TRG | The Bottom Line – 10/6

This past week Southern U.S.-focused road construction firm, Construction Partners (ROAD) and water infrastructure focused Core & Main (CNM) hosted investor days in NYC. This was the first investor day for both companies post IPO (ROAD IPO was 2018, CNM was 2021). Common themes emerged from both investor days, including a singular focus on core strategy and cash valuation metrics. ROAD reiterated its focus on hot-mix asphalt road construction, focused on building market concentration in core and adjacent Southern U.S states. In our opinion, the asphalt road construction business is in the early stages of growth and consolidation, similar to the aggregate industry in the ’90s and ‘00s. ROAD’s geographic footprint fits squarely in high growth markets that are prime targets for consolidation. ROAD seeks essentially to double EBITDA by FY’27, while maintaining a cash conversion rate in the 52-60% range. CNM took the opportunity to clarify the company is a trusted partner in the water infrastructure construction market that also happens to be able to provide product. As such, CNM is not “just” in the distribution business. CNM seeks to grow EBITDA nearly 50% between FY’23-FY’28, in addition to improving cash conversion from 35% to 60-70% over the next five years. Now that money isn’t free and the cost of capital is on the rise, cash really is king. We expect companies will be rewarded for both its ability to grow core earnings (i.e., not just acquire additional earnings) and cash conversion in this cycle.