Summit Materials, one of biggest and fastest growing heavy-side construction materials companies in the US, went public last week. The provider of aggregates, concrete and asphalt paving services raised between $378-422 million through the issuance of 22.2 million shares and offered underwriters the option of purchasing 3,333,333 Class A shares within 30 days. Summit Materials (SUM), which will be listed on the NYSE, opened at $20.16 and was up almost 12% during the day. The Denver Colorado firm, backed by private equity giant Blackstone, says it intends to use the proceeds from the offering for a one time termination fee and to pay off senior debt obligations.
Market scope/Acquisition history
Summit Materials Inc was formed to acquire and consolidate small to medium sized construction material businesses (above) to create “a whole greater than the sum of its parts”. They supply aggregates (components used in the production of cement) cross country with a focus on Central/Southern states, and cement to the Midwest. Their five largest states by revenue are Texas, Kansas, Kentucky, Utah and Missouri representing 34%, 19%, 11%, 10% and 9% respectively.
The firm also uses the material internally, to manufacture ready-mixed concrete and paving mix which they subsequently sell or use in their paving businesses. This vertical integration also allows them to offer other downstream products and services, making them a single source provider to their customers (below).
Favorable Industry Trends
The National Association of Homebuilders has forecasted housing starts to grow 57% from 2013 to 2016. In addition, non-residential private construction is slated to increase 26%. Summit Materials derives much of their revenue from nonresidential construction, remodeling and repair, so this upward trend in private sector recovery, although not consistent across the United States, is a welcome sign for the company.
Another important source of income is from public infrastructure construction. SUM’s acquisitions up to date have been primarily in states where transportation funding sources are constitutionally protected. This allows the company to limit their exposure to local budgetary uncertainty and to increase the stability of their revenues. An important development in national infrastructure was the passing of the Highway Repairs bill in July of 2014 which will provide $10.8 million of funding until May 2015. This will create a steady stream of demand for paving materials.
Even though successor programs have not yet been approved, with the US’s rapidly aging infrastructure and dire need for additional funding (graph above), Summit Materials believe that US infrastructure spending will increase over the long term and consequently trickle down to their pocketbooks.
Financials: Healthy Growth
Summit Materials is one of the fastest growing construction materials companies in the US with their revenues almost doubling since 2010.
For the year ended December 27 2014, sales totaled $1.2 billion which is a 32% increase from 2013(above). This accelerated revenue growth is fueled by their acquisition intensive business model (34 acquisitions since 2009 with 8 coming from 2014 alone). Such an inorganic growth strategy comes at a cost, though, with the company accumulating $1.059 billion of long-term debt.
Even though Summit Materials execs have stated they will use the proceeds from the offering to pay off some of the long-term outstanding debt, the remaining amount is worrisome. If they were to use the $400 million entirely for debt retirement, that would still leave them with a debt to capital ratio of 67.3%, still more than 10% above the industry average of 56.47%.
In addition, the company has yet to turn a profit, incurring a net loss of ($6.3) million in 2014 which is a 94% improvement over the previous year. However, they have made strides in terms of reining in their primary expenses. Their COGS and G&A expenses as a percentage of Sales has fallen 5% in the past 2 years to 86% (below)
As a result their adjusted EBITDA has surged 75% to $161 million in 2014 and their EBITDA margin increased to 13.4% from 10% in 2013. With the positive future projection of the housing and construction market, we can expect these numbers to continue on their upward trajectory.
Potential Risk Factors
- Summit Materials depends heavily on the strength of the construction industry and local economies in which they operate, so any reduction in state infrastructure spending will directly affect the company.
- Their business is highly cyclical and as result they must maintain a certain level of working capital to operate.
- Being an acquisition focused company, they will incur all the risks that go with this type of strategy: inability to integrate acquired firm, become liable for certain liabilities of acquired company, increased pressure on operational and financial resources.
With the cash flow injection from the public offering, we can expect Summit Material to retire some of their debt and lower their financial leverage which comes as a relief considering their aggressive, capital heavy acquisition model.
Martin Marietta Materials (NYSE: MLM), the last major construction materials company that went public is up more than 70% since its IPO. A recovering housing market and a rebounding construction industry will increase demand for their SUM’s materials and aggregates. Coupled with their competent management and backed by an experienced and battle tested private equity firm, we can expect current trends to continue and for profits to increase. There is no reason why Summit Material can’t reach MLM post IPO returns in the same allotted time period.