Description

Mattr (fka Shawcor) was last written up in August 2022 and we would refer to andreas947’s writeup for additional background.

Mattr historically consisted of a range of volatile oil & gas related businesses and the Company was burdened by elevated financial leverage. Over the last couple of years, under the oversight of new management, the Company has completed a business transformation around a narrow range of critical industrial and infrastructure-oriented businesses, thereby significantly strengthening Mattr’s margin profile and balance sheet.

Our work points to the retained Composite and Connection Technologies segments consisting of differentiated, high-quality businesses with strong market positions and meaningful organic growth opportunities.

The Composite Technologies segment primarily consists of (i) spoolable composite pipe products used for oil & gathering systems, and (ii) underground composite storage tanks primarily used for liquid fuels/water storage.

Segment tailwinds:

o   Spoolable composite pipes are taking share from traditional steel/metal pipes due to lower lifecycle costs, quicker installation times, and lower corrosion failure risks. The Company’s recently introduced wider-diameter pipe products have meaningfully expanded the Company’s addressable market and Mattr expects continued share gains in this larger size category.

o   Underlying growth in the composite fuel tanks business is supported by multi-year expansion/unit growth plans by large retail gas station/convenience store operators, as well as the replacement of aging tanks.

o   While the Company is a relatively small player in the storm water management solutions space, underlying demand is driven by tightening regulations and aging infrastructure, and Mattr’s offering has been growing rapidly/gaining share. Management has indicated that this business could ultimately rival the fuel tanks business in size.

o   Increased demand for data centers could become another growth vertical for Mattr’s composite storage tanks business in the years to come (a single datacenter construction site requires 2x-5x the number of fuel/water tanks vs. a single gas station/fuel center site).

The Connection Technologies segment primarily consists of (i) Wire & Cable, and (ii) Heat Shrink Tubing.

Segment tailwinds:

o   The Connection Technologies business, which is focused around extreme condition/high cost of failure applications (e.g. utility/power infrastructure, nuclear power stations), is expected to benefit from ongoing investments in North American electrical infrastructure required to support future electricity capacity requirements.

o   Over time, the Heat Shrink Tubing business should benefit from increased automotive electrification as more demanding EV operating and reliability requirements result in higher revenue per vehicle (~50% higher).

Following the recent sale of the majority of the Pipeline Performance Group (“PPG”) assets in late 2023, Mattr is now in a solid net cash position (vs. >3x net leverage in FY’19).

Recent operating results have been pressured by certain headwinds that we believe are largely transient in nature:

• Non-recurring Operating Costs: The Company is in the process of completing sizeable organic investment initiatives across both segments (expected to result in $150mm+ of total incremental annual revenue generating capacity). However, a consequence of these expansion activities is that Mattr’s reported operating expenses will be elevated in 2024 due to one-time costs of ~$20mm-$25mm associated with the commissioning/start-up of new manufacturing sites (scheduled to commence production between mid-2024 and early 2025). We expect the related commissioning costs to be meaningfully lower in 2025.

• Transient Composite Technologies segment headwinds: Segment results have been adversely impacted by moderating shipments of underground fuel storage tanks as gas station customers have been faced with extended permitting lead-times. However, commentary by large gas station operators point to these permitting headwinds being addressed, and store unit growth accelerating in 2024/2025.

“Expected new construction […] is on track to deliver the 30 to 35 new stores this year, which is in line with our guidance, and a projected increase for the 28 new stores that were opened last year. The new store pipeline is also in great shape and right now stands at the highest level it has been since COVID, which means we are getting line-of-sight to a more robust 2025 opening pace.” – Murphy USA, Q1’24 call

• Transient Connection Technologies segment headwinds: The Company’s Wire & Cable business (Shawflex) has been negatively impacted by destocking actions by Canadian distributor customers. We have spoken with several of these distributors who have confirmed that these inventory reductions have been broad-based and due to elevated material cost inflation and interest rate environment, and indicated that inventory levels should eventually normalize.

While the stock has re-rated higher since it was last written up on VIC, we don’t believe the market fully appreciates the recently completed portfolio optimization efforts and improved balance sheet.

• Mattr’s valuation is undemanding at <6x 2024E Adj. EBITDA (excl. one-time costs) and closer to ~5x Adj. EBITDA on 2025E estimates, which only partially reflects the Company’s ongoing organic growth expansion initiatives.

• By comparison, other premium industrial products peers generally trade at 8-10x+ EBITDA. We believe this valuation discount is undeserved and would expect the valuation gap to narrow over time as the Company executes, and the growth/earnings trajectory of the retained businesses becomes more apparent. If the valuation disconnect persists, we are encouraged by the fact that management has demonstrated a willingness to divest assets to enhance shareholder value in the past.

• Valuing Mattr at 8x-10x 2025E Adj. EBITDA would imply roughly ~50%-80%+ upside from the current share price.

Catalyst

The Company executing and the growth/earnings trajectory of the Composite Technologies/Connection Technologies businesses becoming more apparent