Description

Idea

Tyman is a leading international supplier of engineered components for the door & window industry. The company has a 45% market share in North America, its largest market, representing 63% of revenue. Two-thirds of its N.A. activity is bespoke, whereby Tyman designs and develops a product to fit the client’s requirements. Typically, a door or window design has a seven-year lifecycle and when Tyman is part of the initial product design, they remain the main supplier over the period. These characteristics are reflected in the high operating margins (between 13.9% and 14.2% for the last three years - adjusted) and high returns on average capital excluding goodwill and acquired intangibles of 49.3% for the last 5 years. Return on total average capital employed was 14.5% in 2021 (last five-year average of 13.2%) with a medium-term target of 14.0%.

Since the stock peaked in May 2021 at 500p, it declined to 325p on concerns of a slow-down in building activity. We acknowledge the risk of inflation and higher interest rates, however over the medium-term, Tyman will likely benefit from macro and company-specific tailwinds. A structural under-supply of homes in the US and favourable demographics should support building activity over the medium term. We refer to jso1123’s write-up of Builders FirstSource for an excellent overview of the US housing market. Improving operating margins in the US from 16% to 20%, in combination with renewed M&A, should also boost EPS. At 10x trailing after-tax earnings we consider the risk/reward to be attractive. 

Business

Tyman PLC (Tyman) is listed on the London Stock Exchange (LSE). Tyman is a leading international supplier of engineered components such as handles, locks, seals etc. for the door & window industry. In plain English, if you take away the glass and frame, everything else needed to create a modern, efficient, safe, sustainable product, is what Tyman supplies. While Tyman is a UK company, they only generate 17% of revenue at home. The US and Canada account for 63% of the business, with the balance coming from mainland Europe. Tyman supplies all this hardware to the new build (40%) as well as the remodelling markets (60%). More than 70% of revenue is generated by selling directly to main branded manufacturers. A Tyman competitor would need to put forward serious credentials in production capabilities and efficient supply chain management before they could engage with the major door & window manufacturers like Masonite, Jeldwen or Andersen. These manufacturers have high expectations for quality, reliability, warranty, delivery times and catalogues with thousands of SKUs. Most of its N.A. business (approx. 65%) is bespoke whereby Tyman designs and develops a product to fit the client’s requirements.

Other elements we found to be valuable in our investment case were the quality and regulatory standards in modern construction. For doors & windows, this translates into warranties and energy ratings that the industry needs to offer and adhere to. To Tyman’s advantage, these assembled end-products are put to test and changing some components would require costly re-testing. Because changing these small hardware components is time-intensive and complex to implement, it also makes it more difficult to quickly change your supplier. To be clear, we are not talking about a process where changing for example just one of the substances in the composition of a medicine invalidates the whole FDA approval. It is much less dramatic, but in the case of Tyman, their hardware is used in a tested process and changing the component would incur complexity and costs. When Tyman’s products are part of the initial design they generally remain the main supplier for the life of the product.

Tyman is the only US manufacturer of all components for doors and windows, except for the glass and frames.  After the acquisition of Ashland, the largest hardware manufacturer in the US, Tyman’s market share rose to 45% of the total addressable market with market shares ranging from 20% to 90% depending on the product. The top 5 customers represent 40% of revenue in N.A. and the next 25 represent 40%. These large customers need a large supplier; there is a natural match. We mentioned above that 65% of revenue, and a higher percentage of profit, come from bespoke business and to make this viable, one needs scale. 

Tyman has two divisions outside North America; ERA in the UK and SchlegelGiesse in Italy. These European divisions focus more on home safety (ERA) and sealing systems for aluminium and PVC doors & windows (SchlegelGiesse). In continental Europe Tyman only has a 3-4% market share and in the rest of the world the business is very small. The company’s strategy is to develop a one-stop-shop solution for customers, similar to what they have in N.A.

Cyclicality

The company is exposed to building activity and the negative impact of inflation on purchasing power and higher interest rates are a cause for concern. With a 35% decline from the peak, equity markets have already discounted a deteriorating outlook. However, we see several mitigating factors. Demographics and a structural shortage of supply of housing in the US and the UK should offer support, at least over the medium term. The company is also better equipped to deal with a downturn because of its strong balance sheet, geographical diversification and a more flexible cost structure; Tyman recently completed a restructuring whereby it reduced the number of sites and lowered fixed costs.  

Growth  

FY21 results showed like-for-like growth of c 11% in both revenue and EBIT, compared to the pre-pandemic FY19 trading year. Volume was the main contributor to top-line growth with 7% and price inflation accounted for 4%. Market conditions have remained favourable in FY22 but rising interest rates, an increasingly challenging consumer outlook and a still-to-be-determined global impact of war in Ukraine dictate that some conservatism is required.

For FY22, CEO Jo Hallas expects pricing to be the main contributing factor to revenue growth and low single-digit volume growth. She also said that the company is actively engaging with an M&A pipeline and conversations are taking place with potential opportunities. Tyman has the firepower (net debt/EBITDA 0.9x), to acquire companies in this fragmented market. 

Tyman aims to grow faster than the underlying markets as a result of new products, new customers and improved penetration of their existing customers. Organic growth might also benefit from price increases. The company believes that if you deliver a great product at the right price and with great service, one should be able to increase prices. As a result, the price action taken over the past 12 months allowed the company to recover the cost of inflation, albeit with a time lag. 

Margin improvement

FY21 adjusted operating margin was 14.2% compared to 14% and 13.9% in 2020 and 2019 respectively.

In North America, operating margins declined to 16.4% from 17.3% and 16.7% in the previous 2 years. The dilutive effect of passing on the cost inflation as well as the lag in recovery of cost inflation during the year, in addition to the relocation of some manufacturing lines to sites where labour conditions were less tight, all contributed to lower operating margins. Tyman targets an EBIT margin under normal market conditions of 20%. Most of the hard work has already been done but the efficiency gains from their restructuring effort have not yet resulted in higher margins because of what seems mostly temporary headwinds.

Adjusted operating margins in the UK and Ireland were 14% and 14.7% for the international division. With target margins of 15%, the upside here is smaller than for the North American businesses.

When management target margins are achieved the group should be able to realise an operating margin after centrally incurred costs of 16.8% vs 14.2% in 2021.

Valuation

The shares trade at a P/E of 10.2x based on last year's earnings. We believe this is an attractive valuation based on the characteristics of the business we described above, the scale and market position in North America, the potential for margin improvement in the US and value-accretive M&A in Europe.

Catalyst

- Market sentiment on building activity improves

- Inflation pressures ease

- Operating margin in N.A. improves

- Value-accretive M&A