A new idea for the membership to consider. Never been posted. Yes, go ahead and post the "another way to lose $ in Energy" tag, but this is worth a look.

DMC Global (BOOM - $20)                           10-30-2022                          $390mm Mkt Cap / $500mm EV

Business: Diversified industrial manufacturer serving the energy markets with DynaEnergetics perforating gun segment, commercial and high-end residential construction markets (Arcadia) and various industrial markets with its metal cladding segment called NobleClad.

Management: High Quality mgmt. CEO Kevin Longe focused on ROIC. Previously senior exec at Sonoco Packaging and Lydall. Good culture, LT thinking eg. Pay workers fairly = lower turnover = better performance, customer satisfaction. Good track record of building companies. DynaEnergetics first, now Arcadia has similar opportunity.

Thesis:

1)      Innovative factory assembled perforating gun system has given DynaEnergetics ~25%+ mkt share

2)      Energy markets in upswing likely to be disciplined, and BOOM in past generated >36% GM% and >23% EBITDA margins vs 25% and 9% over LTM, respectively

3)      New Arcadia business has significant growth potential and generates healthy, accretive EBITDA margins, paid $280M for 60% control interest.  

4)      Very cheap on SOTP basis. &X EBITDA = $30. Recent PGTI acquisition at 8X is a good comp for Arcadia.

5)      FCF should rise next year enabling debt repayment. Relatively asset light across all 3 businesses.

Performance Goals:

Yes, I know it a corporate commercial but at least they are SAYING the right things:

1)      Maximize Free Cash Flow through financial discipline

2)      Maximize ROIC by achieving Operational Excellence and making Discerning Investment Decisions

3)      Invest in new technology, product and market development to drive sustained growth and increased

profitability.

Why Now/Recent Results:

Better than expected results with DynaEnergetics a particular standout. Expect continued increases in US completion activity. The company has implemented 3 price increases in the past year in part to offset inflation but also to expand margins. Pushback has been minimal and production is at record highs. 

Arcadia should be able to work through higher cost inventory and deliver better margins in 2023. Arcadia has excellent long term growth potential through geographic expansion beyond the West/Southwest and from specific margin enhancement initiatives such as insourcing more paint/anodizing capacity (300-400 Bps potential).

Overall company investor expectations are reasonable.  Expect EBITDA of $75M and at least $100M in 2022 and 2023, respectively. A valuation of 7X EBITDA yields a target price of $30. About $5 /share of EBITDA expected in 2023.

Net Debt $110M,  19.5M shares.

DynaEnergetics should do $45M EBITDA in 2022, $75M or more in 2023.

Arcadia should do $55M EBITDA in 2022, $55-60M in 2023 with significant growth beyond. Note BOOM gets 60% so $33M/$33-36M.

NobleClad should do +/- $10M EBITDA going forward unless LNG upside ever shows up.

Corporate: ($14-$15M)

FCF positive even before Margin upswing. D&A well above capex.  Net debt already < 2X EBITDA.

Note: Some folks have suggested a Sum of the Parts approach to valuing BOOM, but there is not much difference in the multiples across the segments so it’s not a particularly revealing exercise.  BOOM did pay $280M for Arcadia last year and is pleased with the acquisition so far so that 8X on 2023 segment EBITDA of $35M seems reasonable.

Energy Products – DynaEnergetics 40-45% of sales. 20% market share in a $1.5B market

Market leader in market shift to factory assembled complete perforating systems (from on-site assembly). More efficient and reliable, less working capital, reduced crew requirements, lower costs. Focus on unconventional oil & gas sector.  The company claims cost saving of up to $250k per well.  Factory systems continue to gain share versus multi-vendor, on-site assembly methods.

To oversimplify: Perforating systems use shaped charges to fire plasma jets through the drill pipe and surrounding cement into the resource formation creating tunnels in the formation through which oil& gas flow back into the well. Also used to create the perforations used in the fracking process.

DynaEnergetics also provides a broad suite of products used to decommission end-of-life wells.  This market is growing due to growing awareness of orphan well and other environmental issues.

Global footprint with automated manufacturing in Texas (of course) and Germany.

Obviously volatile but well positioned for current disciplined oil & gas markets. Prior pre-Covid peak at over $300M revs and nearly $100M EBITDA.  2020-2021: $150-$175M / $16M Revs/EBITDA.

Specialty Architectural Building Products – Arcadia 40-45% of sales. 5% share in combined $4.5B markets.

Exterior and interior framing systems, windows, curtain walls and interior partitions for commercial buildings (85%) and highly engineered exterior and interior windows and doors for high-end residential (15%).  Emphasis on commercial glass and glazing. Strong historical position in western and southwestern US commercial markets.

Niche focus, differentiated products result in solid margin profile.  Really 3 businesses: Arcadia for commercial exteriors, think low and mid-rise modern, glass focused designs; Wilson Architecture for commercial interiors (lots of repair/remodel work) and Arcadia Custom for High-end residential.

Win on customer service including quick turn on smaller jobs, get the first call on big ones. Have up to 50% market share in core historical markets.

Arcadia was a family/estate controlled business and thus somewhat capital/expansion constrained given the focus on steady distributions rather than reinvestment/growth.

Expect growth in 1) commercial framing business, now in Texas, expanding to the Southeast. 2) High-end residential, have national distribution but adding physical showrooms for architects/homeowners. Jobs average $300k or more per home.

Note: EBITDA #s exclude 40% non-controlling interest in Arcadia.  BOOM has the right to buy in the minority interest over 3 years at what should prove to be accretive multiples.

Industrial Infrastructure – NobleClad 10-15% of sales. 20% mkt share in a niche $500M market

Custom, composite metal solutions for industrial processing, construction and infrastructure projects.

Not much growth but relatively stable results even through Covid.  Good cash flow, but clearly non-core.

Possible upside from LNG, Hydrogen, Transportation, Petrochemical, Clad Pipe and Solar Power concentration. Not counting on much here but it is a solid niche business.

Unclear if company will seek to monetize now that other two segments seem to have significantly more upside.