Published: Sept 2, 2024
By: Philip MacKellar
How long does a corporate turnaround take? The answer varies widely – in an optimistic scenario, the answer may be a few years, while in pessimistic cases, the answer may be never. Accordingly, investors interested in transition candidates must have significant patience as well as a rigorous methodology for sussing out possible turnaround winners from losers.
One company that is successfully executing a multi-year transformation is Mattr Corp. MATR-T +2.22%increase . The Toronto-based materials technology enterprise shed its Shawcor moniker in 2023 as part of its strategy and joined the TSX Composite roughly a year ago after rallying from penny stock status in early 2020 to a market cap of over a billion dollars.
Here at Contra the Heard, we acquired shares in 2021 and 2022 for an average price of $5.04. At the time, the thesis was straightforward: The organization had survived a gruelling 2020 and had many features that led us to believe it would be one of the names in the sector that thrived long-term. Despite the market’s negativity at the time, the underlying business was remarkably strong, and its various divisions had good prospects. The possible capital appreciation appeared solid, the valuations were excellent, and the firm had a history of respectable cash flows. The balance sheet was decent, too; the current ratio –which is the current assets divided by current liabilities – was regularly well over 2.0, debt was stable, and the share count had been flat for a decade. Insiders owned roughly 1.5 per cent of the stock at the time, and Turtle Creek, the successful (but quiet) independent asset manager based in Toronto, owned 17.8 per cent.
When we bought, the company straddled the new and old energy economies. Its roots were in the oil and gas sector, but it had been rapidly expanding into electrical insulation products, power cables, and wire harnesses, as well as water tank storage and storm-water management solutions. The enterprise was executing this diversification through a combination of organic growth and M&A, including the 2019 purchase of plastic storage tank maker ZCL Composites.
Since 2022, Mattr has divested its oil and gas division, and is now focused on its remaining business units serving customers in the industrial, energy, infrastructure, communications, and transportation sectors. By making this pivot, Mattr is betting on the energy transition, climate change adaptation, better storm-water management, communication upgrades, and the replacement of aging infrastructure.
In late 2023, Mattr unveiled its post-oil-and-gas roadmap through 2030. The plan can be divided into two phases. During the first stage, the organization will spend more than $150-million in capex to build out, modernize, and optimize its production footprint by 2025. The executive team hopes these investments will increase annual sales growth by over 10 per cent a year through 2030, expand EBITDA margins by over 20 per cent, and be done with a free cash flow conversion rate of over 70 per cent. For those new to the term, the free cash flow conversion metric measures how much of a company’s operating income is converted into free cash flow and how efficiently the organization is deploying its resources to generate cash. By the end of this decade, the C-suite estimates revenues will have doubled versus 2023.
Along the way, the top brass wants to maintain the balance sheet and keep net-debt-to-EBITDA below 2.0. At the same time, though, they have also signalled they may consider M&A. While an acquisition could improve top and bottom-line performance further, assuming a deal can be had at a reasonable price, a big enough purchase may be at odds with its desire to maintain balance sheet health. How the executive team squares these potentially contradictory desires has yet to be determined and does represent a potential risk if M&A is executed poorly.
Despite the pivot into growth sectors and the outlook through 2030, the stock has been in the doldrums for 2024, being roughly flat year-to-date. The second quarter saw top-line improvements, but earnings a share missed consensus analyst estimates. Moreover, the fact that two new production facilities came online was overshadowed by weak third-quarter guidance owing to a project deferral by a significant customer. The market may also be weighing the estimated $90-million to $100-million capex for 2024. Investors rarely want to invest in names when capex is so heavy, even if the potential cashflows thereafter are hefty.
Nevertheless, there is more upside here, and the prospects appear strong. We think the market is too focused on capex requirements to upgrade and expand its production facilities and has yet to fully recognize the financial benefits that will flow from these expenditures in the years ahead. Additionally, valuations remain low, the economic trends underpinning the business are good, and the management team is positioning the company to take advantage of these trends. The lacklustre year-to-date share price performance and softness following the latest quarterly results are likely a pause before the next leg higher.
Though the ticker is trading well above the $5.04 where we bought it, there is plenty of room to run. Our sell target currently sits between $20 and $25, but there is, as always, no guarantee it will get there.
Philip MacKellar is a writer for Contra the Heard Investment Newsletter.