Feature: Mattr Infrastructure Technologies

Mattr is a materials technology company that has transformed from a highly cyclical business to one that is more stable and poised to grow in both its composites business and it connection technologies business.

History

Mattr’s history dates back to the 1930s when Francis Shaw started a general contracting business in Ontario. By the mid-1950s, the company had developed ShawPipe, a pipe coating technology using polyethylene and began to expand across Canada. ShawPipe listed on the Toronto Stock Exchange in 1969, and the company continued to grow, expanding into the U.S. market and building out their product line. In 1980, the company changed its name to Shaw Industries. After several acquisitions during the 80s and 90s, it became the largest pipe coating company globally.

In 2001, the company changed its name to ShawCor, and over the years acquired several adjacent businesses. These included DSG Companies, a German company that expanded their heat shrink business, and in 2008, they acquired FlexPipe Systems, a leading manufacturer of composite flexible pipe. By the end of 2018, the company had two reporting segments: Pipeline and Pipeline Services (PPS) and Petrochemical and Industrial. The PPS segment generated ~85% of the revenue, while the industrial business – which included ShawFlex (wire and cable) and DSG-Canusa (heat shrink technology) accounted for the remaining ~15% of the business.

In 2018, ShawCor announced that it was acquiring ZCL Composites for $308M – a leading provider of underground storage tanks primarily serving the fuel tank industry (underground tanks for gas stations).

We have a history with ZCL Composites, as it was a small public company in which we invested prior to its acquisition by ShawCor. While we had a moderate return on that investment, it provided a lot of lessons about investing in companies needing a serious overhaul and how much to rely on management’s guidance. The experience with ZCL Composites held us back from taking a closer look at ShawCor/Mattr when it was undergoing its initial transformation in 2021 and 2022. We suspected that ShawCor had overpaid for ZCL Composites and that the $35M in revenue synergies they were hoping for were extremely optimistic.

The ZCL Composites acquisition, financed entirely with debt, closed in the first half of 2019. Soon after, demand in the cyclical PPS segment softened as the sanctioning of large pipeline projects slowed on lower oil prices. The Covid-19 pandemic further exacerbated the situation in early 2020, causing oil prices to plummet. By mid-March 2020, amidst the panic ShawCor’s stock had fallen to $1.25, a stark contrast to the $20 it had traded at just 12 months earlier.

This drastic decline left the company with a market cap of only $90 million – dwarfed by its $350 million debt and a rapidly evaporating backlog of pipe coating projects.  Estimates for ShawCor’s full-year 2020 EBITDA initially projected at $190 million in mid-2019, were slashed to a mere $25 million after the company reported its Q1 2020 results. This meant that the business had 14x net-debt/expected EBITDA and would soon be offside with its lenders.

Throughout 2020, ShawCor operated under covenant relief from its lenders and implemented drastic measures to reduce overhead, including staff cuts and plant closures. By December 2020, the company announced the sale of its pipeline performance products business for over $100 million, providing much-needed financial breathing room. The board also sought a new CEO with turnaround experience, leading to the appointment of Mike Reeve in March 2021. Reeve brought in his trusted lieutenants, Tom Holloway as CFO and Martin Perez as the head of Composite Technologies, both of whom had previously worked with him.

As oil markets recovered in 2021, ShawCor continued to cut costs through further staff reductions and plant closures. Additionally, they also aggressively paid down their debt and saw their share price recover to the $4.50-6.00 range.  However, there were still questions about the company’s future growth and the health of the PPS business given the weakness in the oil and gas industry.

In 2022, ShawCor announced a strategic review and its intention to sell off the PPS division along with other non-core and more cyclical businesses. This came at a time when the PPS division was starting to win more sizable contracts.  In mid-2023 ShawCor changed its name to Mattr and by August 2023, they had entered into a definitive agreement to sell the PPS division for $225M, positioning itself as a more industrial company focused on providing solutions to critical infrastructure.  

Mattr Today

Today, Mattr is comprised of two main segments: Connection Technologies and Composite Technologies.

Within Connection Technologies, Mattr provides engineered wire, cable, and assemblies through their ShawFlex division and heat-shrink solutions through their DSG-Canusa division.

Within Composite Technologies, Mattr provides spoolable composite pipes through their FlexPipe division and underground composite fuel tanks and stormwater systems through the Xerxes division (the former ZCL Composites business).

The Crown Jewel

Connection Technologies – ShawFlex

ShawFlex sells engineered wire, cable, and assemblies primarily in Canada, supporting various industries, from new construction, repair and rebuild to utilities customers. A distributor network handles about 50% of their sales, and the other 50% goes directly to large buyers in the utility space, such as Bruce Power.

A few years ago, sales were almost 100% in Canada. With the slowdown in construction activity, they marketed their products in the U.S. Northeast to fill capacity. They found buyers primarily in the utilities sector and expanded into this market. Today about 30% of their sales are in the U.S.

There is a large opportunity to grow in the U.S. market, estimated to be 9x the size of the Canadian market. Over 70% of the U.S. electrical grid is over 25 years old, and the demand for electricity is expected grow by over 25% by 2030. Renewable energy requires a lot more engineered wire and cable than fossil fuel sources, and this trend is expected to contribute to the demand.

We really like the set-up for this business and see the potential for it to become the largest business unit by far over the next five years. A smart acquisition in the U.S. market could provide them better access, particularly to markets under Buy America programs. We see a long-term secular tailwind in an industry where ShawFlex has strong technical expertise and deep experience. We believe the growth in this division will lift Mattr’s valuation as it becomes the dominant business within the company.

Our Investment Case

Organic Growth

We believe that the historical under-investment in these previously deemed non-core areas of the business has created an opportunity to super-charge organic growth. Management has a plan to accelerate growth in each division by investing in these businesses. This first phase of growth investments has seen a combined $100M in investment in 2022 and 2023 (of which $83M was invested in 2023) with another $80-90M slated for 2024.

These investments include multiple new production plants, expansion of existing plants, automation, and equipment upgrades, all with a 20% after-tax IRR hurdle rate for each project. After visiting the Rexdale plant in Toronto, it was clear that they were at capacity and managing with structural inefficiencies. We believe they will be able to unlock growth and become more efficient at the same time.

Some of these investments will start to bear fruit in the second half of 2024, but the full impact will mostly be seen into 2025 as new plants take time to ramp up and older plants are decommissioned. With all these investments underway,  it’s hard for investors to gauge the earnings power of the business over the next couple years. We think this uncertainty is creating an opportunity.

While analysts are expecting revenue growth to only be 5-6% from 2024 into 2025, EBITDA growth is expected to be closer to 25% as margins are expected to improve. We understand the reluctance to forecast outsized revenue growth given the uncertainty – but we see room for management to outperform in 2025 and beyond given the scale of these investments. At their investor day late last year, management outlined their ambition to double revenue organically by 2030 – that’s greater than 10% annual organic growth – which is considerable in these more mature markets. This is not our base case for our thesis, but we view management’s optimism as a sign of their confidence in the organic growth story.

Management has also laid the groundwork for further incremental investments, as they built a bigger footprint in the first phase than they initially need. Each new site has 40%+ room for expansion. They can scale operations up with additional equipment and automation investments that will be highly accretive if they are seeing appropriate demand in the market.

Acquisition Growth

While we normally consider acquisitions as optionality within an investment thesis, in this case, management has made it very clear that they are going to put their cash to work. Our thesis includes several small to medium-sized acquisitions that complement the existing businesses – either through geographic expansion (like ShawFlex into the US market) or through product extensions or acquiring proven technology (likely in stormwater management).

Margin Improvement

Management is guiding towards margin improvement and is expecting 20%+ adjusted EBITDA margins as a medium to longer-term goal. We think that 20% is conservative and see a path for the company to get to the 22-25% range over the next 5 years. We believe that there are further efficiencies to be had, particularly in the Xerxes division, and that, through time, management will be able to incorporate more automation in areas where there is less automation today.

While analysts are giving management credit for margin improvement into 2025 (around 19% EBITDA margins) – the benefits compound nicely when you look longer out at both revenue growth and margin improvement. This is where trying to take a longer-term view can help you see something that others are not.

Optionality

2030 Targets

We believe that management's 2030 target of doubling revenue organically is aspirational. This is not our base case, as it implies significantly above-market growth for a sustained period of time. However, we don’t think it’s an outrageous goal either, given the extent to which many of these businesses were starved of growth capital and the degree of operating inefficiencies.  

We view this 2030 targeted organic revenue trajectory as upside to our investment thesis. If it were to transpire in this way – it would have a material impact on both the earnings growth and the valuation multiple applied to the business.

Larger Acquisitions

Management states that they have $400M+ of deployable capital. We think that for the right acquisition, this number can be flexed higher – into the $450-500M range. One or two larger accretive acquisitions deploying all of this capital could meaningfully change the company's growth trajectory. This is not our base case – we assume they deploy only half of this amount over the next three years – in smaller $50-100M sized acquisitions that are only marginally accretive at first.

Valuation

Mattr currently trades at 6x 2024 EV/EBITDA and 14x 2024 P/E. Looking into 2025, it is trading at around 5x EV/EBITDA and 10x P/E. We triangulate our valuation by applying a 7.5x 2025 EV/EBITDA and a 15x 2025 P/E, with both measures reaching a near-term $25/share price target. This is consistent with where analyst consensus is.

When we use a discounted cash flow valuation and incorporate some acquisitions and margin improvement, we arrive at a valuation closer to $40/share. This type of valuation work requires many assumptions and can produce a huge range of outcomes – but it helps us understand the potential impact of improving factors over time.

We like to see a path where an investment could double in value over the next 3-5 years, and we believe that this is possible in this case by looking at how investments today could payoff in the future.

Part of the challenge in valuing a company that has undergone such a transformation is that investors need time to get comfortable with the new strategy. Making things even harder is that Mattr has no direct comparable companies, as it is really unique as a mini-conglomerate of four different businesses. We think steady progress quarter-over-quarter and year-over-year on revenue growth, along with strong margin execution, will lead to a more accurate valuation in the market.

Summary

We like that Mattr is a unique company that has been transformed – it means there is a greater chance that it is misunderstood. It is still considered an energy company despite having much less exposure to the energy industry. (We consider Mattr an industrial company.) We also think that the multi-year investment in the business is good for the long-term and that this impact can be underappreciated in the short-term.

We think the organic growth trajectory is compelling, the potential for acquisitions to move the needle is high, and that there are margin improvement opportunities that are underappreciated. We see a future where the return on invested capital (ROIC) is increasing, and that Mattr could become a long-term compounder in time.