Cactus, Inc.

WHD Details

Cactus, Inc. (NYSE: WHD) is engaged in designing, manufacturing, and commercializing well-head and pressure-controlling equipment. The company also provides short-term renting of frac valves and ancillary equipment and its repair and maintenance services. It operates 15 service facilities in the US, one service center in Eastern Australia, and one production plant in Suzhou, China. WHD operates in 3 segments, viz. 1) Product revenue, consist of the sale of wellhead and manufacturing tress 2) Rental Revenue, derived from the rental of drilling equipment and associated repair of equipment used for suitable control processes, 3) Field service and other revenue, earned when the company provides installation and other field services on the customer's well site. As of June 08, 2021, the company’s market capitalization stood at USD 3.08 billion.

WHD Market Share Growth (Source: Investor Presentation, June 2021)

Q1FY21 Results: The company reported a 23.97% increase in total revenues to USD 84.41 million in Q1FY21 (ending March 31, 2021) compared to USD 68.09 million in Q4FY20 (ending December 31, 2020), primarily due to a 45.40% increase in rental revenue. The company’s product revenue contributed 61%, rental revenue contributed 15%, and field service and other revenues contributed 24% of the total revenues earned during the quarter. In addition, the company reported an increase in net income to USD 15.13 million in Q1FY21 compared to USD 6.13 million in Q4FY20.

Key Risks: The requirement for the company’s equipment depends on the overall degree of activity withinside the oil and gas industry. A decline in the oil and gas prices could negatively affect the operational activity of the oil and gas companies, in turn affecting the demand for WHD’s products and services.

Outlook: For Q2FY21, the company expects its revenue to be up more than 20% QoQ, led by the increase in the Product segment. The company expects the capital expenditure for FY21 to be in the range of USD 10 million to USD 15 million. It would be driven by environmental-related enhancements of equipment, expansion in the manufacturing facility in China, and general maintenance.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Data Source: REFINITIV, Analysis by Kalkine Group)

• % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

WHD Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: WHD’s stock price has significantly surged by 101.71% in the past nine months, and it is currently leaning towards the higher band of the 52-week range of USD 16.11 to USD 41.42. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 35.70. Considering the significant upsurge in the stock price in the past nine months, the macro environment around oil markets, current valuation, and associated risks, it seems like most potential positive catalysts have been discounted in the current price. Hence, we recommend a “Sell” rating on the stock at the closing price of USD 41.11, up by 0.96% as of June 08, 2021.

* The reference data in this report has been partly sourced from REFINITIV.