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FRTA- Forterra Inc.


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I'm writing about an idea that has already been posted on VIC (see attachment).  This is my first post on COBF, and I would be curious if anyone has further thoughts on this idea or on the water infrastructure segment more generally! 


Forterra is a U.S.-based manufacturer of water infrastructure products that operates in two segments: drainage pipes/products and waters pipes/products.  The business is pretty evenly exposed to infrastructure, residential, and non-residential construction segments (34%/40%/26% of FY revenue, respectively).  Both segments stand to benefit significantly from Trumpian infrastructure spending. 


While FRTA has run up in the last few trading sessions (~10%), it still seems cheap relative to other businesses with significant infrastructure exposure--currently trades ~8x 2016E EBITDA.  This seemingly valuation is due to a couple things.  First, the company's IPO in October was not an overwhelming success and awareness in the markets about the company still seems weak (only 3 analysts on the company's Q3 conference call).  The company also has been growing rapidly through acquisitions, in which it acquires local, established water-related businesses throughout the U.S.  The market seems cautious about this inorganic growth and that the company has been using mostly debt to fund bolt-ons (FRTA is ~3.5x levered, which is slightly more than comps).  Lastly, I've seen concerns expressed in research that the company's ductile iron pipe sales may be eroded by the shifting preference to plastic pipes.


Mitigants to market concerns:

-The company has been able to continually improve EBITDA margins through its acquisition cycles.  The local nature of the business means that acquiring businesses with significant local market share may be easier than trying to grow organically.     


-FRTA has number 1 market share in iron pipes and concrete pressure pipes and claims to be the only water infrastructure manufacturer to offer full line of drainage and water pipe products...creates significant cross-selling opportunities   


-Company's debt has no near-term maturities


-Q3 EBITDA likely depressed due to extremely heavy rainfall throughout the southeast that has delayed projects


-FRTA usually pays an effective tax rate ~60% and would benefit significantly from corporate tax cuts


-Capex needs are minimal and are typically ~3% of revenue









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I think they have a tax sharing agreement so I think their tax bill will remain complicated and they may not benefit much from a tax cut (if at all).


Otherwise I like the concept but it's a big time commitment to dig into. I'll write again if I do.

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  • 2 months later...

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