Key insights
- A UK-based roofing and construction company, Northern Bear, is trading at a very low EV/EBITDA multiple compared to industry averages. The author suggests the company is undervalued due to low liquidity on the AIM exchange. While the company has increasing revenue and a healthy balance sheet, the thin trading volume and wide bid-ask spread make it a less attractive investment, with a slightly negative influence on US markets.
Everyone's out there looking at AI companies. And I'm all in favor of that, because it means there are fewer people out there bargain-hunting. Today I'm here to point out one of those bargains I've invested in. Large mature regionally active roofing companies sell at multiples of at least 7 times EBITDA.
So, I was quite eager to grab the opportunity to invest in a regionally active roofing company with 90 million pounds of annual revenue, that was trading at a market cap of 16 million pounds. The company is called Northern Bear.
With 6.76 million in EBITDA and an enterprise value of 14.54 million, you get an EV/EBITDA of 2.15. Again, a healthy number would be north of 7. The company is being undervalued by the market. For my patience, I'll be rewarded with a 3.80% dividend yield.
The company also has businesses that do other construction work besides just roofing, like fire protection and sound insulation. Maybe the better comparison is with general construction companies, which trade at 0.75 - 1.25 times revenue. Northern Bear is trading at ~0.2 times revenue. And it's publicly traded of course, meaning you don't have to know much about construction to get exposure to the industry.
So what's the catch then? Declining revenue? Nope. Revenue has been steadily increasing over the years. High debt load? No, the company's enterprise value is below its market cap, they have more cash on their balance sheet than they have debt. The real catch is that the shares are thinly traded on the AIM, with a thick spread. You're being rewarded for offering exit liquidity.
This is the sort of investment for people who are willing to put their money away for a few years if necessary, with the knowledge in the back of their head that the fundamentals are sound. That is, value investors. The company is very thinly traded, you shouldn't expect to put more than 10,000 pounds into this on a single day without blowing up the price. I stepped in at an average price of 117 GBX. I blew up the price to 133 GBX, which I still consider a good deal.
For context, I've been investing in construction companies for a few years now, starting back in 2021 when I bought shares in Japanese construction firms. They rerated, I made a nice profit and I've been hungrily browsing through my screeners, looking for something similar: Something with a market cap in the tens of millions, trading at around 0.2 times revenue, stable or growing revenue and no debt risk. I no longer manage to find such companies these days, except for Northern Bear.