Description

Company Background

Rockwool (“ROCK”) is a global manufacturer of stone wool products used in residential and commercial insulation applications (“Insulation” segment) as well as acoustic ceiling tiles, exterior wall panels, and horticultural media solutions (“Systems” segment).

Insulation (75% of sales) has historically been a 5% organic grower through the cycle, supported by modest price increases and share gains from fiberglass and rigid foam / plastic insulation. Stone wool has superior fire performance (a key area of focus for European regulators) and provides excellent acoustic insulation.   

The Systems business (25% of sales) is a HSD grower, driven by (1) ROCK’s acoustic tile business (Rockfon), which has been expanding into North America and new European markets, (2) the Grodan stone wool growing media solutions business, which has multiple secular demand drivers including a massive uptick in cannabis production and an increased focus on sustainable growing, and (3) the Rockpanel (façade / external) business, which is rapidly taking share in the UK and certain European markets as high rise buildings can no longer contain combustible materials.

In addition to multiple, durable long-term demand drivers, we believe ROCK is also a major beneficiary of the construction and renovation boom that is currently underway in its key markets.

In the US, ROCK’s key competitors include Owens Corning, Johns Manville (owned by BRK), and Knauf Insulation. Across Europe, competitors include Paroc (stone wool business acquired by Owens Corning), Knauf Insulation, Saint-Gobain, and Kingspan. ROCK is the only global pure-play producer of stone wool and commands a dominant 70%+ of the global stone wool market.

Current Investment Opportunity

Management’s initial guidance for FY21 called for 3-5% organic growth and 11% EBIT margins (~200 bps of y/y compression). Our field work led us to conclude this guidance was highly conservative – we think that view was validated by yesterday’s Q1 pre-announcement in which management raised FY21 organic growth guidance to 10-12% and its EBIT target to 12%. While we unfortunately did not get this write-up out before the release, we continue to think that ROCK offers meaningful upside over the next 6-12 months as ROCK’s FY21 EBIT guidance proves conservative and FY22 growth beats expectations.

ROCK is benefitting from a secular shift toward stone wool and away from fiberglass and rigid plastic insulation, providing the business with durable long-term growth and opportunities to deploy capital into capacity expansion projects. The company will be starting operations at its new Ranson, WV facility in July of this year, which we think will be sold out within a short period of time and contribute 3-5% to growth in FY22. As the company demonstrates the success of the Ranson facility, we believe the market will start to view ROCK as a long-term share winner in the massive US insulation market (in which stone wool currently has <10% market share).

In our field work, we learned that ROCK’s existing facilities are currently sold out across North America, with ROCK communicating to buyers that new orders have ~160-day lead times. While this is no doubt partly a function of the massive uptick in residential newbuild and renovation, ROCK is also taking share in the North American DIY channel (e.g. Home Depot) from Owens Corning’s Thermafiber (stone wool) insulation. These share gains are being driven by a meaningful quality gap and exclusivity agreements that ROCK has won in certain markets.

Additionally, regulatory drivers in large European markets such as the UK and Germany are supporting a rapid transition on the commercial side of ROCK’s business. Following the Grenfell Tower fire in 2017, UK regulators enacted a new requirement stating that buildings over 18 meters can no longer contain combustible material in the building exterior. While this immediately advantaged Rockwool’s Rockpanel product, field contacts informed us that contractors are also increasingly using ROCK’s internal thermal insulation material in place of plastic insulation. This theme is also now playing out in the single-family residential market, as lenders and homeowners alike have begun to prioritize fire performance. Similar regulations have been enacted in France, Germany, and other European markets.

Field contacts also noted that ROCK’s sales and marketing team is best-in-class. A private US competitor we spoke to explained to us that ROCK’s salespeople are highly technical and maintain deep relationships with architects and contractors in a way that competitors do not.

Given the combination of unusually high pricing power, strong growth, and maximum levels of capacity utilization, we expect management’s latest EBIT margin guidance of 12% will also prove conservative; we believe ROCK should instead achieve ~50bps of margin expansion vs. FY20 (13.5% for FY21), even as we factor in the impact of start-up costs at the WV facility and higher depreciation.

Beyond FY21, we think ROCK will see a full-year contribution of 3-5% growth in FY22 from its new WV facility alone; the company has additional capacity expansion projects underway in Europe. Following success at the Ranson facility, we think management will capitalize on the rapidly growing demand for its products by announcing more capacity expansion in the US and elsewhere, supporting HSD growth for years to come at excellent returns on invested capital.

Valuation

We arrive at a FY22 EPS target of €16.32. Should ROCK merely continue to trade at its recent valuation range of 30-35x NTM EPS, we see ~30% upside within the next 12 months (PT = DKK 3,945).   

Catalyst

• Earnings.
• Successful start-up at Ranson facility.