Description
Leading roofing distributor. #2 player (20% share) where top 3 players have >50% market share. BECN has spent the past decade-plus rolling up smaller branches, in addition to two large acquisitions (RSG and Allied). During this consolidation phase, management had a singular mindset (growth), at the expense of profitability/margins/returns. Over the past 2 years, the combination of new management and cyclical tailwinds has driven a step-change in profitability to record margins. Some cyclical risks exists, but consensus assumes margins have peaked, despite some structural initiatives for future tailwinds. Most importantly, the Company is approaching its first opportunity to return meaningful capital to shareholders (I estimate BECN can reduce S/O by 30+% in the next few years), while the Company currently trades at trough valuation (8x EBITDA, 10% FCF yield). I see the potential for a $125 stock over 3 year period.
Industry Overview: $25b in annual sales. Industry has been consolidating for decades but remains fragmented on the local/regional level. BECN’s ~20% mkt. share only trails privately held ABC Supply’s ~24% mkt share. Industry is currently benefiting from record demand, but demand is reasonably inelastic - 80-90% of roofing demand is re-roofing (necessary maintenance required every ~20 years dependent on climate), the remainder is new construction.
Company Overview: BECN is the largest public wholesale distributor of roofing materials and complementary building products. The company runs a decentralized structure, where separate branches are given autonomy with pricing, sales, staffing, etc. and where profits are distributed to the branches accordingly.
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Roofing (78% of sales): ~60% residential/40% non-residential –10-year residential CAGR of 15% significantly outperforming ARMA industry growth of 2.6%. Non-residential roofing is growing at 10% CAGR. Primary customer base is contractors – distribution is handled by BECN through their fleet of ~1,800 trucks. ~99% of orders are fulfilled through existing inventory.
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Complementary Products (22% of sales): Complementary 10-year sales growth of 18% CAGR driven primarily by M&A (Allied acquisition in 2018 -> 174% increase in complementary products sales). Complementary products have larger residential exposure (80/20) and benefit from residential tailwinds accordingly.
New Management/Margins: Historically a poorly integrated roll-up, in 2019 BECN appointed Julian Francis (formerly division president at Owens Corning) as CEO and Frank Lonegro (formerly CFO at CSX) as CFO. Together they have done an impressive job turning around the business (and both have recently been purchasing stock). 27.6% gross margin vs. low 20’s prior to the pandemic, EBITDA margin approaching 10% vs. 5.9-8.7% L10Y, 300+ bps y/y. Margin improvement has benefitted from cyclical upcycle: numerous price increases ranging from 5-30%, positive mix, transitory inventory benefits, and mid-teen residential growth (>50% rev). Structural margin improvement is evident and still in the early innings.
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Underperforming Branches: $40m (+ $20m LY) of incremental operating profit is now expected in FY’21 from bottom quintile branches, exceeding the $30m expectation announced previously = 9% boost to FY’20 EBITDA.
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Digital Sales: 14% of sales, uses up 50%, accretive to margin (long term target = 30-50% of sales).
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On-Time and Complete (OTC) Network: Initiative to improve inventory availability and reduce cost to serve. Inventory to be reduced by $50-$100m (4.3-8.5% of inventory). Still in early innings (~50% of branches currently participating).
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Private Label: Up 30% y/y, accretive to GM.
Balance Sheet / Capital Allocation Potential: LY, BECN was >5x levered – strong cash flow and sale of non-core Interiors businesses has resulted in 2.4x leverage and should trend to 2x in the coming quarter/two. Leverage target is 2-3x and the Company is restarting some branch M&A (tuck-ins). CFO understands the importance of capital returns to S/H (was aggressive on buyback at CSX) and I think a detailed capital allocation plan will be disclosed at Analyst Day (early 2022). Below table assumes modest margin improvement (100 bps over 3 years) and that ~half of FCF is used for buyback (other half for M&A), while staying at 2.5x leverage. Even assuming the stock has a 30% IRR, BECN can retire 36% of S/O in the next 3 years, and assigning historical 10x EBITDA multiple = $125 stock
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
ANalyst Day