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ALPHA PRO TECH LTD APT
July 14, 2021 - 6:05pm EST by
abcd1234
2021 2022
Price: 6.99 EPS 0.86 0.65
Shares Out. (in M): 13 P/E 8.1 10.8
Market Cap (in $M): 93 P/FCF 5.9 12.2
Net Debt (in $M): -18 EBIT 12 10
TEV (in $M): 75 TEV/EBIT 4.9 5.5

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Description

Alpha Pro Tech is an interesting little business at an undemanding valuation in a secularly growing,
consolidating industry. It has no sell-side coverage (Taglich Brothers recently dropped coverage), limited
disclosures in its SEC filings, no company presentations or conference calls, and has never been written
up on VIC. Despite its small size (~$90mm market cap), it trades a surprising amount of volume,
averaging 1.1mm shares per day over the past year so it is liquid enough for small funds to build a
position. The largest shareholder is the founder’s widow, owning just under 10% of the shares. I believe
this company ultimately gets sold – historically all FCF has been returned to shareholders in the form of
buybacks (58% of total shares have been retired) so investors earn a yield until a sale occurs.
 
Company Description
 
APT has two business segments: Disposable Protective Apparel and Building Supply. Normalized,
building supply represents about 55-60% of sales and about 40-50% of segment pre-tax profits with the
disposable protective apparel representing the balance.
 
Disposable Protective Apparel (“DPA”):
 
APT manufacturers a collection of disposable protective apparel including face masks (N95 represents
the bulk of the mask sales), face shields, gowns, booties, lab coats, etc. It has a catalog on its website
but below are some pictures:
 
 
The Covid-19 pandemic was obviously a huge boon for this segment. Pre-covid, the company sold about
$5 million face masks and shields per year and sold nearly $53 million in 2020. This is normalizing
quickly but it still sold over $8 million masks and shields in 1Q 2021.
 
Building Supply:
 
The building supply segment consists mostly of roof underlayment and housewrap, representing 48%
and 43%, respectively, of 2020 with the remainder being “other woven materials.” For those unfamiliar,
pictures below:
 
 
This segment is also benefitting from the current housing boom, but I believe this segment still has
substantial growth going forward. I believe sales would have been significantly higher last year if not for
capacity constraints. The company typically spends about $1 million per year in capital expenditures but
is investing an additional $4 million this year to expand production capacity. I expect a 30% ROIC on this
invested capital.
 
Valuation
 
At $7.00 per share, the company has a $93 million market cap, $18 million of net cash for an EV of $75
million. I expect a $15 million release of working capital off Q1 as the business normalizes and elevated,
albeit declining significantly from 2020, profitability throughout 2021. I think buybacks will flex
depending on the share price, but I expect the company to be aggressive if the share price remains in
this context.
 
I expect the company’s free cash flow to normalize to $5.5 - $6.0 million, nearly double the company’s
pre-covid free cash flow of approximately $3 million. I expect about 2/3rds of this growth from the
business supply segment. I also think demand for PPE is permanently higher than it was pre-covid and
thus I do not revert DPA profitability all the way back to pre-covid levels. On these assumptions, the EV
will be bought down below $60 million and the current price represents greater than a 10% normalized
FCF yield (6x EBITDA).
 
Other Considerations
 
I believe one of the larger misconceptions about APT and other PPE manufacturers are comparing them
to hand sanitizer manufacturers or other truly one-time covid beneficiaries. I think there is a credible
argument to saying covid was actually a negative for hand sanitizers (aside from the cash generated) as
there are no barriers to entry and margins for these products will likely be lower than pre-covid for a
long time.
 
I don’t think the same is true for PPE. Although there are limited barriers to entry to the DPA APT sells,
there are some. All of APT’s products are manufactured in FDA approved facilities (these can’t be made
 
in converted buildings). These are single use, low priced products but their performance is extremely
important. The products are used by medical professionals where brand value matters. Our customer
calls indicate that APT products are the highest price but the most premium product in the market.
Notably, N95 masks (most of the DPA sales right now) have a proprietary aspect to them. 3M, the
largest manufacturer of N95 masks explained the bottleneck throughout covid by saying, “it’s a difficult
item to manufacture, particularly the main filter. It requires specialized machinery that is very
expensive.” APT is the only N95 manufacturer that I could find that makes a “flexible” N95 mask (looks
very similar to the blue surgical masks that are handed out at many retail stores). All other N95
manufacturers make the cardboard N95s that are considered less comfortable. Of the 9 selected CDC
stockpiled N95 masks tested by NIOSH, only 2 (APT’s mask and the Gerson 1730) were designated to not
have a shelf life.
 
As mentioned at the start, I think this company would be an attractive acquisition candidate. The senior
executives were all promoted from within, and all have been with the company for greater than 20
years. The “unallocated corporate” expense is greater than $6 million per year which I expect could
nearly be eliminated.
 
Lakeland Industries (ticker: LAKE) makes PPE but does not make any face masks. Also generating
substantial cash last year, it has $60 million of cash on its balance sheet and recently doubled the size of
its RC to $25 million for “inorganic corporate developments.” A prior LAKE presentation (the slide which
has since been removed) highlighted the substantial M&A in the sector:
 
 
As with most industries, the multiples expand with scale so a roll-up strategy makes a lot of sense. We
believe LAKE would be a natural acquirer.
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Aggressive share buybacks
  • Longer tail to mask sales and other DPA
  • Aquired by larger competitor
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