Tony Anderson
Shares of MasterBrand, Inc. (NYSE:MBC) hit the newswires recently as the largest North American residential cabinet manufacturer increased its market positioning with the purchase of Supreme Cabinetry Brands. This is a substantial deal, as MasterBrand has only been a separate business since late 2022.
While MasterBrand trades at a non-demanding earnings multiple, there are many moving factors, as multiples in the industry are quite modest overall. This means that I am not automatically chasing the shares here, but am curious to learn more about the prospect for the shares, certainly after the recent deal.
About MasterBrand
MasterBrand is the largest North American residential cabinet manufacturer, founded back in 1954. Owner of brands such as Aristokraft, Kemper, Diamond, Mantra, Schrock, Starmark Cabinetry and others, the company employs over 12,000 workers who produce and distribute cabinets from over 20 factories to more than 4,000 dealers, among other channels. While dealers are responsible for half of sales, the company directly services retail customers (with in-stock and semi-custom solutions) as well as builders.
A $2.5 billion business pre-pandemic saw sales peak at $3.3 billion, aided by Covid-19 trends and the impact of inflation, as a reversal of demand and pricing power meant that sales fell back towards $2.7 billion in 2023. Of course, higher interest rates and the pandemic bringing forward remodeling jobs hurts demand for both new-built homes and repair & remodeling jobs.
Despite the decline in sales last year, the company managed to grow low double-digit EBITDA margins towards the mid-teens, a real achievement amidst top-line sales pressure, as this arguably has been driving the stock higher in a tough high-interest rate environment.
Note that MasterBrand was spun-off from Fortune Brands late in 2022. Shares started trading about the $10 mark, traded at single digits during the first half of 2023, when investors were fearful about the impact of higher interest rates. Shares have seen a steady rise to a high of $19 per share in March, now trading at $16.
Picking Up The Valuation
In February of this year, MasterBrand reported a big 17% decline in 2023 sales to $2.73 billion, but amidst inflationary pressures dropping off, the company grew gross profits by more than 4 points to 33% of sales.
The company was very profitable, as it posted GAAP operating profits of $306 million, even after a combined $25 million restructuring and amortization charge, with GAAP earnings of $182 million coming in at $1.40 per share. Adjusted earnings came in at $1.49 per share, with most of the modest adjustment relating to restructuring charges, with earnings on this front down from $2.02 per share in 2022 amidst the severe pressure on the topline.
Net debt was reported at $558 million as the company made huge inroads in reducing net debt during the year, for a 1.5 times leverage ratio based on adjusted EBITDA of $383 million.
For the year 2024, the company guided for low single digit sales declines. Adjusted EBITDA was seen between $370 and $400 million, with adjusted earnings seen between $1.40 and $1.60 per share, largely at par compared to 2023.
With 130 million shares trading at $16 per share, the equity value of the firm comes in close to $2.1 billion, for a roughly $2.6 billion enterprise valuation. This values the business at about 1 times sales, and at less than 7 times EBITDA, non-demanding multiples certainly.
Early in May, the company posted a near 6% fall in first quarter sales to $638 million, with net debt coming in flattish at $554 million, with the company reiterating the full-year guidance.
A Substantial Deal
Taking advantage of the reduced leverage profile, MasterBrand announced a $520 million cash deal to acquire Supreme Cabinetry Brands from GHK Capital Partners LP later in May. Valued at 8.9 times EBITDA, after factoring in $25 million in net present value of tax benefits, the deal comes at a premium. However, if synergies, pegged at $28 million per annum, are included, the purchase multiple drops to 5.9 times EBITDA. This suggests an $84 million EBITDA contribution (including synergies).
The deal is set to close in the third quarter, and while the net debt load will double to just over a billion, leverage ratios are only set to rise to about 2.5 times, factoring in the added EBITDA here as well. With the deal, the company will fill in gaps in the premium segment, as well as adding bath products to its product portfolio.
Moreover, real synergies of $28 million are seen in year three, mostly from operations and to a lesser extent the supply chains and process improvements. While it will take three years for synergies to be fully realized, most of the synergies are seen in the first two years.
What Now?
The deal for Supreme comes at about of fifth of the enterprise valuation of MasterBrand here, making this a substantial deal. Of course, leverage will increase a bit as the modeling is complicated with the EBITDA of the acquired business not having broken out, as moreover the revenue numbers of Supreme have not been communicated.
That being said, the company expects unknown accretion from a current $1.50 per share number, with the shares trading at just 10 times earnings, and likely lower, although that leverage ratios will increase towards 2.5 times EBITDA here.
These multiples look very modest, but this applies to multiple operators in this industry. A name like American Woodmark (AMWD), which makes kitchen and bath cabinets, is a serious competitor. This company saw 2023 sales down 11% to $1.85 billion on the back of the similar headwinds as those seen by MasterBrand, while posting similar EBITDA margins at 13% and change. Commanding a $1.7 billion enterprise valuation, the company trades at just below 1 times sales, largely in line with the valuation of MasterBrand.
Amidst all this, I would like to learn a bit more about the recent deal and company, certainly after shares have doubled over the past year. Shares look very interesting to keep a close eye on, but before reconsidering a neutral stance (despite a modest valuation), I would like to learn more about the business and the recent deal.
Credit: Source link
