Tenon is undertaking a strategic business review to identify a path to increase shareholder value. Our analysis suggests a very positive outlook for its core US markets; the company is set to deliver faster earnings growth and this is clearly visible in FY16 trading to date. Tenon currently stands on mid- to low single-digit prospective valuation multiples. Peer group comparisons suggest a valuation range in excess of NZ$4.51 based on calendarised 2015 multiples, and higher still on estimates beyond this.
Following FY15 results, we have increased our EBITDA estimates by 5.5% and 26.9% for FY16 and FY17 respectively, reflecting an ongoing positive market outlook, new business wins, regional expansion and a stronger US$. With a further profit uplift anticipated in FY18, our estimates show EBITDA increasing by more than three times and EPS by more than four times over the three years to FY18. Over the same time period we expect Tenon to grow its newly-restored dividend and to generate sufficient free cash to end FY18 with a minimal level of debt.
As a distributor, Tenon’s existing US distribution infrastructure should be capable of accommodating higher volume levels. Tenon is targeting increased efficiencies by consolidating warehouses in Texas to enhance service levels in both pro-dealer and remodelling channels. In addition, US$7m of capex to upgrade the New Zealand sawmill and remanufacturing process facilities is being implemented to increase the throughput potential of higher-grade clearwood products, largely for the US market.
Tenon’s share price responded well to the FY15 results announcement, (including a resumption of dividends), and the announcement of a strategic review in August and October respectively. The share price has risen by c 43% year to date (and is now back up to mid-2007 levels). Our EBITDA estimates for FY16 and FY17 have also increased by c 17% and c 38% respectively since December – partly due to FX movements – giving EV/EBITDA multiples of 6.2x and 3.9x for these years. For FY18e, this drops further to 2.8x. Over the same time period, the company’s P/E moves from 7.8x to 4.0x. Applying US peer-group ratings gives an indicative valuation range of NZ$6.42-7.05 per share based on calendarised 2016e earnings and even higher further out. Prospectively, Tenon is also set to provide a c 3.0% dividend yield for FY16, growing thereafter.