Wasan Tita
SPX Technologies (NYSE:SPXC) started 2024 with a bolt-on deal, adding to its string of dealmaking efforts in recent times. M&A efforts have stood at the foundation of a real transformation over the past five years or so, and while topline sales have not grown, the business has become a lot more profitable and future-proof.
With this story being well understood by the market, investors have subsequently awarded premium multiples to the shares, a bit too demanding if you ask me, leaving shares more than fully valued here.
Trading at a mid-twenties current multiple, execution has been more than priced in, although backed by an impressive performance. Weighing it all together, I continue to acknowledge the strong performance, but feel no need to chase the shares here.
Boosting Canadian Exposure
SPX has reached a deal to acquire Mirabel-based Canadian firm Ingenia Technologies in a USD $300 million deal. Ingenia designs and manufactures custom air handling units, typically used in high precision and reliability settings such as healthcare, pharmaceutical, education and industrial markets, among others.
With a USD $100 million sales contribution, SPX has paid a 3 times sales multiple for the business, with margins and growth exceeding the HVAC segment average, the unit in which the activities will be housed within SPX.
By now the company has built up a real acquisition track record, as this was the 14th acquisition since 2018, having been instrumental to its successful transformation in recent years, as shares have risen to fresh all-time highs at $109 at the moment of writing.
Putting The Deal Into Perspective
In November, SPX posted its third quarter results for 2023, and they were very strong, with sales reported up 21% to $449 million, with full year sales seen around $1.75 billion. Third quarter sales growth has been split pretty evenly between inorganic growth and the impact of acquisitions.
The vast majority of the business is comprised out of the HVAC segment, set to generate just over $1.1 billion in sales this year, equal to about two-thirds of total sales, complemented by a >$600 million detection and measurement business. HVAC focuses on cooling, in which SPX benefits from the rise of data centers and the semiconductor sector, as well as heating with companies and consumers moving away from gas powered heating, among others.
Despite a sizable size difference, both segments post margins of about 20% on a segment basis. With corporate operating margins reported in the mid-teens, the company now sees full year adjusted earnings around a midpoint of $4.27 per share. Needless to say, multiples are demanding at 25–26 times adjusted earnings.
With net debt reported at $573 million at the time, this pro forma net debt load will increase to about $873 million, becoming substantial with adjusted operating profits coming in around $300 million, while depreciation charges are rather minimal. That being said, based on the commentary about the margins, Ingenia should add least add $20 million to operating earnings going forward. This works down to approximately a 2.7 times EBITA leverage ratio, or just a bit lower leverage ratio based on EBITDA multiples.
With 47 million shares trading at $109, the company commands a $5.1 billion equity valuation and pro forma enterprise valuation around $6.0 billion. This implies that the company itself trades at 3.3 times sales ahead of the pre-deal. While the purchase does not look very cheap, it likely is accretive to SPX because of its own premium valuation here.
Continued Progress In An Impressive Transformation
SPX Technologies was spun off from SPX Corp back in 2015, and at the time was a $1.8 billion business, with sales largely on par to today. That looks to be a huge disappointment, but the contrary is the case. After all, the company relied heavily on a billion dollar power business, carrying both lower and more cyclical margins, with HVAC and the detection & measurement business being much smaller.
A mere $10 stock was posting earnings around a dollar, while leverage was high, as the real transformation came in 2021 when the former power business was sold, with proceeds used for deleveraging and bolt-on dealmaking. This included a $125 million deal for TAMCO, as announced in April of last year, with a $418 million deal for ASPEQ following in May of last year, as closing throughout the year makes that 2024 will naturally become another year of growth.
The transition has been impressive with shares having ten folded over the past decade, while total sales are flattish, as valuations are quite stretched in the mid-twenties, amidst a 2.5 times leverage ratio. Then again, the company has outlined some ambitious 2025 targets, calling for sales over $2 billion, but more important for earnings in excess of $5 per share. Even if this is achieved, a 22 times forward multiple for 2025 looks quite demanding, although SPX has rapidly built up a very impressive track record here in the time frame of just a few years.
