FORTERRA INC (FRTA) FRTA
June 05, 2017 - 2:43pm EST by
bdad
2017 2018
Price: 7.50 EPS 0 0
Shares Out. (in M): 64 P/E 0 0
Market Cap (in $M): 479 P/FCF 0 0
Net Debt (in $M): 1,190 EBIT 0 0
TEV ($): 1,668 TEV/EBIT 0 0

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Description

This write-up will be an attempt to update 85Bears pitch since the stock has gotten crushed in past month. On May 16, the Company reported weak Q1 numbers and guided ’17 numbers down. The stock is down 60%+ in the ensuing few weeks but I think this has created an opportunity (albeit one admittedly still fraught with risk). This is a falling knife but I think term structure of debt makes it a cheap option. There are no maturities until ’21 and a recently refi’d TL has basically no maintenance covenant so this is a levered equity with plenty of runway to get things right (frankly if it weren’t for that term structure, this wouldn’t be interesting but I like these sorts of setups)

 

Q117 EBITDA of $12MM was well below consensus closer to $34MM. The Company attributed the underperformance to weather and increased competition in Houston that impacted their drainage business. GM was down from 19.1% in Q116 to 11.5% in Q117 (EBITDA margin also got smooshed from 8.5% to 2.2%). The Company also cut guidance for Q2 to $50-60MM while the Street had been closer to $90MM

See below but numbers were just admittedly awful and the poor communication for a Company that only went public in Q416 has put them in the penalty box.

($ in million

Q1 2017 Q1 2016 Q4 2016

 

The Company’s explanations for the weak Q1 performance and poor Q2 guidance aren’t particularly encouraging. Weather is an easy one to blame. Having said that, going through past transcripts, they did note on Q4 call that Q116 weather was favorable which set up a tought comp. Q2/3 ’16 were wetter than normal so accordingly comps over next 2 Q’s should be more favorable and it’s possible they lowered bar to a level they can step over.

They also mentioned a roll off a big high margin project in Canada which led to revenue contraction in Water Pipe segment. The fact that the market wasn’t prepared for these factors illustrates the poor communication of mgmt. This is something they should have seen coming.

But I think this is a falling knife worth catching. The tailwinds from infrastructure and non-res construction are real and assuming modest revenue growth next year leaves the stock trading at ~6.2x EBITDA which is arguably too cheap for a decent business and not hard to pencil out a 20% FCF yield. See my rough cut at #s below.

Mangement has a decent history with CEO Jeff Bradley having previously run GSM which was sold during his tenure. Similarly, Lone Star still owns 70% of the equity and they obviously have a strong incentive to right the ship here.

Fiscal Year End December 31

31-Dec-16

31-Mar-17

30-Jun-17

30-Sep-17

31-Dec-17

31-Dec-17

31-Dec-18

 

2016PF

1Q17

2Q17E

3Q17E

4Q17E

2017E

2018E

 

 

 

 

 

 

 

 

Drainage Pipe & Products

795.9

160.4

234.9

267.2

192.8

855.4

910.1

Growth Y-o-Y %

2.4%

-1.6%

10.3%

9.9%

9.1%

7.5%

6.4%

 

 

 

 

 

 

 

 

Water Pipe & Products

801.9

177.8

228.3

239.4

204.4

849.9

902.6

Growth Y-o-Y %

-5.1%

-2.3%

5.2%

6.1%

15.3%

6.0%

6.2%

 

 

 

 

 

 

 

 

Bricks

 

 

 

 

 

 

 

Growth Y-o-Y %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

1,609.3

338.3

463.2

506.6

397.2

1,705.3

1,812.7

Y-o-Y % Chg

-0.8%

-1.9%

7.7%

5.5%

12.2%

6.0%

6.3%

 

 

 

 

 

 

 

 

COGS

1,243.2

299.3

385.6

373.0

313.5

1,371.5

1,331.7

 

 

 

 

 

 

 

 

Gross profit

366.1

39.0

77.6

133.6

83.6

333.8

481.0

Gross Margin %

22.7%

11.5%

16.7%

26.4%

21.1%

19.6%

26.5%

 

 

 

 

 

 

 

 

SG&A

(246.7)

(65.3)

(57.9)

(58.8)

(60.4)

(242.4)

(316.0)

Impairment

(2.2)

(0.4)

 

 

 

(0.4)

 

Other Operating Income

6.6

1.2

0.5

0.5

0.5

2.7

0.0

Equity earnings from equity Method

12.1

3.2

3.8

3.8

3.8

14.4

12.0

 

 

 

 

 

 

 

 

Operating income

86.1

(22.4)

23.9

79.1

27.5

108.1

175.0

Operating margin %

5.4%

-6.6%

5.2%

15.6%

6.9%

6.3%

9.7%

 

 

 

 

 

 

 

 

Interest expense, net

(136.5)

(13.5)

(12.5)

(12.5)

(12.5)

(51.0)

(49.0)

 

 

 

 

 

 

 

 

Other expense, net

0.3

0.0

0.0

0.0

0.0

0.0

0.0

 

 

 

 

 

 

 

 

Pre-tax income

(50.1)

(35.9)

11.4

66.6

15.0

57.0

126.0

 

 

 

 

 

 

 

 

Income tax expense

22.2

13.4

(5.7)

(33.3)

(7.5)

(33.1)

(63.0)

 

 

 

 

 

 

 

 

Net income from continuing

(48.9)

(22.5)

5.7

33.3

7.5

23.9

63.0

 

 

 

 

 

 

 

 

Net income (loss)

(52.5)

(22.5)

5.7

33.3

7.5

23.9

63.0

 

 

 

 

 

 

 

 

Basic shares outstanding

63.8

63.8

63.8

63.8

63.8

63.8

63.8

Diluted shares outstanding

64.3

63.8

63.8

63.8

63.8

63.8

63.8

 

 

 

 

 

 

 

 

Diluted EPS

$0.36

($0.35)

$0.09

$0.52

$0.12

$0.38

$0.99

 

 

 

 

 

 

 

 

Adjusted EBITDA

270.6

11.9

50.2

105.3

53.7

221.1

280.0

Margin %

16.8%

3.5%

10.8%

20.8%

13.5%

13.0%

15.4%

 

         

 

 

 

0.0

       

0.0

0.0

Adjusted FCF

78.2

(88.4)

5.9

63.0

21.2

1.8

95.2

Adjusted FCF per share

$1.23

($1.39)

$0.09

$0.99

$0.33

$0.03

$1.49

 

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.

Catalyst

Recovery from awful Q1

    sort by    

    Description

    This write-up will be an attempt to update 85Bears pitch since the stock has gotten crushed in past month. On May 16, the Company reported weak Q1 numbers and guided ’17 numbers down. The stock is down 60%+ in the ensuing few weeks but I think this has created an opportunity (albeit one admittedly still fraught with risk). This is a falling knife but I think term structure of debt makes it a cheap option. There are no maturities until ’21 and a recently refi’d TL has basically no maintenance covenant so this is a levered equity with plenty of runway to get things right (frankly if it weren’t for that term structure, this wouldn’t be interesting but I like these sorts of setups)

     

    Q117 EBITDA of $12MM was well below consensus closer to $34MM. The Company attributed the underperformance to weather and increased competition in Houston that impacted their drainage business. GM was down from 19.1% in Q116 to 11.5% in Q117 (EBITDA margin also got smooshed from 8.5% to 2.2%). The Company also cut guidance for Q2 to $50-60MM while the Street had been closer to $90MM

    See below but numbers were just admittedly awful and the poor communication for a Company that only went public in Q416 has put them in the penalty box.

    ($ in million

    Q1 2017 Q1 2016 Q4 2016

     

    The Company’s explanations for the weak Q1 performance and poor Q2 guidance aren’t particularly encouraging. Weather is an easy one to blame. Having said that, going through past transcripts, they did note on Q4 call that Q116 weather was favorable which set up a tought comp. Q2/3 ’16 were wetter than normal so accordingly comps over next 2 Q’s should be more favorable and it’s possible they lowered bar to a level they can step over.

    They also mentioned a roll off a big high margin project in Canada which led to revenue contraction in Water Pipe segment. The fact that the market wasn’t prepared for these factors illustrates the poor communication of mgmt. This is something they should have seen coming.

    But I think this is a falling knife worth catching. The tailwinds from infrastructure and non-res construction are real and assuming modest revenue growth next year leaves the stock trading at ~6.2x EBITDA which is arguably too cheap for a decent business and not hard to pencil out a 20% FCF yield. See my rough cut at #s below.

    Mangement has a decent history with CEO Jeff Bradley having previously run GSM which was sold during his tenure. Similarly, Lone Star still owns 70% of the equity and they obviously have a strong incentive to right the ship here.

    Fiscal Year End December 31

    31-Dec-16

    31-Mar-17

    30-Jun-17

    30-Sep-17

    31-Dec-17

    31-Dec-17

    31-Dec-18

     

    2016PF

    1Q17

    2Q17E

    3Q17E

    4Q17E

    2017E

    2018E

     

     

     

     

     

     

     

     

    Drainage Pipe & Products

    795.9

    160.4

    234.9

    267.2

    192.8

    855.4

    910.1

    Growth Y-o-Y %

    2.4%

    -1.6%

    10.3%

    9.9%

    9.1%

    7.5%

    6.4%

     

     

     

     

     

     

     

     

    Water Pipe & Products

    801.9

    177.8

    228.3

    239.4

    204.4

    849.9

    902.6

    Growth Y-o-Y %

    -5.1%

    -2.3%

    5.2%

    6.1%

    15.3%

    6.0%

    6.2%

     

     

     

     

     

     

     

     

    Bricks

     

     

     

     

     

     

     

    Growth Y-o-Y %

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Net Sales

    1,609.3

    338.3

    463.2

    506.6

    397.2

    1,705.3

    1,812.7

    Y-o-Y % Chg

    -0.8%

    -1.9%

    7.7%

    5.5%

    12.2%

    6.0%

    6.3%

     

     

     

     

     

     

     

     

    COGS

    1,243.2

    299.3

    385.6

    373.0

    313.5

    1,371.5

    1,331.7

     

     

     

     

     

     

     

     

    Gross profit

    366.1

    39.0

    77.6

    133.6

    83.6

    333.8

    481.0

    Gross Margin %

    22.7%

    11.5%

    16.7%

    26.4%

    21.1%

    19.6%

    26.5%

     

     

     

     

     

     

     

     

    SG&A

    (246.7)

    (65.3)

    (57.9)

    (58.8)

    (60.4)

    (242.4)

    (316.0)

    Impairment

    (2.2)

    (0.4)

     

     

     

    (0.4)

     

    Other Operating Income

    6.6

    1.2

    0.5

    0.5

    0.5

    2.7

    0.0

    Equity earnings from equity Method

    12.1

    3.2

    3.8

    3.8

    3.8

    14.4

    12.0

     

     

     

     

     

     

     

     

    Operating income

    86.1

    (22.4)

    23.9

    79.1

    27.5

    108.1

    175.0

    Operating margin %

    5.4%

    -6.6%

    5.2%

    15.6%

    6.9%

    6.3%

    9.7%

     

     

     

     

     

     

     

     

    Interest expense, net

    (136.5)

    (13.5)

    (12.5)

    (12.5)

    (12.5)

    (51.0)

    (49.0)

     

     

     

     

     

     

     

     

    Other expense, net

    0.3

    0.0

    0.0

    0.0

    0.0

    0.0

    0.0

     

     

     

     

     

     

     

     

    Pre-tax income

    (50.1)

    (35.9)

    11.4

    66.6

    15.0

    57.0

    126.0

     

     

     

     

     

     

     

     

    Income tax expense

    22.2

    13.4

    (5.7)

    (33.3)

    (7.5)

    (33.1)

    (63.0)

     

     

     

     

     

     

     

     

    Net income from continuing

    (48.9)

    (22.5)

    5.7

    33.3

    7.5

    23.9

    63.0

     

     

     

     

     

     

     

     

    Net income (loss)

    (52.5)

    (22.5)

    5.7

    33.3

    7.5

    23.9

    63.0

     

     

     

     

     

     

     

     

    Basic shares outstanding

    63.8

    63.8

    63.8

    63.8

    63.8

    63.8

    63.8

    Diluted shares outstanding

    64.3

    63.8

    63.8

    63.8

    63.8

    63.8

    63.8

     

     

     

     

     

     

     

     

    Diluted EPS

    $0.36

    ($0.35)

    $0.09

    $0.52

    $0.12

    $0.38

    $0.99

     

     

     

     

     

     

     

     

    Adjusted EBITDA

    270.6

    11.9

    50.2

    105.3

    53.7

    221.1

    280.0

    Margin %

    16.8%

    3.5%

    10.8%

    20.8%

    13.5%

    13.0%

    15.4%

     

             

     

     

     

    0.0

           

    0.0

    0.0

    Adjusted FCF

    78.2

    (88.4)

    5.9

    63.0

    21.2

    1.8

    95.2

    Adjusted FCF per share

    $1.23

    ($1.39)

    $0.09

    $0.99

    $0.33

    $0.03

    $1.49

     

    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.

    Catalyst

    Recovery from awful Q1

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