Announces Large Acquisition In The Midwest Our Conclusion
We are reiterating our Outperformer rating on ADENTRA and increasing our
price target to C$52 (from C$51), reflecting a slightly higher 2025E
EV/EBITDA valuation multiple (raised 0.25x to 7.0x) following the accretive
acquisition of Woolf Distributing Company. 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 favourable
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 Woolf contributing sales representing over
20% of the targeted $800MM of additional run-rate revenues from
acquisitions by 2028).
Key Points
Acquiring Woolf Distributing Company: On Monday evening, ADENTRA
announced the $130MM acquisition of Woolf, a value-added distributor of
architectural building and millwork products serving customers in seven
states (from four locations in Illinois and Wisconsin). Woolf’s customer base
will expand ADEN’s presence in the Pro Dealer channel. The transaction
includes an earn-out consideration of up to $15MM ($5MM for each of the
next three years) if the business hits certain stretch targets.
Valuation Appears Attractive: ADEN characterized the Woolf transaction
as being accretive to both EPS (high-single digits) and EBITDA margins.
While the company did not disclose the EBITDA contribution of the business,
we estimate trailing EBITDA in the ~$20MM/year range (assuming a 12.25%
EBITDA margin on Woolf’s LTM sales of $164MM [through June 30, 2024]).
This suggests a trailing EV/EBITDA multiple in the 6x-7x range (pre-
synergies) which compares with the 6.2x-8.5x range paid for the company’s
three large notable prior deals (2016 acquisition of Rugby for $107MM, 2021
purchase of Novo for $343MM and 2022 addition of Mid-Am for $285MM).
Although the price-to-sales multiple of 0.8x is higher than the company’s
historical M&A average of 0.6x, we see sales synergy opportunities being
realized with the company’s Mid-Am platform over the next two years. With
pro forma leverage in the high 2s, we see room for ADEN to remain active on
its M&A pipeline (though near-term deals are likely to be smaller).
Raising EBITDA Estimates This Year/Next Year By 4%/10%: We have
increased our 2024 EBITDA estimate from $189MM to $196MM (reflects the
July 29 close of Woolf). Our 2025 EBITDA estimate increases by $20MM to
$218MM. We see top-line growth of 7.5% in 2025 (3.2% from organic
growth), with ~6.5% organic growth in 2026 (factoring in some sales
synergies from Woolf).