Concerns Over Southland's Zero Margin Backlog & Rising Debt: Analyst Downgrades Stock

DA Davidson analyst Brent Thielman downgraded Southland Holdings Inc SLND to Neutral from Buy at a lowered price target of $7 from $12. 

The analyst is bearish on the company following weaker-than-expected Q2 FY23 results.

The company reported Q2 adjusted EPS loss of $(0.76), which missed the consensus of $0.34, and sales of $256.93 million missed the street view of $257.00 million. 

Thielman thinks Southland's disclosure of a backlog of $500 million which is largely at zero margin and some extending to 2025, poses a risk for the company. 

The analyst notes the significant charges related to the discontinuing operations and future anticipated costs for relying on third parties to complete related work led to a gross and adjusted EBITDA loss in Q2.

The analyst also sees a significant increase in debt/EBITDA leverage ratios as a matter of concern.

Consequently, Thielman considerably reduced the estimate for EBITDA to $19.4 million (from $145.3 million) vs. consensus of $102.6 million for FY23 and $83.0 million (from $167.3 million) vs. $156.1 million estimate for FY24.

Price Action: SLND shares are trading lower by 2.18% at $6.27 on the last check Wednesday.