year-over-year revenue growth in the third quarter. We are raising our fair value estimate to $21 from $19 to account for solid third-quarter results, our updated forecast, and time value of money since our last update. Management remains upbeat about the outlook for the rest of the year, as the company raised its full-year 2018 EPS guidance range by a nickel to $1.45-$1.55.Government services revenue increased by 59%, fueled by strategic acquisitions and 12% organic growth. Technology sales grew by 35% compared with the same period last year due to high demand for petrochemical and refining technologies. Hydrocarbon services sales were down year over year, but these results were in line with management expectations, and the segment delivered solid margins.
The Ichthys LNG project, where KBR is part of a contracting joint venture, is nearing completion and management forecasts the remaining three steam turbine generators to be completed in the second quarter of 2019. We’ve made some puts and takes in our model, as management increased its estimated investment to complete the power plant by an additional $100 million. On the other hand, KBR received a favorable arbitration ruling in October regarding the joint venture’s entitlement to approximately $332 million of settlement claims.
Overall, the third-quarter results are emblematic of CEO Stuart Bradie’s strategy of shifting the portfolio to rely more on differentiated government services through acquisitions of Wyle and Honeywell in 2016 and SGT in 2018. The government services segment now accounts for over 80% of the company’s backlog, which underscores management’s effort to derisk the portfolio by focusing on stable high-margin differentiated government services work.
KBR provides services and technologies across the asset and program life-cycle within the government services and hydrocarbons industries. The company has three segments: Government Solutions, which provides life-cycle support solutions to defense, space, aviation and other programs and missions for military and other government agencies; Technology Solutions, which combines technologies, equipment and catalyst supply, digital solutions and associated knowledge-based services into a global business for refining, petrochemicals, inorganic and specialty chemicals; and Energy Solutions, which provides life-cycle support solutions across the upstream, midstream and downstream hydrocarbons markets.
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