Description

Janus International Group, Inc. (NYSE: JBI)

SUMMARY THESIS

Janus is an opportunity to own a self-store and a commercial warehousing business with premium margins which is compounding faster than the market in a recession-proof industry at an attractive discount to intrinsic value.

BUSINESS OVERVIEW

Janus International Group, Inc. (“Janus,” “JBI,” or the “Company”) is a manufacturer, supplier and provider of premium self-storage doors and locks.

JBI has three main sales channels: new construction, R3 (Restore, Rebuild & Replace), and Commercial with each segment contributing ~1/3 of total LTM Q2’23 revenue.

The Company is a first mover in providing smart lock technology through its Noke wireless solution. Janus offers two different smart locks, which are targeted at retrofitting and new construction, respectively. Janus can integrate Noke locks into its manufacturing process which creates a natural moat against new entrants.

Janus has a strong value proposition for customers by providing mission-critical products with high cost of failure representing a small fraction of total facility cost. Customers place a premium on efficiency and reliability, which allows Janus to capture LTM Q2’23 Adj. EBITDA margins of ~25% with historical margins ranging from 20% to 25%.

Although the Company doesn’t disclose EBITDA margins by sales channel, management indicated on earnings calls that gross margins and EBITDA margins are higher for the self-storage new construction and R3 segments compared to the commercial segment because of the value-added proposition with detailing design and installation compared to simple product sales on the commercial side. However, commercial sales are more recurring because customers have shorter life cycles as their door are generally larger and used more frequently compared to self-storage.

Looking at the unit economics, Janus’s dollar content per square foot increases significantly for conversion versus new construction greenfield projects. Janus’s dollar content per square foot increases from $8 per square foot with new construction to circa $20 per square foot potentially on conversions due to value-added services. This creates a sizable opportunity for the R3 business due to the antiquated self-storage infrastructure which is set to go through a multiyear replacement cycle.

The Company’s customer base is highly fragmented with Janus’s top 10 accounts representing less than ~15% of total revenue, which creates a favorable pricing dynamic for Janus as the go-to provider of choice for doors and locks in the self-storage industry.

JBI is concentrated in the US with 93% of LTM Q2’23 revenue coming from the US and 7% of revenue coming from International. Management characterizes the Europe and Australasia markets as 10 - 15 years behind the US but they remain attractive due to quicker adoption of the Company’s access control offering.

COMPANY HISTORY

To understand how Janus operates, it is important to look at the Company’s history.

Private equity firm Clearlake acquired Janus in 2018 and helped to build out new software-based solutions and close on several accretive acquisitions. As a result, during the 5 years before going public, Janus doubled its business.

In 2020, the Company announced to merge with Juniper, a SPAC led by Roger Fradin and Brian Cook, two Honeywell veterans who delivered a ~279% TSR from 2000 to 2018 at Honeywell compared to a ~72% TSR for the S&P 500 by executing on a similar M&A playbook with 60+ acquisitions.

INDUSTRY OVERVIEW

Janus is positioned to benefit from the early innings of a strong multiyear demand environment. The existing self-storage infrastructure is old with 60% of the self-storage facilities being over 20 years old and needing to be upgraded. New capacity in the self-storage industry continues to move towards conversions and expansions of existing facilities versus greenfield operations, favoring Janus’s R3 business with similar margins as new construction. Big box retail is e-commerce affected, leaving unused brick-and-mortal retail capacity which customers are converting into self-storage, creating further opportunities for the R3 business.

The self-storage industry is running at almost 95% capacity utilization above the historical sweet spot of 85%. To get to historical utilization rates, 220 million square feet of incremental capacity is needed, translating into a $1.7bn revenue opportunity for Janus. Janus is a leading beneficiary of capacity additions, no matter which form they take, be it new construction or repurposing and refurbishing existing facilities.

Janus has ~80% market share with institutional REITs and ~50% market share in the entire self-storage space. Janus focuses on REITs and institutional customers because they’re the fastest-growing segment of the industry. In 2006, REITs and institutional operators owned approximately 24% of the marketplace compared to over 30% today. Given that the larger REITs are financially sophisticated and returns driven, industry consolidation is driving increased demand for Janus’s R3 services in order to modernize state-of-the-art self-storage portfolios.

INVESTMENT THESIS

1) Underappreciated Business Quality and Misunderstood Cyclicality

The market is underappreciating Janus’s business quality which has caused the company to trade at a depressed ~7x EV / LTM EBITDA multiple like a low margin building products company. However, there is no clear-cut comparable company to Janus in the public markets and Janus’s exceptional margin and free cash flow profile warrants a higher valuation closer to ~10-12x EV / LTM EBITDA in line with higher quality peers.

Janus is a high-quality business which captures 50% market share in the self-storage space. Even with the industry’s ongoing supply constraints, Janus’s lead times continued to be better than many competitors, resulting in superior execution for customers and higher growth. Janus products account for only a small portion of the facility cost of ~5-10% but are mission critical, which is why customers are willing to pay a premium for Janus self-storage doors and locks.

Furthermore, Janus has an exceptional cash flow profile due to a CapEx-light business model with CapEx equating to about 1% to 2% of sales annually and low working capital requirements.

The market is also misunderstanding Janus’s cyclicality. The demand in the self-storage industry is not tied to new home construction but rather life events which are referred to as the 6 D’s: dislocation, divorce, disaster, decluttering, and distribution. These life events occur regardless of the macroeconomic environment and make the demand for self-storage capacity resilient.

2) Strong Organic Growth Profile with Inorganic Opportunities

In addition to 4% - 6% targeted organic growth over the next 3 - 5 years, Janus has the proven capability to generate excess returns through accretive M&A. The successful $625 million refinancing of the Company’s term loan in August 2023 at an attractive SOFR + 10bps Adj. + 325bps interest rate and a 2030 maturity provides Janus with amble runway to focus its capital allocation strategy on M&A.

M&A is a core competency for Janus. Janus completed 6 deals since 2016 which have collectively enhanced its growth trajectory, technology and global footprint, while providing access to highly attractive adjacent categories. Janus acquired its largest competitor DBCI in addition to ACT in the second half of 2021 and was able to integrate and realize synergies for both businesses faster than expected by the end of 2022.

Management guided towards M&A being the top capital allocation priority. Given the strong cash flow generation of the business, this creates significant optionality to exceed the FY’23 Adj. EBITDA guidance of ~$270mm - $290mm.

3) Free Noke Option Value

There is substantial upside from the Noke smart lock business, which is currently incorporated at a “very conservative level” in the company's projections according to management. While disclosure is limited, management disclosed that the Noke business is expected to contribute revenue in the mid $40 million range for 2023 and showed 50% units growth in FY’22.

Management sized the opportunity for Noke at over $1 billion. The underlying math is 55k facilities with 400 units per facility, i.e. 22 million doors, multiplied by ~$250 Noke dollar content per unit, equating to a $5.5bn TAM with ~20% long-term Noke market penetration. Management is currently operating under a 1% assumed adoption rate and is projecting continued penetration growth over the next 3 years.

Customers are increasingly interested in automating processes because of labor shortages, which is a growth driver for Janus’s Noke business. At higher incremental margins Noke’s growth could drive long-term margin expansion and a potential multiple rerate due to the double digit end market growth.

Janus’s Noke business would not be the first time the Company built a profitable business from scratch. In 2009, Janus had no revenue from R3. Today, the Company is generating ~$350mm in R3 sales. At the current depressed valuation, the Noke business comes as a free option on top of the strong core cash flowing business.

WHY DOES THIS OPPORTUNITY EXIST?

1) Clearlake Selldown

JBI’s share price continues to be pressured because Clearlake has been gradually reducing its stake from ~53mm shares in Q2’21 to ~44mm shares in Q3’23 and continues to hold ~30% of the shares outstanding. Clearlake’s motivation to sell is likely driven by an objective to monetize their 2018 investment towards the tail-end of a typical 5 to 7-year hold period for private equity managers.

The current share price represents an attractive entry point to take advantage of this shareholder base rotation at a discount to the intrinsic value of the business.

2) SPAC Overhang

Janus’s transition to becoming a public company in 2021 was bumpy. Janus put out FY’21 EBITDA targets that it didn’t initially due to higher public company costs. This caused a selloff from ~$14 / share in November 2021 to the current trading levels of ~$9 - $12 / share in 2023. After 2021, management has adjusted its guidance strategy to “set realistic expectations” and to put out more conservative guidance numbers that it thinks it can beat.

VALUATION

How much to pay for a market leader in a recession-resilient industry with ~25% LTM EBITDA Margins, a ~20% 4-year Revenue CAGR and ~100% Net Income / FCF Conversion? Arguably a ~10x EV / EBITDA if not a low double-digit EBITDA multiple.

While there is no clear-cut public comp for Janus, similar mid-cap industrial companies are trading at ~10x EV / LTM EBITDA compared to JBI trading at ~7x while having lower EBITDA margins (18% average vs. 25% LTM EBITDA margins for JBI) and lower top-line growth (-3% vs. 18% LTM YoY revenue growth).

Applying a 10x EV / EBITDA multiple to LTM Q2’23 EBITDA of ~$267mm translates into an implied share price of ~$14 / share or a ~49% upside to the current share price of ~$9 / share and is in line with 2021 trading levels of ~$12 - 14 / share.

CATALYSTS

1) Rotation in Shareholder Base

Janus simplified its capital structure by redeeming all options and Clearlake continues to sell down its stake by taking discounts on block trades. This puts near-term pressure on the share price but represents a medium-term catalyst once the shareholder base rotation is completed. The shareholder base rotation creates an attractive entry point due to a mismatch between selling dynamics and the Company’s underlying fundamentals.

2) Earnings Beats

Janus has been raising and beating street estimates for EBITDA for the last 6 quarters which could translate into a similar pattern for the second half of FY’23, as management has expressed high visibility into near-term results for at least forward 12 months due to the robust backlog. 68% of JBI’s backlog is R3, which should increase visibility for Janus due to higher probability of execution compared to greenfield projects.

3) Increased Analyst Coverage

As Janus continues to build a strong track record as a public company, more analysts could cover the stock, driving up attention around the name and catalyzing a multiple rerating.

4) More Noke Disclosure

Management hinted at disclosing more information around Noke once it becomes a more meaningful part of the business. Increased disclosure around the Noke segment could drive a multiple rerating on a SOTP basis due to the recurring SaaS nature of the business.

RISKS & MITIGANTS

1) Inflationary Pressures

Janus has been facing inflationary headwinds related to the cost of raw materials, labor and logistics. Steel prices represent most of these continued headwinds.

However, Janus is addressing these headwinds through price and cost-saving initiatives that, by their nature, tend to lag the moves in input costs by several months. Janus is adding price escalation language to its longer-term contracts, seeking change orders on some legacy price backlog, and continuing to focus on operational excellence through 5S initiatives.

Furthermore, the labor shortage has accelerated the demand for Noke automation technology.

2) M&A Integration & Leverage

Since M&A has been a major component of the Janus growth story, successful M&A integration is critical to underwrite. Janus has been thoughtful and opportunistic with add-ons in the past, which mitigates future integration risk. The successful integration ahead of schedule with greater-than-expected synergies of the DBCI and ACT acquisitions in 2021 demonstrates that the Company is well positioned for future M&A.

Furthermore, leverage is modest at ~2.1x Net Debt / Adj. EBITDA as of Q2’23 and at the lower end of the Company’s leverage goal of 2.0x to 3.0x Adjusted EBITDA.

3) Recession Risk

The self-storage industry is being misunderstood as being highly correlated with housing turnover with some concern that the rise in mortgage rates may reduce that metric.

However, self-storage is an event-based business. In good and bad economic times, self-storage thrives. Self-storage was a pandemic darling and was one of the better performing asset classes during the recession in '08 and '09. Storage REITs have grown their same-store NOI far more rapidly since 2019 than any other REIT sector and should continue to perform well given the stickiness of demand.

Furthermore, as new construction goes down, R3 tends to increase, creating a natural hedge across Janus’s segments.

4) Consolidation of REITs

Consolidation of REITs which are Janus’s core customers poses a risk for the Company’s bargaining power. However, as customers consolidate, this also creates rebranding opportunities for Janus on the R3 side of the business.

APPENDIX

Catalyst

1) Rotation in Shareholder Base

Janus simplified its capital structure by redeeming all options and Clearlake continues to sell down its stake by taking discounts on block trades. This puts near-term pressure on the share price but represents a medium-term catalyst once the shareholder base rotation is completed. The shareholder base rotation creates an attractive entry point due to a mismatch between selling dynamics and the Company’s underlying fundamentals.

2) Earnings Beats

Janus has been raising and beating street estimates for EBITDA for the last 6 quarters which could translate into a similar pattern for the second half of FY’23, as management has expressed high visibility into near-term results for at least forward 12 months due to the robust backlog. 68% of JBI’s backlog is R3, which should increase visibility for Janus due to higher probability of execution compared to greenfield projects.

3) Increased Analyst Coverage

As Janus continues to build a strong track record as a public company, more analysts could cover the stock, driving up attention around the name and catalyzing a multiple rerating.

4) More Noke Disclosure

Management hinted at disclosing more information around Noke once it becomes a more meaningful part of the business. Increased disclosure around the Noke segment could drive a multiple rerating on a SOTP basis due to the recurring SaaS nature of the business.