Description

Tyman Plc (LSE: TYMN)

Certain statements contained herein reflect the opinion of the author as of the date written. NO INVESTMENT DECISIONS SHOULD BE BASED IN ANY MANNER ON THE INFORMATION AND OPINIONS SET FORTH IN THIS REPORT. YOU SHOULD VERIFY ALL CLAIMS, DO YOUR OWN DUE DILIGENCE AND/OR SEEK ADVICE FROM YOUR OWN PROFESSIONAL ADVISOR(S) AND CONSIDER THE INVESTMENT OBJECTIVES AND RISKS AND YOUR OWN NEEDS AND GOALS BEFORE INVESTING IN ANY SECURITIES MENTIONED. Please see additional Important Disclaimers at the end of this analysis.

Overview: Tyman Plc (“Tyman”) is a cheap way to gain exposure to US housing at a Brexit price.  The company makes window and door hardware, an essential product within an essential product.  While the company is UK listed, it gets approximately 65% of revenue from the US/Canada and only 16% from the UK. The company trades at ~8x trailing earnings, as of 12/31/18, despite being cash generative and having an attractive ROIC. On the downside, they are in the final stages of a footprint consolidation that could offset macro pressures and the company only gets about 40% of revenue from new construction.

The shares trade for £2.30 and there are 194.8m shares outstanding for a market cap of £450m.  Net debt is £210m for an EV of £660m.  Because the business is more heavily weighted to the US, it is more helpful to think of this in dollar terms – the market cap is $570m and the EV is $840m.  Trailing EBIT is £83.6m/$110m.  CapIQ 2019 estimates, which I don’t have major qualms with, are for £0.31 of EPS and £94m of EBIT, putting it at a 2019 PE of 7.5 and EV/EBIT of 7x.

Quality Core Business A window is basically a square with glass, but there is also a range of doohickies that are also essential to its operation like hardware, seals, balances, and operators. Tyman provides the doohickies.  The frame and glass comprise the majority of costs in window production and can be bought in bulk, whereas the doohickies range from a few cents to a few dollars and could comprise 30-50 parts in a single window.

The company gets 70% of revenue from selling direct to OEMs like Jeldwen, Andersen, and Masonite.  While price is important, quality and efficient supply chains are also key to the operation of a window or door plant. This is more than boilerplate language as windows are either large scale runs for selling in Home Centers or to builders or custom made for individual orders. In the case of large runs, working capital is key for the OEM and home center so plants don’t keep a lot of inputs laying around, but need easy access to them.  In the case of custom orders, a major selling point for the end user is turnaround time. Combining a wide number of offerings particularly in hardware with the shortest possible turnaround time means that OEMs aren’t waiting around for containers of parts on their way from China. 

Windows are also sold with a warranty and energy rating, which results from testing the entire design, components and all, such that the products Tyman sell typically are not switched out on a whim. Furthermore, the frames are made using molds that will have specific housings for the hardware, so switching out hardware will either require a competitor custom designing a part to fit the mold or the OEM making a new mold. This isn’t the same degree of difficulty as replacing the provider of a 737 engine, but it takes up time and creates some friction over an input that is not that expensive relative to the total cost.

Divisions

AmesburyTruth (“AT”). This division is the US/Canada business.  It is about 65% of revenue and 68% of EBIT.  Near the start of 2018 it acquired Ashland Hardware, another large player in the market.  This strengthened their position in the market and they now have 40-50% market share depending on the specific area, as each window type (casement, double hung, etc.) typically has its own suppliers. It is about 50/50 split between remodeling and new construction. This portion of the business benefits the most from the dynamic of consolidation in US window and door manufacturers as AT is the logical player for large customers to seek out to consolidate their purchases. The top 50 customers account for approximately 2/3 of revenue and then there is a long tail of smaller customers, as of 12/31/18.

ERA. This segment is their UK and Ireland business.  It is ~16% of revenue and ~14% of EBIT. While there are some concerns around Brexit, this segment gets approximately 95% of its revenue from the remodel market, which is typically less cyclical than the newbuild market [2]. They’ve done some minor footprint consolidation in recent years, but not as costly or ambitious as the US business. They generated a 13.1% adjusted EBIT margin in 2018 and have a target of 15% over the medium term.

SchlegelGiesse. This segment is every other geography, which is mostly Europe. It is ~20% of revenue and ~18% of EBIT.  They have plants in Italy, UK, Germany, China, Brazil, and Australia, but also sell into surrounding areas like India, the Middle East, and Latin America. They are a leader in aluminum hardware, which is more popular in Southern Europe and warmer climates generally, as well as commercial, compared to timber and PVC. While management currently targets a 15% EBIT margin in the medium term against a 2018 margin of 12.8%, I believe there is the potential for further acquisitions to scale this business up in coming years.

Cost Savings Tyman acquired Truth Hardware (“Truth”) and merged it with its Amesbury business in 2013. Truth had fewer plants that were larger and more efficient (rev/location). Truth had 15% EBIT margins compared to 10% margins at Amesbury in 2012. The company has since undertaken a major footprint consolidation and relocation in North America that would drive further scale. Since 2013, they have gone from 15 manufacturing sites to 4 major ones and 3 satellites. Tyman’s adjusted operating margins were 14.1% in 2018 with a target of 20% by 2020. The company has spent $23.6m to date and only achieved $1.7m of savings.  They forecast $5m of savings in 2019 and $10m in 2020, which will be material on $83m of EBIT. This has been more disruptive than initially anticipated, but the moving of production is behind them and they are already ramping up the facilities.

The major footprint consolidation and charges on acquisitions have been the major exceptional charges, which indicates in my view that future earnings are likely to be without many adjustments.

Parallel to the footprint consolidation, the company has had to contend with raw material inflation. While Tyman has typically been able to pass it on, the company didn’t in 2018 as some problems with the footprint consolidation made a discussion about raising prices awkward. Gross margin dropped from 36.5% in 2016 and 2017 to 35.2% in 2018.  As operations normalize, I believe they should be able to increase pricing to recover raw material inflation. One point of GM improvement, which should drop down to earnings, is worth approximately £6m of EBIT.

Acquisition Opportunities There are numerous smaller players across geographies that represent an attractive investment opportunity for the company.  They have generally achieved attractive returns on their acquisitions.  A valid criticism would be that they’ve maintained a high dividend and won’t go above 2x leverage resulting in the use of equity placements to fund their acquisitions. Going forward, this risk might be offset by the presence of Alantra, an 11% holder (a “hands on” approach; https://www.alantra.com/private-equity-2/) and Sterling (“where appropriate, an engaged and supportive approach”; https://sterlingstrategicvalue.com/), a 4% holder. Tyman is their 6^th and 3^rd largest positions, respectively.  If acquisitions in the future can achieve similar returns as past ones and be funded with existing cash flow then I believe there should be real value creation.

Source: Slide 47 Company Presentation March 5, 2019

Leverage The UK market appears to be jittery over companies with debt. It’s noteworthy that the new CEO has brought down the leverage target to 1-1.5x from 1.5-2x, which should give them flexibility down the line to take on some more debt for an acquisition instead of issuing shares. The company actually has a reasonably attractive debt profile. As of 12/31/18, most of their debt goes out to 2024 and is denominated largely in line with its currency exposures.  The covenant is 3x adjusted EBITDA, which they are currently far away from and even in a slowdown they have some cushion to earnings from the US footprint consolidation.

Macro I don’t have some variant perception to offer on macro. I would regurgitate the major talking point, which is that the existing housing stock is getting older and that household formation is exceeding new construction in both the US and UK.

Data Sources

[1] Unless otherwise noted, all Tyman statistical and financial data throughout this write-up is from Tyman’s public Company Filings/Reports through 12/31/2018 available at: https://www.tymanplc.com/investor-relations/document-centre, and/or the Tyman Company Presentation, 2018 YE Tyman plc Presentation Final, dated March 5, 2019, available at:  https://www.tymanplc.com/investor-relations/document-centre.

Important Disclaimers

The provision of this report does not constitute (and should not be construed as) a recommendation, financial promotion, investment advice, encouragement or solicitation to buy, sell, or hold the security of the subject issuer (the “Security”), or any other securities, discussed herein. This report is for informational purposes only. All of the information contained herein is based on publicly available information with respect to the Security and the author’s analysis of such information. Past performance is not indicative of future results.

Certain statements reflect the opinions of the author as of the date written, may be forward-looking and/or based on current expectations, projections, and/or information currently available. The author cannot assure future results and disclaims any obligation to update or alter any statistical data and/or references thereto, as well as any forward-looking statements, whether as a result of new information, future events, or otherwise. Such statements/information may not be accurate over the long-term. The views are those of the author acting in his individual capacity and not as a representative of the firm. The author’s opinions on this Security may change at any time in the future and the author will not, and disclaims any obligation to, update this report to reflect any change in opinion. The author further disclaims any obligation to respond to any comments or questions posted regarding the Security discussed herein.

NO INVESTMENT DECISIONS SHOULD BE BASED IN ANY MANNER ON THE INFORMATION AND OPINIONS SET FORTH IN THIS REPORT.  YOU SHOULD VERIFY ALL CLAIMS, DO YOUR OWN DUE DILIGENCE AND/OR SEEK ADVICE FROM YOUR OWN PROFESSIONAL ADVISOR(S) AND CONSIDER THE INVESTMENT OBJECTIVES AND RISKS AND YOUR OWN NEEDS AND GOALS BEFORE INVESTING IN ANY SECURITIES MENTIONED. AN INVESTMENT IN THE SECURITY DOES NOT GUARANTEE A POSITIVE RETURN AS STOCKS ARE SUBJECT TO MARKET RISKS, INCLUDING THE POTENTIAL LOSS OF PRINCIPAL.

The author or his or her respective employer or employer’s clients, affiliates, officers, managers and directors, may or may not hold positions in the Security noted in this article. These parties may trade at any time, without notification to this community, and will not disclose this information to this community. The author and his employer disclaims any liability for investment losses that you may incur under any circumstances.

The author does not hold a position with the issuer of the Security such as employment, directorship, or consultancy.

Catalyst

Conclusion This is a reasonably high quality business at a very depressed price. Over 3-5 years, people will likely continue demanding buildings with windows and doors, over which time the company can generate cash that can be distributed or redeployed into acquisitions that have historically generated attractive returns.