Fab Form Industries - Q2 Update

As some may remember, I published a short post about Fab Form Industries a few months back. Following the release of the Q2 report yesterday, I figured I might give a short comment on the case. First, a reminder about what the case is all about (some of it is copied from the previous post):

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Business

Fab-Form is a Canadian-based firm that manufactures, develops, and distributes technology to “form concrete footings, columns, foundations, and walls for building structures.” The company is headquartered in Delta, Canada, and operates primarily in the same country. The company’s products are available in the United States, and the revenue split is roughly 75/25, favoring Canada. The products are sold to construction companies around the country, which use them to simplify their building processes, primarily for smaller buildings. 

An example from their product lineup is Fastfoot, a 100 feet (30 meters) long roll made of high-density polyethylene fabric used as a substitute for lumber when making foundations for houses. According to the company’s website, One roll of Fastfoot forms the same amount of concrete as 1500 pounds (680kg) of timber, which is a solid sales argument when lumber prices are high. The general theme for their products is that they make the job easier and cheaper for builders. For a complete product lineup, updated regularly, check out this link.

About half of the products are patented, and a fabric development agreement was signed with Hagihara Industries late last year. The company actively seeks to expand its product offering and develop new products, which will help to drive growth going forward. The current product lineup, as well as the status regarding patents, is presented in the table below:

One of the main risks I see is the dependence on Nudura to drive sales. As of Q1 2022, the division of sales among products looked like the following:

Although Monopour and Bracing were the two fastest-growing product categories during the second quarter, Nudura grew faster than the company, indicating that its share of sales is growing further.

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Financials

Now, for the second quarter of 2022, I was impressed by the solid development of the firm. Sales grew by 46% compared to the same quarter last year, and earnings were 81% higher. The financial development can be seen in the charts below:

By quarter:

Trailing 12 months:

It seems the company reached a new inflection in the first quarter of 2021, following a time of challenging macroeconomic conditions during Covid.

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Valuation

At the time of writing (August 24), the stock is up 22% for the day, trading at CAD 1,1. This indicates a market cap of CAD 10 million, equivalent to an EV/EBIT ratio of roughly 5,1 (7,7/1,5). With no debt and CAD 2,3 million in cash, the valuation doesn’t seem stretched regardless of how you put it.

I have done a DCF valuation as well, but given how uncertain my projections are, It seems that sharing my motivated value here contributes with little to no value.

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Business during the quarter

Business seems to be progressing according to plan, with the Leveler prototypes currently being tested on-site. The fast tube optimization together with Hagihara is also developing as anticipated, and testing should be complete by the end of this fall.

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These were just my initial thoughts, and if you want to discuss the case in greater detail, please feel free to contact me in the comments or on Twitter (@vardevalpen)