We think Concrete Pumping Holdings “Pumping” is an exceptional business run by an exceptional management team. There is one large issue with the investment which is the leverage. It shouldn’t be minimized but we believe appropriately sized BBCP could easily offer multi-bagger returns as the company de-leverages and the multiple rerates for both the leverage and business quality. As an aside, post election we expect some sort of large stimulus, regardless of who wins. This will mean bridges, airports, roads etc….which all involves lots and lots of concrete.
What is Concrete Pumping?
·Concrete needs to move from point A to B on a construction site and be “placed”
oIt can be done via wheelbarrow, out of the back of the truck, bucket dropped or “pumped”
oFor any job of size and complexity, pumping is the preferred method due to cost, accuracy and safety.
oVariety of equipment aka types of pumps.
oYou need a skilled technician to handle these million-dollar machines
Who is Concrete Pumping Holdings?
·They only pump concrete. They move it with highly technical equipment and highly trained operators
·They do not take possession of concrete
·They do not rent equipment or take liability for concrete.
·They invoice daily for their work
They are purely a service provider
BBCP focuses on complex projects, where competition is limited and they can charge premium prices
Why is this an attractive industry?
·Concrete is perishable, and has a 90-minute life. It needs to be placed quickly, safely and accurately
·It represents 10% of a project costs and happens near the start
·It’s a gating item to the rest of the project and if delayed project costs can skyrocket
·For complex projects, developers will pay a substantial premium for service of a deep fleet, safety record, experienced operators, and reliable delivery of all of the above.
·High forward visibility with take or pay contracts for large jobs
Why is Concrete Pumping Holdings Attractive?
·The are the scale provider in the US and UK
·They are the only reputable exit for small regional players and can extract substantial synergies post acquisition via higher utilization and scale purchasing. recent Capital deal in Texas being an example
·Widest fleet of equipment that results in high utilization (rotate equipment where it is needed)
·Diversified end markets by geography, type of construction and end-customer
·Scale allows deals with suppliers, fuel purchasing, training, etc
·They have a high growth-related business Eco-pan which provides environmental remediation services around concrete pumping e.g. regulatory required
·Core business and Eco Pan produce 25% and 55% unlevered ROIC
·CEO started as a truck/pump operator and knows the industry and business well
·Large growth runway as older founders retire both in US an UK, as well as organic
·Vertically integrated in many respects
·Proven M & A platform
·Highly variable cost structure (proven in Covid) 70% variable
What’s not to like?
·The leverage. The company has been highly levered but has been paying down debt quickly over last 12 months
The company has committed to not do any material acquisitions and use its substantial cash flow to de lever. Since the start of the year they have brought Net Debt from 435m to 395m (in six months) and we believe it is closer to 375m today. This includes a period where they were severely affected by Covid related shutdowns. Additionally, the company has deferred delivery of new equipment, has extended maintenance cycles on existing fleets and has the ability to sell down their fleet to generate cash as well. The company produces roughly 85090 m of pre-cap-ex cash flow, and if they stick to their plan will drop very close to 2.5-3X Debt to EBITDA in the next 24 months. The revolver is almost completely paid down and they have a term loan that matures in 2023. We believe the company will pay down the revolver and refinance (and re-term) the entire facility to 2025 or beyond with the accommodative debt markets. It is important to realize that their fleet is highly monetizable in the secondary market and is a real source of liquidity if needed. They have high visibility into their pipeline as complex projects have a large lead time both in planning, reserving trucks and the RFP process.
By investing in Pumping we are betting on a continued deleveraging of the business and that accrual of value to the equity holders. The high ROIC and leverage and cash generation create substantial upside albeit at the risk of the equity being wiped out if they get into extreme trouble. We believe the spring of 2020 was a real-world test and they survived quite well, and so a likely worst-case scenario has passed. Even then construction was deemed essential in most places.
We believe and assume the following:
1.No top line growth
2.No growth Cap-EX or acquisitions
3.Cash Flow goes almost exclusively to deleveraging and minimal maintenance
The value comes from two source, the accretion of de leveraging to the equity holders and a rerating of the multiple given that de-leveraging and recognition of the market of business quality and growth prospects. Those are important assumptions. I do think the actual event path will include modest growth, a re-term of the debt facility and increasing EBITDA and not as rapid a paydown of debt as I model. They might even throw in some modest stock buybacks too or a decent size acquisition once they re-term the credit facility. But I trust management and the board to make the right call.