MORAM - OneWater Marine investment thesis + Capital Structures (Educational article)
Monday 19th June 2023
This week we share an investment thesis and an educational article on capital structures.
Investment thesis on OneWater Marine $ONEW - A serial acquirer in a highly fragmented industry that rewards economies of scale. Revenue CAGR >20% in the last 5 years, improving margins, >25% ownership, and facing significant market penalization due to recent acquisitions, increased debt, and the macroeconomic landscape. We revisit our initial thesis from 8 months ago to update the sales forecast, analyse in detail the multiples paid for recent acquisitions, forecast the debt evolution (considering assumptions on sales, floor plan, etc.),...
Capital Structures - Educational article on capital structures and their importance when valuing a company. We focus on explaining the components and associated concepts with practical examples from various companies whose theses we have presented on our website/Substack to facilitate understanding of both the concepts and the companies themselves.
1) Investment Thesis - OneWater Marine
We update the thesis of OneWater Marine only 8 months after we first published it. At that time, we commented that there were many things we liked about the company but it was facing challenging quarters due to the impending recession, which would affect this industry considerably - unlike the megayacht sector that we also cover, where being oriented towards UHNWIs, this segment is much less affected by the crisis (the average ticket price for $ONEW is around $210k, not several million dollars).
Today, after spending the last few months analyzing other dealers and small boat companies (<20m) and having the 2Q23 data for the entire industry, we revisit this thesis to analyze the company's evolution (which had a remarkable 2Q23) and the industry, examine in detail the points that concern us the most (such as debt or the multiples of some of the acquisitions made), and update our valuation of the company.
First, we will provide an overview of the company and the industry in the US. Then, we will explain its business model and the strengths of OneWater Marine. We will focus on the debt and forecast its evolution and interest payments in our base scenario, as well as its growth (analyzing both its strategy and execution). We will evaluate the company, discuss what we consider the main risks (apart from those mentioned here), and provide detailed conclusions and our portfolio strategy with the company.
OneWater Marine $ONEW is one of the fastest-growing recreational boat dealers in the US. Its market cap is around $550MM, and it is publicly traded since its IPO in 2020. The company was originally founded in 1987 under the name of Singleton Marine by the parents of the current CEO. In 2014, after the merger of Singleton Marine (CEO's family) and Legendary Marine (Bos family), OneWater Marine arose. The Singleton family has ~10% ownership of the company, and total insider ownership is close to ~26%.
$ONEW offers new and pre-owned boats, maintenance services and insurance & financing (through a third party). The next couple of pictures illustrate its revenue evolution and the distribution among segments (later we analyze in detail the economics of each segment)
OneWater Marine is characterized by being a serial acquirer in a highly fragmented industry that has around 4,300 retail stores (it is one of the top 3 players and has less than 3% of total sales in the US - 15% among the top 3). It has retail stores in 16 states in the US and is the market leader in 13 of them (including Florida). One attractive aspect of the industry is the succession issues in the industry, where there is a lack of interest from heirs to continue the family business, resulting in continuous attractive acquisition opportunities. Additionally, OneWater Marine is entering the services and parts business, which is less cyclical.
In the last year and a half, it has been pretty active in acquisition:
This has allowed OneWater Marine's revenue to grow at a >20% compound annual growth rate (CAGR) for the last 5 years, and it has also been tremendously profitable in terms of net income. Since its IPO in 2020, it has expanded its retail store count from 61 to 100.
This is due, in part, to four very interesting aspects:
Scale & Synergies: When they acquire a company, it is relatively simple to plug its CRM and widen its catalogue. Moreover, the traditional dealer that they acquire does not sell insurance & finance. So, from the first moment, they are fostering cross-selling and giving them access to premium brands. The gross margin has doubled in the last 5 years
Margins & Cross-Selling: The margins of insurance & financing (100% as it is based on commissions) and service & maintenance are considerably higher than the segments of selling boats.
Retain talent: The are huge problems related to succession as heirs do not want to work in the sector. OneWater offers owners an exit plan based on performance incentives. Consequently, $ONEW manages to maintain clients and internal knowledge and they eliminate the risk of replicate the business and "steal" the customers.
Power over suppliers: OneWater's largest supplier accounts for 10% of their purchases, whereas for some of their key suppliers, OneWater represents over 30% of their sales. As a result, the potential impact of losing a supplier for OneWater is much lower compared to the potential impact of losing OneWater as a dealership for the supplier.
Despite all of this, $ONEW trades at a P/E ratio of 4.28 (TTM), partly due to fears of a deep recession that could decrease sales and margins, and partly because we understand that the market closely scrutinizes the company's debt, which has grown significantly in the last two years.
To continue enjoying the rest of the thesis & have access to all out content…
2) Capital structures, related concepts and applied examples
As a result of Jadestone's recent capital increase, several of you have asked questions about some concepts of the capital structure. As you have also asked us about related topics regarding Newlat or New Fortress, we have decided to write an article to explain the main elements, their effects, and provide practical examples from various companies in our coverage universe, such as New Fortress Energy, OneWater Marine, Kistos, Vermilion, Cheniere, Newlat, and more, in order to enhance understanding.
As we have mentioned on several occasions, and also influenced due to the fact that some of us have professional experience in distress situations, restructurings, and debt-related matters, we believe that understanding the capital structure is crucial in the company valuation process. Furthermore, given the current macroeconomic environment, we believe that there are equally or even more interesting opportunities in this area compared to equity.
This article serves as an introduction, covering many key concepts and providing examples from well-known companies, which is the most practical and comprehensible approach. If you still have questions or are interested in more complex topics, we will prepare a separate educational module in the coming weeks (something we plan to do covering industries and subjects relevant to financial markets. Although it will be offered apart from the subscription plans, we have decided that everything we offer will be included in the annual subscription).
Now, in addition to investment theses and macroeconomic articles, we also include all the educational content (modules, slides,.. that we will create) as part of the annual subscription!