BBCP - Concrete Pumping: Good Near-Term As Well As Long-Term Prospects

2023-08-31 09:34:11 ET

Summary

• Concrete Pumping Holdings is expected to benefit from strong revenue growth driven by demand in commercial and infrastructure markets.
• The company has exhibited robust growth in recent quarters, with double-digit sales growth.
• The company's margin growth is expected to improve due to the stabilization of diesel prices and a higher proportion of high-margin commercial projects.

Investment Thesis

Concrete Pumping Holdings (BBCP) is poised to benefit from robust revenue growth driven by strong demand in the commercial and infrastructure end markets. This coupled with market share gain, expansion of Eco-Pan opportunity, strategic Mergers and Acquisitions (M&As), and federal funding from the Infrastructure Investment and Jobs Act (IIJA) should drive increased revenue in the long term.

In terms of margins, the adjusted EBITDA margin should improve in the coming quarters due to the stabilization of diesel prices and a higher proportion of high-margin commercial projects. Furthermore, the current valuation appears appealing when compared to the company's five-year historical average which combined with the promising growth prospects makes BBCP's stock an attractive buy.

Revenue Analysis and Outlook

In recent quarters, BBCP has exhibited robust growth across all segments, thanks to its focus on gaining market share, strategic M&A, and expanding the Eco-Pan service.

This growth trajectory continued into the second quarter of 2023, marking the seventh consecutive quarter of double-digit sales growth. During this period, the company's revenue increased by 12% YoY to reach $108 million. This impressive growth was underpinned by robust organic growth driven by higher volumes, improved pricing, and the favorable impact of the recent acquisitions.

Segment-wise, the revenue of the US concrete pumping segment increased by 9% YoY to $78 million. This growth can be attributed to the $5 million contribution from the Coastal Carolina acquisition, coupled with an increase in hourly rates charged by the company. Meanwhile, the UK Operations segment experienced a revenue increase of 13% YoY, reaching $15 million, primarily fueled by enhanced pricing strategies across various UK regions. The U.S. Concrete Waste Management Services segment, operating under the Eco-Pan brand, witnessed a remarkable 26% YoY increase in revenue. This growth was driven by the expansion of the salesforce and the introduction of enhanced service offerings, resulting in a substantial boost in organic volume growth.

Looking ahead, the company is well-positioned to achieve revenue growth, benefiting from strong demand in the commercial and infrastructure sectors. The residential market revenues have also been relatively stable for the company despite the macro concerns around rising interest rates. Over the long term, a rebound in the residential market as the interest rate cycle eventually reverses, combined with a continued focus on expanding market share, strategic M&As, and Eco-Pan expansion, is expected to further drive revenue growth.

The commercial end-market, accounting for ~60% of the company's revenue, is poised to sustain its positive growth trajectory due to the ongoing reshoring trends in the U.S. The U.S. government's initiatives to revive domestic manufacturing through the CHIPS and Science Act and the Inflation Reduction Act are spurring manufacturing activities. The incentives provided by this legislation have encouraged manufacturers to relocate production to the U.S. Consequently, the company has witnessed robust growth, particularly in large commercial projects like distribution centers, warehouses, semiconductor fabrication plants, and EV and battery manufacturing facilities. I expect the growth in this market to further accelerate as the federal government continues to deploy stimulus funds.

In the infrastructure end-market, constituting 11% of the company's revenue, momentum is expected to build both in the U.S. and the UK, benefiting from the Infrastructure Investment and Jobs Act (IIJA) and the HS2 rail project . The IIJA allocates funds for transportation and infrastructure projects, including a specific $110 billion for investments in roads, bridges, and major projects. As IIJA fund flow ramps up and is deployed into various projects, the company anticipates an increase in projects this season. The management intends to vigorously pursue these opportunities as construction and infrastructure projects gain traction. Additionally, the long-term nature of infrastructure projects suggests a sustained tailwind for the company's business over the next four to five years. Furthermore, the HS2 rail project in the UK, which is a concrete-intensive project, is set to substantially contribute to revenue growth. The company's expertise in concrete-intensive projects positions it well to capitalize on the robust demand from this project, making HS2 a significant long-term opportunity.

While the commercial and infrastructure markets were expected to be strong even at the beginning of the year, one thing that has positively surprised many investors is the strength in the residential end-market which accounts for ~29% of its revenues. Many investors were expecting a sharp slowdown in this market given the way interest rates have risen. However, not only the slowdown turned out to be shallow, but the company noted that it saw stable revenues from this end-market in Q2, and expects revenue to remain stable in Q3 as well implying we are likely near the bottom in this end-market. The interest rate cycle is near peak and as the interest rate cycle reverses over the next couple of years, we can see a swift recovery in this market given the tight demand-supply conditions following over a decade of underbuild after the great housing recession of 2008.

The company also has an opportunity to increase market share as it currently holds only ~17% of the ~$1.8 bn addressable market. For this, the company is increasing as well as improving its fleet of operational equipment to bolster safety and reliability. Further, it is strategically focusing on securing engagements related to the HS2 rail initiative in the UK region, which is expected to yield a substantial increase in revenue as well as market share.

Over recent years, the company has also undertaken tuck-in acquisitions to broaden the company's geographic footprint within the US and UK regions. These acquisitions not only enhance the company's operational reach but also open doors to cross-selling opportunities for the Eco-Pan service which has witnessed consistent double-digit organic growth since 2021. This business segment offers cost-effective and environmentally friendly solutions for containing and disposing of concrete washout. With a targeted approach to expanding its presence within existing concrete pumping footprints, the company has established sales teams in various locations. This strategy enhances service accessibility and effectively communicates the economic advantages of the Eco-Pan service to potential clients. Given that every concrete placement necessitates a washout service, this situation offers a valuable cross-selling opportunity for BBCP's concrete pumping business. Moreover, it represents a favorable long-term trend that supports revenue growth. Currently, Eco-Pan's market share is just ~5% compared to BBCP's 17% market share in the US concrete pumping sector. As the company continues to cross-sell these services, there is considerable room for long-term improvement in market penetration for Eco-Pan services.

In summary, the strength in the commercial and infrastructure segment should drive the company's near-term revenue. In the longer term, the company's growth strategy, encompassing market share expansion and Eco-Pan service cross-selling, in conjunction with the ramping up of projects funded through the IIJA, should drive revenue growth.

Margin Analysis and Outlook

In recent quarters, BBCP's margin growth was impacted by elevated inflationary input costs, encompassing diesel fuel and labor expenses. These were further compounded by costs linked to additional headcount related to recent acquisitions.

Moving into Q2 FY23, the company witnessed an improvement in input costs, particularly with the stabilization of diesel fuel prices. However, this progress was counterbalanced by increased labor costs due to reduced equipment utilization. Challenging weather conditions, primarily affecting areas west of the Rocky Mountains and the company's home state of Colorado, contributed to decreased equipment usage. Consequently, the company's adjusted EBITDA margin experienced a year-on-year decline of ~200 basis points, settling at 26.7%.

Looking ahead, while inflationary labor costs remain a near-term challenge, the combination of lower diesel prices and a greater proportion of high-margin commercial projects is poised to more than offset these concerns and facilitate margin growth in the upcoming quarters.

Last year, disruptions in transportation due to reduced Mississippi River water levels and supply shortages stemming from the Russian invasion of Ukraine led to a surge in diesel prices, negatively impacting BBCP's margins. However, diesel prices have since seen some easing and stabilization. The U.S. Energy Information Administration ((EIA)) projects a decline in diesel prices for 2023 and an even further decrease in 2024. This improvement in diesel prices, combined with the favorable YoY comparison, is anticipated to bolster the company's margin growth in the coming quarters.

Furthermore, the strength in the commercial market and a slowdown in the residential market have improved the mix for BBCP. The commercial market traditionally carries superior margins compared to other end markets. The residential and commercial end markets now constitute 29% and 60% of total revenue, respectively, compared to 33% and 56% in FY22. By leveraging higher-margin opportunities within the commercial sector, this shift in the end-market composition is poised to help margin growth looking forward. Moreover, improved fleet utilization and operational efficiency as the company enters its peak summer construction season are also expected to contribute to margin expansion in the current quarter.

Given these factors, I have an optimistic outlook regarding the company's margin growth prospects.

Valuation and Conclusion

The company is currently trading at a forward P/E of 15.06x FY23 consensus EPS estimate of $0.50 and an 11.19x FY24 consensus EPS estimate of $0.67. Over the last 5-years, the company's stock has traded at an average forward P/E of 41.15x. The company's forward EV/EBITDA as per consensus estimates is 6.94x . BBCP's valuation looks attractive considering its growth prospects. The company has good near-term as well as long-term prospects. In the near term, strength in the commercial and infrastructure market is expected to help growth while in the long term, growth should benefit from an eventual recovery in residential construction, market share gains, acquisitions, and expansion of Eco-Pan opportunity. The company's margin outlook is also good thanks to easing diesel prices and increasing commercial mix. This coupled with reasonable valuation makes the stock a good buy.

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