Knife River - Stock In-depth analysis

DescriptionWe initially looked at Knife River with a long bias as it checked several boxes: an optically high quality business being spun off from a parent whose core business was in an unrelated biz line (in this case MDU, a utility). However, we came away very unimpressed by the historical business performance and initiatied a short position in the company recently. We believe this business is much lower quality than peers despite trading at a comparable valuation. FWIW we are also long in equal size CRH, which we believe is the best in class company with a catalyst of a US re-listing to drive alpha. We see 20% near-term downside and longer-term 60%+ downside if people start valuing the company on FCF vs EBITDA. Biz Performance Has Been Worst in Class-KNF organic growth (which we estimated based on historical M&A spend, 8x acquisition multiples and 10% margins) has been anemic a 1.8% CAGR over the last 6 years. This is worst in class.-The business hasn't expanded EBITDA margins in 6 years. Moreover, while typically I would expect a margin expansion story from the spin, its not at all apparent to me what exactly would cause this business to improve. This was a quality business/premium multiple business within MDU that received the bulk of the capital. While management points to handwavy pricing initiatives and their EDGE cost program, I find this unconvincing.-Cash conversion for KNF also worst in class, which is one of the things I care most about. Capital allocation solely focused on M&A, which I'm skeptical of given elevated multiples in the sector.Cost of equity calculatorCost of debt calculatorWACC calculatorKNF Valuation Doesn't Fit FundamentalsKNF mostly pitches itself as an aggregate company. I get why they want to do this given everyone agrees aggregates are great, local monopoly businesses with steady pricing. However, the reality is KNF is not an aggregate busienss. In fact, only 19% of their EBITDA comes from upstream building product segments that get higher multiples. The majority of KNF's business comes from downstream (Asphalt/Concrete), an odd cement import business in Hawaii (likely impacted by recent fires) and a road paving business. These businesses all tend to get much lower mulitples than building product companies. Illustratively, I assigned multiples across each segment that I believe are directionally consistent with sector norms (albeit note I do believe in the case of CRH, my 8x building product and 6x Europe are draconian. Check out the Breedon thread for summary of Europe and we believe CRH's building product business is best in class). Anyway, the message is clear: KNF should trade at a significant discount to any of the big three US pureplays (SUM, MLM, VMC).However, that isn't what you see. KNF trades right on top of SUM at around 10x EBITDA (and a very large 3x discount to CRH). KNF also operates in states I wouldnt want to be in long-termWhile not a key focus on the pitch, the best stock research websitesdon't seem to support where the company operates. Their focus is mostly on the west coast (their Texas business is very small). While management points to their states growing above average, I doubt the next 10 years will look at as good for the West Coast as the prior 10. Moreover, you are seeing the West receive the lowest amount of DOT awards of any region, implying recent infrastructure bills will not be as much of a boon for them as other players. Fair Value and OpportunityBusiness will do around $360mm of EBITDA this year. The company expects LT capex to be 6% of sales (or $160mm, they noted this year they are underspending a bit). Interest expense is $65mm. Taxes of $34mm (25% tax rate). That gets you to $100mm of FCF before NWC. NWC is normally a drag of at least $30mm a year. That results in runrate FCF around around $70mm or 19% of EBITDA (note this is better than average performance over last 3 years). If you value the business at 8x EBITDA that gives you TEV of $2.9bn less net debt of 771mm, gives you a FV of $37/share (~20% downside). Note even at my valuation, the stock isnt particularly attractive at a ~3.3% yield. Realistically, I think this business should trade at a 6-7% yield so if the market switches from an EBITDA to FCF valuation framework and values stock at 6.5% yield on $70mm FCF, it would yield a stock price of $19 or 60% downside. Regardless, I think KNF is an exceptional relative short to the rest of the infrastructure stocks.In terms of why the opportunity exists? the best stock screeners think people dont really know KNF yet. People are lumping it in with the aggregates companies. Most agree its not a VMC/MLM but are lumping it in with SUM and I think this business has performed much worse than SUM over time with worse business mix. Everyone wants to find an infrastructure stock to play all the stimulus coming so guys are buying first, asking questions later. Over time, we believe this business will be revealed to be an inferior play that is better expressed elsewhere.

我们最初对Knife River（KNF）持长期看多仓位，因其符合多项选股标准：作为一家从非关联主业母公司分拆出的优质企业，其母公司为公用事业公司MDU。然而，我们对其过往经营业绩深感失望，并于近期建立了该公司的空头头寸。我们认为，尽管该公司估值与同行相当，但其业务质量远逊于同业。顺带一提，我们同时持有同等仓位的CRH，我们认为CRH是行业内的顶尖企业，其美国重新上市的催化剂将推动超额收益（alpha）。我们预计该股短期内将下跌20%，若市场开始以自由现金流（FCF）而非息税折旧摊销前利润（EBITDA）进行估值，则长期下跌幅度将超过60%。

### 行业垫底的经营表现
KNF的有机增长率（我们基于过往并购支出、8倍收购估值倍数及10%利润率估算）十分疲软，过去6年的复合年增长率仅为1.8%，位列行业末位。
该业务在6年内未能实现息税折旧摊销前利润（EBITDA）利润率扩张。通常而言，分拆后的企业往往具备利润率扩张的潜力，但我们完全看不出有哪些因素能推动该公司业务改善。该业务曾是MDU旗下的优质/高估值业务，并获得了绝大多数资本投入。尽管管理层提及了模糊的定价举措及其EDGE成本计划，但我们认为这些说辞缺乏说服力。
KNF的现金转换能力同样位列行业末位，这也是我们最为关注的指标之一。其资本配置完全聚焦于并购，鉴于当前行业估值高企，我们对此持怀疑态度。
附带工具：股权成本计算器、债务成本计算器、加权平均资本成本（WACC）计算器。

### KNF的估值与基本面不符
KNF大多将自身定位为集料（aggregate）企业。鉴于市场普遍认为集料业务是优质的本地垄断型业务，定价稳定，我们理解其为何要做此定位。但实际情况是，KNF并非集料业务。事实上，其仅19%的息税折旧摊销前利润（EBITDA）来自上游建筑产品板块——该板块往往享有更高估值倍数。KNF的大部分业务来自下游业务（沥青/混凝土）、夏威夷的特种水泥进口业务（或受近期山火影响）以及道路铺装业务。这些业务的估值倍数普遍远低于建筑产品企业。
举例而言，我们为各业务板块赋予的估值倍数符合行业常规方向（需说明的是，我们认为针对CRH的8倍建筑产品板块估值及6倍欧洲业务估值已较为保守，可查阅Breedon相关讨论总结欧洲市场情况，且我们认为CRH的建筑产品业务为行业顶尖）。综上，结论十分明确：KNF的交易估值理应较美国三大纯集料玩家（SUM、MLM、VMC）有显著折价。
但实际情况并非如此：KNF的估值与SUM基本持平，约为10倍EBITDA（较CRH折价约3倍）。

### KNF的运营区域并非长期优质选择
尽管这并非本次推介的核心重点，但顶尖股票研究网站的信息似乎与该公司的运营区域不符。其业务主要集中于西海岸（德克萨斯州业务占比极低）。尽管管理层称其运营州的经济增速高于平均水平，但我们怀疑未来10年西海岸的表现不会像过去10年那般亮眼。此外，美国交通部（DOT）授予的合同中，西海岸地区占比最低，这意味着近期的基建法案对该公司的利好将不及其他同业。

### 公允价值与投资机会
该公司本年度的EBITDA预计约为3.6亿美元。公司预计长期资本支出占销售额的6%（即1.6亿美元），并提及本年度资本支出略有不足。利息支出为6500万美元，税收为3400万美元（税率25%），据此可算出净营运资本（NWC）前的自由现金流（FCF）为1亿美元。净营运资本通常每年至少拖累3000万美元的现金流，因此稳态自由现金流约为7000万美元，占EBITDA的19%（这一表现优于过去3年的平均水平）。若以8倍EBITDA估值，企业总价值（TEV）为29亿美元，扣除7.71亿美元净债务后，每股公允价值为37美元（对应约20%的下跌空间）。需注意，即便按照我们的估值，该股3.3%的股息收益率也并不具备特别吸引力。实际上，我们认为该业务应实现6%-7%的股息收益率：若市场从EBITDA估值框架转向自由现金流估值框架，并以7000万美元自由现金流为基础给予6.5%的股息收益率，则股价将跌至19美元，对应60%的下跌空间。
无论如何，我们认为相较于其他基建类股票，KNF是极具吸引力的做空标的。
为何存在此次投资机会？顶尖股票筛选工具显示，市场尚未真正了解KNF。投资者将其与集料企业混为一谈。多数人认同其并非VMC/MLM，但仍将其与SUM归为一类，而我们认为KNF的长期表现及业务结构均逊于SUM。当前市场普遍希望找到能受益于各项刺激政策的基建股，因此投资者纷纷买入，未做充分尽调。我们认为，随着时间推移，市场将逐渐认清KNF并非优质标的，更佳的投资选择可在其他领域找到。