Wavin Wavin.NA
December 19, 2006 - 6:25pm EST by
nha855
2006 2007
Price: 13.92 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 1,081 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Wavin offers investors a chance to purchase a high quality, growing company at a reasonable price. I expect the company to deliver nearly 20% annual returns to shareholders over the medium term through a combination of a mid-teens earnings growth and a dividend yield of about 4%. In addition, with the shares trading at 12x 2007E EPS, there is a strong possibility for higher returns through multiple expansion. Lastly, the company’s excess debt capacity and history of making accretive acquisitions is likely to provide further upside to shareholders.
Company Overview
 
Wavin is the largest manufacturer of plastic pipes in Europe and has activities in both the above ground and below ground markets. The above ground market represents about 30% of total sales and sells to both new construction and repair & maintenance (RMI) for both residential and commercial end markets. Based on my conversations with the company, I believe that sales are split roughly equally between RMI and new construction. The below ground market represents about 65% of sales and sells largely to municipalities and utilities for wastewater and telecom fiber pipes. The below ground market has some exposure to new construction but is primarily a maintenance focused market. Again, based on my conversations with the company, I think that roughly 75% of the company’s below ground revenues come from RMI. The remaining 5% of sales is classified as “other” and comprises license income, raw materials, valves, and concrete.
 
Background
 
Wavin is a recent IPO on the Amsterdam stock exchange. The company was founded by a Dutch water utility to make plastic pipes. Seven years ago, the company was sold to CVC, a European LBO firm, which oversaw a restructuring of the company and brought in a new management team in 2000. Under the management team brought in by CVC, the company has successfully increased its EBITDA margins every year, from 10% to 13%, and has made nearly a dozen acquisitions in order to increase its footprint across Europe. The company had the misfortune of going public this fall at the same time as a number of much-hyped European IPOs, such as Gagfah and multiple biodiesel/bioethanol companies. As a result, the company received scant attention from investors and the IPO priced at the bottom of the range.
 
Operations
 
Wavin’s operations are solid and are currently growing in excess of 10% annually. Going forward, we believe that the company should be able to grow in the mid single digits on a sustainable basis before factoring in the effect of higher raw material prices. Practically, this has meant that the company has been able to grow revenue at over 10% this year through a combination of volume and mix (estimated at 6% by the CFO) and raw-material based price increases (estimated at around 4%). While some of the company’s growth has come from price increases, the Company has also told us that they have been unable to fully pass-thru raw material price increases thus far and that there is at least a year of catch-up pricing increases that they will be able to take.
 
Aside from the effects of raw materials, the company should continue to grow at a rate above that of construction due to secular growth in plastics away from traditional, more costly materials. In the above-ground segment, the company is benefiting from a shift away from copper pipes due to elevated copper prices, the lower labor needs for plastic pipes (a plumber can install plastic 3-4x more quickly than copper), and innovative products that can command premium prices, such as the company’s push together plastic pipes that eliminate the need for welding. In the below-ground segment, the company is also benefiting from a shift to plastic pipes and away from concrete pipes. This has been driven mostly by the substantial installation cost savings that municipalities can realize by using plastic. The company has also benefited from increased maintenance spending by municipalities on refurbishing aging water infrastructure. Lastly, the company’s revenues have benefited as telecom operators begin installing FTTH due to an innovative piping product that Wavin recently introduced that helps guide and protect optical cables.
 
EBITDA margins are now above 13% and 2006 is likely to represent the fifth consecutive year of margin growth at the company. I believe that the company’s success in increasing margins despite the drag from raw materials speaks highly to management’s ability to find efficiencies in the company and to leverage their relatively fixed cost overheads. Going forward, I expect the company’s margins to continue expanding due to (1) faster sales growth in Eastern Europe (margins are higher in Eastern Europe than in Western Europe, (2) faster sales growth in higher margin product areas such as Hot & Cold, Water Management, and Cable Ducting, (3) continued realization of synergies with Hepworth (a UK company they recently acquired), and (4) continued cost cutting and efficiency measures, such as the company’s recent decision to consolidate several of its smaller factories. Based on comments from the management team, the company should be able to steadily improve margins by 30-40 basis points per year and reach at least 14% EBITDA margins in the medium term. This would still leave the company meaningfully below the margin levels of its peers, such as Uponor with 17% margins and Geberit with 28% margins.
 
In addition to the organic revenue growth and margin expansion, Wavin’s operations have been substantial beneficiaries of nearly a dozen acquisitions in the past 5 years. Wavin has typically been able to acquire companies at under 6x pre-synergy EBITDA and to subsequently increase the acquired EBITDA by 50-100% through eliminating overheads, buying raw materials more efficiently, rationalizing excess capacity, and harmonizing some product ranges. The company has historically used acquisitions to enter new geographies or to acquire new technologies. At the current time, the company has signed a LOI with Petzetakis, the leading Greek manufacturer of plastic pipes. While Wavin is still in negotiations with Petzetakis, it fits nicely with the company’s strategy. Petzetakis is the largest manufacturer of plastic pipes in Greece, Wavin does not have operations in Greece today, buying and overhead synergies should exist, and Petzetakis has excess manufacturing capacity that Wavin will be able to use to expand its operations in the Balkins. In addition to Petzetakis, Wavin has told investors that it is actively negotiating with three other companies. In total, the CFO told me he thinks that he can make at least EUR 100mm of additional acquisitions before he would need to issue equity.
 
Management
 
Wavin’s management team has been with the Company since its LBO by CVC. The CEO, Philip Houben, previously ran Tenneco’s European business, and joined Wavin in 2000, shortly after the business was bought by CVC. The CFO, Pim Oomens, was previously CFO of Numico, another Dutch-listed midcap. I have met with both of them and regard them as operationally solid and focused on value creation. In total, management owns 6.6% of the company and the CEO has told me that his stake represents the vast majority of his net worth. Importantly, the only shares sold by the management team in the IPO were in order to satisfy the taxes they needed to pay after the company went public.
 
Valuation
 
From a valuation point of view, Wavin is trading at 12x 2007E EPS and 10x 2008E EPS. While I see this valuation as absolutely low, it is also substantially below its closest peers, Uponor and Geberit. Uponor currently trades at 18x 2007E EPS and 17x 2008E EPS while Geberit trades at 20x 2007E EPS and 19x 2008E EPS. The company also trades at a substantial discount to its DCF value, which I estimate to be in the range of EUR 20 – 25 per share. Lastly, the Company intends to pay out 40-50% of its earnings as a dividend. Taking the midpoint of the range means that the company would have a dividend yield of 3.8%.
 
Earnings Model
 
 
 
 
 2006 Estimates
 
 2007 Estimates
 
 2008
 2009
 
 
 
 H1
 H2
 Year
 
 Organic
 Acquired
 Total
 
 Organic
 Organic
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
 
         734.3
         775.3
      1,509.6
 
          1,645
           50.0
         1,695
 
          1,814
          1,923
% Growth YOY
 
11.5%
10.0%
10.7%
 
9.0%
 
12.3%
 
7.0%
6.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA
 
 
           89.6
         107.0
         196.6
 
          218.8
             6.0
         224.8
 
          247.6
          269.2
EBITDA Margin
 
12.2%
13.8%
13.0%
 
13.3%
12.0%
13.3%
 
13.7%
14.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation
 
 
           25.7
           28.0
           53.7
 
            55.0
             1.5
           56.5
 
            61.7
            65.4
% Sales
 
 
3.5%
3.6%
3.6%
 
3.3%
3.0%
3.3%
 
3.4%
3.4%
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITA
 
 
           63.9
           79.0
         142.9
 
          163.8
             4.5
         168.3
 
          185.9
          203.8
EBITA Margin
 
8.7%
10.2%
9.5%
 
10.0%
9.0%
9.9%
 
10.3%
10.6%
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization
 
 
             3.5
             2.0
             5.5
 
              2.5
               -  
             2.5
 
              1.0
               -  
% Sales
 
 
0.5%
0.3%
0.4%
 
0.2%
0.0%
0.1%
 
0.1%
0.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
EBIT
 
 
           60.4
           77.0
         137.4
 
          161.3
             4.5
         165.8
 
          184.9
          203.8
EBIT Margin
 
8.2%
9.9%
9.1%
 
9.8%
9.0%
9.8%
 
10.2%
10.6%
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Paid
 
 
 
          (20.0)
 
 
 
 
          (36.9)
 
          (34.6)
          (31.8)
PBT
 
 
 
           57.0
 
 
 
 
         128.9
 
          150.3
          172.1
Taxes
 
 
 
          (16.5)
 
 
 
 
          (37.4)
 
          (43.6)
          (49.9)
Tax Rate
 
 
 
29%
 
 
 
 
29%
 
29%
29%
Net Income
 
 
 
           40.5
 
 
 
 
           91.5
 
          106.7
          122.2
Minority Interest
 
 
 
 
 
 
 
            (1.0)
 
            (1.0)
            (1.0)
Net Income to Common
 
 
 
 
 
 
 
           90.5
 
          105.7
          121.2
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Shares
 
 
 
 
 
 
 
           77.7
 
            77.7
            77.7
 
 
 
 
 
 
 
 
 
 
 
 
 
EPS
 
 
 
 
 
 
 
 
           1.17
 
            1.36
            1.56
% Growth YOY
 
 
 
 
 
 
 
 
 
16.8%
14.6%
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend per Share
 
 
 
 
 
 
 
           0.52
 
            0.61
            0.70
Payout Ratio
 
 
 
 
 
 
 
45%
 
45%
45%
 
DCF Model
 
 
 
 
 
 
2007
2008
2009
2010
2011
2012
2013
 
 
 
 
 
 
 
 
 
 
 
 
Sales
 
 
 
 
          1,695
          1,814
          1,923
          2,019
          2,100
         2,163
         2,206
% Increase YOY
 
 
 
 
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
EBITDA
 
 
 
 
             225
             248
             269
             283
             294
            303
            309
EBITDA Margin
 
 
 
13.3%
13.7%
14.0%
14.0%
14.0%
14.0%
14.0%
Depreciation
 
 
 
 
               57
               62
               65
               69
               71
              74
              75
EBIT
 
 
 
 
             168
             186
             204
             214
             223
            229
            234
Taxes
 
29%
 
 
             (49)
             (54)
             (59)
             (62)
             (65)
             (66)
             (68)
NOPAT
 
 
 
 
             120
             132
             145
             152
             158
            163
            166
Depreciation
 
 
 
 
               57
               62
               65
               69
               71
              74
              75
Capex
 
 
 
 
             (60)
             (63)
             (65)
             (69)
             (71)
             (74)
             (75)
Change in Working Capital
12%
 
 
             (16)
             (14)
             (13)
             (12)
             (10)
               (8)
               (5)
Free Cash Flow
 
 
 
             100
             117
             132
             140
             148
            155
            161
 
 
 
 
 
 
 
 
 
 
 
 
Years Outstanding
 
 
 
              0.5
              1.5
              2.5
              3.5
              4.5
             5.5
             6.5
Discount Factor
8.0%
 
 
96%
89%
82%
76%
71%
65%
61%
 
 
 
 
 
 
 
 
 
 
 
 
Discounted Cash
 
 
 
               96
             104
             109
             107
             105
            102
              98
 
 
 
 
 
 
 
 
 
 
 
 
Discounted Cash
 
            720
 
 
 
WACC
Plus Terminal Value at g=
2%
         1,595
 
 
          21.32
6.0%
7.0%
8.0%
9.0%
10.0%
Fair Enterprise Value
 
         2,315
 
 
0.0%
          24.36
          19.51
          15.89
         13.08
         10.84
2006 Ending Debt (estimated)
           (658)
 
 
1.0%
          29.23
          22.79
          18.22
         14.79
         12.14
Fair Equity Value
 
         1,657
 
Terminal
2.0%
          36.52
          27.39
          21.32
         17.00
         13.76
 
 
 
 
 
Growth Rate
3.0%
          48.68
          34.29
          25.67
         19.93
         15.85
Shares Outstanding
 
           77.7
 
 
4.0%
          72.99
          45.78
          32.19
         24.05
         18.63
 
 
 
 
 
 
5.0%
        145.94
          68.76
          43.06
         30.22
         22.52
Value per Share
 
         21.32
 
 
 
 
 
 
 
 
 
 
Conclusion
 
Wavin represents a compelling opportunity to own at 12x 2007E EPS a growing market leader with structural tailwinds as it takes share in its end markets. This valuation represents a substantial discount to its nearest peers and to its DCF valuation. Based on the mid-teens earnings growth I see at the company along with a generous dividend policy, shareholder returns should be at least 20% annually for the medium term.

Catalyst

Continued earnings growth and strong execution
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