TRG | The Bottom Line – 7/15

This week TRG picked up coverage of composite decking and materials producer AZEK Company (AZEK). AZEK went public in the heart of the global pandemic (Priced at $23, June 2020), peaked at ~$46 by spring 2021, and has since slide below the IPO price, today hovering around $18. The stock has taken a beating on ongoing concerns about inflation, consumer sentiment and the economy. Why AZEK and why now? AZEK has been a beneficiary of and a driver of the wave of composite decking growth, and as one of the largest providers, we believe this wave has years to run, benefitting the entire portfolio of outdoor products AZEK produces. The entry point is attractive at current levels, valued at ~10x and 9x EV on our FY’22 and FY’23 EBITDA estimates. This multiple is attractive on a relative basis (to its key large peer) and absolute basis. While there may have been some pull-forward in the COVID period, the pull-forward was not maximized given AZEK and other peers did not have the capacity to fully meet demand. Channel inventory remains solid and more normalized given higher production capacity, which is a headwind to upcoming near-term comps. Ultimately, we believe the company’s strong market position will enable robust growth in the next few years, the margin expansion opportunity is sizable as AZEK raises its usage of recycled materials (FY’22 guide ~23%, FY’27 guide 27%+). AZEK sells at a modest ~5x EV on FY’27 EBITDA target of $625MM and even if EBITDA comes up ~$100MM short, it is still at modest valuation of ~6x.