Well Positioned To Continue Elevating Margins Through M&A Our Conclusion
We are reiterating our Outperformer rating on ADENTRA and increasing our
price target to C$53 (from C$52), reflecting an expected 2025 return of the
majority of the duties (~$26MM) paid under the hardwood plywood trade
case. With ~80% of the company’s sales derived from housing end markets
(split evenly between new res and R&R), ADEN’s long-term volumes should
be supported by North American housing activity remaining above mid-cycle
levels given favorable demographic trends and elevated home equity levels.
At the same time, we expect additional M&A in coming years as the
company advances towards its Destination 2028 plan (with the recent Woolf
acquisition contributing sales representing over 20% of the targeted $800MM
of additional run-rate revenues from acquisitions by 2028).
Key Points
2024/2025 EBITDA Estimates Largely Unchanged: Our Q3 EBITDA
estimate of $52MM (vs. $48MM in Q2) reflects an ~11% Y/Y sales increase
(better than the 6%-8% Y/Y declines over H1), reflecting assumed
stabilization in prices and two months of contribution from the Woolf
acquisition. ADEN is guiding for flat sequential organic EBITDA. For full-year
2024, we see organic revenues declining 0.8% (weighed down by the ~7%
decline in H1), better than industry peer, MasterBrand (largest NA residential
cabinet manufacturer), which recently indicated that it expects its 2024
organic sales to be down low-single digits Y/Y. While prices declined ~5%
Y/Y in Q2, this was markedly better than the 9%-10% decline rates in the
prior three quarters. At the same time, ADEN appears to be managing
margins well as prices normalize (and is even seeing signs of prices moving
higher again for doors and MDF mouldings).
Consumption and pricing trends for ADEN’s architectural building products
tend to lag other building products given that they are typically installed in the
finishing stages of new builds and renovation projects. With our expectation
that organic volumes see low-single-digit growth in H2, we expect overall
organic revenue comps to average 3%-4% in H2 (on flattish pricing), with 3%
organic growth in 2025 as the top line grows in line with inflation/historical
R&R growth rates.
We expect gross margins to average 21.6% this year (vs. 20.8% last year),
with levels moderating from 21.9% in H1 to 21.4% in H2. Our longer-term
estimates assume a gross margin of 21.2%. We forecast an 8% Y/Y increase
in EBITDA this year to $199MM, before levels increase ~10% to $218MM in
2025E (with the growth largely fueled by the $130MM Woolf acquisition).
Attractive Valuation: ADEN’s current valuation (6.6x 2025E EV/EBITDA vs.
RCH at 10.5x) looks compelling given its increasing mix of non-commodity-
type products (share of which will likely grow further through M&A), large
U.S. network and recent public-market M&A (including MasterBrand’s
purchase of Supreme Cabinetry earlier this year for 8.9x LTM EBITDA and
Home Depot’s acquisition of SRS at ~16.6x trailing EBITDA).