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EV/EBIT now at 7x. Missed their FY24 estimate by $50M
Old valuation $2.95 from Ord Minnett initiating coverage
Valuation & Recommendations ▪ We initiate coverage of BRI with BUY recommendation ($2.95 PT). Valuation weighted 50/50 between a DCF and Peer Multiples approach. ▪ Key risks relate to the impact of rising domestic interest rates upon the construction cycle, adverse weather conditions, persistent supply chain pressures and increased competition. ▪ We believe these risks are more than reflected in current valuations, with BRI trading at 3.6x, representing a 40%+ discount to domestic peer group at 7.5x
The strength of BRI’s supply chain and manufacturing was a key point of difference throughout the pandemic, enabling it to consistently win market share. Our BUY recommendation is predicated upon BRI’s (1) material organic growth opportunities, particularly within its Panels and Building Trade Centre divisions, (2) strong balance sheet and accretive M&A optionality, and (3) steep valuation discount relative to Australian Building Materials and Distribution peers.
Within the Trade distribution market, Bunnings Trade (separate to its ‘Big-box’ style retail hardware stores) and Metcash Hardware (which operate under various banners) are the dominant players. Outside these large players, the market remains highly fragmented. BRI estimates that there are ~700+ privatelyowned operators. BRI has been particularly acquisitive within its Building Trades Centres division. We expect this to continue, with smaller independent operators to remain the focus of its M&A strategy in the space. In total, BRI estimates the total addressable market (excluding retail distribution) is ~A$15bn. On this basis, we assume BRI currently has 1-1.5% market share. Over the medium-term, we believe BRI could increase its market share via a combination of organic and inorganic growth to 2-3%, which would imply an additional ~A$120m-$270m revenue opportunity.
Coffee Microcaps interview of CEO and CFO following the release of the results and Investor Presentation.
Well, I was certainly wrong about the bottom and my reentry of $1.80 has proven to be a poor decision. Sell down looks over done considering they are still paying a dividend and the EPS is 35% higher than when the share price was last around this level in 20/21. Long term view is positive in light of need for housing but might be a quiet 12-18 months.
After a very strong 22/23 the market had priced in continued growth at an accelerated rate but the slowdown in housing construction has hit hard. NPAT down 64% leading to a drop from the recent highs of $1.70 to the $1.30s.
The following graphic tells the story.
Revenue down 7.7% driven by lower residential activity, impact of continued labour shortages and site delays.
• Gross margin down 142 basis points versus FY23. This was due to reduced Frame & Truss volumes and increased competitive pressures.
• Finance cost increase due to additional borrowings and interest rate changes. Net debt increased by $16.4m resulting primarily from additional borrowing for acquisition of Specialised Laminators, payment of contingent consideration and prior year income tax liability.
• Operating expenses: like-for-like operating cost (+1.3%) is well managed in the current inflationary macro-economic environment as we continue to invest in people, processes and systems for future growth.
Outlook
Consumer confidence around residential building remains subdued. Expect market to be soft for next 12 months. Medium term outlook is more positive given demand, low vacancy rates, expected interest rate decreases and government initiatives.
We will take advantage of growth segments particularly in Queensland, Western Australia and South Australia.
The Group has seen increased vendor activity for M&A. We will continue to asses opportunities to add strategically aligned and value accretive businesses to the group.
Held in RL and SM
BRI continuing to roll up companies and be in a strong position as building recovers. SP looks to have bottomed out for now so looking to reenter a position. 9% dividend yield on previous earnings will drop back a bit but still solid.
Big River Industries to acquire the trading business and assets of Specialised Laminators (SLQ) located in Brisbane, Queensland.
This acquisition continues the expansion of the Big River network and will add to the Panels Division a complementary business, with differentiated manufacturing of premium products coupled with a strong value-add solution-based service offering. SLQ is a manufacturer and distributor of decorative, functional, and specialised premium value products and services for the panels market, achieving $26.2m revenue for FY2023.
It will add increased capabilities in specialised products to Big River customers, synergies to the Group through new and existing products and markets, as well as supply and logistics benefits.
One of the founders of the business, John Closter, along with General Manager Wayne Austin, will remain with Big River to manage the business.
The purchase consideration of $10m at completion comprises $7m of cash and $3m in BRI ordinary shares. There is the potential for the vendors to receive an additional earnout of up to $4.3m, payable 70% cash / 30% BRI ordinary shares over a three-year period if certain profit growth targets are achieved.
The acquisition is expected to be earnings per share accretive from year one and will be funded by the Company’s existing cash and debt facilities.
BRI results down as expected off last year's. Heading for 52 week lows. $7M NPAT for a market cap of $166M is solid. Forecasting possible revenue fall in second half due to site delays.
John Lorente, Big River CEO, said: ‘It is satisfying to deliver solid results, in a challenging macro environment as we continue to invest in the business for future growth. We strive to deliver an average 10% EBITDA margin through the cycle, and we remain on that trajectory while managing costs and cash extremely well. Project pipelines continue to be solid across all segments with a positive medium-term outlook for our markets.”
The market outlook is supported by buoyant residential housing and commercial demand in the short to medium term, with the Group’s market segment diversity positioning us well to capture market opportunities through the cycle. Extended site delays have pushed the pipeline into the second half of CY2024 and there are signs that the market in the short-term will be less predictable than previous years. If projects continue to be delayed then 2HFY24 revenue could be below the first half result.
The Group’s 1HFY24 revenue of $218.8m was broadly consistent with the prior half, up 0.8% on 2HFY23 and down 5.9% as we cycle off a stronger than usual performance in 1HFY23.
Continued strong EBITDA margin to revenue at 9.2%. EBITDA for the half of $20.0m (before significant items) was however down 28.3%, against 1HFY23 on the back of lower sales.
Operating expenses were well managed given the macro inflationary environment and were up 3.8%, however flat on a like for like basis, as the business continued to invest for future growth while maintaining prudent cost management across the group.
Continued improvements in operational efficiencies and disciplined cash management delivered a strong Balance Sheet, with Working Capital to Revenue ratio at 15.7% compared to 17.7% in pcp. EBITDA to Cash conversion at 98.0% in 1HFY24 compared to 74.9% in 1HFY23.
Ample capacity for future acquisitions with a gearing ratio of 13.6%. The Group is continuing to actively explore opportunities for value-accretive acquisitions.
An interim dividend of 5.5 cents per ordinary share fully franked was determined by the Board.
Investor presentation and some media coverage (Rask Investor NAOS) proposing BRI as a solid small cap dividend (fully franked at 50-70% of profits) share. SP has bounced around over the last 6 months. Presentation suggests lower results this year due to investment in the business.
Margins expected to be under pressure in the coming year. Alignment with our key partners and our supply chain diversity has us well positioned to mitigate.
We will continue to increase investment in the business over the coming year to deliver efficiencies, synergies and long-term growth.
• This will have a short-term impact but position the business for continued expansion.
• The daily sales run rate has been consistent over the past 6 months, this is expected to continue into 2HFY24.
Headlines
10-Dec-2020: CCZ Equities Research: Big River Industries (BRI): Acquisition consistent with growth strategy
Analyst: Raju Ahmed, email: [email protected], phone: +61 2 9238 8237
* Market capitalization assumes settlement of the Timberwood Group acquisition transaction by the end of March 2021.
Report:
--- click on the link at the top to view the full CCZ report on BRI ---