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Industrials
TRG sees more change ahead that is positive for GVA’s profitability, cash flow and the multiple that investors should apply to the stock. They believe the business is evolving to look more like Knife River and Construction Partners - KNF trades at ~10x FY25 Street estimates and ROAD ~13x (vs. GVA at ~7x TRG’s estimates). Upcoming catalysts include: 1) Positive operating backdrop and rising margins. 2) Increased disclosures for the Materials segment. 3) Updated multi-year guidance to be provided on the 3Q24 conference call. TRG has been bullish on the name for a few years now (the stock is up c.100% over the past year) and they continue to believe the shares are undervalued.
Industrials
TRG has maintained a bullish view of GVA in the past few years, as the company worked down its Old Risk Portfolio and executed on a low-risk consistent growth strategy. The stock is valued at ~5x EV/EBITDA, which TRG believes is overly punitive and lumps it in with Fluor and Tutor Perini. They believe this is the wrong peer set. Instead, GVA should be compared to Construction Partners and Knife River, who sell at ~10x EV/EBITDA. These three companies have vertically integrated operations (materials producers + contracting services). ROAD and KNF have consistently produced better margins than GVA, but GVA’s 2024 targets show that it can close that gap.
Industrials
TRG initiates coverage on ROAD, a company benefitting from a structural US population shift to “smile states” and the passage of significant US and state funding initiatives supporting a 5+ year runway for infrastructure and private construction projects. They expect ROAD to generate significantly more cash annually through 2025 as EBITDA margins improve back to 12%+ and revenue continues to grow at historical rates (~18-20% p.a. - balanced mix of organic / inorganic growth). Importantly, management has also taken proactive steps (ahead of peers) to focus on recycled materials and additional ways to reduce the firm's carbon footprint. 12-month TP $39.
