Description

DIRTT has been written up on VIC by Mason in 2015, tim321 in 2017, and Dr1004 in 2018 - these writeups give a good background and the evolution of the company.

Thesis: The DRTT is executing on idiosyncratic catalysts – improving its operations and commercial functions – which should help expand EBITDA margin from 12% to ~20% by 2023. These efforts are being implemented by a new, credible management team and the wind at their back. DIRTT has an innovative product, a vertically integrated manufacturing, a large TAM, a clean balance sheet and FCF positive starting point.

Dirtt Environmental Solutions Ltd (DRTT): Founded in 2003 and headquartered in Canada, DIRTT is a vertically integrated manufacturing company that designs, configures and manufactures prefabricated interior solutions (i.e., prefabricated Walls, Doors, Millwork, etc.). The Company uses its proprietary ICE Software (“ICE”), and technology-driven, lean manufacturing practices to provide an end-to-end solution for the traditionally inefficient and fragmented interior construction industry.

The value proposition to its customers includes quality, greater cost and schedule certainty, shorter lead times, future flexibility, and better environmental sustainability than conventional construction. The company is also solving an important challenge today, given the shortage of a skilled job site labor force - DRITT is 30% labor cost compared to 70% labor cost in conventional construction. DIRTT’s solutions are manufactured at its plants and shipped (in ~2-3 weeks) to the job site where it is put together like Lego pieces – requiring less job site labor, time, and waste.

In the past, DIRTT was led by its founders who primarily focused on innovation and technology and less on scale and profits. Today, innovation, customer satisfaction, and value propositions seem evident. Over the past 15 years, DIRTT has delivered interior construction projects to more than 7,800 clients and has grown its annual revenue to ~$250M. However, there was a lack of focus on profit, had a suboptimal sales approach (Distribution Partners), and was overall not a very scalable operation. Over the last year, the company changed the leadership team with the goal of improving operations and manufacturing, as well as revamp its sales and marketing strategy.

The new CEO, Kevin O’Meara, and team are a very important part of the thesis. Kevin brings an interesting background and set of expertise to DIRTT. He was the co-founder of Builders FirstSource, Inc. (BLDR), a ~$3B market cap manufacturer and supplier of building materials.  While at BLDR, Kevin served as the CFO and COO between 1997 to 2007, during which time BLDR acquired 23 companies and recorded $1.6B in sales during 2007. Kevin has also served as the CEO of Atrium Corporation, one of the largest vinyl and aluminum window manufacturer, from 2010 to 2012.  Other key hires include Geoffrey Krause (CFO) and Jennifer Warawa (CCO). The new management team brings a mature, metrics-driven continuous improvement culture to an already innovative company with a proven value proposition and customer satisfaction.

Following the completion of a strategic plan (presentation), the new management team announced target revenue of $500M and EBITDA Margins of 20%, at the midpoint, by 2023 (up from revenue of $270M and EBITDA margins of 12% in the LTM 3q2019).  We think this target is achievable. Further, given the large TAM of ~$150B, we think the company will have a long runway for continued growth. Management’s 2023 target implies EBITDA of ~$100M vs $280M EV today on a debt-free balance sheet with FCF positive operation.

Most of the expected margin enhancement comes from COGS. Below is the gross profit margin bridge to 2023.   

S&M Targets: 2020 is expected to have elevated levels of investments in S&M as well as expansion CapEx related to the new Charlotte plant.

CapEx Targets:

Overall, given DRTT’s proven value proposition and growing revenue base, coupled with the new management’s focus on profitability and scale, we think the 2023 target is achievable.  The next few quarters can potentially be lumpy and will have some investment spending – in S&M as well as CapEx for the new Charlotte plant. However, looking out 2-3 years, we think the margin improvement is achievable. The downside protection, even if management fails to deliver and margin profile remains the same around current levels (~12%) – we are looking at ~$60M EBITDA business. If DRTT delivers results close to its 2023 target EBITDA of ~$100M, the stock should be worth north of $10 (8x EBITDA).

Catalyst

• Execution towards management's 2023 target.