Description

        I.            Elevator Pitch

New to VIC: Concrete Pumping Holdings (CPH; ticker: BBCP) is a beaten down stock (down ~80% from its high earlier this year).  CPH trades at 6.1x EV/Pro Forma Adjusted EBITDA before synergies, 5.75x Adjusted EBITDA after synergies with adjustments being “one-off) and not recurring, and 20%+ Pro Forma FCFE yield.  Yet, CPH has a strong ROIC of 20% - 25%, excellent M&A track record, and compelling growth drivers. I see an opportunity for shares to increase in value by 100% to 200% over the next 2 – 3 years.

     II.            Why Does This Opportunity Exist?

There are several reasons why this opportunity exists:

(1)   The stock is beaten down and not many people are willing to look at it.

(2)   CPH screens poorly due to its recently completed acquisition. [x]

(3)   Concerns about the cyclical nature of the business and “end-of-the-cycle” concerns.

  III.            What Does CPH Do?

CPH is a concrete pumping company.  CPH is the largest concrete pumping provider in the U.S.  What is concrete pumping?  In construction projects there are several different methods to pour concrete.  Concrete pumping has several advantages over other methods for many projects: speed and efficiency, easier access, precision of placement, and safety.  Even better, the costs of concrete pumping are comparable to other methods despite these advantages, which explains why concrete pumping has been gaining share from ~20% of all concrete placement in the U.S. in 2000 to ~34% in 2018. 

In order to do concrete pumping, one obviously needs to have pumping trucks, which are expensive and require a highly skilled and trained operator.  Because a typical construction company would normally need these pumping trucks for only a short period of time during the project, it does not make a lot of sense for even large construction companies to own their own trucks, even if they prefer to own a lot of the other equipment that they use.  Instead, it makes more sense to hire pumping trucks together with an experienced operator from a company such as CPH and pay only for the time and materials needed for the specific job. This is exactly the service that CPH offers.

In its core, CPH is a specialty equipment rental company where a rented equipment comes with an operator. 

It is also important to note what CPH is NOT:

ü  CPH does not take possession of concrete.

ü  CPH does not take construction risk.

ü  CPH does not have inventory.

ü  CPH does not use completion method of accounting.

  IV.            Capital Structure at a Glance

CPH has 57M shares outstanding.  At $3.30, it is ~$188M market cap.  Debt = $441M. EV = $630M.  

    V.            CPH Completed a Substantial Acquisition in Mid-May 2019

On May 15, 2019 CPH completed a substantial acquisition of Capitol Pumping.  CPH paid ~$129.2M. CPH’s 2018 Adjusted EBITDA was $83M. Capital Pupming’s 2018 Adjusted EBITDA was $23M.  Thus, by doing this deal CPH has increased its EBITDA base by ~27.7%. CPH paid 5.6x before synergies (at that time when the deal was announced CPH shares were trading a lot higher - ~8.5x EV/EBITDA). 

  VI.            Basis of Competition and Economies of Scale

CPH competes based on level of service, availability of equipment, and price.

As the largest player in the industry, CPH enjoys economies of scale. 

1.      Discounts on equipment buying of ~10% compared to competition.

2.      Discounts on parts of ~10% compared to competition.

3.      Better / wider availability of equipment on offer due to more SKUs.

4.      CPH can achieve higher utilization rate because it can easily and efficiently move equipment between neighboring states.  It only costs CPH $3 per mile travelled to move equipment around.

5.      Higher utilization rate => higher revenue per piece of equipment => higher EBITDA => higher ROIC.  This allows us to provide a better price – if and when necessary.

VII.            Revenue Growth Drivers

CPH should benefit from several growth drivers: 

1.      Concrete pumping is gaining share vis-à-vis other methods of pouring concrete.

2.      Eco-Pan has a strong growth potential.  See more on this below. 

3.      M&A.

VIII.            Eco-Pan Is a Crown Jewel within CPH

1.  What Is Eco-Pan?

Let’s start with a quick background.  Every time when a pumping truck comes and does it job, the construction company needs to wash out concrete off.  Concrete is a waste that a construction company needs to dispose. EPA and its equivalents at the state level require construction companies to dispose concrete.  Some states are very strict about enforcing these regulations and some are less stringent. Eco-Pan solves this problem by providing its solution and taking care of the waste. 

Eco-Pan is a route-based business which means that as it gets more customers and the density of its local network increases, its margins go up. 

2.  Eco-Pan Has Been Growing Rapidly

Eco-Pan has been showing rapid growth over the past few years.   Below I provide historical growth information.

3.  Eco-Pan Growth Has Two Drivers

There are two drivers to Eco-Pan growth:

(1)   Increasing demand for Eco-Pan among existing locations – similar to same store sales

(2)   Rollout of Eco-Pan across more existing CPH’s branches.

While the SSS driver is more difficult to estimate, the second driver rollout) presents a long growth runway.  As of April 30, 2019 (end of 2Q 2019) CPH had Eco-Pan in 14 of its branches. Management estimates that Eco-Pan can be in as many as 35 of its existing branches. 

4.  Eco-Pan Has Superior Margin and ROIC Profile vs. Core Business

Eco-Pan has a higher EBITDA margin (~45%) vs. the consolidated EBITDA margin of 31% - 32%.  Thus, as Eco-Pan contribution to overall revenues grows, the consolidated EBITDA margin should expand. 

Eco-Pan also has higher ROIC (~50%) vs. the core business ROIC of 20% - 25%. 

  IX.            M&A History

CPH has been a serial acquirer.  Below I provide their M&A history and the multiples CPH has paid (before synergies). 

Source: CPH June 2019 Investor Presentation.

    X.            Useful Life of Equipment and Maintenance CapEx

According to the company, the equipment has a useful life of 20 years.  While this seems high, my industry checks confirm that 20 years is a very reasonable expectation. 

Based on conversations with management, maintenance CapEx (MCX) is minimal – i.e., maintenance expenditures run through the income statement.  Thus, CapEx running through the CFS is either replacement CapEx or growth CapEx. 

  XI.            Insiders Are Aligned through High Insider Ownership

CPH has aligned management and Board of Directors. 

Argand Partners, a middle market PE firm focusing on investing in industrial companies, owns ~15.48M shares or 27.2%. 

CEO Bruce Young owns ~2.87M shares or 5%. 

There is a the Equity Incentive Plan in place.  Under the plan top executives can get 6.7M shares.  Here are important details:

(1)   1.3M shares are subject to time vesting over a 5 year period.  I have already included them in the share count.

(2)   1.76M shares will vest if share price is ~$13.00 or higher.

(3)   1.76M shares will vest if share price is ~$16.00 or higher.

(4)   1.76M shares will vest if share price is ~$19.00 or higher.

Share are at ~$3.30 right now and have a long way to go before management starts getting its performance-based shares.

XII.            Capital Allocation

Given the amount of leverage, the management has been clear that debt paydown is the highest priority. 

I would not be surprised by a small occasional M&A deal but I do not expect anything as big as Capital Pumping acquisition. 

XIII.            EV/EBITDA Valuation

Here is my take on EV/EBITDA valuation. 

 Please note that the valuation upside based on this methodology is driven by multiple expansion.  Given that market cap as % of EV is small, equity behaves as a levered stub. 

I am ignoring EBITDA growth driven primarily by Eco-Pan which should come as an extra source of upside. 

Furthermore, as the company pays down debt, the debt paydown should accrete to equity. 

XIV.            FCFE Valuation

EV/EBITDA valuation approach here does not serve us too well because it ignores the incredible tax efficiency that CPH has.

Under the 2017 Tax Act, CPH’s equipment purchases are immediately tax deductible.

Furthermore, when CPH does an M&A transaction, CPH can structure it as an asset purchase for the tax purposes and as a result can deduct the entire purchase price in the year when the acquisition is completed. 

 Yes, CPH is a highly levered company but ~25% FCFE seems to be excessive. 

XV.            Debt Refinancing Would Boost FCFE per Share Even Further

CPH pays high interest rate on its debt: LIBOR + 600 bps.  If CPH refinances the debt at a lower rate, then FCFE per share would get a boost.  Every 100 bps of reduced interest rate will lead to $0.08 of extra FCFE per share. If you put 5x multiple on this number, it is $0.40.  At a more reasonable 10x, it is $0.80 or further 24% upside to the share price. 

XVI.            Infrastructure Bill Upside

If the Infrastructure Bill is ever passed, CPH will be a substantial beneficiary. 

XVII.            Risks

Macro is the key and obvious risk.  If there is a recession, CPH performance will suffer. 

I see a few mitigants. 

#1:  Strong Visibility into Pipeline

Construction projects rarely stop overnight when the recession hits.  They generally get finished. That should keep demand for CPH’s services for 9 – 12 months. 

#2:  Highly Variable Cost Structure

About 70% of CPH’s cost are variable.  Thus, if the demand dries up, so will variable costs. 

#3:  Ability to Turn Off / Delay CapEx

CPH can always turn off / delay CapEx which will provide a boost to FCF.

XVIII.            Catalysts

1.      Earnings / FCF growth. [X]

2.      Reporting clean financials (i.e., financials that will include Capital Pumping’s performance).

3.      Eco-Pan growth that should lead to margin expansion (all else being equal).

4.      Debt paydown.

5.      Debt refinancing.

Disclaimer

Presented recommendation and analysis is an opinion of the author.  The author and / or affiliated entities are long BBCP shares. Various factors may influence or factor into the analysis or the opinion.  The author does not assume any obligation to update the analysis or recommendation.

Catalyst

1.      Earnings / FCF growth. [X]

2.      Reporting clean financials (i.e., financials that will include Capital Pumping’s performance).

3.      Eco-Pan growth that should lead to margin expansion (all else being equal).

4.      Debt paydown.

5.      Debt refinancing.