10-Dec-2020:  CCZ Equities Research: Big River Industries (BRI): Acquisition consistent with growth strategy

Analyst:  Raju Ahmed, email: rahmed@ccz.com.au, phone: +61 2 9238 8237

• Recommendation: BUY
• Target Price: 230cps (unchanged)
• Market Capitalization: $118m*
• Index: None
• Share Price: 147cps (150cps on Fri 11-Dec-2020)
• Sector: Materials

* Market capitalization assumes settlement of the Timberwood Group acquisition transaction by the end of March 2021.

Report:

• Forecasts updated on the latest company specific changes: BRI recently updated the market with an upgraded 1H-FY21 earnings guidance, a strategic acquisition, and further clarity on the Wagga Wagga site closure plans.
• Upgrade to guidance: The company will now deliver an 1H-FY21 NPAT +10% above pcp on the back of positive 2Q-FY21 sales performance in the residential construction and alterations & additions markets, as well as in the Formwork segment. We note BRI’s pre-COVID NPAT margin was circa 2%, implying any small change in sales has a leveraged effect on NPAT. We previously forecast 1H-FY21 NPAT decline of -9.8%pcp (to $2.2m, vs $2.3m in pcp) on the back of -4.6%pcp same store sales decline. We have now refreshed our 1H-FY21 same store sales forecast to -3.5%pcp, leading to a sharp improvement in 1H-FY21 NPAT to $2.5m, +10%pcp. Revised FY21 and FY22 NPAT are now +17.9% and +14.4% respectively vs last published, driven by +1.3% improvement in our 2yr sales forecast. The early Grafton/Wagga Wagga consolidation upside guidance of >20% in U/EPS accretion from FY23 is not a surprise per our last published forecasts.
• Timberwood Group acquisition: BRI announced the acquisition of plywood and architectural panels business Timberwood Group. Timberwood generated $51.3m in sales and $6.0m EBITDA ($4.7m pre-AASB16) in FY20, with the key sales mix being 40% commercial, 46% remanufacturing, and 12% housing. BRI will pay $22.5m upfront ($18.5m cash, $4.0m scrip) and up to $6.0m in earnouts subject to FY22, FY23 & FY24 U/EBITDA pre-AASB16 on a $4.5m-$5.5m straightline sliding scale range. Inclusive of earnouts (but excluding $1.5m to be paid for working capital contribution), the EV/EBITDA pre-AASB16 is 6.1x. This multiple is within range of what BRI has historically paid for its other plywood/timber segment acquisitions. Given the size of the acquisition, we see synergies in both revenue and procurement functions, albeit the former may not be immediate. This acquisition (with assumed 31 Mar’21 settlement worst case) has resulted in FY22 NPAT addition of +54% on the upgraded ex-acquisition NPAT forecasts discussed above. The acquisition is being funded with a $20.4m equity capital raise ($1.35/share), plus the aforementioned $4.0m in BRI scrip.
• Investment thesis: Our valuation and thesis are unchanged, given the acquisition is in line with BRI’s growth strategy.

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