Description

Investment Thesis

Malibu Boats (NasdaqGM:MBUU, “Malibu” or the “Company”) is a long. Malibu is the leading designer, manufacturer and marketer of performance sport boats, having the number one market share position in the U.S. since 2010. The Company’s boats are used for water sports, including water skiing, wakeboarding and wake surfing, as well as general recreational boating. Concerns over slowing growth in a cyclical industry have allowed MBUU to trade at an attractive free cash flow multiple of under 9x. Due to MBUU’s position as a market leader with sustainable competitive advantages, high cash generation and low leverage (albeit operating in a cyclical industry), we believe MBUU should trade closer to 12.5x free cash flow, or $20.74 per share, representing 42% upside.   

Company Overview

Malibu was founded in 1982 and is based in Loudon, Tennessee. The Company has two brands: Malibu, which is the flagship brand, and Axis, which is the value brand. The Malibu brand offers the latest innovations and is the premium brand with retail prices ranging from $40,000 to $175,000 per unit. Axis was created for more cost-conscious consumers with retail prices ranging from $45,000 to $95,000 per unit. Malibu sells high-performance fiberglass inboard wake and waterski boats (inboard means the engine is enclosed within the hull of the boat as opposed to mounted outside). The Company’s distribution channel consists of 110 independent dealers in North America operating in 147 locations in North America and 58 independent dealer locations across 38 countries outside of North America, including Australia.  

Malibu has an extremely good reputation within the industry. If you talk to boaters or read forums online, by and large people have very good things to say about Malibu and the quality of its boats and are excited to learn about Malibu’s new releases (the Company releases several new models each year). Malibu is a pioneer in boat technology and has several patents. We believe Malibu to be differentiated for these reasons and that its position within the space entails several barriers to entry that would be challenging for a new entrant to overcome. Contrast Malibu’s business as a designer and manufacturer to that of a distributor and we believe the former is a higher quality business that should trade at a premium multiple.

Industry Overview

During 2015, retail sales of new powerboats in the U.S. totaled $7.8 billion. Of the powerboat categories defined and tracked by the National Marine Manufacturers Association (NMMA), Malibu’s core market corresponds most to the inboard ski/wakeboard category, which the Company refers to as the performance sport boat category. 7,800 performance sport boats were sold in 2015, representing $686 million of sales (average unit sale price of $88,000). 2006 represented the peak in the performance sports boat market with 13,100 units sold. The market bottomed in 2011 with 4,850 units sold, representing 37% of 2006’s sales. This is a key concern of bears, who suggest that if an economic downturn is imminent and 2015 is near and/or the top of the cycle, then Malibu’s earnings are in for a huge decline. We take a different approach and note that 2015’s sales remain 40% below 2006’s peak sales, so we believe there is still room for growth. Our thesis is similar to the one we had for Thor Industries this time last year. Thor is the one of the largest manufacturers of recreational vehicles (RVs) in the U.S. and Canada and had unit sales in 2015 well below pre-recession levels. The multiple was cheap and in the last year volumes have continued to recover and the stock is up more than 40%.

Bears may counter and suggest that the marine industry is in secular decline unlike the RV market; therefore performance sport boat sales should not recover to pre-recession levels. While there may be certain verticals within the marine industry that are in decline, the performance sport boat category is not one of them. In fact the category is increasing its share. For example, new unit sales of performance sport boats increased by 16% from 2013 to 2014 while all other powerboat sales increased just 6%. Further, from 2014 to 2015 new unit sales of performance sport boats increased by 10% compared to 7% for all other powerboat sales. This trend is expected to continue. Therefore, even if growth in the overall market slows or flattens, we believe performance sport boats can continue to grow by taking share.

Even if performance sport boats do not gain share, in the event the overall market flattens, Malibu can outperform by continuing to take share of the performance sport boat market. Malibu has increased its share of the market from 23% in 2008 to 32% today. MasterCraft, the number two player, has seen its share steadily decrease from 24% in 2008 to 22%. The third largest player is Nautique with 22% share (down from 24% in 2008) and the fourth biggest participant is Supra/Moomba with 13% share (down from 17% in 2008). We like that the top four players control 88% of the market, resulting in an oligopoly. We also like that since 2008, of the top four players only Malibu has increased its market share with the others having since lost share. While we believe MasterCraft is also an attractive buy today, we prefer Malibu given the Company is the number one market leader and trades at a similar multiple to MasterCraft.

The increasing age of used boats is also a catalyst for growth in new boat sales. In 2015, new powerboats represented one out of five sales compared to one out of four sales from 2002 to 2008. More people have been buying used boats in part due to the economic downturn. The average age of powerboats has increased from 15 years in 1997 to over 21 years today. As older boats become retired (which we think will be accelerated so long as gasoline prices remain low), new boat sales should benefit.

The continued modest (but steady) growth of the economy and recovery of the boating market should continue to drive sales growth for Malibu, with further upside in the event Malibu continues to gain market share within a market that could itself continue to gain share.

Financial Overview

Malibu’s fiscal year ends June 30th. For FY2017, management has guided to unit volumes up mid single digits and average sale price up low single digits, resulting in sales growth of 5-7%. Management has also guided to modest increases in gross margin and EBITDA margin. For FY2016, Malibu had sales of $253 million, up 153% from FY2011’s sales of $100 million. FY2016’s gross profit was $67 million (26% margin), up from $16 million (16% margin) in FY2011. FY2016’s EBITDA was $45 million (18% margin), up from $7 million (7% margin) in FY2011. I am comparing FY2016 to FY2011 because FY2011 represented the bottom of the market. During this time period, SG&A as a percentage of sales remained fairly flat, so that the increases in gross margin fell down to the EBITDA margin.

FY2016’s EPS was $1.00. FY2016 had operating cash flow of $35.6 million and capex of $6.2 million, resulting in $29.4 million of levered free cash flow, or a 12% levered FCF margin, which we view as attractive.  

Malibu has a market cap of $258 million, debt of $71 million, cash of $26 million, and minority interest of $5 million, for an enterprise value of $308 million. The Company’s modest leverage (debt/LTM EBITDA of 1.6x) should provide the Company with flexibility during a downturn. Malibu has negative working capital of $(1) million and PP&E of $18 million. Off of these numbers, Malibu, which had $39 million of EBIT in FY2016, is generating a return on capital of over 200%. Another way to calculate the return on capital is to take Malibu’s book value of $14 million, debt of $71 million, and EBIT of $39 million, which results in a return on capital of 46%, which we view as impressive and suggestive that this is a pretty good and differentiated business with barriers to entry.

The one area we would like to see improvement is in Malibu’s allocation of capital as it relates to returning cash flow to shareholders. While Malibu generates significant free cash flow, the Company does not currently pay a dividend and has a modest share repurchase program. In the past year, Malibu generated $29.4 million of FCF, of which $6.5 million was used to pay down debt and $4.0 million was used to buyback shares (representing just 1-2% of the total share count), with the remaining cash flow going to the balance sheet as cash. We believe the announcement of a dividend and an increase in the buyback program is a catalyst that could cause MBUU to trade at a higher multiple. That said, we don’t view the Company’s building of cash as a necessarily bad use of FCF given the industry is cyclical and would clearly much prefer this strategy to wasting money on over-priced acquisitions or other low-ROIC projects.   

Valuation

Malibu generated $29.4 million of levered FCF in FY2016, resulting in the Company currently trading at a levered FCF multiple of 8.8x. We believe a market leader like Malibu, who has sustainable competitive advantages, high cash generation and low leverage (albeit in a cyclical industry), should trade closer to 12.5x FCF (or an 8% FCF yield). We value Malibu’s market cap at $368 million. Our share price target is $20.74, representing 42% of upside. We note this is not a significant premium to Malibu’s 52 week high of $18.08 and our price target is actually lower than the $23 price that shares traded at in March 2015 when earnings were lower than they are today.  

Analysts are projecting sales growth of 6.8% in FY2017, resulting in sales of $270.1 million, EBITDA of $51.6 million and EPS of $1.46. MBUU is currently trading at 6.0x FY2017 EV/EBITDA and 10.0x FY2017 P/E (both off of consensus estimates). Our share price target of $20.74 translates to FY2017 EV/EBITDA of 8.1x and FY2017 P/E of 14.2x.

Malibu’s closest comp MCBC Holdings/MasterCraft (NasdaqGM:MCFT) is the number two player and trades at 5.9x FY2017 EBITDA and 8.4x FY2017 P/E. These multiples represent a slight discount to MBUU, which we think is warranted given Malibu’s premium position within the market. That said, we believe both Malibu and MasterCraft are undervalued and have substantial upside.

Catalyst

• Continued strong earning releases along with any indications that MBUU and the performance sport boat category are continuing to gain market share
• Announcement of dividend and a larger share buyback program