In cases like this, usually what happens is your underwriting on earnings is too aggressive. I've seen the "it's cheap, will return the market cap in x years" thesis blow up dozens of times before, and it's always because the cash didn't materialize.
The market is telling you this is peak earnings. Backlogs can be cancelled, work stopped/halted, budgets changed (esp after an election year). I'm not sure I'd be so fast to rest my hat on that as a justification for it being particularly cheap, and I think to really convince people of the thesis that's what you need to prove out. Why can't their backlog be cancelled? How fast is it growing? Who are their counterparties, what are they building, why won't it stop/is it funded etc.
Earnings will be lumpy. There are no recurring revenues, and the projects are few and big. As such, you might say it is aggressive of me to have any view on the next 12 months.
However, all the data points we have point towards more growth over the next years, and the valuation does not support that.
We are in an election year. We don’t know who’s going to win, but Trump strikes me as a guy who likes construction :)
CFO said that backlog doesn't tend to cancel. Projects tend to dry up and then competitors that usually aim for other kind of projects get into the space and aggressively bid for contracts.
He also said that they expect to be at 70$ million cash at the end of the year (they were now at 22 or so)
Thanks for adding this. Question is when projects will dry up and I guess this is what the market is battling. Like i write: If it lasts for as long as Management says, then the current valuation doesn’t make sense. Esp considering the cash generation you are alluding to
It's nuts because if this valuation is the same year end and they made another 50€ million repurchase, they would have repurchased around 20 to 25% of the company in a single year. Actually in closer than 6 months than a year.
You can see things I reference in the CFO interview released yesterday.
This seemed to be a sleepy little company for a long time. Looking back at the data, they didn't really start growing until 2022 and since them, the growth has been very aggressive. Was there a major change in management or ownership that caused this?
ADF is highly cyclical. Meaning that in cyclical downturns, order book and revenues get hit pretty significantly. The reason why you are seeing growth from 2022 onwards are simple: 1) Cyclical upturn for steel where market demand has increased and 2) Automation investments for the company which has allowed it to scale production (both in terms of scaling revenues and improving margins). The benefits from the automation investment really starting showing towards the second half of last year, and has continued into this year. If you look at ADF’s historical stock chart, you will see how the cycles have affected it’s stock price historically
If this business is ceasing to exist in 5 years(hypothetically), why is a 8x multiple conservative and not e.g a 4-5x multiple instead? Perhaps this is what the market is pricing in
If this company, which has excisted since 1956, ceases to excist in 5 years, then 8x EBITDA is too high. If it ceases to excist in 5 years with its current valuation, they would (with some assumptions) be able to pay back its shareholders in cash over that period
I don’t think they did conference calls before, atleast I am not able to find it.
However, from their Q1 presentation for last year (on the 7th of June 2023, i.e at the beginning of this explosive growth), the CFO was positive about the market outlook, but he’s was not overselling it. He was saying things like «the growth is there, the market looks good and we expect to maintain good numbers in the coming quarters». So essentially speaking the same language as he is now.
I will characterize Management as realistic and trustwhorty. They also focus on not taking on projects with too much risk, so there is a conservatism at the heart of this company, which is family owned and was founded in 1956.
Thanks for putting together these thoughts on ADF. That's a compelling and coherent investment case.
Re point 3) The source is the CEO in the most recent Conf call - here at 11:10
https://app.webinar.net/EPnVjR6jr71/on-demand
Thanks!
In cases like this, usually what happens is your underwriting on earnings is too aggressive. I've seen the "it's cheap, will return the market cap in x years" thesis blow up dozens of times before, and it's always because the cash didn't materialize.
The market is telling you this is peak earnings. Backlogs can be cancelled, work stopped/halted, budgets changed (esp after an election year). I'm not sure I'd be so fast to rest my hat on that as a justification for it being particularly cheap, and I think to really convince people of the thesis that's what you need to prove out. Why can't their backlog be cancelled? How fast is it growing? Who are their counterparties, what are they building, why won't it stop/is it funded etc.
Earnings will be lumpy. There are no recurring revenues, and the projects are few and big. As such, you might say it is aggressive of me to have any view on the next 12 months.
However, all the data points we have point towards more growth over the next years, and the valuation does not support that.
We are in an election year. We don’t know who’s going to win, but Trump strikes me as a guy who likes construction :)
CFO said that backlog doesn't tend to cancel. Projects tend to dry up and then competitors that usually aim for other kind of projects get into the space and aggressively bid for contracts.
He also said that they expect to be at 70$ million cash at the end of the year (they were now at 22 or so)
Thanks for adding this. Question is when projects will dry up and I guess this is what the market is battling. Like i write: If it lasts for as long as Management says, then the current valuation doesn’t make sense. Esp considering the cash generation you are alluding to
It's nuts because if this valuation is the same year end and they made another 50€ million repurchase, they would have repurchased around 20 to 25% of the company in a single year. Actually in closer than 6 months than a year.
You can see things I reference in the CFO interview released yesterday.
This seemed to be a sleepy little company for a long time. Looking back at the data, they didn't really start growing until 2022 and since them, the growth has been very aggressive. Was there a major change in management or ownership that caused this?
ADF is highly cyclical. Meaning that in cyclical downturns, order book and revenues get hit pretty significantly. The reason why you are seeing growth from 2022 onwards are simple: 1) Cyclical upturn for steel where market demand has increased and 2) Automation investments for the company which has allowed it to scale production (both in terms of scaling revenues and improving margins). The benefits from the automation investment really starting showing towards the second half of last year, and has continued into this year. If you look at ADF’s historical stock chart, you will see how the cycles have affected it’s stock price historically
If this business is ceasing to exist in 5 years(hypothetically), why is a 8x multiple conservative and not e.g a 4-5x multiple instead? Perhaps this is what the market is pricing in
If this company, which has excisted since 1956, ceases to excist in 5 years, then 8x EBITDA is too high. If it ceases to excist in 5 years with its current valuation, they would (with some assumptions) be able to pay back its shareholders in cash over that period
Exist*
How conservative/trustworthy was this mgmt before? What happened in the last cycle?
I don’t think they did conference calls before, atleast I am not able to find it.
However, from their Q1 presentation for last year (on the 7th of June 2023, i.e at the beginning of this explosive growth), the CFO was positive about the market outlook, but he’s was not overselling it. He was saying things like «the growth is there, the market looks good and we expect to maintain good numbers in the coming quarters». So essentially speaking the same language as he is now.
I will characterize Management as realistic and trustwhorty. They also focus on not taking on projects with too much risk, so there is a conservatism at the heart of this company, which is family owned and was founded in 1956.
Thanks for the input. Also I found conference calls going back to 2010 on capiq