Description

I first started looking at PRM earlier this year. I found the business quite interesting but the valuation less compelling when the stock was in the low teens. Now that it's down to $8, it's not screamingly cheap, but at close to 10x my 2023E EBITDA number, it's more palatable.

This market is wild and PRM is a small-cap, former SPAC with ~4 turns of leverage and little coverage. So anything could happen. Do your own work and all that. It's something I would look to get aggressive with if this market turns truly gruesome and it gets to the $5 range and starts acting like an equity stub (which it decidedly is not.)

The precursor to PRM, Everarc Holdings, was written up in August 2020 by bigvic. There wasn't a business attached to it yet, but the people involved were, and remain most impressive. Contrary to opinions I've seen expressed here and elsewhere, Nick Howley is not just lending his name to PRM in exchange for a paycheck. He and other board members like Sean Hennessy (former SHW CFO) are very involved in helping management execute and helping vice chairman Haitham Khouri execute on expansion and capital allocation. Haitham continues to build out a great team on this side of the business, with an impressive new hire just this week to head the M&A effort.

Perimeter is a pretty simple business. They have two segments: oil additives and fire safety. Let's dispense with oil additives quickly. It's about a $100MM revenue business with low 20s EBITDA margins historically. It's fine, but not the fun part of this story.

The fun comes courtesy of the fire safety business, where Perimeter is the industry leader in fire retardant chemicals used in forest fires.  Think this sort of thing:

The fire retardant industry meets what I refer to as the holy trinity for pricing power:

• A "must have" product

• High barriers to entry in a rational/consolidated industry

• Product is a small portion of overall value chain

If it's a product the customer must have, they can't get it anywhere else, and it's a fairly small overall piece of total costs, pricing power is your friend. Paint, aggregates, aircraft parts, critical software, specialty chemicals, and uranium all come to mind. You go to parties, you talk to people. You get the idea.

Is it distasteful to take price on chemicals used to fight forest fires? I don't know. Ask Nick Howley. These guys save forests, so I'm going to call them good guys, classify PRM as ESG friendly, and move on with my life.

Sadly, forest fires provide a secular growth backdrop. The company has experienced ~10% annual volume growth over the last decade. Per the USDA Forest Service, the trailing five year average of acres burned in the US has increased from an average of 3.2MM in 1996 to 8.1MM in 2021. Increased building in former wildlife areas and drier fire seasons have driven this growth. You can add climate change as a factor if you like. The good news, for both the country's trees and Perimeter, is that US aircraft capacity dedicated to fighting forest fires has been on the rise since 2010 and is expected to continue to grow on a go forward basis.

Historically, PRM has done an excellent job of keeping pace with demand for fire retardant chemicals, as seen below:

But the company's top line has merely mirrored demand growth. Under the new leadershp, we expect them to increase prices as well, thus taking top line growth from HSD/LDD into the teens and driving annual margin expansion along the way. This is a low capital intensity business to operate, and maintenance capex runs only ~2% of annual revenues, with no need for growth capex. As a result, FCF generation is attractive and the business is capable of handling an elevated debt profile.

The CEO, Nick and Haitham all laid out the bull case quite well on their first earnings call in late 2021. The slides are informative (link here) as is the call itself (link here). Pretty amazing there was an earnings call that included Nick Howley and William Thorndike and it only lasted 30 minutes and had one question. 

You can easily pencil out your own assumptions for volume/price growth and mix and other key modeling points. I get to ~$200MM+ of 2023E EBITDA. At current prices, that's a bit less than 10x EV/'23 EBITDA. As I said, not dirt cheap, but a price I can live with and one I'd add to should it go lower. 

In addition to the core business, there is some embedded optionality with PRM from capital allocation / deployment. Management's highest priorities are

a) incremental tuck-in acquisitions in fire safety and

b) platform acquisitions that meet the company's criteria:

   ✓ Recurring and predictable revenue streams

   ✓ Long-term secular growth tailwinds

   ✓ Products that account for critical but small portions of larger value streams

   ✓ Significant free cash flow generation with high ROTC

   ✓ Potential for opportunistic consolidation 

My educated guess given the people involved at PRM is that they will not be bashful about using leverage to make acquisitions and they will look to improve pricing/margins immediately upon closing. It is of course impossible to know what they will buy or when they will buy it, but I am happy making a bet on the jockey(s) here, especially since at $8/share I view that as a small dollar bet with large potential upside.

We can all do our own math on how much value might be created by an acquisition by making some assumptions around the size and profitability of the target and the debt/equity financing PRM uses to effectuate the transaction.

The biggest risks here in my view are:

• Results can be lumpy - they are both seasonal and subject to yearly fluctuation
• Leverage cuts both ways
• They make a bad acquisition.
• Key man (men) risk if Khouri or Howley in particular should get hit by a bus (or an airplane as the case may be.)

Catalyst

• Pricing power => revenue growth

• Margin expansion

• Incremental M&A

• New platform M&A