Tecnoglass - Capital Appreciation Expected With Income While You Wait

Sep. 20, 2019 11:28 AM ETTecnoglass Inc. (TGLS)7 Comments
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Summary

  • TGLS has entered a number of smart partnerships such as a JV with Saint-Gobain and Schuco Alliance. These are positive for the firm moving forward.
  • TGLS has an impressive backlog 1.3x the revenue the firm has generated in the past 12 months. This is up 6% + YoY.
  • The firm is trading at a low forward P/E of 8.72, with a dividend of 7.41%. This is a company with low-risk and high-reward potential.

Investment Thesis

Tecnoglass Inc (NYSE:TGLS) is undervalued and has a number of excited partnerships with other companies. The firm is well placed in the US market to capitalize on high consumer demand. TGLS now has an impressive backlog as a result and has revised earnings higher. What's the result of this? A forward P/E of 8.72. This is a company that will outperform the market and generate solid returns in the medium term. There is also an impressive dividend of 7.41% to collect while you wait.

Catalysts

Saint-Gobain Joint Venture

TGLS has levers that will lead to increased revenue moving forward. There was the May 2019 join-venture with the float-glass company Saint-Gobain. The joint-venture is aimed at increasing TGLS's leading vertical integration strategy. It will lead to secure float-glass supply and lead to many synergies over the years. One of these synergies is better purchasing economics. This will lead to lower cost of goods and higher profits. The deal also has the effect of elevating the global profile of the company with customers, suppliers, architects and other industry participants. The result of the joint-venture has already been seen with $1 million of increased adjusted EBITDA in 2 months of operations during the last quarter. This is a positive sign, and shows the potential that this deal has on future earnings.

Automation Efficiencies

There have been increased investment in operating key operations in the glass and aluminum facilities by the end of the year. This will increase the efficiency of operations, and position the firm to generate attractive returns as it executes against a backlog of projects. This is again a positive for the company in the long term. This is all expected to be completed by the end of 2019. This is another lever that will lead to increased profitability for the company.

There has been a huge expanding backlog of sales for TGLS. This will be reflected in earnings moving forward, that are being revised upwards. In response to the demand, there is an expansion of the aluminum extrusion facilities in July. This will lead to better supply of incremental aluminum throughout the market. This also puts the firm in a better position to capitalize on its competitive US position. This will lead to an increase in aluminum production capacity by 25%.

Schuco Alliance

The alliance that TGLS made with Schuco is helping TGLS to accelerate its growth in the US markets. TGLS was awarded several projects in Schuco product lines in the North-East and this has helped to increase TGLS's backlog. The alliance has led to strategic footprint penetration in the residential market and the competitive advantages allow TGLS to capitalize on strong bidding activity. This again will be another positive lever for earnings moving forward. The revenues being received in themselves are at record levels invoicing at industry-leading margins.

US Market Share

TGLS still has a tiny fraction of the $30 billion US architectural glass and aluminium industry. 2/3rds of this opportunity exists in the profitable residential end of the segment. The efforts that TGLS has made in the residential segment as well as in establishing its commercial reputation will allow them to gain market share fast in this market. Earnings will be higher when you look at the big upside in the business to capture rising share of the residential and overall US market moving forward. TGLS is confident in their ability to keep growing their market share and they should be.

TGLS benefited from the US having stronger residential invoicing, healthy commercial construction activity, market share gains and price and mix improvement in the latest earnings report. This solid US growth is overlooking the soft LatAm environment for the company. Tecnoglass earns 85% of its revenue from the US now, which is interesting for a Latin American company. On the other hand comparable US competitor companies have an average of 79%. This highlights the strong market position TGLS has in the US. While competitors have faced higher raw material costs and labor constraints, these structural competitive advantages haven't affected Tecnoglass.

Backlog

TGLS has a huge backlog at the moment. The 2nd quarter backlog grew 6% year-on year to a record $535 million. This backlog is an impressive 1.3x last 12 months' revenue. This shows the strength of the strategy of the company, product diversify and increasing customer relationships. Every project is showing the quality of the company and as a result the business is benefiting from increased word of mouth and the reputation. There have been solid conditions in the residential and commercial construction in the US. This has been from solid project wins from the sales team in New York, Texas and Washington. The firm has been wise to diversify its geographical presence and product mix in solid markets, with good economic fundamentals. The outperformance in key operating metrics has been by focusing on innovation through high return projects, a talented sales team, strategic partnerships and improved productivity. The backlog earnings will ensure earnings remain solid for TGLS. Earnings have recently been revised higher as a result They will support the cheap share price as it moves higher.

Valuation

TGLS has the quantitative and qualitative figures to back it. The firm is trading at a low forward P/E of only 8.72. The median for the industry is 12.74. Historically over the past 10 years the firm has traded at a P/E of 19.

If the forward P/E was just to move in line with the industry there is an impressive 46% of upside for the firm. This gives us a price target of $11. There is quite a lot of resistance from a technical analysis standpoint around the $9.9 area, so this would be a good place to take profits.

While you wait as well you get an attractive dividend yield of 7.41%. This makes the company not just a growth stock but an income play as well.

Conclusion

TGLS has qualitative and quantitative factors going for it. There is very low risk and high return at current levels. There is also income, while you wait for capital appreciation. TGLS is well placed to earn significant revenues through its partnerships and backlog. This is a company that is well worth looking at, in the current overpriced market.

This article was written by

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Articles from now on will be:Value & Growth Ideas in the Consumer Goods SectorExperience:- Building an eCommerce Consumer Goods Company (Cosmetics - Direct to Consumer)- Previous BIG 4 Audit Experience- Bsc in Accounting & Finance at the Number 1 Business School in Europe

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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