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Metals USA Holdings (MUSA)
$238mm IPO Friday, April 9, 2010, priced at $21. Valuations updated at report bottom.
Conclusion: Reliance Steel (RS) is a much better buy than MUSA
This appears to be another case of a major private equity firm trying to pull fast one on investors, see below |
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SUMMARY |
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The industry outlook is trending up: as of Feb 2010 industry inventory levels 22% less than a year ago and shipments up 10% |
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MUSA makes the case it is positioned to benefit from a cyclical upturn in manufacturing activity |
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However… |
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A standard ‘compare & contrast’ analysis suggests that Reliance Steel & Aluminum (RS) is a much better way to participate in the industry’s expected cyclical growth, rather than MUSA. |
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For example… |
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For the quarter ended Dec 31, 2009 RS’s gross margins were 32%. MUSA’s were 23%. |
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RS is actually making money and MUSA is just breaking even |
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Price-to-book and price-to-tangible book ratios both favor RS over MUSA, see table below |
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BUSINESS |
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Purchases metal from primary producers that generally focus on large volume sales of unprocessed metals in standard configurations and sizes. |
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In most cases, MUSA perform customized, value-added processing required to meet the specifications provided by end-use customers, such as cutting, sawing, punching, shot blasting, surface grinding and drilling |
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Based on 2008 revenues the top 100 competitors represent 47% of industry revenue. Metals USA is ranked ninth among this group based on 2008 revenues. |
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MUSA’s ten largest customers represented less than 14% of net sales in 2009. |
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Metals costs represent 75% of net sales. . MUSA’s top three metals suppliers represent a significant portion of metal purchasing cost |
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COMPETITIVE ADVANTAGE? |
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MUSA believes it operates its on a lean basis relative to competitors and has one of the lowest relative non-metal cost structures in the industry.
For example, MUSA says it had a lower ratio of total operating expenses (excluding cost of sales) compared to revenues for the nine months ended September 30, 2009 than a similarly situated peer group of public companies (mentioned in MUSA’s SEC filing) which consisted of Reliance Steel & Aluminum Co., Olympic Steel Inc. and A.M. Castle & Co. |
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But the key is gross margins, where MUSA significantly lags Reliance Steel (RS): 23% to 32% |
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COST REDUCTION INITIATIVES |
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Since the fourth quarter of 2008, MUSA implemented $50.0 million of annualized cost savings, a vast majority of which MUSA believes are permanent reductions. |
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The cost savings entail several elements, including reducing headcount by approximately 30%, modifying employee benefits, facility consolidation (primarily in the Building Products Group), reducing employee work hours and streamlining the delivery fleet. |
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$10 million of the cost reductions are costs of purchasing goods sold, $20 million are related to selling and administrative activities and $20 million are costs associated with metal processing services and delivery of product to customers. |
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CYCLICAL BUSINESS |
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MUSA believes demand for its product is currently in the lower end of the cycle, although conditions have steadily improved throughout the latter half of 2009 |
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Through the first eight months of 2009, service centers reported the lowest-ever inventory levels during the 32 years that this data has been collected for the industry |
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Steel mills reported increased capacity utilization rates during the second half of 2009 and some even reported returns to historic operating levels in the first quarter of 2010. |
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Domestic mill utilization rates increased to approximately 69% during the week ending February 20, 2010, from approximately 61% at the end of 2009. |
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INDUSTRY INVENTORIES 22% LESS THAN LAST YEAR
Steel |
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. US inventories are 22% lower than at the same time in 2009. February month-end steel inventories totaled 6.48 million tons
. Sufficient for 2.4 months at current shipping rates |
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Aluminum |
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. Inventories 25% below year-ago levels. At the end of February totaled 260,800
. Equal to a 2.9-month supply at current shipping rates. |
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FEB INDUSTRY SHIPMENTS RISE 10%
beat year ago volume for the first month since April 2008 |
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Steel +10% |
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. February shipments of steel from U.S. metals service centers rose 10.4% above shipments for the same month in 2009
. Marking the first time since April 2008 that year-over-year shipments have been higher
. In Canada, February steel shipments rose 15.8% from year-ago volume, marking a second consecutive month of gain. |
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Steel shipments for the first two months of the year of 5.24 million tons were up 4.5% from last year.. |
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Aluminum +8% |
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. February aluminum shipments from U.S. metals service centers totaled 90,000 tons, or 8.1% more than in February 2009.
. Year-to-date total shipments of 183,500 tons are 5.3% larger than the same period last year. Steel Product Activity |
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SUPPY-DEMAND CYCLE |
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. Metal prices generally change in response to changes in supply, demand or raw material input costs.
. During the first eight months of 2009, demand declined in reaction to a slowing economy and metal prices dropped in response.
. Beginning in the late third quarter of 2009 and continuing into the first quarter of 2010 raw material input costs have been increasing and metal demand has generally exceeded available supply.
. As a result metal prices have been increasing. |
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CUSTOMERS & FACILITIES |
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. 14,000 customers in such segments as land and marine transportation, energy, aerospace, defense, electrical and appliance manufacturing, fabrication, furniture, commercial construction, and machinery and equipment industries, among several others, throughout the United States
. Operates 35 facilities comprising almost 5 million square feet of industrial space.
. For the year ended December 31, 2009, average transaction size was $2,950. Sold over 1.4mm tons of metal products in 2008 |
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COMPETITION |
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Highly fragmented industry |
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MUSA competes with a large number of other value-added oriented metals processor/metal service centers on a regional and local basis |
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The United States and Canadian metal service center industry generated $153 billion in sales from approximately 1,200 participants in 2008. MUSA ranked ninth among this group based on 2008 revenues. |
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Peer group of public companies (mentioned in MUSA’s SEC filing) includes Reliance Steel and Aluminum Co., Olympic Steel Inc. and A.M. Castle & Co. |
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PURCHASE ACCOUNTING |
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Under the purchase method of accounting, the operating results of each of the acquired businesses, including the 2006 Acquisitions and Lynch Metals, are included in financial statements only from the date of the acquisitions. |
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APOLLO MGT |
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leveraged buyout, concluded in 2007
. As of December 2008, Apollo managed over US$37 billion of investor commitments across its private equity funds and other investment vehicles making it one of the largest private equity firms globally.
. Pre IPO Apollo owns 93%, post-IPO Apollo will own 61%, assuming Apollo’s 1.5mm shares offered as a ‘greenshoe*’ option are exercised by the underwriters
* A provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. |
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USE OF IPO PROCEEDS |
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$182mm from sale of 10.5mm shares
. $171.6mm to repay debt including accrued interest of 11 1 /8% per annum
. Remaining net proceeds will be used for general corporate purposes. |
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Note: Valuation ratios heavily favor RS over MUSA |
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VALUATION RATIOS |
IPO Mrkt |
Price / |
Price / |
Price / |
Price / |
GrosPft |
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12 months ended Dec 31 |
Cap (mm) |
Sales |
Earnings |
BookValue |
TangibleBV |
Dec Qtr |
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Metals USA (MUSA) |
$758 |
0.7 |
-237 |
5.6 |
10.4 |
23% |
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Reliance Steel & Alum (RS) |
$3,930 |
0.7 |
27 |
1.5 |
4.9 |
32% |
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Olympic Steel (ZEUS) |
$384 |
0.7 |
-6 |
1.5 |
1.5 |
20% |
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AM Castle (CAS) |
$320 |
0.4 |
-12 |
1.0 |
1.5 |
5% |
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COMPARE & CONTRAST |
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Enterprise Value = |
Mrk Cap |
+Total |
-Cash |
=Enterprise |
Price |
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Balance sheet: Dec 31 '09 |
($mm) |
debt* |
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Value (EV) |
April 9 |
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Metals USA (MUSA)* |
$758 |
$307 |
-$16 |
$1,049 |
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Reliance Steel & Alum (RS) |
$3,930 |
$1,700 |
-$43 |
$5,587 |
$53.29 |
$54.96 |
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Olympic Steel (ZEUS) |
$384 |
$79 |
-$5 |
$458 |
$33.75 |
$35.32 |
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AM Castle (CAS) |
$320 |
$240 |
-$28 |
$532 |
$14.22 |
$13.98 |
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*post IPO for MUSA |
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ENTERPRISE VALUE |
Enterprise |
EV / |
EV / |
EV / |
EV / |
GrosPft |
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12 months ended Dec 31 |
Value, $mm |
Sales |
Earnings |
BookValue |
TangibleBV |
Dec Qtr |
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Metals USA (MUSA) |
$1,049 |
0.93 |
-327.7 |
7.8 |
15.9 |
23% |
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Reliance Steel (RS) |
$5,587 |
1.05 |
37.8 |
2.1 |
6.9 |
32% |
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Olympic Steel (ZEUS) |
$458 |
0.88 |
-7.5 |
1.8 |
1.8 |
20% |
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AM Castle (CAS) |
$532 |
0.66 |
-19.7 |
1.7 |
2.4 |
5% |
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Metals USA Holdings |
MUSA, C+, 6.5 |
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Post-IPO shares: 36mm |
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Metal processing |
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co. estimate |
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Houston, TX |
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2007 |
2008 |
2009 |
March Qtr |
IPO Mkt |
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Revenue ($mm) |
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$1,845 |
$2,156 |
$1,099 |
$283 |
Cap (mm) |
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Gross profit % |
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23% |
25% |
19% |
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$758 |
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Operating inc % of reve |
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6% |
10% |
-2% |
4% |
@$121 |
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(Loss) Gain on debt redu |
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-$8.4 |
-- |
+92.1 |
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Interest expense |
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$87 |
$88 |
$64 |
$13 |
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Interest exp % of revenue |
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5% |
4% |
6% |
5% |
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Profit (loss) |
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$14 |
$73 |
$4 |
-$1 |
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Profit (loss) % of revenue |
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1% |
3% |
0% |
0% |
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EBITDA $ |
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$137 |
$230 |
-$1 |
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EBITDA % of revenue |
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7% |
11% |
0% |
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Fixed chrg coverage ratio |
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1.31 |
2.91 |
0.42 |
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Quarterly progression |
Sept '08 |
Dec '08 |
March '09 |
June '09 |
Sept '09 |
Dec '09 |
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Revenue |
$638 |
$456 |
$330 |
$268 |
$255 |
$245 |
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Gross profit % |
30% |
20% |
13% |
15% |
27% |
23% |
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VALUATION RATIOS |
IPO Mrkt |
Price / |
Price / |
Price / |
Price / |
% offered |
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trailing 12 months |
Cap (mm) |
Sales |
Earnings |
BookValue |
TangibleBV |
in IPO |
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Metals USA (MUSA) |
$758 |
0.7 |
-237 |
5.6 |
10.4 |
32% |
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SCORECARD |
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Mgt |
Market |
Market Do- |
Proprie- |
Total |
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1-5, 5 is high |
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Growth |
mination |
tary |
rating |
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20 is perfect |
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1.5 |
2 |
2 |
1 |
6.5 |
