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DMC Global Inc ($BOOM)

DMC Global Inc is an industrial services firm which trades at a 6.8x EBITDA, a 6.8x FCF, and operates 3 manufacturing businesses: Arcadia, DynaEnergetics, and NobelClad. Arcadia is a construction business, DynaEnergetics makes products used in oil and gas exploration (mainly perforation systems), and NobelClad manufactures equipment for industrial processing (although it’s a lot smaller than the other two).   

  

In 2021, it purchased a 60% stake in Arcadia. Since the previous operations of the company were almost entirely centered around energy, Arcadia provides greater stability and a greater growth potential. According to management, Arcadia is expected to be the main driver of future growth, and the credit facility was expanded from $200mn to $300mn to finance the purchase of the remaining 40% of Arcadia.   

  

Arcadia was acquired by DMC in December 2021 from the Munera Family ESBT, and DMC currently owns 60% of Arcadia Products. A put/call option on the remaining 40% stake in Arcadia becomes exercisable on December 23, 2024. If the put option is exercised by Munera, then DMC will be required to purchase Munera’s 40% stake in the company for the greater of the a) value based on the acquisition price ((Final Equity Value x Total number of option units) - Bridge Loan Allocations), or b) a 9.5 x multiple of Arcadia Products’ average EBITDA for the preceding two fiscal years and its projected EBITDA for the then-current fiscal year (DMC pays in 20% cash and 80% in preferred shares or in 100% cash, it’s decision). If DMC exercises the call option, it will pay the same price, all in cash. If the EBITDA value is higher, in line with current EBITDA growth, the company will have to pay ~$2 bn, with a cash minimum of $400 mn. Given the company’s increasing FCF and good history of paying back debt, I don’t think this presents too big of a risk.  

  

Arcadia has shown increasing EBITDA margins and the purchase of the remaining 40% will boost EBITDA significantly and allow the company to operate more efficiently due to more streamlined management. Currently, DMC can appoint 4 directors (including the chairman) while Munera can appoint 3. Most of the decisions are taken by a majority vote, but some decisions require 80% approval. As Munera ownership of Arcadia decreases, the number of directors it can appoint will also decrease. DMC also recently appointed a new CEO (Michael Kuta) due to them wanting to focus more on cost/cuts and margin expansion. This seems to be a positive due to DMC’s increase in credit facility.    

  

Meanwhile, DynaEnergetics (the other major business – also the most volatile) has had decreasing EBITDA margins over the past few years. It is also greatly impacted by changes in oil prices, with revenue from DynaEnergetics showing no stability (NobelClad is also heavily dependent on metal prices). The complete acquisition of Arcadia and its prioritization coupled with the possible sale or merger of DynaEnergetics should allow the firm to increase EBITDA margins by focusing on Arcadia, increasing stability (and thus investor confidence) along with efficiency. This sale or merger is a strong possibility, as a review for strategic alternatives was launched on Jan 29, 2024 – options under review include business combinations, a merger, and a sale.   

  

Stability is also likely to rise due to the shifting internal structure of Arcadia. It itself is the largest business and consists of 3 segments: Arcadia, Wilson Partitions, and Arcadia Custom. Arcadia is a commercial exteriors business, Wilson Partitions is a commercial interiors business, and Arcadia Custom is an ultra high-end residential construction business. Arcadia accounts for 69% of net sales, Wilson for 10%, and Arcadia Custom for the remaining 21%. Arcadia customs has been accounting for a greater percentage of total Arcadia net sales, increasing its share from 17% last year. I believe this is a good sign as residential construction is less volatile and cyclical than commercial construction. In addition, a new ERP (enterprise resource planning) system was recently adopted specifically for Arcadia products, showing management's focus on its growth. This new system was responsible for a slowdown after it went live in June 2023, but I expect it will lead to greater efficiency over time due to its ability to automate manual processes.   

  

The major risk with the company is the potential for difficulties faced with debt incurred due to borrowing to finance the purchase of Arcadia - although, as I previously mentioned, DMCs has a stellar history/relationship with repaying debt. 

 

Catalyst  

Greater investor confidence due to increased stability (caused by the growth of Arcadia/the sale of DynaEnergetics and NobelClad) 

  

More streamlined/efficient management following the complete acquisition of Arcadia 

  

Rising EBITDA margins from the increased efficiency of Arcadia (due to greater/full focus on Arcadia and new ERP) 

 

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