Comments & Adjustments
Raymond James analyst Daryl Swetlishoff views Doman Building Materials Group Ltd.’s (DBM-T +2.22%increase
) US$255-million acquisition of South Carolina-based Tucker Lumber LLC as “transformative,” calling the assets “complementary to Doman’s existing footprint (zero overlap), with its operations located across 10 previously unserved southern/east coast states (Carolinas, Florida, Georgia, Virginia, West Virginia, Delaware, Maryland, New York, Pennsylvania) — many with high-growth attributes.”
“We regard the deal as highly attractive — supporting 40-per-cent treated lumber capacity expansion and estimated 25-30-per-cent 2025 EBITDA and EPS accretion,” he added. “Additionally, the acquisition complements Doman’s existing U.S. operations by adding scale, volume, and additional reach into adjacent U.S. South/East Coast geographies.
“Completed at just 5.5 times 2025 EV/EBITDA and US$319/mfbm [thousand board feet] on a capacity basis, we highlight the deal is immediately accretive given DBM shares traded at a healthy 1.5 times premium pre-announcement. Albeit heading into a seasonally slower period, we expect M&A-driven earnings momentum in coming quarters to send DBM shares higher while evidence of margin expansion, which we highlight remains a key focus for the company, will also present itself after DBM executed on two deals year-to-date.”
Mr. Swetlishoff estimates the deal, which was announced before the bell on Tuesday, will increase the Vancouver-based company’s U.S. revenue by 40 per cent, and he’s forecasting U.S. market exposure to hit 70 per cent on a run rate basis, which implies “a more than tenfold increase over the past decade.”
“Reflecting the asset’s attractive geographic footprint and product portfolio, we note a series of modest cost and operational synergies provide additional upside, in our view, including: 1) immediate purchasing scale in lumber treatment chemicals; 2) the ability to leverage DBM’s direct manufacturer relationships; 3) the opportunity to bolster treatment plant utilization rates and eliminate third-party outsourcing,” he said. “Despite this, we contend the deal is more about the prospective growth opportunity, with synergies estimated in the single digits on an EBITDA basis. While Doman will prioritize integrating the asset over the near term, we also envision additional tuck-ins to augment this new footprint over time.”
Also pointing to “improving macro tailwinds on the back of a North American easing cycle” and an expectation of bottoming building materials markets, Mr. Swetlishoff increased his target price to $11.50 from $9.75, “backstopping a 55-per-cent total return inherent in the shares. The average on the Street is $9.42.
“We reiterate our Strong-Buy rating and highlight Doman as a top building materials pick featured on the Raymond James’ 2024 Best Picks’ list,” he concluded.
Elsewhere, other analysts making target adjustments include:
* Stifel’s Ian Gillies to $9.25 from $9 with a “buy” rating.
“Strategically, the deal helps turn Doman in a coast-to-coast distributor of pressure treated lumber products,” he said. “Financially, we estimate the deal is 7.5-per-cent accretive to EPS and 4.1-per-cent accretive to FCF/sh.”
“Doman offers torque as a derivative to the U.S. home builder trade. We continue to think a catch-up trade for DBM is likely given it has underperformed the XHB (S&P Homebuilders Index) by 36 per cent year-to-date. The company has just increased its exposure to U.S. homebuilding through the Tucker acquisition, plus its elevated B/S leverage, will give it significant equity torque if a meaningful earnings recovery occurs in either 2025 or 2026. Every 5-per-cent increase in our 2025 estimated EBITDA at the current EV/EBITDA of 6.6 times would add $0.86/sh to the equity price.
* Canaccord Genuity’s Yuri Zoreda to $11 from $9 with a “buy” rating.
* CIBC’s Hamir Patel to $9 from $8.50 with an “outperformer” rating.