Legacy Housing Proposes Terms For $41 Million U.S. IPO

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About: Legacy Housing (LEGH), Includes: BRK.A, CVCO, SKY
by: Donovan Jones
Summary

Legacy Housing intends to raise $41 million from the sale of its common stock in an IPO.

The firm designs, manufactures, and provides financing for manufactured housing of all sizes, primarily to the Southern U.S. market.

LEGH is growing at an accelerating rate, has produced solid financial results, and the IPO valuation appears reasonable.

legacy housing ipo

Quick Take

Legacy Housing (LEGH) intends to raise $41 million from the sale of its ordinary shares in a U.S. IPO, per an amended registration statement.

The company designs, builds, and finances manufactured homes for the U.S. market.

LEGH has produced solid financial results, a ‘backlog’ of homes to deliver, and a reasonable IPO valuation.

Company & Business

Bedford, Texas-based Legacy Housing was founded in 2005 to build, sell and finance full-sized manufactured homes and tiny houses. Tiny houses are structures between 320 and 399 square feet.

Management is headed by Co-Founders and Co-CEOs Curtis D. Hodgson and Kenneth E. Shipley.

The firm offers an array of homes ranging in size from approximately 390 to 2,667 square feet, consisting of 1 to 5 bedrooms with one to three and a half bathrooms.

Below is a brief overview video of what stands out in a Legacy home:

Source: Legacy Housing

Legacy Housing also offers financing services, such as floor plan financing for the company’s independent retailers.

Customer Acquisition

Legacy Housing markets its offerings across 15 states through a network of 117 independent and 11 company-owned retail locations, and direct sales to owners of manufactured home communities.

Management says the firm is the fourth largest producer of manufactured homes in the U.S.

SG&A expenses as a percentage of revenue have been on a decreasing trend as sales have increased, per the table below:

SG&A

Expenses Vs. Revenue

Period

Percentage

Through Q3 2018

11.6%

2017

13.3%

2016

12.3%

Sources: Company Prospectus, IPO Edge

Average Revenue per Customer has grown so far in 2018 vs. full-year 2017, per the table below:

Average Revenue Per Customer

Period

ARPC

Variance

Through Q3 2018

$41,786.21

6.3%

2017 Year End

$39,320.71

N/A

Sources: Company Prospectus, IPO Edge

Market & Competition

According to a 2016 release by the U.S. Census Bureau, the total manufactured homes market was valued at about $6.245 billion in 2007, marking a decline to about $5.8 billion in 2016.

The average sale price per manufactured house has risen from $65,400 in 2007 to $70,600 in 2016, while the total number of homes sold has declined from 95,752 in 2007 to 81,136 in 2016.

Major competitors that build or sell manufactured housing include:

  • Clayton Homes
  • Cavco Industries (CVCO)
  • Skyline Champion (SKY)

Lenders that are competitors to Legacy’s lending service are:

  • 21st Mortgage (Clayton)
  • Berkshire Hathaway (BRK.A)
  • Triad Finance
  • CU Factory Built Lending

Financial Performance

LEGH’s recent financial results can be summarized as follows:

  • Growing topline revenue at an accelerating rate
  • Increased operating profit
  • Steadily increasing gross margin
  • Swing to positive cash flow from operations

Below are the company’s financial results for the past two years (Audited PCAOB):

Source: Legacy Housing S-1/A

Relevant financial metrics from the firm’s most recent registration statement:

TTM Revenue

Period

TTM Revenue

Variance vs. Prior

Through Q3 2018

$ 127,239,000

46.6%

2017

$ 128,736,000

16.5%

2016

$ 110,545,000

Operating Profit

Period

Operating Profit

Variance vs. Prior

Through Q3 2018

$ 28,689,000

161.2%

2017

$ 28,095,000

152.5%

2016

$ 18,425,000

EBITDA

Period

EBITDA

Through Q3 2018

22.5%

2017

21.8%

2016

16.7%

Cash Flow From Operations

Period

Cash Flow From Operations

Through Q3 2018

$ 562,000

2017

$ (710,000)

2016

$ (1,903,000)

Sources: Company Prospectus, IPO Edge

As of September 30, 2018, the company had $449,000 in cash and $90.7 million in total liabilities. (Unaudited, interim)

Free cash flow during the nine months ended September 30, 2018, was a negative ($4.2 million).

IPO Details

LEGH intends to sell 3.5 million shares of common stock at a midpoint price of $11.75 per share for gross proceeds of approximately $41.1 million, not including the sale of customary underwriter options.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $279.7 million.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 14.9%.

Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:

Consistent with our long-term strategy of conservatively deploying our capital to achieve above average rates of return, we intend to use the net proceeds of this offering to expand our retail presence in the geographic markets we now serve, particularly in the southern United States. Each retail center requires between $1,000,000 and $2,000,000 to acquire the location, situate an office, provide inventory, and allocate the initial working capital. We expect to open 10 to 15 additional retail centers by the end of 2020. We also expect, based on our current financial position, that we will opportunistically increase our credit lines on terms that will allow us to rapidly expand the pace of our financing solutions for our retail consumers, giving our new retail centers the support they need to generate sales.

We also expect to use a portion of the net proceeds to provide financing solutions to a select group of our community-owner customers, in a manner that includes developing new sites for products in or near urban locations where there is a shortage of sites to place our products. These solutions will be structured to give us an attractive return on investment, when coupled with the gross margin we make on products specifically targeted for these new manufactured housing communities.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are B. Riley FBR and Oak Ridge Financial.

Expected IPO Pricing Date: Week of December 10, 2018.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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