TGLS - Tecnoglass: A Strong Q1 And A Bright Future Ahead

2023-05-08 08:00:00 ET

Summary

• Tecnoglass is leader in the architectural glass and has established a reputation for high-quality products and exceptional customer service.
• TGLS is well-positioned to benefit from several tailwinds, including urbanization, sustainable construction practices, increasing government infrastructure spending, and the popularity of glass facades.
• The firm is managed by its founder who have major incentives and an incredible track record.
• Despite the recent rally, valuation is not a concern due to an underappreciated story and rock solid profitability / growth prospects.

Company presentation

Founded in 1984 and headquartered in Barranquilla, Colombia, Tecnoglass (TGLS) is a Colombian company specializing in the design, manufacture, and distribution of architectural glass, windows, and aluminum products for residential and commercial construction.

The group offers a wide range of products that are designed to meet the demand of the construction industry such as:

- Architectural Glass

- A wide variety of Windows: (hurricane-resistant windows, energy-efficient windows, and impact-resistant windows…)

- Aluminum Products (frames, doors, curtain walls…)

- Solar Control Products (Low-E glass, solar coatings, and tinted glass…)

- Glass Hardware (hinges, handles, and locks…)

Note that 96% of the firm's revenue comes from the U.S.

Going more into details, the firm is mainly exposed to the Southern states with Florida accounting for close to 64% of U.S. revenues.

Note that TGLS is vertically integrated which is good to consider when seeking investment opportunities in the construction industry. The firm has already made significant investments in vertical integration, including the development of its own glass recycling plant. The group plans to continue to work in this way in order to improve efficiency, reduce costs, drive growth and profitability.

Overview of a very solid Q1

TGLS reported a strong quarter with record first-quarter results, including record revenues (up 50.6% YoY to $202.6 million), gross profits (gross margin of 53.2%, up 830 basis points YoY), adjusted EBITDA (Adjusted EBITDA was up 89% YoY) and backlog (+19% YoY to $776 million) reflecting strong momentum in commercial demand and market share gains in single-family residential. The company raised its full-year 2023 growth outlook for adjusted EBITDA to a range of $315 million to $335 million on total revenues of $810 million to $850 million.

The company's growth is driven by its sustainable competitive advantages, investments in automation and capacity enhancements, and ability to serve a broader market with a broader product offering. The firm is experiencing rapid growth and demand for its products, particularly in the Southeast U.S., where it enjoys secular tailwinds.

Major long-term tailwinds on the horizon

As the construction industry continues to grow, TGLS is in my opinion well-positioned to thrive.

I identify several drivers that might play in favor of TGLS:

The first one is linked to the urbanization trend. Indeed, as more people move to cities, there will be a growing demand for new buildings and infrastructure. The urbanization rate is high in the US (close to 82%) and is expected to reach 90% in 2050.

The other tailwind is linked to the strong demand for sustainable constructions and retrofitting. As you know, there is a growing trend towards sustainable construction practices, which include the use of energy-efficient products and materials. TGLS is well-positioned to benefit from this trend, as it offers a range of energy-efficient products, including Low-E glass and solar control products.

According to a study made by McKinsey , this market could represent an $800-1900 billion opportunity in 2050.

One other driver to consider is linked to U.S. Infrastructure Bill ($1.2 trillion bipartisan Infrastructure Investment and Jobs Act + $2.3 trillion from the Build Back Better Act resulting in $3.5 trillion investments). The U.S. Government, but also many governments around the world are increasing their infrastructure spendings to support economic growth. This trend is driving demand for construction materials and products.

Finally, TGLS potential is also driven by the increasing popularity of glass facades and of glass use in general, especially in construction. Indeed, glass facades are becoming increasingly popular in modern architecture, as they offer a range of benefits, including natural light, energy efficiency, and recyclability. This trend is driving demand for high-quality architectural glass products, which is a core product offering of TGLS.

A study made by Global Market Insights highlighted that the global flat glass market size was valued at over $88 billion in 2020 and is expected to grow at a CAGR (Compound Annual Growth Rate) of around 7% between 2021 and 2027 to reach $180 billion.

Finally, as TGLS is strongly exposed to Southern U.S. states. Thus, I expect the group to benefit from demographic trends linked to migration in southern states. This trend has accelerated after the Covid-19 crisis and was still visible in 2022 according to CBS .

Focus on Management

When I invest in firms, I tend to appreciate when management members have incentives linked to the firm performance. I appreciate it even more when the current management is composed of the firm's founders. With TGLS, we have these two elements. Indeed, the group was founded by the current CEO, Christian Daes, and his brother, Jose Manuel Daes, in 1984. Christian Daes is a Colombian entrepreneur and business executive who has been leading the company since its inception. He has over 35 years of experience in the glass and construction industry. Through a Holding called Energy Holding Corp, the management has 56.48% of the shares outstanding which is an interesting element to consider in my view.

Financials and Valuation

To compute this analysis, I selected TGLS peers operating in the construction materials industry mainly in the windows/doors one. All these peers are comparable in terms of activity but also in terms of market cap.

I selected Apogee Enterprises (APOG), PGT Innovations (PGTI), Quanex Building Products (NX), American Woodmark Corp (AMWD), and Masonite International (DOOR).

First, when looking at debt, TGLS is well positioned as it has a very strong short and long-term liquidity position with a current ratio that is close to the group average and the lowest Debt/EBITDA ratio. However, what attracts my attention is linked to the valuation. Indeed, when you have a look whether at the PE and EV/EBITDA, you might conclude that the firm appears to trade at a reasonable level of valuation with a 14% premium taking the PE ratio as a reference, and at a 5% discount taking EV/EBITDA as a reference. That is true, the firms trade at conservative levels of valuation. These levels might be too conservative in my view.

This slight "premium" is very reasonable and justified by two elements:

- TGLS has very strong profitability

- TGLS has solid and robust growth expectations

Since its listing, TGLS never stopped to increase its profitability thanks to wise investments and major progress in the creation of a fully integrated business model.

Regarding earnings growth, I expect TGLS earnings to grow at 5% per year during the upcoming 5 years which is slightly under the growth rate of the flat glass U.S. market. Management plans to pursue its operations improvement objectives while focusing on margins and investing in M&A. All these elements should support growth and profitability.

I choose a 3% perpetual growth rate. Representing the average US industrial growth rate from 1920 to 2022. To these numbers, I applied a 10% discount rate which is our firm's WACC. With such assumptions, we reach a target price of $62 representing a 30% upside potential.

Risks

Some important risks are to consider especially when looking at a construction company:

- Should we get into a recession, or should interest rates stay higher for longer, this might impact the dynamic in the real estate market and thus TGLS activity. However, note that close to 30% of TGLS business is linked to the repair and replacement of glasses which is immune to interest rates.

- Tougher competition than expected and disruption in the glass industry in a market composed of many small players.

- Reduction in US spending regarding infrastructure linked to Debt ceiling negotiations.

Conclusion

In my view, TGLS's business and quality are underappreciated. The company seems well-positioned to take advantage of all the opportunities we mentioned earlier. Management has a rock-solid track record of incentives leading me to expect that the team will continue to deliver during the upcoming years. They have in my view all the cards in hand to maintain TGLS' leading position while delivering above-market growth, profitability, and value to its shareholders. I expect a 30% upside for 2023 and initiate on TGLS with a Strong Buy rating and a target price of $62.

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