This article has been written by an expert contributor Munro Partners
Who are they?
Advanced Drainage Systems (ADS) is a mid-cap US-based company that is headquartered in Ohio. The company makes resin drainpipes for both residential homes across the US in addition to a range of commercial buildings such as offices, retail stores and data centres. The company also has an international presence in Canada and Mexico, as well as an agriculture business providing solutions into the agriculture industry to help manage the water table and create a more efficient use of water.
The company’s residential and commercial drain solutions have a structural penetration opportunity, in that ADS is taking market share from traditional concrete pipes.
The competitive advantage the company is creating are more environmentally friendly, allow for a more efficient use of water, have greater longevity that prevents replacement and maintenance, and are more cost-effective. These solutions are becoming increasingly important in new residential construction in the US and in modern commercial buildings, such as data centres, that are now being built with a water management plan in place.
ADS is also a significant plastic recycler. In fact, it is the second largest plastic recycler in North America given it can take hard plastic waste and create a water management solution.
Why we like ADS
The company has a very committed and reliable management team which has allowed ADS to enjoy a dominant market position in their industry. This dominant position has allowed the company to make a relatively recent highly accretive acquisition of Infiltrator Water Technologies. Because of this strength in its market positioning, the company recently announced EBITDA margins in the low 30% range, already surpassing management’s expectations for a high 20% margin over the next 3-4 years.
We view ADS as a relatively undiscovered climate change champion given its importance in water management and plastic recycling. We believe with the company’s prospects and climate structural tailwinds, their multiple has the potential for rerating.
Written by Munro Partners, October 2022.
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