Company Description
Pure play on the US non-residential and public works construction cycle. 1/3 of sales in institutional (schools, healthcare, stadiums), 1/3 commercial (office buildings, hotels, retail strip malls), 1/3 public works (roads, bridges, dams). DSUP is the leading manufacturer and distributor of metal/plastic concrete accessories and forms used in concrete and masonry-based construction. Products are used to form and strengthen concrete. The company operates in three segments product sales (81%), rental revenue (13%) and used sales (6%).
Quick Numbers
|
Segment Sales |
2005 |
2006 |
2007 |
2008 |
|
Product |
353 |
390 |
425 |
455 |
|
Rental |
50 |
61 |
67 |
75 |
|
Used |
17 |
24 |
21 |
21 |
|
|
|
|
|
|
|
Total Sales |
420 |
475 |
513 |
551 |
|
|
|
|
|
|
|
Cost of Product Sold |
320 |
340 |
354 |
378 |
|
Gross Profit |
100 |
135 |
159 |
173 |
|
|
|
|
|
|
|
SG &A |
94 |
102 |
106 |
111 |
|
|
|
|
|
|
|
Ebitda |
|
60 |
83 |
91 |
|
Ebit |
6 |
33 |
53 |
62 |
|
Interest Expense |
48 |
50 |
40 |
25.5 |
|
Pre Tax NI |
-42 |
-17 |
13 |
37 |
|
Share Count |
9.9 |
10.5 |
18.8 |
19 |
|
Cash EPS |
|
|
$0.69 |
$1.92 |
Thesis
Price target $18.
US nonresidential construction company trading at 5.5x my 2008 Ebitda and 6.3x my 2008 EPS (non-tax payer for 3 years). The combination of a heavily levered balance sheet and a sloppy seasonally slow Q1 earnings number has this broken IPO trading at a significant discount to fair value. The catalyst will come at the end of June when the company refinances its debt and will save 300-400bps on its cost of debt. Sell side models do not account for the debt refinance which will drive ~60 cents to 2008 earnings.
Catalysts.
1) June debt refinance should bring cost of debt down from 11.8% to 8-9%. At the mid- point this will reduce debt costs by 14mm from analyst estimates. As the company has 130mm NOL this will fall straight to the bottom. Each 100bps change in the cost of debt will increase EPS by 17 cents.
2) Company is targeting 150/200 bps of product gross margin improvement starting this year until the Gross Margins reach 30%. In the first quarter gross margins were up 330 basis points.
3) Company announced a 6% price increase on its products effective April 1st which seems to be sticking.
4) Utilization in the rental segment is improving allowing the company to increase prices ahead of peak summer demand.
5) Slow start in the US non-residential and silent management team has the stock trading at a significant discount to non-residential peer multiples (7x Ebitda on avg)
Other Catalysts
1) Analysts and management have been rightfully conservative on the sales growth for the company. While sales grew 14% in 2006, analysts estimate sales growth of 7% in 2007. With the company targeting 30mm+ in new product sales in 2007, theses estimates could prove conservative if the nonresidential market improves in the back half of the year.
2) Mgt would like to reduce debt by $50-60mm over the next 18-24 months. Reduced leverage should result in a higher valuation as value falls to the equity holder.
Risks
1) Large buyer of steel. 20% of COGS- spike in steel prices would be a negative if they are unable to pass along the cost.
2) Commercial segment is clearly the most cyclical part of their business mix. If the weak residential market causes the commercial space to slow then my sales targets will not be achieved. Slowing of the non-residential space- huge debt burden, need a strong market to bring down debt to a more manageable level
3) 54% Odyssey position puts an overhang on the stock
4) Illiquid stock
Debt Refi-Not in analyst models.