April 12, 2012, 1:48 pm

CSTE - Caesarstone

Note: long CSTE from ipo and expecting similar performance as recent highlighted ipo EPAM.


2012-03-17
CSTE - Caesarstone

CSTE - Caesarstone Sdot-Yam plans on offering 7.66 million shares at a range of $14-$16. Insiders will be selling 2 million shares in the deal. JP Morgan, Barclays and Credit Suisse are leading the deal, Baird and Stifel co-managing. Post-ipo CSTE will have 32.37 million shares outstanding for a market cap of $486 million on a pricing of $15. 1/3 of the ipo proceeds will go to pay a dividend to insiders, the remainder to complete distributor acquisition, expand production lines and general corporate purposes.

Kibbutz Sdot-Yam(KSY) will own 53% of CSTE post-ipo. KSY is an Israeli commune established in 1940. KSY founded CSTE in 1987.
From the prospectus:
'We are a leading manufacturer of high quality engineered quartz surfaces sold under our premium Caesarstone brand.'
Engineered quartz slabes primarily for kitchen countertops in the renovation and remodeling end markets. Other end products include vanity tops, wall panels, back splashes, floor tiles, staris and other interior surfaces.
Apparently the use of quartz is relatively new and the fastest growing material in the countertop industry. Between 1999 and 2010, quartz sales to end-consumers have grown 16.4% annually compared to 4.4% total worldwide countertop growth.
In 2011 quartz received the highest overall score among countertop materials from Consumer Reports Magazine.
As of 2010, engineered quartz had just a 4.3% penetration of the global countertop market. In the US penetration is just 5%, however penetration in Australia is 32% and in Israel 82%. The growth opportunity here would appear to be the US as 1) it is an underpenetrated quartz counterop market and 2)Quartz countertop sales are growing and reviews appear to be strong.
Sold in 42 countries via direct sales and distributors. Australia accounted for 34%, US 23% and Israel 15% of 2011 revenues.
***Solid 13% market share in global engineered quartz selling volume in 2010. Leading position in Australia, the US, Israel and Canada.
CSTE has displays in over 8,000 locations in the US.
Sector - Global countertop industry generated $68 billion in end consumer sales and installations in 2010. US accounts for 20% of global countertop sales to end-consumers. Not the best sector to be in 2008 and 2009 as demand is driven by reneovation/remodeling of existing homes and the construction of new homes. A future downturn would undoubtedly hurt CSTE's share price.
***Global countertop market has been flat at best since 2007 while CSTE has shown an 18.7% compoud annual growth rate.
Legal - Since 2008 there have been 14 lawsuits filed against CSTE alleging silicosis through exposure while cutting, polishing, sawing, grinding, breaking, crushing, drilling, sanding or sculpting quartz tabletops. All but one of the suits is in a preliminary stage. One settlement has been settled for $71,970 with CSTE's liability being $2,617.
34% of revenues in Australian dollars, 25% in US dollars and 15% in Euros.
76% of CSTE's quartzite is sourced in Turkey.
Financials
$1.50 per share in cash post-ipo, $23 million of debt. Net cash per share is right around $1.
Seasonality - Third quarter tends to be the strongest of the year. First quarter slowest, impacted by slowdown in new construction and renovation in the winter months(and public holidays in Australia).
Revenues dipped slightly in 2009, but have rebounded strongly since. CSTE has outperformed the worldwide countertop sector since the 2008 economic recession.
CSTE remained profitable through the 2008 and 2009 worldwide economic slowdown. Impressive considering CSTE's end market housing renovation and new builds were hardest hit in the slowdown and have really yet to recover.
***In 3/11 CSTE acquired full ownership of their US distributor. Accounting wise this market 2011 revenues appearas if they've grown much stronger than they actually have. We've accounted for this below.
2011 - $282 million in total revenues, an 'apples to apples' increase of approximately 10% from 2010. 40% gross margins. 14.6% operating margins. 15% tax rate plus minimal debt servicing expense puts net margins at 12%. EPS of $1.05.
2012 - Plugging in 8%-10% growth in 2012 puts us at $305 million. Very mature market in Australia, the US should be driving this growth in 2012. Again, keep in mind 2011 and the quarterlies look far stronger than anything CSTE had done before. This is a direct result of an accounting change when CSTE purchased their US distributor and began recognizing gross revenues and not just net. We are going to read how CSTE grew massively in 2011, but that just isn't true. They grew, but much of the perceived growth was just an accounting change.
$305 million in 2012 revenues. 40% gross margins, 15% operating margins. It appears once public, CSTE will maintain a 15% tax rate due to favorable status in Israel. Net margins of 12.3%. EPS of $1.16. On a pricing of $15, CSTE would trade a lightly taxed 13 X's 2012 estimates.
Nice growth is what has been a stagnant end market. Plenty of room to continue to gain market share in the US, CSTE appears to be positioned well. Over the years at times Israeli ipos have had trouble generating a strong multiple. Even so this looks like an attractive sleeper ipo in a sector left for dead the past few years. If CSTE can continue to outperform their end market competitors(as they have done since 2007), this should be a nice mid-term play. wouldn't expect much in the short term, but mid-term+ recommend based on strong track record and opportunity for growth in the US.

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