Select Interior Concepts – SIC ($11)
Select Interior Concepts is a B business, run by B/C management, selling at a C valuation. Where’s the
“A”? A is for Activist (or ADW, to be more specific). On 5/13/19 SIC announced a strategic review and
the formation of a “transaction committee” along with the hiring of RBC as financial advisor, largely in
response to ADWs push for sale (3/26/19) and highly effective “no vote” campaign around the May
2019 annual meeting.
We expect the strategic review to result in the sale of the company for a
substantial premium over the current price.
SIC was posted on VIC about a year ago (9/3/18) and received only 2 votes, not enough to warrant a
rating. The last conference call had exactly 1 listed participant (and questioner) the analyst from 12%
owner B.Riley. The Company did a 144A offering at $12 in 2017, a Jobs act IPO in 2018 and promptly
reset the bar (yes, lower). Excited yet?
Why Now. The business has stabilized (+ org growth, core margins up slightly), has a decent balance
sheet (2.5X, +FCF), a low valuation and is in the midst of a “Comprehensive review of strategic
operational and financial alternatives to enhance shareholder value”. While I think ADW’s $40 Strategic
Value (13X a higher EBITDA #, see 3/26 letter) is more than a tad rich, a value up 50% - 60% from here
seems very achievable and the board is “on the clock”. $18 = 8X 2019 EBITDA (ex-corp). $20 = 8X ’20
ex- acqs, ex-corp, including 2019 FCF.
Concentrated Ownership: Top 5 shareholders control 52% of shares, including Solace/Gateway 15.6% and also have a director
(Solace bought at $12 on 2017 FBR/BRiley 144A – do these ever work?), BRiley 12%, ADW 9.8% and the
original PE sponsor Trive at 8%. ADW has been vocal, of course, but we do believe the other
shareholders would welcome, if not push for, a sale with a reasonable premium.
The Business. Select Interior Concepts is a relatively simple company with two distinct divisions, both with strong local
regional market share and reputations. Both divisions have been active consolidators of their respective
highly fragments markets. Trive Capital had acquired (and begun building) each before combining them
for critical mass for the 2017 144A deal.Generally concentrated in California, Texas, the southeast and
mid-Atlantic states, but expanding to serve larger homebuilder customers.
Residential Design Services (RDS):
Interior design installation services primarily flooring, countertops and cabinets for residential home
construction and renovation. Optional customer upgrades (85% upgrade) create larger orders and
higher margins. 150 homebuilder/construction customers and 230 suppliers. 35 locations, including 21
design centers. The Design centers are the competitive advantage as this is where the upsell happens
with the ultimate homeowner.
Architectural Surfaces Group (ASG):
Leading importer of natural and engineered stone for residential, commercial construction and
remodeling. Only scale consolidator (is that good?). Global supply chain (nominal direct China