Tubi or not to be (ASX:2BE)
12/07/2019
Trav Mays
Follow @MaysTrav
Today we will be looking at Tubi
Limited (ASX:2BE) a recently IPO’d growth company with a bright future ahead of
it. Whilst reading this, please keep in mind that this is my attempt at evaluating
agrowth company, which is not a style of investing that I have a lot of
experience with. It was however suggested to me by a very smart investor (Mr.
Joshua Baker) and I also saw that “The Gentleman”, an ASX growth investor who blogs for Ethical Equities has it
in his portfolio, so I thought it was worth a good look.
Before we get started, I would
like to expand a little on my thoughts about the difference between value and
growth investing.Without growth there isn’t value (other than a pure asset
play), the two go hand in hand, as Warren Buffett said in his 1992 annual
letter “The two approaches are joined at the hip: Growth is always a component
in the calculation of value, constituting a variable whose importance can range
from negligible to enormous and whose impact can be negative as well as
positive”. By calling this company a growth company, I am referring to the fact
that there is little to no history for Tubi and with the company changing so
dramatically in the near future, the metrics that I normally use are completely
useless. So I have instead put a lot more emphasis on trying to predict future
growth.
Company
Tubi group (2BE:ASX) is a HDPE pipe manufacturer with a
twist, they have created a patented modular manufacturing facility, allowing
them to produce their pipe onsite. This has a number of advantages over a conventional
fixed factory, the main two are that they can produce longer lengths of pipe, due
to them not being limited to available space on truck beds and there is no need
for transportation, cutting expenses down immensely. Along with their modular
factory, they have the ability to put large diameter (up to 315mm OD) HDPE pipe
on a reel for transportation. Whilst not currently patented, this technology is
quite unique and gives Tubi access to additional revenue streams.
Tubi was founded in 2009 by Marcello Russo, who up to this
point had worked for 15 years as the General Manager of Cromford, a plastic
pipe manufacturer. Just 5 years later, they had completed their first plant and
successfully manufactured pipe for the British Gas Coal Seam project in
Queensland. From here they have gone from strength to strength, below is an
excerpt from Tubi’s prospectus.
As you can see, after supplying
to ISCO Industries, they were awarded the contract to supply the Central Plains
New Zealand Irrigation Project, a 10-month long project that supplied
irrigation water to farmlands. The success of this project paved the way for
the 2 year take or pay contract with MPS Enterprises in the Permian Basin. 7
months later, MPS signed another agreement with Tubi, requesting a second
modular facility and another 2-year supply contract. December 2018 was a busy
time for Tubi, not only did they secure the second MPS contract, but they sold
a modular factory to Iplex to be used exclusively in NZ, commissioned the
building of these two plants and Jeff Shorter came on board as CEO.
The sale of the modular plant to
Iplex was an Equipment Purchase Agreement, under which, Iplex is prohibited
from selling or transferring the plant to any other entity or person or
transporting it to another country without consent from Tubi. Along with the
Equipment Purchase Agreement, they have signed a 3-year Service Agreement,
which pays Tubi a monthly service fee for support of their modular factory.
Under the Equipment Purchase Agreement, Iplex has agreed to pay for the modular
factory in instalments, with 40% being paid on signing of the agreement (21/12/19),
with the rest paid once the plant is delivered to site and successfully passed
its SAT (site acceptance test). The modular plants take 9 – 12 months to
construct, so the final 60% should be paid sometime in the first half of
FY2020.
The contracts with MPS are far
simpler, they are your typical 2 year Manufacturing and Supply Agreements (MSA).
Within which, Tubi has a protection clause that stipulates that MPS must
purchase a minimum quantity of pipe per year. On completion of the contract,
the agreement automatically renews for an additional year unless either MPS or
Tubi supply advanced notice that the plants are not required. They also give
MPS first right of refusal to enter another MSA on any additional mobile plants
that are constructed.
Along with securing the two
contracts outlined above, in December 2018, they also employed Mr. Jeff Shorter
as CEO. Mr. Shorter, a Texas based veteran of over 25 years in the oil and gas,
piping and steel industries, holds a Bachelor of Mechanical Engineering from Michigan Technological University and a MBA from Youngstown State University.
Mr. Shorter begun working at the top level of management in 2002 as VP and GM
of Maverick Tube corp. He has since worked at the top level for several
companies, most notably Flex Steel pipeline technologies, Tenaris and Sturrock
and Robson. There isn’t much info online about Mr. Shorter, but it is clear
that he has worked at large organisations in senior positions and compliments
the other members of the board’s skills excellently.
Following on from this, Tubi
completed a pre-IPO capital raising, issuing 50 million shares at a price of
$0.20 per share, raising $10 million. This money was then used to help fund two
additional mobile plants (four in total), costing a total of $22 million ($5.5m
each).
They then went on to list on the ASX on the 14th June, issuing 28.8 million shares at a price of $0.20 raising $5.76 million, valuing the company at ~$50 million. As opposed to issuing to raise funds for growth or acquisitions, Tubi has listed, primarily, to allow the founder, Mr. Marcello Russo, the opportunity to receive a return on his investment. There are no new shares being issued for the IPO, all 28.8 million shares are coming from Mr. Russo’s slice of the pie, see below, encouragingly, he still owns quite a large percentage. Please note that the no. of shares is a little misleading, Mr. Willsallen and Mr. Tilley both have a stake in the 104,014,980 shares, they don’t both own that amount.
Competitive Advantage
Tubi’s mobile plant gives them a
number of competitive advantages over the conventional factory, but essentially
it comes down to their ability to produce HDPE pipe sections in lengths that
exceed 50 feet. Whilst the $/lm (Linear meter) will be higher than a
conventional factory, their ability to reduce both transport costs and the
number of welds brings them out ahead, by a considerable margin. MWH Global in
their document titled “An introduction to the Central Plains Irrigation Scheme”
commented that “A major advantage of making pipes on site is the resulting
speed of installation, since the number of welding operations (which can take
many hours at larger diameters) is reduced by a factor of around 7”.
CS&D Services did a thorough analysis (find it here) of the Central Plaines
New Zealand Irrigation Project and found that the number of welds needed was
reduced by 80%! When you add this to the transportation savings, Tubi was able
to reduce the total projects cost by $3.217m (~16%), a saving of $0.32m per
month. CS&D’s breakdown of the costs can be seen below.
Along with the cost savings, Tubi has that advantage of
being able to set up their self sustained plant in just 2 days anywhere on the
planet. They also have both an Australian and an International patent, helping
to reduce competition. There is another company called Poly Piping Systems, who
also have a mobile HDPE plant, but from what I can tell, despite them holding
the patent for mobile plants, they have yet to start any projects. I’m basing
this off their website as the only images of the plant are CGI and every other
photo is just a stock image. Other companies offer mobile plants, which are
essentially mini HDPE factories, requiring concrete foundations and large sheds
to be built on site.
Evaluation
As this company doesn’t have a long track record, we will be
making a lot of assumptions, but if we are conservative, it should give us a
somewhat solid foundation to build our house of cards on 😊.
We will begin the evaluation by approximating the revenue a
plant has the capacity to generate in a given year, obviously this will vary
depending on the size of the pipe but is a good starting point to begin with.
In FY2017, Tubi generated $4.66m in revenue, this was from the initial 3 months
of work on the NZ Central Plains Irrigation Project. In FY2018 they had the
mobile plant operational for 10 months, 8 months in NZ and the final 2 in Texas
working for MPS, generating a total revenue of $17.38 million. As you can see
below, they generated a higher amount of revenue per month in FY18, $0.19m more.
Unfortunately we can only speculate on the cause of which, it could be from a
final push at the NZ site, or the Texas site is producing more costly pipe,
fingers crossed for the latter.
Now that we have established the
average amount of revenue one plant can produce in a given year (I’m sure you
are all rolling your eyes at the moment, saying “Come on Trav, you can’t
extrapolate from 2 data points and then create your whole thesis around that”
and you’re right, more data is always better, but as this is all we have, so as
long as we don’t let the assumptions get out of hand we should be ok), we can
estimate the sale price of the Iplex unit as well as the FY EPS for any
combination of plants we can think of.
In HY2019, Tubi generated
$17.172m in revenue, which included 40% of the total Iplex unit cost and 6
months of continuous work in Texas. Using the average Rev/month of $1.65m, we
can estimate that Iplex paid $18.24m for the unit (That’s a gross profit of
$12.74m and a gross margin of 70%).
Now that we have approximated the
cost of the Iplex plant and the potential revenue from a single plant, we can
estimate the FY19, FY20 & FY21 EPS and from this it’s FP/E and PEG, with
the hope of trying to equate if they are currently under or overpriced. As we
have no information regarding the Iplex Service Agreement, I have just left
this out, which is most likely making this approximation too conservative, but
given the results, I think we can look at it as cream. Other assumptions made
are as follows:
1. First plants are constructed and shipped to site before the end of HY20 and the second lot of plants are constructed and producing for the whole of FY21
2. EBIT margin of 8.8%; taken from their prospectus
3. Tax rate of 30%
4. FY19 revenue is HY19 + 6 months of continuous production of one plant at the average monthly revenue calculated above
5. FY20 revenue includes 18 months (1.5 plants) of production + the remaining 60% of the Iplex plant
6. FY21 revenue is from 4 plants producing for 12 months
7. No new shares are issued
1. First plants are constructed and shipped to site before the end of HY20 and the second lot of plants are constructed and producing for the whole of FY21
2. EBIT margin of 8.8%; taken from their prospectus
3. Tax rate of 30%
4. FY19 revenue is HY19 + 6 months of continuous production of one plant at the average monthly revenue calculated above
5. FY20 revenue includes 18 months (1.5 plants) of production + the remaining 60% of the Iplex plant
6. FY21 revenue is from 4 plants producing for 12 months
7. No new shares are issued
Peter Lynch famously said that a
company’s P/E ratio should roughly equal the growth rate of the company.
Essentially, he is stating that a company’s PEG
(Price/Earnings/Growth) rate should be equal to 100 (or 1, depending on your
denominator), anything below shows a company that is undervalued whilst over
100 is a company overvalued. The tricky part is choosing the right growth rate,
above I have simply used the approximated growth rate in EPS in the next year,
with FY21’s growth rate of 25% being the added benefit of one extra plant. As
you can see below, I have changed the growth rate’s around a little, I have
looked a little further out for FY19, bringing it up to 60% and assumed a
little worse FY21, reducing FY20’s growth rate to just 50%.
As you can see, we have
approximated values that are indicating that Tubi is currently under-priced.
Very encouraging, especially given my conservative assumptions and the fact
that this doesn’t include the service agreement revenue.
Risks
This type of stock has several major risks associated with
it and I wouldn’t recommend people even begin to start their own research, if
they are not more risk tolerant than the usual. There is a plethora of
articles, anecdotes and statistical evidence that show how extreme the odds are
against an investor who purchases a company at its IPO.If it wasn’t for the skill
of Mr. Baker, who recommended it, and the fact that this is not a capital
raise, it is just an opportunity for the founder to cash in on some of the hard
work he has been doing over the past 10 years, I would never have looked at it.
I have used several assumptions in my evaluation, all of
which would be subject to any number of cognitive biases, confirmation, framing
effect, in group etc (Feel free to pick any number from Barry's great list) all having
either a negative or positive effect on the evaluation.
Whilst they do have the first movers advantage, they are
reliant on the modular factory patent. If there is a way for them to either
lose it or a competitor can find a way around it, they could be in a lot of
trouble from the big pipe producers. They are currently working with pipe
producers as opposed to competing against them, so this risk is somewhat
mitigated, but if there is a big enough margin, competitors will always follow
suit.
Another risk is that after they sell the unit to Iplex, the
vast majority of their ongoing revenue will come from MPS Enterprises. If there
was an issue either within the Oil and Gas industry or MPS, they have little to
no protection.
The mobile plants take between 9 – 12 months to produce,
this means that future growth, after the 4 ordered plants will come about somewhat
slowly.
Marcello Russo sold his shares for just $0.20 cents each,
they are currently trading at a 80% premium to this ($0.36).
This stock was suggested to me, Matt Brazier again with
extremely timely advice wrote this a day or 2 later on his blog “It is ok to get
investment ideas from other investors if you also thoroughly investigate these
stocks independently by scrutinising primary sources. It is tempting to skimp
on this process after you have been spoon fed a seemingly compelling thesis.
You may earnestly attempt to do the research without realising that you are
merely going through the motions. If you don't do the work properly then you
don't know what you own and if you don't know that then you are asking to have
your money taken off you.” This could definitely be what has happened during
this analysis.
Whilst I have tried to overcome these risks with
conservatism, it is almost impossible. I do however think that I have taken
adequate precautions and the level of potential growth is high enough to
warrant purchasing at today’s prices.
Discussion
Whilst Tubi may not yet have contracts
for 2 of their ordered plants, they are starting to ramp up their operation,
more specifically the number of employees. In June 2019 they filled the
following positions, a Senior Operations Manager in Texas, a Technical Sales
Manager in Texas and a Project Engineer based in either Sydney or Texas who
will be required to spend 5 months in Texas, 5 months in Sydney and 2 months in
Europe. I don’t think we should read too much in the 2 months in Europe, but
clearly they are looking to expand there in the future. Right now though, they
are rightfully focusing on the Permian Basin, having hired a Texas based CEO
and recently moved their headquarters to Texas. Which is a smart move, as the
Permian Basin is now the world’s
most productive oil field.
Initially
when I saw that Tubi had sold a plant to Iplex I thought that they were going
down the wrong path, selling instead of renting out their modular plants.
However, I now believe that they have sold this unit to Iplex because they are
focusing on the Permian Basin and didn’t want to spread themselves too thin, which
is great to see. I have witnessed a number of start ups (I’m not sure if this
still constitutes a start-up) expand to fast, it’s as if they believe that all
they need to do is expand, expand, expand and eventually they will tip over a
point and everything will be fine. But during this rapid expansion, if you
don’t keep a tight ship, you allow bad processes and cultures to develop (Uber
for example, although if Tubi expands rapidly and gets to the same evaluation
as Uber, I wouldn’t be complaining 😊). A good balance between the rapidity of growth
and the time it takes to ensure that once you get big everything is set up for
further growth is a tricky balancing act.
Conclusion
Tubi is an excellent company with very large insider
ownership, forward orders in the bag, easily scalable, limited industry and
geological specific risks (they can move anywhere and work for more industries
than just oil and gas), a proven concept and a very simple business to
understand. The success of these modular factories is clear, as the only two
companies to have used them so far have either purchased a factory for
themselves or started another contract. It doesn’t come without risks though, I
do believe that the potential rewards from this company outweigh the risk, but,
an investor would need to be quite risk tolerant to even consider doing their
own analysis on this one, a lot of things need to come together for this thesis
to pan out.
As always, thanks a lot for reading, I really appreciate all
the feedback I have received so far. I have also just recently found twitter Follow @MaysTrav, give me a
follow if you like and/or send me a msg, it’s always great to meet other ASX
investors. If you don't have twitter we can connect on Linkedin .
.
Thanks for reading
Just Culture Investor
Trav Mays
Subscribe to Just Culture Investor by Email
3. https://www.waternz.org.nz/Attachment?Action=Download&Attachment_id=426
4.https://csdservices.com.au/wp-content/uploads/2018/05/CSD-TUBI-High-Level-General-study-SFIS-Pipe-Schedule-V1-Project.pdf
5. https://ritholtz.com/2018/12/24-cognitive-biases-warping-your-reality/
6.https://www.forbes.com/sites/rrapier/2019/04/05/the-permian-basin-is-now-the-worlds-top-oil-producer/#10b057ca3eff
4.https://csdservices.com.au/wp-content/uploads/2018/05/CSD-TUBI-High-Level-General-study-SFIS-Pipe-Schedule-V1-Project.pdf
5. https://ritholtz.com/2018/12/24-cognitive-biases-warping-your-reality/
6.https://www.forbes.com/sites/rrapier/2019/04/05/the-permian-basin-is-now-the-worlds-top-oil-producer/#10b057ca3eff
The author is a current owner of a portion of Tubi Group, given this, they may be subject to one or a number of biases, more specifically anchoring and/or confirmation bias. This article is neither general nor personal advice and in no way constitutes specific or individual advice. The website and author do not guarantee, and accept no legal liability whatsoever arising from or connected to, the accuracy, reliability, currency or completeness of any material contained on this website or on any linked site. This website is not a substitute for independent professional advice and users should obtain any appropriate professional advice relevant to their particular circumstances. The material on this website may include the views or recommendations of third parties, which do not necessarily reflect the views of the website or author, or indicate its commitment to a particular course of action
