TRG | The Bottom Line – 9/1

TRG has maintained a bullish view of Granite Construction the past few years, as the company worked down its Old Risk Portfolio (ORP) and executed on a low-risk consistent growth strategy. GVA is valued at ~5x EV/EBITDA, which we believe is overly punitive and lumps it in with FLR and TPC. We believe this is the wrong peer set. Instead, we believe GVA should be compared to Construction Partners (ROAD) and Knife River (KNF), both companies currently trading at ~10x EV/EBITDA. The driver for this belief is 1) GVA operationally is similar and 2) we expect GVA margins will gravitate closer to the levels of ROAD and KNF. These three companies have vertically-integrated operations (materials producers + contracting services). ROAD and KNF have consistently produced better margins than GVA, but GVA’s 2024 targets show that they can close that gap. GVA margins were held back by large projects won in prior years, which have finally burned off. The new management team has successfully focused the company on low-risk quick-burn projects, which carry strong margins. As such, we are confident in the achievability of the FY’24 EBITDA margin target of 9-11%. We believe that the higher multiples applied to ROAD and KNF are justified given their given their consistent long-term execution and projected margin expansion from higher levels. ROAD has displayed the best combination of sales growth, and margins are currently suppressed for low-margin work won in COVID. That said, we believe the discount applied to GVA vs. ROAD and KNF is too drastic.