Iceberg initiates coverage on Tutor Perini (TPC). The company’s issues are not restricted to the “unbilled”. Tutor Perini has an impressive number of structural problems that, we believe, are underestimated by the market.

Summary of findings:

• Tutor Perini (“Tutor”) is a $1.5b market cap company, but it has recorded only $3m in operating cash flow (“OCF”) since 2010. Tutor has not paid dividends since 2010.

• Although Tutor records positive OCF quarters periodically, due to the fact that its revenue is amassed in lump sums and seasonal, its overall ability to generate cash has been structurally weak. Based on its average OCF since 2014, it would take 33 years to repay its existing net debt of $622m.

• Tutor’s stock surged by 47% after Trump’s election. The President-elect pledged to spend $1 trillion over 10 years on infrastructure without raising new taxes. The sketchy plan would translate into a 60% increase in annual infrastructure spending. However, experts have already expressed doubts over the feasibility of a plan that relies entirely on private funding.

• Tutor’s inability to generate cash has been partially explained by the growth in its “unbilled”. We have compared the annual expectations of unbilled realization and actual OCF. Based on this analysis, we have strong doubts regarding the recoverability of these assets.

• Although Tutor presents its unbilled as a straightforward collection issue, in reality clients often counter-sue Tutor, for example for false claims. We analyzed Tutor’s legal cases and found the situation particularly concerning. Tutor faces substantial contingent liabilities. In the past, Tutor had recognized insufficient provisions for these liabilities, even though it was clear that Tutor’s legal position was very weak, and indeed they lost the lawsuit.

• Large retainage ($542m), higher than competitors, suggests future collection issues.

• We expect Tutor to continue to struggle to generate material OCF on a sustainable basis.

• We think the market is unaware of the fact that banks have been actively reducing their exposure on Tutor. Tutor’s interest expenses jumped by 32% in 9M 2016. Recently, the company had to withdraw a $500m bond offering as the pricing was too high.

• Governance is very weak, especially for a US company: directors on the compensation committee have been “independent” for an average of 14 years, shareholders’ votes on remuneration policy have been systematically ignored, same auditor for the past 15 years, etc.

• Almost half of the shares of Chairman and CEO, Ronald Tutor, who controls 19.6% of shareholding, are pledged as collateral for a line of credit.

• Based on cash flow valuation, we expect the stock to fall by at least 55%. Our target price is $13.

Our full report can be found here.