AZEK is an IPO that will price tomorrow and offers an asymmetric risk/reward with >140% upside. At the IPO mid-point, AZEK trades at a -52% discounted multiple to TREX, its closest competitor … but I believe AZEK should garner a very similar if not premium multiple to TREX as it has the same secular growth prospects + >500 bps margin opportunity with the recent investments made around recycling capabilities (AZEK is a couple years behind TREX on vertically integrating but the investments have been completed by AZEK). Assuming you can look out couple years, AZEK trades at an inexpensive multiple for its compounder characteristics: 1) strong competitive moat, 2) operating in a duopoly industry structure, 3) benefiting from l-term secular growth drivers (installed base is old and shifting to composite materials provided by TREX and AZEK), and 4) most importantly for AZEK vs TREX, AZEK uniquely has a >500 bps margin uplift story given investments recently completed driving bottom-line growth. Given these positive characteristics, a comparable multiple to TREX is warranted (if not a premium) driving a $45 - $50+/ share FV versus IPO mid-pt price of $20 / share (>140% upside). If TREX multiple gives investors pause as overly-reliant on a 3-year forward perspective, its also worth highlighting an attractive aspect to this investment is going long AZEK and short TREX and letting the multiples compress closer to each other ... pairing AZEk long w/ TREX short (liquid ~$7Bln market cap) is an attractrive way to buy AZEK trading at ~14x 1-year forward EBITDA and shorting TREX trading at closer to ~30x 1-year forward EBITDA.
AZEK operates in a 1) rational duopoly industry structure with strong barriers to entry (TREX is the primary composite decking competitor), 2) AZEK product categories have durable secular growth tailwinds that should drive sustainable high single / low double digit top-line growth (>57MM installed decks w/ >50% beyond useful life w/ vast majority of installed base being traditional wood which is market share donor to composite decking, i.e. AZEK / TREX), 3) resilient end-market characteristics as >95% is R&R related (March-April data points on mid-single digit growth highlight the resilience) and a highly variable cost structure, 4) attractive FCF characteristics (AZEK has made significant upfront capital investments around recycling which will start to normalize over the next 24-months, capex as % of sales will fall below XX%), and 4) AZEK plays well into the current environment where homeowners will likely increasingly focus on home-related outdoor living projects + repairs and which could lead to a n-term growth acceleration.
Proceeds from the IPO will be used to pay down debt and the resulting balance sheet for AZEK is modestly leveraged at <3x on FYE Sep 20E EBITDA and closer to ~2.5x on FYE Sep 21E. As noted below, assuming 1) ~10% top-line growth driven by wood to composite conversion, secular growth, new products, channel growth and 2) mid-teens bottom-line growth driven by volume growth + recycling integration >500 bps margin over time = AZEK trades for attractive multiples couple years out (high single / low double digit % FCF yield, <9x EBITDA, <10x unleveraged FCF and <14x PE).
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
IPO pricing tomorrow, sell-side research roll-out in next 45-days, KPIs over the next 6 - 12 months (positive growth even during the Feb - May period)