Ameron International AMN W
June 13, 2007 - 2:29pm EST by
britt12
2007 2008
Price: 77.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 706 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

  • A

Ameron International represents an opportunity to buy a portfolio of niche industrial businesses trading for a significant discount to their sum of the parts value with rich underlying net asset value that provides considerable downside protection. The Company’s businesses are diversified across end use markets by product, industry and geography, with each segment providing identifiable long term competitive advantages. In addition, with $56 million of net cash, the Company is considerably underutilizing its asset rich balance sheet, and further financial leverage would provide even greater upside.

 

Business Overview:

Ameron (ticker: AMN on NYSE) is a multinational manufacturer of highly-engineered products and materials for the chemical, industrial, energy, transportation, water, wind, and infrastructure markets.  AMN is a leading producer of fiberglass composite pipe for transporting oil, chemicals, and corrosive fluids; water transmission lines for the conveyance of fresh and wastewater, and aggregates used in infrastructure development projects within Hawaii.  Ameron’s product portfolio also includes wind tower fabrication and a 50% ownership interest in TAMCO, a steel mini-mill located in California.

 

I. Fiberglass-Composite Pipe Segment (~1/3 of Consolidated Revenues):

Ameron manufacturers the world’s most comprehensive line of fiberglass-composite pipes under names such as Bondstrand, Dualoy, PSX, and Centron.  These applications are used in chemical processing and transportation, power generation, industrial, oilfield, fuel handling, offshore and marine markets.  In essence, the Fiberglass-Composite Pipe segment serves as an alternative to metallic piping systems which ultimately fail under corrosive conditions.  The key differentiating characteristics of fiberglass composite pipe vs. steel pipe are its ability to function properly in extreme operating environments, superior strength to weight ratio, nonconductive nature, and infinite lifespan.  Given the rising price and short replacement cycle of steel pipe (in some cases less than five years), coupled with higher transportation and installation costs, the economics of the fiberglass market relative to steel are extremely attractive.  The segments two biggest end markets, offshore oil drilling (platforms and pipelines, ~50% of segment revenues) and marine tanker shipping, sport sizable, multi-year backlogs and all indications are that robust growth should continue in the future.  Within the marine tanker segment, the substantial increase in tanker weight caused from the shift in production from single hull to double hull tankers has driven the demand for fiberglass frame and pipe higher in order to substitute heavy steel for lighter weight fiberglass components.

 

The Fiberglass segment generated $186MM in LTM revenue, approximately 1/3 of AMN’s consolidated sales.  The segment’s compounded annual revenue growth over the past 5 years is 11%, driven by strong demand across the aforementioned end markets.  The segment’s EBITDA margins, currently 22%, should continue to increase given AMN’s strong competitive position within the industry (market share estimated to be greater than 80% for certain applications) and significant pricing power.  A summary of the segments historical operating performance is as follows:

Fiberglass-Composite Pipe:            
($, 000's) 1996 1997 1998 1999 2000 2001
Sales: $104,070 $102,690 $105,633 $95,524 $103,066 $106,872
YoY Sales Growth %: -1.3% 2.9% -9.6% 7.9% 3.7%
EBIT: $10,052 $12,293 $14,211 $12,055 $15,963 $12,125
EBIT Margin %: 9.7% 12.0% 13.5% 12.6% 15.5% 11.3%
EBITDA: $13,856 $15,999 $17,833 $15,656 $19,499 $15,899
EBITDA Margin %: 13.3% 15.6% 16.9% 16.4% 18.9% 14.9%
   
% AMN Consolidated Sales: 29.4% 30.0% 31.2% 27.6% 28.3% 29.5%
   
   
($, 000's) 2002 2003 2004 2005 2006 LTM
Sales: $88,393 $114,613 $116,289 $134,071 $176,721 $186,638
YoY Sales Growth %: -17.3% 29.7% 1.5% 15.3% 31.8% 29.4%
EBIT: $10,862 $21,881 $21,429 $24,482 $37,804 $41,004
EBIT Margin %: 12.3% 19.1% 18.4% 18.3% 21.4% 22.0%
EBITDA: $14,864 $25,821 $25,544 $28,552 $42,489 $40,677
EBITDA Margin %: 16.8% 22.5% 22.0% 21.3% 24.0% 21.8%
   
% AMN Consolidated Sales: 24.8% 27.9% 28.6% 27.1% 32.2% 34.3%
*Consolidated sales excludes revenue generated from AMN's formerly owned Coatings Business.      

Ameron

Fiberglass-Composite Pipe ($, 000's):
5 Year Sales CAGR: 10.6%
10 Year Sales CAGR: 5.4%
LTM EBITDA: $40,677
5 Year Average EBITDA: $27,454
10 Year Average EBITDA: $22,216
5 Year Average EBITDA Margin %: 21.3%
10 Year Average EBITDA Margin %: 18.9%
Year End '06 Backlog: $51,310
Backlog YoY% Change: 18.7%
 
II. Water Transmission Segment (~1/3 of Consolidated Revenues):

Ameron is an industry leader in the manufacture and supply of large-diameter (>12 ft.) concrete and steel pipe products for high-pressure water and wastewater conveyance primarily within the Southwestern United States.  Typical projects include large scale water transmission and distribution lines, aqueduct siphons, and sewer infrastructure.  Ameron markets its products within the segment to local/state/federal agencies, municipalities, real estate developers and contractors from production facilities located in Southern California, Arizona and Mexico.  Since the delivery and transportation of large-diameter water piping is economical to only 500 miles, Ameron’s optimal geographic footprint and proximity to the water scarce, arid Southwest places them in a strong competitive position.  Booming migratory population trends within Ameron’s geographic landscape, exemplified by the fact that Arizona and Nevada rank #1 and #2, respectively, in population growth, and #49 and #50 in annual precipitation, are straining the already limited freshwater resources available to local populations.  California, one of Ameron’s largest end-markets, is projected to add 5 million people from 2000-2010.  The combination of these factors has served as an impediment to regional economic growth (i.e. a developers inability to secure water rights in order to develop real estate) and has brought the issue of water scarcity to the forefront of government organizations, scientific and environmental communities, and the general public.  Ameron is poised to benefit from elevated water-related infrastructure spending at the federal, state and local level. 

 

Ameron’s water-infrastructure and transmission business is characterized by pronounced cyclical swings and lumpy cash flow generation driven by the timing of large-scale water related infrastructure project activity.  As evidenced by the segments recent operating performance, Ameron’s water transmission business has been trending downward since late 2005 when it generated $29.8MM in EBITDA to the current trough and LTM EBITDA generation of $1.3MM.  Management has indicated that it sees an inflection point in bidding activity occurring during mid-07’, driven by several large-scale projects planned in Southern California and Nevada.  In late April, California Governor Arnold Shwarzenegger announced a $6B proposal aimed at improving water storage, conveyance and infrastructure systems.  Additionally, Nevada is moving ahead with a massive pipeline project intended to extract groundwater from the central part of the State to Clark County (home of Las Vegas).  We believe Ameron’s inevitable emergence from the recent cyclical trough provides an opportunity for significant earning power going forward.  The segments average annual EBITDA over the past five years is $24.2MM, and past ten years is $25.2MM.  With the recent increase in bidding activity, water-related bond issuance in AZ, NV and CA and announced capital spending initiatives coming to fruition over the next year and a half, we expect Ameron’s water division to return to at least its normalized historical operating performance over the next two fiscal years. 

Water Transmission:            
($, 000's) 1996 1997 1998 1999 2000 2001
Sales: $148,952 $146,069 $131,633 $142,468 $149,384 $143,226
YoY Sales Growth %: -1.9% -9.9% 8.2% 4.9% -4.1%
EBIT: $17,936 $15,172 $19,475 $23,022 $23,083 $29,011
EBIT Margin %: 12.0% 10.4% 14.8% 16.2% 15.5% 20.3%
EBITDA: $22,008 $19,107 $23,559 $27,022 $27,733 $33,221
EBITDA Margin %: 14.8% 13.1% 17.9% 19.0% 18.6% 23.2%
   
% AMN Consolidated Sales: 42.1% 42.6% 38.9% 41.2% 41.1% 39.5%
   
($, 000's) 2002 2003 2004 2005 2006 LTM
Sales: $145,024 $165,497 $154,231 $192,731 $174,986 $161,398
YoY Sales Growth %: 1.3% 14.1% -6.8% 25.0% -9.2% -19.7%
EBIT: $27,347 $26,634 $13,458 $25,845 $7,577 $1,548
EBIT Margin %: 18.9% 16.1% 8.7% 13.4% 4.3% 1.0%
EBITDA: $31,507 $30,758 $17,435 $29,755 $11,577 $1,265
EBITDA Margin %: 21.7% 18.6% 11.3% 15.4% 6.6% 0.8%
   
% AMN Consolidated Sales: 40.7% 40.3% 38.0% 39.0% 31.9% 29.7%
*Consolidated sales excludes revenue generated from AMN's formerly owned Coatings Business.      
Water Transmission ($, 000's):  
5 Year Sales CAGR: 4.1%
10 Year Sales CAGR: 1.6%
LTM EBITDA: $1,265
5 Year Average EBITDA: $24,206
10 Year Average EBITDA: $25,167
5 Year Average EBITDA Margin %: 14.7%
10 Year Average EBITDA Margin %: 16.5%
Year End '06 Backlog1: $183,802
Backlog YoY% Change:   42.1%
1. Includes $97.1MM of orders for wind towers
 

III. Infrastructure Products Segment (~1/3 of Consolidated Revenues):

Ameron’s Infrastructure Products Group consists of two divisions: (1) construction aggregates and (2) concrete/steel poles used in a wide array of lighting applications.  The Company does not break out revenues or operating income attributable to each unit within the segment, but management indicated to us that segment revenues consist of approximately 50% construction aggregates and 50% poles products.  Operating and EBITDA margins are similar across each unit.

 

Ameron’s Construction Aggregates unit operates exclusively in Hawaii’s two principal islands of Oahu and Maui.  The Company mines and operates the largest aggregate quarry in the state of Hawaii, one of only two quarries of any scale in the State.  The mine supplies ready-mix concrete, crushed and sized basaltic aggregates, dune sand and concrete pipe to the construction industry in Hawaii.  Sales of aggregates are made directly to contractors in the commercial, governmental, industrial, residential and military construction markets.  Ameron owns the exclusive right to mine and extract aggregates from their principal quarry on Oahu through 2052, at which point the mining license may be renewed at undisclosed terms.  The mine contains the highest grade basaltic rock (aggregate) in all of Hawaii.  The lack of competing permitted quarries and readily available construction aggregates on the island, coupled with Ameron’s proximity to project sites create a huge competitive advantage for the Company.  Additionally, Ameron is protected from mainland and overseas competition due to the extreme weight of most construction aggregates and the substantial transportation costs that would be incurred to ship the rock to Hawaii.  

 

The most significant risk faced by Ameron’s aggregate division is its raw exposure to the Hawaiian economy, in particular that of the commercial and industrial construction market.  Hawaii’s population growth and GDP per capita are somewhat similar to those of mainland averages, but construction activity is driven by tourism to the State.  We found private building permits in the State to be the best indicator of construction trends in Hawaii, which are reported monthly and made available to the public.  The total value of authorized private building permits has risen from $1B in 1998 to ~$3.8B at year-end 2006, yielding a CAGR >20%.  While a softening in building activity is inevitable at some point in the future, all indications are for continued growth in the construction market going forward.  Hawaii’s low correlation with broad economic trends on the mainland should dampen any ripple effects from the nationwide housing slowdown. 

 

Ameron’s Pole Products Division produces and supplies concrete street-lighting poles and bollards along with steel traffic and lighting poles to customers throughout the U.S.  This division operates manufacturing facilities in California, Washington, Oklahoma and Alabama.  Major end-markets include airports, parks, stadiums, parking lots, residential (decorative lighting) and commercial construction.  The Pole Products Division is the largest manufacturer of decorative, spun-cast, and prestressed concrete street-lighting poles in the United States.  Despite some exposure to the “decorative” residential lighting pole market, the division’s sales and operating income rose during 1Q07 vs. 1Q06 driven by favorable commercial, civil and industrial markets.  Management recently indicated that the outlook remains “generally favorable” for this division going forward, and that pure residential real estate exposure is limited.

Infrastructure Products:            
($, 000's) 1996 1997 1998 1999 2000 2001
Sales: $101,794 $94,858 $102,066 $105,559 $112,105 $113,824
YoY Sales Growth %: 7.6% 3.4% 6.2% 1.5%
EBIT: $10,680 $9,919 $10,721 $17,155 $17,666 $13,089
EBIT Margin %: 10.5% 10.5% 10.5% 16.3% 15.8% 11.5%
EBITDA: $15,167 $14,119 $14,897 $21,155 $22,316 $17,387
EBITDA Margin %: 14.9% 14.9% 14.6% 20.0% 19.9% 15.3%
   
% AMN Consolidated Sales: 28.8% 27.7% 30.2% 30.5% 30.8% 31.4%
   
($, 000's) 2002 2003 2004 2005 2006 LTM
Sales: $123,610 $130,493 $136,312 $168,990 $198,177 $197,074
YoY Sales Growth %: 8.6% 5.6% 4.5% 24.0% 17.3% 9.6%
EBIT: $17,019 $15,509 $14,519 $22,127 $30,607 $30,471
EBIT Margin %: 13.8% 11.9% 10.7% 13.1% 15.4% 15.5%
EBITDA: $21,386 $19,891 $19,026 $26,571 $35,116 $30,126
EBITDA Margin %: 17.3% 15.2% 14.0% 15.7% 17.7% 15.3%
   
% AMN Consolidated Sales: 34.7% 31.8% 33.6% 34.2% 36.1% 36.3%
*Consolidated sales excludes revenue generated from AMN's formerly owned Coatings Business.      

 

Infrastructure Products ($, 000's):
5 Year Sales CAGR: 11.7%
10 Year Sales CAGR: 6.9%
LTM EBITDA: $30,126
5 Year Average EBITDA: $24,398
10 Year Average EBITDA: $21,186
5 Year Average EBITDA Margin %: 16.0%
10 Year Average EBITDA Margin %: 16.5%
Year End '06 Backlog: $34,866
Backlog YoY% Change:   15.4%

 
IV. Joint Ventures

Ameron has investments in three separate Joint Ventures: (1) TAMCO—50%, (2) Ameron Saudi Arabia—30%, and Bondstrand, LTD—40%.  We will focus mainly on TAMCO, its equity and income contribution to Ameron, and its valuation in this section.  We value Ameron’s other two joint venture investments at cost, collectively carried at $3.8MM on their balance sheet.  

 

TAMCO is Ameron’s principal joint-venture.  The Company recycles and processes ferrous scrap metal into reinforcement bar (rebar).  They own 50% of the entity, accounted for under the equity method, with the remaining ownership being held by Tokyo Steel (25%) and Mitsui & Co. (25%).  TAMCO operates the only steel rebar mini-mill in California, serving the infrastructure markets in Arizona, California, and Nevada for projects like bridges, roads, freeways, buildings, parking garages, and other concrete structures.  For example, TAMCO has been the largest supplier of rebar to Las Vegas for decades, and continues to supply most new infrastructure and commercial development within the city.  They are the direct beneficiary of the rigorous regulatory and environmental permitting hurdles for steel manufacturers in California, effectively positioning them as the only game in town for rebar manufacturing.  The significant barriers to entry and regional market dominance are an often overlooked competitive advantage for the Company. 

 

TAMCO was valued on Ameron’s balance sheet at $20.7MM as of the Company’s most recent 10Q (2/25/07).  Given the fact that TAMCO has historically generated annual net income of nearly as much as the JV’s carrying value, the entity’s fair market value is clearly understated on Ameron’s balance sheet.  It’s also worth noting that the partnership has historically paid out at least 90% of its earnings in dividends. We value AMN’s ownership in TAMCO using a blended average of two methodologies: a multiple of EBITDA based approach and an EV/Ton approach.  Our multiples are derived from the North American Mini-Mill peer group.  The seven constituents of our peer group trade at an average EV/EBITDA of 6.8X and an EV/ton of capacity of $1,083.  Our Peer Group is comprised of the following tickers: CHAP, PLTE, CMC, GNA, IPS, NUE, and STLD.  The table below summarizes our estimates of TAMCO’s fair market value net to Ameron:

($, 000's) Operating Performance
TAMCO  
LTM ending 2/25/07 LTM FY2006 FY2005 FY2004
Net Sales: $298,389 $273,036 $252,435 $215,849
Gross Profit: $78,024 $61,336 $42,188 $45,885
EBITDA (Est.): $59,976 $47,781 $29,535 $35,183
Net Income: $40,154 $30,559 $20,391 $23,427
   
Shareholders Equity $54,336 $44,741 $43,295  
Gross Profit Margin 26.1% 22.5% 16.7% 21.3%
EBITDA Margin (Est): 20.1% 17.5% 11.7% 16.3%
Profit Margin 13.5% 11.2% 8.1% 10.9%
   
Net to AMN (50% Ownership) Multiple Derived Valuation
TAMCO  
AMN EBITDA (Est.) $29,988 $23,891 $14,767 $17,592
AMN Earnings $20,077 $15,280 $10,196 $11,714
Multiple of EBITDA: 6.8X  
FMV of TAMCO to AMN (50% owned): $203,919  
   
  Capacity Derived Valuation
Annual Production Capacity: 500,000  
N.A. Mini-Mill EV/Ton Peer Group Avg: $1,000  
FMV of TAMCO to AMN (50% owned): $250,000  
   
Blended Average FMV to AMN: $226,960  
         
 
One point worth noting is our estimate of TAMCO’s 20.1% EBITDA margin.  The company does not disclose TAMCO’s EBITDA or associated margin within their consolidated financial statements, but based on our margin analysis of the peer group and extensive conversations with management, we feel comfortable with our estimate and believe it to be conservative.  Our blended average fair market value estimate of ~$227MM for TAMCO net to AMN fits within management’s estimate of $200MM-$250MM.  Relative to its carrying value (~$20.2MM), we believe AMN’s investment in TAMCO represents a significant source of hidden and unrecognized asset value for the Company.  Additionally, management recently indicated to us that TAMCO’s run rate of net income over the next year should surpass the $20MM it generated over the last twelve months, as demand and pricing power continues to remain strong in the near term.  All things considered, we believe this segment could be worth north of $25.00/share.
 

V. Wind Energy Segment: (Component of Water Transmission Group)

During late 2005, Ameron made the strategic decision to retrofit an existing steel pipe manufacturing facility located in Northern California and convert it into a wind tower steel fabrication facility for the production of wind tower poles.  Management was astute to recognize wind tower fabrication as a logical and synergistic market opportunity leveraging the Company’s operational expertise in highly engineered pipe/pole manufacturing.  Wind tower poles vary in size and can be as tall as 300 ft. in length and over 20 ft. in diameter.

 

Wind Power currently supplies less than 1% of the nation’s electricity.  However, President Bush has recently called for the Nation to increase its total dependency on wind energy to 20% by 2020.  While I won’t speculate on whether we achieve the President’s slated target, significant sums of capital are currently being deployed to develop wind farms in the United States.  For the second year in a row, the U.S. installed more wind power capacity than any nation in the world (>2,500 MW).  New wind power generating capacity worth $4B was installed in the U.S. during 2006, and this figure is projected to increase substantially over the next decade.

 

To date, Ameron has spent ~$26MM to retrofit their wind tower fabrication facility.  After minor production delays in 1Q 07, production has now commenced, and management expects to achieve full-scale commercial production later this fiscal year.  The company is expecting gross margins to be north of 20%, and EBIT margins >15% at full utilization.  Backlog for wind towers grew exponentially year-over-year, from $1.5MM in 2005 to $97.1MM in 2006.  Management expects to turn at least 80% of their backlog over the next twelve months, driven primarily by orders from GE, Mitsubishi and Siemens.  We think this segment should conservatively generate at least $8MM in EBITDA over the next year, and management believes that current order flow is sustainable going forward based on conversations with existing customers (GE, Mitsubishi, Siemens).  The market seems to be unfairly penalizing AMN’s water segment while the wind tower division’s expense ramp-up is artificially depressing water segment margins (where this segment is currently consolidated), while at the same time giving the Company no credit for any potential incremental earnings power generated from the wind business.  The lack of identifiable pure-play comps engaged in wind tower fabrication makes relative valuation challenging for this segment.  Ameron’s closest competitor in this segment is a division of Trinity Industries, Inc. (Ticker: TRN), a company better known for railcar manufacturing and leasing.  Trinity entered the wind tower fabrication market during late 03’, and revenues within this segment grew from $11MM in 2004 to $130MM in 2006 (07’ consensus estimates are for >$220MM in revenues during 07’).  While Trinity does not disclose specific wind tower fabrication margins in their financial statements, we believe our margin assumptions for AMN are well below Trinity’s implied margins.

 
VI. Valuation

At the time of this writing, AMN trades for approximately $77.00/share, has 9.17MM shares outstanding and a fully diluted market cap of $706MM, $56.4MM in net cash on the balance sheet and an enterprise value of $650MM.  The Company’s LTM EBITDA from continuing operations was $64.8MM, and inclusive of TAMCO’s estimated $30MM in EBITDA, the consolidated enterprise generated $94.8MM in EBITDA over the last twelve months, despite a sub-par year for the water business.  At its current EV/EBITDA multiple of 6.8X, 1% dividend yield, LTM P/E of 12X and ~9.0% FCFE yield, AMN appears cheap on a trailing basis.  Additionally, if we factor in the substantial forward earnings power potential of the wind and water businesses, we believe Ameron’s valuation becomes even more compelling.  If we make the realistic assumption that AMN’s water business emerges from its current cyclical trough and  generates a normalized $24MM of EBITDA, and include the incremental $8MM of EBITDA from the newly created wind tower business, AMN’s consolidated EBITDA increases $32MM to ~$127MM (EV/EBITDA of 5X) and FCFE increases from $61MM to $84MM (12.0% FCFE Yield).  We believe both of our assumptions are easily attainable and should be achieved over the next two fiscal years.  Keep in mind that we are not factoring in any incremental growth in our forward estimate of EBITDA from any of AMN’s other underlying operating segments, despite their commendable historical growth rates and favorable market conditions today.  If we include conservative growth rates for Ameron’s remaining operating segments, we believe the Company could generate north of $160MM in EBITDA going forward (EV/EBITDA of 4X).

 

As an alternative valuation methodology, we like to evaluate AMN’s business within a sum-of-the parts framework, giving some consideration to an inevitable upturn in the Water Transmission Group’s operations and the emergence of the Wind Tower Fabrication Segment.  Below is a summary of our analysis:

($, 000's)
Sum of Parts Analysis:
Fiberglass Composite Pipe Segment:  
LTM EBITDA: Multiple FMV ($, 000's)
$40,677 9.0x $366,091
   
Water Trasmission Group:  
5 Yr Avg. EBITDA: Multiple FMV ($, 000's)
$24,206 9.0x $217,858
   
Infrastructure Products Group:  
LTM EBITDA: Multiple FMV ($, 000's)
$30,126 10.0x $301,258
   
Wind Pole Group:  
Forward EBITDA: Multiple FMV ($, 000's)
$8,000 9.0x $72,000
   
TAMCO: $226,960
   
Sum of Parts: $1,184,167
Less 8x Corp. Overhead: ($216,000)
Enterprise Value: $968,167
Less Net Debt (+Net Cash): ($56,457)
Market Value of Equity: $1,024,624
Shares Outstanding: 9,173
Equity Value/Share:   $111.70
 

We view our sum-of-the parts analysis as conservative.  An analysis of various pure play comps or businesses focused within the same industries as AMN provides some validation.  For example, Northwest Pipe Co (Ticker: NWPX), a close competitor to AMN’s water transmission segment, is geographically positioned in less favorable markets yet trades at ~10X LTM EBITDA.  Hanson Plc (Ticker: HNS LN on Bloomberg), a major provider of large-diameter water transmission products in the U.S. (along with aggregate production in Europe) and a close competitor of AMN was recently acquired for 12.5X TTM EBITDA by German industrial conglomerate HeidelbergCement.  The rich trading/take-out multiples evident in today’s market for industrial conglomerates similar in profile to AMN underscores our view that the Company trades well below intrinsic value.  Another point worth mentioning is Ameron’s excessive corporate overhead expenditures.  Our analysis of U.S. domiciled small-cap industrial conglomerates yields an average corporate overhead expense as a percent of sales of 1.9%, versus Ameron’s 5%.  If AMN were able to achieve the peer group average, our sum-of-the parts value would increase 13% to $126/share. 

 

With $56MM in net cash currently in the bank, AMN’s balance sheet is substantially overcapitalized when taking into consideration their ROIC, current and potential borrowing rates, and free cash flow generation.  By adding incremental leverage through new debt issuance (shown as a multiple of Debt/EBITDA), AMN has the potential to significantly increase their free cash flow to equity yield by using the proceeds to repurchase stock.  In the analysis below, we assume Ameron uses their current net cash balance and the incremental debt proceeds to repurchase stock at $77.00/share, the stock price at the time of this writing.  As shown in the table below, if AMN were to solely use their current net cash balance to repurchase shares, and not add any incremental debt, their LTM free cash flow to equity yield would be 9.3%.  If we assume that the water and wind businesses generate our estimate of forward FCFE, this yield would increase to 12.5%.  Adding incremental leverage to repurchase additional shares would result in a dramatic increase to AMN’s free cash flow yield to equity (i.e. ROIC > Incremental Cost of Debt):

Additional Debt Capacity/Share Repurchase Analysis:
   
Leverage Factor Current Net  LT Debt Est. Interest Interest Proceeds Available Current Shares Shares Repurchased
Debt/EBITDA Multiple: Debt (Cash)  Out ($MM) Rate (%)1: Expense ($MM): to Repo Stock Out (MM) @ $77/share(MM)
0X ($56.4) $0.0 NM $0.4 $56.4 $9.2 $0.7
2X ($56.4) $129.6 7.0% $9.1 $186.0 $9.2 $2.4
4X ($56.4) $259.2 8.0% $20.7 $315.6 $9.2 $4.1
6X ($56.4) $388.7 9.0% $35.0 $445.2 $9.2 $5.8
Leverage Factor Shares Out Market Value LTM  LTM EBDA less Maintenance LTM LTM FCFE
Debt/EBITDA Multiple: Post Repo of Equity ($MM): EBDA ($MM): Incremental Int. Exp Cap Ex ($MM): FCFE ($MM): Yield (%)
0X 8.4 649.7 71.1 70.7 10.0 60.7 9.3%
2X 6.8 520.3 71.1 62.0 10.0 52.0 10.0%
4X 5.1 390.7 71.1 50.4 10.0 40.4 10.3%
6X 3.4 261.1 71.1 36.1 10.0 26.1 10.0%
Incremental Water & Wind FCFE Analysis
Leverage Factor LTM + Water Forward + Wind Forward  Incremental Forward FCFE FCFE ROIC%4
Debt/EBITDA Multiple: FCFE ($MM): FCF Estimate2 FCF Estimate3 Maintenance CapEx Estimate: Yield (%) (Blue Book)
0X $60.7 $17.0 $5.6 $2.0 $81.3 12.5% 16.7%
2X $52.0 $17.0 $5.6 $2.0 $72.6 14.0% 16.7%
4X $40.4 $17.0 $5.6 $2.0 $61.0 15.6% 16.7%
6X $26.1 $17.0 $5.6 $2.0 $46.7 17.9% 16.7%
1. Borrowing costs are based on prevailing market lending rates
2. Assumes Water business earns 5Yr Average EBITDA
3. Assumes Wind business turns $80MM of $100MM backlog during FY08' at 10% EBITDA margin.  
4. Only includes EBIT from trailing twelve months continuing operations. 
Does not include operating income from TAMCO.  

 

Finally, Ameron has considerable downside protection in the form of hidden asset value, real estate, and replacement value. After adjusting for under-reflected pension liabilities, AMN currently trades at 2.2X tangible book value/share.  However, in replacing TAMCO’s (AMN’s 50% joint venture) current carrying value on the balance sheet of $20.2MM with a more realistic fair market value of $230MM (derived in detail above), AMN’s adjusted book value per share increases to $53.00 (P/Adj.book of 1.4X).  Additionally, the Company owns several parcels of extremely valuable, under-utilized real estate in Southern California and Phoenix that are on the books for well below fair value and could realistically be monetized without affecting the operations of the underlying business.  Management estimates that the replacement value of all their facilities is worth at least 2X net PP&E (not including land values), and altogether, we believe AMN trades well below the replacement value of its net assets.

 
VII. Other Factors to Consider:
Throughout our diligence process, we found ourselves continually asking each other why a business like AMN was trading at such a discount to our estimate of fair market value.  Some of the reasons we came up with include the following:

·         The Company does not host earnings conference calls or participate in investor conferences

·         AMN does not have a dedicated or centralized Investor Relations Department, and  management is notorious for being impossible to get a hold of

·         There is limited sell side coverage (one boutique sell-side firm currently covers the stock)

·         The Company is being unfairly penalized by the market for its perceived exposure to the residential real estate market.

·         Wind Tower division’s production delays and expense ramp-up ahead of commercial production is artificially depressing true water segment margins (wind tower business is lumped within water transmission segment)

 

Some may view AMN’s poor shareholder communication as a negative, but we tend to view it as an opportunity for the Company to broaden their market recognition and exposure in the institutional marketplace.  While we are accustomed to poor shareholder communication in heavily insider controlled public companies, we were surprised to discover that Senior Officers and Directors (collectively “insiders”) currently own only 1.5% of the outstanding stock.

 

VIII. Conclusion:

Ameron International is a significantly under-followed, mis-priced security trading at a steep discount to its fair market value.  While the majority of the Company’s core operating segments are growing at attractive double-digit rates of revenue with stable and/or increasing margins, a meaningful component of our thesis relates to the segments that are either at a cyclical trough (Water Transmission Group) or just commencing production (Wind Pole Fabrication Segment).  Inclusive of the Company’s consolidated future earnings power, AMN trades at less than 5X forward EBITDA (>12% FCFE Yield) while also hosting considerable downside protection based on our appraisal of tangible net asset value.  Finally, if the Company appropriately utilizes its highly leveragable assets and funds a significant share repurchase program, this would provide even greater upside. 

Catalyst

*Water Transmission Group's emergence from cyclical trough & future earnings power

*Ramp-up of Wind Tower Fabrication Division & future earnings power

*Incremental leverage and subsequent share repurchase program

*Enhance market recognition via implementation of clear mgmt/shareholder communication channels
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    Description

    • A

    Ameron International represents an opportunity to buy a portfolio of niche industrial businesses trading for a significant discount to their sum of the parts value with rich underlying net asset value that provides considerable downside protection. The Company’s businesses are diversified across end use markets by product, industry and geography, with each segment providing identifiable long term competitive advantages. In addition, with $56 million of net cash, the Company is considerably underutilizing its asset rich balance sheet, and further financial leverage would provide even greater upside.

     

    Business Overview:

    Ameron (ticker: AMN on NYSE) is a multinational manufacturer of highly-engineered products and materials for the chemical, industrial, energy, transportation, water, wind, and infrastructure markets.  AMN is a leading producer of fiberglass composite pipe for transporting oil, chemicals, and corrosive fluids; water transmission lines for the conveyance of fresh and wastewater, and aggregates used in infrastructure development projects within Hawaii.  Ameron’s product portfolio also includes wind tower fabrication and a 50% ownership interest in TAMCO, a steel mini-mill located in California.

     

    I. Fiberglass-Composite Pipe Segment (~1/3 of Consolidated Revenues):

    Ameron manufacturers the world’s most comprehensive line of fiberglass-composite pipes under names such as Bondstrand, Dualoy, PSX, and Centron.  These applications are used in chemical processing and transportation, power generation, industrial, oilfield, fuel handling, offshore and marine markets.  In essence, the Fiberglass-Composite Pipe segment serves as an alternative to metallic piping systems which ultimately fail under corrosive conditions.  The key differentiating characteristics of fiberglass composite pipe vs. steel pipe are its ability to function properly in extreme operating environments, superior strength to weight ratio, nonconductive nature, and infinite lifespan.  Given the rising price and short replacement cycle of steel pipe (in some cases less than five years), coupled with higher transportation and installation costs, the economics of the fiberglass market relative to steel are extremely attractive.  The segments two biggest end markets, offshore oil drilling (platforms and pipelines, ~50% of segment revenues) and marine tanker shipping, sport sizable, multi-year backlogs and all indications are that robust growth should continue in the future.  Within the marine tanker segment, the substantial increase in tanker weight caused from the shift in production from single hull to double hull tankers has driven the demand for fiberglass frame and pipe higher in order to substitute heavy steel for lighter weight fiberglass components.

     

    The Fiberglass segment generated $186MM in LTM revenue, approximately 1/3 of AMN’s consolidated sales.  The segment’s compounded annual revenue growth over the past 5 years is 11%, driven by strong demand across the aforementioned end markets.  The segment’s EBITDA margins, currently 22%, should continue to increase given AMN’s strong competitive position within the industry (market share estimated to be greater than 80% for certain applications) and significant pricing power.  A summary of the segments historical operating performance is as follows:

    Fiberglass-Composite Pipe:            
    ($, 000's) 1996 1997 1998 1999 2000 2001
    Sales: $104,070 $102,690 $105,633 $95,524 $103,066 $106,872
    YoY Sales Growth %: -1.3% 2.9% -9.6% 7.9% 3.7%
    EBIT: $10,052 $12,293 $14,211 $12,055 $15,963 $12,125
    EBIT Margin %: 9.7% 12.0% 13.5% 12.6% 15.5% 11.3%
    EBITDA: $13,856 $15,999 $17,833 $15,656 $19,499 $15,899
    EBITDA Margin %: 13.3% 15.6% 16.9% 16.4% 18.9% 14.9%
       
    % AMN Consolidated Sales: 29.4% 30.0% 31.2% 27.6% 28.3% 29.5%
       
       
    ($, 000's) 2002 2003 2004 2005 2006 LTM
    Sales: $88,393 $114,613 $116,289 $134,071 $176,721 $186,638
    YoY Sales Growth %: -17.3% 29.7% 1.5% 15.3% 31.8% 29.4%
    EBIT: $10,862 $21,881 $21,429 $24,482 $37,804 $41,004
    EBIT Margin %: 12.3% 19.1% 18.4% 18.3% 21.4% 22.0%
    EBITDA: $14,864 $25,821 $25,544 $28,552 $42,489 $40,677
    EBITDA Margin %: 16.8% 22.5% 22.0% 21.3% 24.0% 21.8%
       
    % AMN Consolidated Sales: 24.8% 27.9% 28.6% 27.1% 32.2% 34.3%
    *Consolidated sales excludes revenue generated from AMN's formerly owned Coatings Business.      

    Ameron

    Fiberglass-Composite Pipe ($, 000's):
    5 Year Sales CAGR: 10.6%
    10 Year Sales CAGR: 5.4%
    LTM EBITDA: $40,677
    5 Year Average EBITDA: $27,454
    10 Year Average EBITDA: $22,216
    5 Year Average EBITDA Margin %: 21.3%
    10 Year Average EBITDA Margin %: 18.9%
    Year End '06 Backlog: $51,310
    Backlog YoY% Change: 18.7%
     
    II. Water Transmission Segment (~1/3 of Consolidated Revenues):

    Ameron is an industry leader in the manufacture and supply of large-diameter (>12 ft.) concrete and steel pipe products for high-pressure water and wastewater conveyance primarily within the Southwestern United States.  Typical projects include large scale water transmission and distribution lines, aqueduct siphons, and sewer infrastructure.  Ameron markets its products within the segment to local/state/federal agencies, municipalities, real estate developers and contractors from production facilities located in Southern California, Arizona and Mexico.  Since the delivery and transportation of large-diameter water piping is economical to only 500 miles, Ameron’s optimal geographic footprint and proximity to the water scarce, arid Southwest places them in a strong competitive position.  Booming migratory population trends within Ameron’s geographic landscape, exemplified by the fact that Arizona and Nevada rank #1 and #2, respectively, in population growth, and #49 and #50 in annual precipitation, are straining the already limited freshwater resources available to local populations.  California, one of Ameron’s largest end-markets, is projected to add 5 million people from 2000-2010.  The combination of these factors has served as an impediment to regional economic growth (i.e. a developers inability to secure water rights in order to develop real estate) and has brought the issue of water scarcity to the forefront of government organizations, scientific and environmental communities, and the general public.  Ameron is poised to benefit from elevated water-related infrastructure spending at the federal, state and local level. 

     

    Ameron’s water-infrastructure and transmission business is characterized by pronounced cyclical swings and lumpy cash flow generation driven by the timing of large-scale water related infrastructure project activity.  As evidenced by the segments recent operating performance, Ameron’s water transmission business has been trending downward since late 2005 when it generated $29.8MM in EBITDA to the current trough and LTM EBITDA generation of $1.3MM.  Management has indicated that it sees an inflection point in bidding activity occurring during mid-07’, driven by several large-scale projects planned in Southern California and Nevada.  In late April, California Governor Arnold Shwarzenegger announced a $6B proposal aimed at improving water storage, conveyance and infrastructure systems.  Additionally, Nevada is moving ahead with a massive pipeline project intended to extract groundwater from the central part of the State to Clark County (home of Las Vegas).  We believe Ameron’s inevitable emergence from the recent cyclical trough provides an opportunity for significant earning power going forward.  The segments average annual EBITDA over the past five years is $24.2MM, and past ten years is $25.2MM.  With the recent increase in bidding activity, water-related bond issuance in AZ, NV and CA and announced capital spending initiatives coming to fruition over the next year and a half, we expect Ameron’s water division to return to at least its normalized historical operating performance over the next two fiscal years. 

    Water Transmission:            
    ($, 000's) 1996 1997 1998 1999 2000 2001
    Sales: $148,952 $146,069 $131,633 $142,468 $149,384 $143,226
    YoY Sales Growth %: -1.9% -9.9% 8.2% 4.9% -4.1%
    EBIT: $17,936 $15,172 $19,475 $23,022 $23,083 $29,011
    EBIT Margin %: 12.0% 10.4% 14.8% 16.2% 15.5% 20.3%
    EBITDA: $22,008 $19,107 $23,559 $27,022 $27,733 $33,221
    EBITDA Margin %: 14.8% 13.1% 17.9% 19.0% 18.6% 23.2%
       
    % AMN Consolidated Sales: 42.1% 42.6% 38.9% 41.2% 41.1% 39.5%
       
    ($, 000's) 2002 2003 2004 2005 2006 LTM
    Sales: $145,024 $165,497 $154,231 $192,731 $174,986 $161,398
    YoY Sales Growth %: 1.3% 14.1% -6.8% 25.0% -9.2% -19.7%
    EBIT: $27,347 $26,634 $13,458 $25,845 $7,577 $1,548
    EBIT Margin %: 18.9% 16.1% 8.7% 13.4% 4.3% 1.0%
    EBITDA: $31,507 $30,758 $17,435 $29,755 $11,577 $1,265
    EBITDA Margin %: 21.7% 18.6% 11.3% 15.4% 6.6% 0.8%
       
    % AMN Consolidated Sales: 40.7% 40.3% 38.0% 39.0% 31.9% 29.7%
    *Consolidated sales excludes revenue generated from AMN's formerly owned Coatings Business.      
    Water Transmission ($, 000's):  
    5 Year Sales CAGR: 4.1%
    10 Year Sales CAGR: 1.6%
    LTM EBITDA: $1,265
    5 Year Average EBITDA: $24,206
    10 Year Average EBITDA: $25,167
    5 Year Average EBITDA Margin %: 14.7%
    10 Year Average EBITDA Margin %: 16.5%
    Year End '06 Backlog1: $183,802
    Backlog YoY% Change:   42.1%
    1. Includes $97.1MM of orders for wind towers
     

    III. Infrastructure Products Segment (~1/3 of Consolidated Revenues):

    Ameron’s Infrastructure Products Group consists of two divisions: (1) construction aggregates and (2) concrete/steel poles used in a wide array of lighting applications.  The Company does not break out revenues or operating income attributable to each unit within the segment, but management indicated to us that segment revenues consist of approximately 50% construction aggregates and 50% poles products.  Operating and EBITDA margins are similar across each unit.

     

    Ameron’s Construction Aggregates unit operates exclusively in Hawaii’s two principal islands of Oahu and Maui.  The Company mines and operates the largest aggregate quarry in the state of Hawaii, one of only two quarries of any scale in the State.  The mine supplies ready-mix concrete, crushed and sized basaltic aggregates, dune sand and concrete pipe to the construction industry in Hawaii.  Sales of aggregates are made directly to contractors in the commercial, governmental, industrial, residential and military construction markets.  Ameron owns the exclusive right to mine and extract aggregates from their principal quarry on Oahu through 2052, at which point the mining license may be renewed at undisclosed terms.  The mine contains the highest grade basaltic rock (aggregate) in all of Hawaii.  The lack of competing permitted quarries and readily available construction aggregates on the island, coupled with Ameron’s proximity to project sites create a huge competitive advantage for the Company.  Additionally, Ameron is protected from mainland and overseas competition due to the extreme weight of most construction aggregates and the substantial transportation costs that would be incurred to ship the rock to Hawaii.  

     

    The most significant risk faced by Ameron’s aggregate division is its raw exposure to the Hawaiian economy, in particular that of the commercial and industrial construction market.  Hawaii’s population growth and GDP per capita are somewhat similar to those of mainland averages, but construction activity is driven by tourism to the State.  We found private building permits in the State to be the best indicator of construction trends in Hawaii, which are reported monthly and made available to the public.  The total value of authorized private building permits has risen from $1B in 1998 to ~$3.8B at year-end 2006, yielding a CAGR >20%.  While a softening in building activity is inevitable at some point in the future, all indications are for continued growth in the construction market going forward.  Hawaii’s low correlation with broad economic trends on the mainland should dampen any ripple effects from the nationwide housing slowdown. 

     

    Ameron’s Pole Products Division produces and supplies concrete street-lighting poles and bollards along with steel traffic and lighting poles to customers throughout the U.S.  This division operates manufacturing facilities in California, Washington, Oklahoma and Alabama.  Major end-markets include airports, parks, stadiums, parking lots, residential (decorative lighting) and commercial construction.  The Pole Products Division is the largest manufacturer of decorative, spun-cast, and prestressed concrete street-lighting poles in the United States.  Despite some exposure to the “decorative” residential lighting pole market, the division’s sales and operating income rose during 1Q07 vs. 1Q06 driven by favorable commercial, civil and industrial markets.  Management recently indicated that the outlook remains “generally favorable” for this division going forward, and that pure residential real estate exposure is limited.

    Infrastructure Products:            
    ($, 000's) 1996 1997 1998 1999 2000 2001
    Sales: $101,794 $94,858 $102,066 $105,559 $112,105 $113,824
    YoY Sales Growth %: 7.6% 3.4% 6.2% 1.5%
    EBIT: $10,680 $9,919 $10,721 $17,155 $17,666 $13,089
    EBIT Margin %: 10.5% 10.5% 10.5% 16.3% 15.8% 11.5%
    EBITDA: $15,167 $14,119 $14,897 $21,155 $22,316 $17,387
    EBITDA Margin %: 14.9% 14.9% 14.6% 20.0% 19.9% 15.3%
       
    % AMN Consolidated Sales: 28.8% 27.7% 30.2% 30.5% 30.8% 31.4%
       
    ($, 000's) 2002 2003 2004 2005 2006 LTM
    Sales: $123,610 $130,493 $136,312 $168,990 $198,177 $197,074
    YoY Sales Growth %: 8.6% 5.6% 4.5% 24.0% 17.3% 9.6%
    EBIT: $17,019 $15,509 $14,519 $22,127 $30,607 $30,471
    EBIT Margin %: 13.8% 11.9% 10.7% 13.1% 15.4% 15.5%
    EBITDA: $21,386 $19,891 $19,026 $26,571 $35,116 $30,126
    EBITDA Margin %: 17.3% 15.2% 14.0% 15.7% 17.7% 15.3%
       
    % AMN Consolidated Sales: 34.7% 31.8% 33.6% 34.2% 36.1% 36.3%
    *Consolidated sales excludes revenue generated from AMN's formerly owned Coatings Business.      

     

    Infrastructure Products ($, 000's):
    5 Year Sales CAGR: 11.7%
    10 Year Sales CAGR: 6.9%
    LTM EBITDA: $30,126
    5 Year Average EBITDA: $24,398
    10 Year Average EBITDA: $21,186
    5 Year Average EBITDA Margin %: 16.0%
    10 Year Average EBITDA Margin %: 16.5%
    Year End '06 Backlog: $34,866
    Backlog YoY% Change:   15.4%

     
    IV. Joint Ventures

    Ameron has investments in three separate Joint Ventures: (1) TAMCO—50%, (2) Ameron Saudi Arabia—30%, and Bondstrand, LTD—40%.  We will focus mainly on TAMCO, its equity and income contribution to Ameron, and its valuation in this section.  We value Ameron’s other two joint venture investments at cost, collectively carried at $3.8MM on their balance sheet.  

     

    TAMCO is Ameron’s principal joint-venture.  The Company recycles and processes ferrous scrap metal into reinforcement bar (rebar).  They own 50% of the entity, accounted for under the equity method, with the remaining ownership being held by Tokyo Steel (25%) and Mitsui & Co. (25%).  TAMCO operates the only steel rebar mini-mill in California, serving the infrastructure markets in Arizona, California, and Nevada for projects like bridges, roads, freeways, buildings, parking garages, and other concrete structures.  For example, TAMCO has been the largest supplier of rebar to Las Vegas for decades, and continues to supply most new infrastructure and commercial development within the city.  They are the direct beneficiary of the rigorous regulatory and environmental permitting hurdles for steel manufacturers in California, effectively positioning them as the only game in town for rebar manufacturing.  The significant barriers to entry and regional market dominance are an often overlooked competitive advantage for the Company. 

     

    TAMCO was valued on Ameron’s balance sheet at $20.7MM as of the Company’s most recent 10Q (2/25/07).  Given the fact that TAMCO has historically generated annual net income of nearly as much as the JV’s carrying value, the entity’s fair market value is clearly understated on Ameron’s balance sheet.  It’s also worth noting that the partnership has historically paid out at least 90% of its earnings in dividends. We value AMN’s ownership in TAMCO using a blended average of two methodologies: a multiple of EBITDA based approach and an EV/Ton approach.  Our multiples are derived from the North American Mini-Mill peer group.  The seven constituents of our peer group trade at an average EV/EBITDA of 6.8X and an EV/ton of capacity of $1,083.  Our Peer Group is comprised of the following tickers: CHAP, PLTE, CMC, GNA, IPS, NUE, and STLD.  The table below summarizes our estimates of TAMCO’s fair market value net to Ameron:

    ($, 000's) Operating Performance
    TAMCO  
    LTM ending 2/25/07 LTM FY2006 FY2005 FY2004
    Net Sales: $298,389 $273,036 $252,435 $215,849
    Gross Profit: $78,024 $61,336 $42,188 $45,885
    EBITDA (Est.): $59,976 $47,781 $29,535 $35,183
    Net Income: $40,154 $30,559 $20,391 $23,427
       
    Shareholders Equity $54,336 $44,741 $43,295  
    Gross Profit Margin 26.1% 22.5% 16.7% 21.3%
    EBITDA Margin (Est): 20.1% 17.5% 11.7% 16.3%
    Profit Margin 13.5% 11.2% 8.1% 10.9%
       
    Net to AMN (50% Ownership) Multiple Derived Valuation
    TAMCO  
    AMN EBITDA (Est.) $29,988 $23,891 $14,767 $17,592
    AMN Earnings $20,077 $15,280 $10,196 $11,714
    Multiple of EBITDA: 6.8X  
    FMV of TAMCO to AMN (50% owned): $203,919  
       
      Capacity Derived Valuation
    Annual Production Capacity: 500,000  
    N.A. Mini-Mill EV/Ton Peer Group Avg: $1,000  
    FMV of TAMCO to AMN (50% owned): $250,000  
       
    Blended Average FMV to AMN: $226,960  
             
     
    One point worth noting is our estimate of TAMCO’s 20.1% EBITDA margin.  The company does not disclose TAMCO’s EBITDA or associated margin within their consolidated financial statements, but based on our margin analysis of the peer group and extensive conversations with management, we feel comfortable with our estimate and believe it to be conservative.  Our blended average fair market value estimate of ~$227MM for TAMCO net to AMN fits within management’s estimate of $200MM-$250MM.  Relative to its carrying value (~$20.2MM), we believe AMN’s investment in TAMCO represents a significant source of hidden and unrecognized asset value for the Company.  Additionally, management recently indicated to us that TAMCO’s run rate of net income over the next year should surpass the $20MM it generated over the last twelve months, as demand and pricing power continues to remain strong in the near term.  All things considered, we believe this segment could be worth north of $25.00/share.
     

    V. Wind Energy Segment: (Component of Water Transmission Group)

    During late 2005, Ameron made the strategic decision to retrofit an existing steel pipe manufacturing facility located in Northern California and convert it into a wind tower steel fabrication facility for the production of wind tower poles.  Management was astute to recognize wind tower fabrication as a logical and synergistic market opportunity leveraging the Company’s operational expertise in highly engineered pipe/pole manufacturing.  Wind tower poles vary in size and can be as tall as 300 ft. in length and over 20 ft. in diameter.

     

    Wind Power currently supplies less than 1% of the nation’s electricity.  However, President Bush has recently called for the Nation to increase its total dependency on wind energy to 20% by 2020.  While I won’t speculate on whether we achieve the President’s slated target, significant sums of capital are currently being deployed to develop wind farms in the United States.  For the second year in a row, the U.S. installed more wind power capacity than any nation in the world (>2,500 MW).  New wind power generating capacity worth $4B was installed in the U.S. during 2006, and this figure is projected to increase substantially over the next decade.

     

    To date, Ameron has spent ~$26MM to retrofit their wind tower fabrication facility.  After minor production delays in 1Q 07, production has now commenced, and management expects to achieve full-scale commercial production later this fiscal year.  The company is expecting gross margins to be north of 20%, and EBIT margins >15% at full utilization.  Backlog for wind towers grew exponentially year-over-year, from $1.5MM in 2005 to $97.1MM in 2006.  Management expects to turn at least 80% of their backlog over the next twelve months, driven primarily by orders from GE, Mitsubishi and Siemens.  We think this segment should conservatively generate at least $8MM in EBITDA over the next year, and management believes that current order flow is sustainable going forward based on conversations with existing customers (GE, Mitsubishi, Siemens).  The market seems to be unfairly penalizing AMN’s water segment while the wind tower division’s expense ramp-up is artificially depressing water segment margins (where this segment is currently consolidated), while at the same time giving the Company no credit for any potential incremental earnings power generated from the wind business.  The lack of identifiable pure-play comps engaged in wind tower fabrication makes relative valuation challenging for this segment.  Ameron’s closest competitor in this segment is a division of Trinity Industries, Inc. (Ticker: TRN), a company better known for railcar manufacturing and leasing.  Trinity entered the wind tower fabrication market during late 03’, and revenues within this segment grew from $11MM in 2004 to $130MM in 2006 (07’ consensus estimates are for >$220MM in revenues during 07’).  While Trinity does not disclose specific wind tower fabrication margins in their financial statements, we believe our margin assumptions for AMN are well below Trinity’s implied margins.

     
    VI. Valuation

    At the time of this writing, AMN trades for approximately $77.00/share, has 9.17MM shares outstanding and a fully diluted market cap of $706MM, $56.4MM in net cash on the balance sheet and an enterprise value of $650MM.  The Company’s LTM EBITDA from continuing operations was $64.8MM, and inclusive of TAMCO’s estimated $30MM in EBITDA, the consolidated enterprise generated $94.8MM in EBITDA over the last twelve months, despite a sub-par year for the water business.  At its current EV/EBITDA multiple of 6.8X, 1% dividend yield, LTM P/E of 12X and ~9.0% FCFE yield, AMN appears cheap on a trailing basis.  Additionally, if we factor in the substantial forward earnings power potential of the wind and water businesses, we believe Ameron’s valuation becomes even more compelling.  If we make the realistic assumption that AMN’s water business emerges from its current cyclical trough and  generates a normalized $24MM of EBITDA, and include the incremental $8MM of EBITDA from the newly created wind tower business, AMN’s consolidated EBITDA increases $32MM to ~$127MM (EV/EBITDA of 5X) and FCFE increases from $61MM to $84MM (12.0% FCFE Yield).  We believe both of our assumptions are easily attainable and should be achieved over the next two fiscal years.  Keep in mind that we are not factoring in any incremental growth in our forward estimate of EBITDA from any of AMN’s other underlying operating segments, despite their commendable historical growth rates and favorable market conditions today.  If we include conservative growth rates for Ameron’s remaining operating segments, we believe the Company could generate north of $160MM in EBITDA going forward (EV/EBITDA of 4X).

     

    As an alternative valuation methodology, we like to evaluate AMN’s business within a sum-of-the parts framework, giving some consideration to an inevitable upturn in the Water Transmission Group’s operations and the emergence of the Wind Tower Fabrication Segment.  Below is a summary of our analysis:

    ($, 000's)
    Sum of Parts Analysis:
    Fiberglass Composite Pipe Segment:  
    LTM EBITDA: Multiple FMV ($, 000's)
    $40,677 9.0x $366,091
       
    Water Trasmission Group:  
    5 Yr Avg. EBITDA: Multiple FMV ($, 000's)
    $24,206 9.0x $217,858
       
    Infrastructure Products Group:  
    LTM EBITDA: Multiple FMV ($, 000's)
    $30,126 10.0x $301,258
       
    Wind Pole Group:  
    Forward EBITDA: Multiple FMV ($, 000's)
    $8,000 9.0x $72,000
       
    TAMCO: $226,960
       
    Sum of Parts: $1,184,167
    Less 8x Corp. Overhead: ($216,000)
    Enterprise Value: $968,167
    Less Net Debt (+Net Cash): ($56,457)
    Market Value of Equity: $1,024,624
    Shares Outstanding: 9,173
    Equity Value/Share:   $111.70
     

    We view our sum-of-the parts analysis as conservative.  An analysis of various pure play comps or businesses focused within the same industries as AMN provides some validation.  For example, Northwest Pipe Co (Ticker: NWPX), a close competitor to AMN’s water transmission segment, is geographically positioned in less favorable markets yet trades at ~10X LTM EBITDA.  Hanson Plc (Ticker: HNS LN on Bloomberg), a major provider of large-diameter water transmission products in the U.S. (along with aggregate production in Europe) and a close competitor of AMN was recently acquired for 12.5X TTM EBITDA by German industrial conglomerate HeidelbergCement.  The rich trading/take-out multiples evident in today’s market for industrial conglomerates similar in profile to AMN underscores our view that the Company trades well below intrinsic value.  Another point worth mentioning is Ameron’s excessive corporate overhead expenditures.  Our analysis of U.S. domiciled small-cap industrial conglomerates yields an average corporate overhead expense as a percent of sales of 1.9%, versus Ameron’s 5%.  If AMN were able to achieve the peer group average, our sum-of-the parts value would increase 13% to $126/share. 

     

    With $56MM in net cash currently in the bank, AMN’s balance sheet is substantially overcapitalized when taking into consideration their ROIC, current and potential borrowing rates, and free cash flow generation.  By adding incremental leverage through new debt issuance (shown as a multiple of Debt/EBITDA), AMN has the potential to significantly increase their free cash flow to equity yield by using the proceeds to repurchase stock.  In the analysis below, we assume Ameron uses their current net cash balance and the incremental debt proceeds to repurchase stock at $77.00/share, the stock price at the time of this writing.  As shown in the table below, if AMN were to solely use their current net cash balance to repurchase shares, and not add any incremental debt, their LTM free cash flow to equity yield would be 9.3%.  If we assume that the water and wind businesses generate our estimate of forward FCFE, this yield would increase to 12.5%.  Adding incremental leverage to repurchase additional shares would result in a dramatic increase to AMN’s free cash flow yield to equity (i.e. ROIC > Incremental Cost of Debt):

    Additional Debt Capacity/Share Repurchase Analysis:
       
    Leverage Factor Current Net  LT Debt Est. Interest Interest Proceeds Available Current Shares Shares Repurchased
    Debt/EBITDA Multiple: Debt (Cash)  Out ($MM) Rate (%)1: Expense ($MM): to Repo Stock Out (MM) @ $77/share(MM)
    0X ($56.4) $0.0 NM $0.4 $56.4 $9.2 $0.7
    2X ($56.4) $129.6 7.0% $9.1 $186.0 $9.2 $2.4
    4X ($56.4) $259.2 8.0% $20.7 $315.6 $9.2 $4.1
    6X ($56.4) $388.7 9.0% $35.0 $445.2 $9.2 $5.8
    Leverage Factor Shares Out Market Value LTM  LTM EBDA less Maintenance LTM LTM FCFE
    Debt/EBITDA Multiple: Post Repo of Equity ($MM): EBDA ($MM): Incremental Int. Exp Cap Ex ($MM): FCFE ($MM): Yield (%)
    0X 8.4 649.7 71.1 70.7 10.0 60.7 9.3%
    2X 6.8 520.3 71.1 62.0 10.0 52.0 10.0%
    4X 5.1 390.7 71.1 50.4 10.0 40.4 10.3%
    6X 3.4 261.1 71.1 36.1 10.0 26.1 10.0%
    Incremental Water & Wind FCFE Analysis
    Leverage Factor LTM + Water Forward + Wind Forward  Incremental Forward FCFE FCFE ROIC%4
    Debt/EBITDA Multiple: FCFE ($MM): FCF Estimate2 FCF Estimate3 Maintenance CapEx Estimate: Yield (%) (Blue Book)
    0X $60.7 $17.0 $5.6 $2.0 $81.3 12.5% 16.7%
    2X $52.0 $17.0 $5.6 $2.0 $72.6 14.0% 16.7%
    4X $40.4 $17.0 $5.6 $2.0 $61.0 15.6% 16.7%
    6X $26.1 $17.0 $5.6 $2.0 $46.7 17.9% 16.7%
    1. Borrowing costs are based on prevailing market lending rates
    2. Assumes Water business earns 5Yr Average EBITDA
    3. Assumes Wind business turns $80MM of $100MM backlog during FY08' at 10% EBITDA margin.  
    4. Only includes EBIT from trailing twelve months continuing operations. 
    Does not include operating income from TAMCO.  

     

    Finally, Ameron has considerable downside protection in the form of hidden asset value, real estate, and replacement value. After adjusting for under-reflected pension liabilities, AMN currently trades at 2.2X tangible book value/share.  However, in replacing TAMCO’s (AMN’s 50% joint venture) current carrying value on the balance sheet of $20.2MM with a more realistic fair market value of $230MM (derived in detail above), AMN’s adjusted book value per share increases to $53.00 (P/Adj.book of 1.4X).  Additionally, the Company owns several parcels of extremely valuable, under-utilized real estate in Southern California and Phoenix that are on the books for well below fair value and could realistically be monetized without affecting the operations of the underlying business.  Management estimates that the replacement value of all their facilities is worth at least 2X net PP&E (not including land values), and altogether, we believe AMN trades well below the replacement value of its net assets.

     
    VII. Other Factors to Consider:
    Throughout our diligence process, we found ourselves continually asking each other why a business like AMN was trading at such a discount to our estimate of fair market value.  Some of the reasons we came up with include the following:

    ·         The Company does not host earnings conference calls or participate in investor conferences

    ·         AMN does not have a dedicated or centralized Investor Relations Department, and  management is notorious for being impossible to get a hold of

    ·         There is limited sell side coverage (one boutique sell-side firm currently covers the stock)

    ·         The Company is being unfairly penalized by the market for its perceived exposure to the residential real estate market.

    ·         Wind Tower division’s production delays and expense ramp-up ahead of commercial production is artificially depressing true water segment margins (wind tower business is lumped within water transmission segment)

     

    Some may view AMN’s poor shareholder communication as a negative, but we tend to view it as an opportunity for the Company to broaden their market recognition and exposure in the institutional marketplace.  While we are accustomed to poor shareholder communication in heavily insider controlled public companies, we were surprised to discover that Senior Officers and Directors (collectively “insiders”) currently own only 1.5% of the outstanding stock.

     

    VIII. Conclusion:

    Ameron International is a significantly under-followed, mis-priced security trading at a steep discount to its fair market value.  While the majority of the Company’s core operating segments are growing at attractive double-digit rates of revenue with stable and/or increasing margins, a meaningful component of our thesis relates to the segments that are either at a cyclical trough (Water Transmission Group) or just commencing production (Wind Pole Fabrication Segment).  Inclusive of the Company’s consolidated future earnings power, AMN trades at less than 5X forward EBITDA (>12% FCFE Yield) while also hosting considerable downside protection based on our appraisal of tangible net asset value.  Finally, if the Company appropriately utilizes its highly leveragable assets and funds a significant share repurchase program, this would provide even greater upside. 

    Catalyst

    *Water Transmission Group's emergence from cyclical trough & future earnings power

    *Ramp-up of Wind Tower Fabrication Division & future earnings power

    *Incremental leverage and subsequent share repurchase program

    *Enhance market recognition via implementation of clear mgmt/shareholder communication channels

    Messages


    Subjectquestions
    Entry06/13/2007 04:14 PM
    Memberoscar1417
    Thank you for a very thorough write-up. I do have a few questions.
    Most of the business units showed close to flat revenues for the 5-7 years preceding 2002-2003, and then started to show decent gains for 4-5 years leading up to 2006. Do you know what changed 5 years ago to deliver this growth? Was there a specific change in market dynamics or demographics, or a change in business plan, that explains this change? The forward growth assumption makes a huge difference in the overall valuation.
    My first question when I see a big backlog (i.e. the wind tower business) is about the revenue recognition practices. Do you have any insight into their revenue recognition (beyond the brief disclosure in the 10-K)?
    Another question is whether or not there is any value added to the individual businesses by virtue of being in a conglomerate structure. The 5% of revenues figure is a strike against them in this category. Do you know the explanation for this overhead figure? Management comp is somewhat rich, with $2.3M of cash comp for the CEO in 2006 and total cash comp of $6.3M for the top 5 execs in 2006, before stock comp, and total insider ownership of 1.5%. It could be that the discount to fair value that you're observing is a "conglomerate discount". Do you have any insight on this from management, or knowledge of any initiatives they've taken to ensure that they either realize fair value from each business unit, or do something to make the whole greater than the sum of the parts?
    Thanks again.

    SubjectNWPX
    Entry06/13/2007 06:14 PM
    Memberruby831
    Why has AMN water transmission group had such bad results in past few years? NWPX results are flat to slightly up in the same time period.

    SubjectSlight Calculating Error--My a
    Entry06/14/2007 11:27 AM
    Memberbritt12
    Dear VIC, we recently realized an error in our LTM EBITDA calculations which significantly effect our Sum-of-the parts value. The adjusted #'s are as follows:
    FIBERGLASS LTM EBITDA: $46.183MM
    WATER TRANSMISSION GROUP LTM EBITDA: $6.727MM
    INFRASTRUCTURE PRODUCTS GROUP LTM EBITDA: 35.650MM

    These positive adjustments increase our SOP value to $123.12/share. The error was in the d&a line item. Sorry for the confusion.

    SubjectTAMCO
    Entry06/14/2007 12:12 PM
    Memberruby831
    First, thanks for a very well organized write-up. Secondly, can you confirm that TAMCO is debt free.
    Thanks

    SubjectThanks for your questions. Ye
    Entry06/14/2007 01:44 PM
    Memberbritt12
    Thanks for your questions. Yes, TAMCO is essentially debt-free. As of the most detailed JV filng date, FY2006 (11/30/06), TAMCO had non-current liabilties of $7.8MM. It is our understanding that a very small portion of this is actually LT Debt, but managment did not quantify for us. Needless to say, even if all of their non-current liabilities are LT Debt, at $7.8MM it is relatively insignificant vs. our appraisal of fair market value. Like AMN, TAMCO also appears overcapitalized to us. TAMCO could easily recap, lever up and pay a significant dividend to AMN. Hope this helps.

    SubjectCongrats
    Entry06/22/2007 10:38 AM
    Memberangus309
    That didn't take long...
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