TRG | The Bottom Line – 9/13

TRG this past week spent time in NYC and Boston meeting with our valued clients and marketing with Construction Partners (ROAD) and Knife River (KNF). KNF made its debut as a public company in 2023 after spinning out of MDU Resources, and ROAD went public in May 2018, just before the global pandemic. Both companies are relatively newcomers to the public markets, a rarity for “old world” infrastructure and road construction industries. While in completely different geographies, both share a focus on building infrastructure/roads in what many would view as "second tier" cities. These are cities in which vertical integration is often a necessity to meet community needs (i.e., it makes more sense to own a quarry to service asphalt operations). Both benefit from the secular trend of the reindustrialization of the U.S./North American market, a trend TRG believes has a long tail for growth (10 years at least). Each company brings a different strategy flavor to the table. KNF’s margin expansion is a significant lever for growth. In our opinion, KNF was an “orphaned asset” under the MDU umbrella, and now as an independent entity, KNF has a greater ability to focus on value creation. To that end, KNF has already hit its 15% EBITDA margin bogie two years early (original target was 2025). The next stop is 20%+, which we believe will come from a mix of pricing, cost control, and mix shift to materials focused from both organic and acquired efforts. ROAD continues to consolidate the asphalt road construction market in the southeast, focused on disciplined growth and staying focused on its asphalt-centered infrastructure strategy. ROAD management shared that there remain ample growth opportunities in the sunbelt states it currently operates and continues to expect to grow 15-20% per year through a combination of organic activity and M&A. Despite weather headlines that dominated Q2, both KNF and ROAD outperformed the industry.