Description

Apex Tools 9% notes (APEXTO) due February 2023 offers an attractive risk reward with a >15% CY and >31% YTM (closer to ~40% return to 2-year-play). Apex Tools came together in 2010 with the combination of Danaher Tool Group and Cooper Industries’ Tools. Bain Capital acquired Apex in 2012 for ~$1.7Bln and more recently (less than 9-months ago) infused an additional ~$80MM of equity to help facilitate an extension of the term loan maturity profile (TL now matures in Aug 2024 which is outside of the bond maturity). I recommend purchasing the APEXTO 9% notes due February 2023 as there are multiple options to address this maturity and Bain is committed to playing through the current down-cycle. The creation multiple through the notes is currently less than ~6x LTM EBITDA at face (less than ~$1.25Bln of net debt) and inside of ~5.4x at market prices. Notably, in speaking to management, we believe there is likely $150 - $250MM of owned real estate that could be unlocked if required (recently sold 3 facilities for $50MM and Apex Tools owns an additional ~20 facilities around the world of which ~10 are suitable for a sale leaseback). Additionally, if push comes to shove, the management team will likely be forced to look at monetizing the Power Tools segment which I believe could have significant value.

Apex Tools operates an attractive business model: >75% of profits from Hand Tools (30 proprietary brands, #1 / #2 brand positioning), remaining ~25% of profits from Power Tools (mostly auto and aerospace oriented and past 18-months have already suffered from a brutal macro backdrop). Re: end-market exposure, >45% is through distribution, under ~35% is retail oriented (all the big boxes), ~15% direct, ~5%+ ecommerce and growing. NA is ~55 – 60%, EMEA is ~15^ and APAC is ~20%+. Apex owns SATA (dominant positioning in China) which has a lot of value.

Apex Tools has done an impressive job managing through multiple headwinds over the past few years: 1) Sears was 15-20% of the business when Bain purchased and its effectively 0 now, 2) tariffs had a material impact in 2019 (>20 – 30MM hit), 3) and Power Tools segment has suffered over the past 18-months and more to come but should be a coiled spring in >2021 – onwards and has strategic value

In a more normal environment, I believe the business will generate >$225MM of EBITDA on >$1.4Bln of revenues. Given limited capital needs of $20MM per annum, the business should be worth more than $1.5 - $2.0Bln (7.5x – 10x unleveraged FCF)

Catalysts: 1) Q1 earnings call next week, 2) clarity on managing cost structure, 3) clarity on SATA performance in Q2 – onwards, 4) cadence of earnings power

Catalyst

1) Q1 earnings call next week, 2) clarity on managing cost structure, 3) clarity on SATA performance in Q2 – onwards, 4) cadence of earnings power through 2020E - 2021E outlook