Company Overview: Malibu Boats, Inc. is a designer, manufacturer and marketer of performance sport boats. The Company's segments include the U.S. and Australia. Each segment is engaged in the manufacturing, distribution, marketing and sale of performance sport boats. Its U.S. segment serves markets in North America, South America, Europe and Asia. Its Australia segment serves the Australian and New Zealand markets. The Company's boats are used for water sports, including water skiing, wakeboarding and wake surfing, as well as general recreational boating. The Company sells its boats under Malibu and Axis Wake Research (Axis) brand names. The Company's boats are constructed of fiberglass, equipped with inboard propulsion systems and available in a range of sizes and hull designs. The Company also offers various accessories and aftermarket parts. The Company's boat models include Malibu M Series, Malibu Wakesetter, Malibu Response and Axis.


MBUU Details

Leading Name and a Consistent Performer in the Respective Industry: Malibu Boats, Inc. (NASDAQ: MBUU) is a US-based company, which is engaged in the manufacturing and distribution of recreational sports boats, under three brands, namely Malibu, Axis Wake Research (Axis), and Cobalt. The company has been holding number one position in the US market since 2010 and has grabbed around one third of the domestic market share. MBUU operates through two broad segments- (a) the U.S., primarily serves markets in North America, South America, Europe, and Asia, and (b) Australia through which the company offers its services to New Zealand Market as well.

Analyzing the financial journey from FY15 to FY18, the top-line is understood to have grown from $228.6 million to $497 million, posting a CAGR growth of 29.5% over the same period. On the same line, net profit also depicted a robust increase from $14.7 million to 27.6 million, almost double during the period. Bottom-line of the business witnessed a CAGR growth of 23.4% during FY15-FY18. Over the period, the company has enjoyed the adjusted EBITDA margin, broadly in the range of 18.7% to 19.8%. Average sales per unit also increased from $66 to $79 over the period. 


Financial Snapshot FY14-FY18 (Company’s Reports)

Under the vertical integration strategy, the company announced the engine marinization initiative in November 2016. The project is progressing well with decent results. The Management will incorporate the MBBU-owned engines into Malibu boats in the model in 2019, for which a completed rollout has been scheduled for all Malibu and Axis models in FY20. The company is planning and analyzing the prospects for further vertical integration to attain further competitive advantage through the control on entire product lifecycle and value of key components. In addition to that, the acquisition of Cobalt and Pursuit are expected to provide the company with new opportunities to enhance the value for the company and hence, for the shareholders. 

Strong Performance in the Third Quarter of 2019: MBUU in 3QFY19 witnessed strong results in terms of top-line & bottom-line. The company reported the adjusted EPS (earnings per share) of $1.15, as compared with the 3QFY18 EPS of $0.89, reflecting a growth of 29%. The company reported the adjusted revenue growth of 42.4% to $199.92 million in 3QFY19. Malibu brand formed about 41.5% of the total unit sales. Axis brand accounted for about 20.9%, which means 437 units. Cobalt brand formed 30.8%, which means 645 boats and Pursuit sold the remaining 143 boats.


Brand-Wise Contribution to Sales (Source: Company Reports)

Consolidated net sales per unit saw a rise of 21.4% in the period to about $95,500. This growth was achieved mainly on the back of addition to Pursuit models, which saw a significantly higher average selling price as compared to the other brands. During the period, the company posted a 36.7% increase in the gross profit to $49.7 million. However, the gross margin fell slightly to 24.9% in Q3 2019 as compared to 25.9% in the prior corresponding period, mainly due to the inclusion of Pursuit. Comparable gross margin for the combined Malibu and Cobalt business expanded by 50 basis points on a year-over-year basis in 3QFY19. During the period, the company recorded a 32.2% growth in the net income to $22.2 million. Adjusted EBITDA, for the period, witnessed a rise of 32.4% to $37.8 million, however, the adjusted EBITDA margin contracted by ~140 basis points to 18.9%, mainly due to the acquisition of Pursuit. Operating income stood at $30.6 million from $23.9 million in the corresponding period of FY18.

Cost of sales in the period also increased by 44.3%, to $150.2 million against pcp. This rise in the cost of sales was incurred due to the incremental costs from the acquisition of Pursuit in October 2018. During the period, selling and marketing expenses grew about 62% mainly due to the seasonal spend at Pursuit for larger boat shows. The selling and marketing expense, as a percentage of sales also expanded by 30 basis points. General and administrative expenses (G&A) rose 56.8% to $4.5 million whereas G&A expenses, as a percentage of sales, excluding amortization expanded by approximately 60 basis points to 6.2%.


Third Quarter 2019 Financial Performance (Source: Company Reports)
  
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 45.88% of the total shareholding. The BlackRock Institutional Trust Company, N.A. and Macquarie Investment Management hold the maximum interest in the company at 6.41% and 5.89%, respectively.


Top 10 Shareholders (Source: Thomson Reuters)
 
Key Metrics: The company posted healthy margins in the third quarter of FY2019. Gross, EBITDA and net margins for 3QFY19 stood at 24.9%, 18.0%, and 11.1%, respectively, showing an improvement over sequential and year on year basis. The margins remained above the industry as well, barring the gross margin, for which the industry median stood at 40.8%.  ROE at 12.2% in the third quarter of FY19 was well-above the industry median of 3.1%.


Key Metrics (Source: Thomson Reuters)
 
Capital Management: On 18 June 2019, MBUU has authorized a stock repurchase program, which will allow the company to repurchase up to $35 million of the Company’s Class A Common Shares and the units in Malibu Boats Holdings, LLC. This is over the duration of July 1st, 2019 to July 1st, 2020. The Company intends to fund this repurchase from cash on hand.

Plan for Pursuit: MBUU is currently advancing with the integration of Pursuit, which was acquired in 2018. The company is expanding its capacity for the production of Pursuit. MBUU has planned to build more product in the year 2020, however, there will be a real increase in the value when the company brings the new plant online which is expected to be over the period of next 12 to 15 months. The company is in the final stage of receiving permission, and it expects to start construction in the next 2 to 3 months. MBUU is confident that it will complete the construction of this new plant on time and within budget. Further, Pursuit is growing and capturing the market share in the 22-foot to 44-foot saltwater outboard segment. Pursuit and its dealers posted double-digit growth in the boat show season compared to 2018.


Key Valuation Metrics (Source: Thomson Reuters)
 
Valuation Methodology:

Method 1: Price-to-Cash Flow Multiple Approach (NTM):

Price/Cash Flow Based Valuation (Source: Thomson Reuters)

Method 2: PE- Based Multiple Approach (NTM):

P/E-Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Outlook for Future: MBUU in the first half of fiscal 2020, plans to launch another outboard model, and during the second half of the fiscal year 2020, it will again be launching another model. These models will result in the growth of unit volume for the fiscal year 2020, boosting the company’s topline. The real effect will come in 2021, when all the models will be able to complete the first full year. Moreover, the company is currently incorporating the patented swim-step technology from Cobalt into the Malibu boats. As a result, MBUU has started with new 25 LSV and even expanded into additional models. 

Meanwhile, for FY19, from Malibu and Cobalt, the company is expected that the volume will grow in double digits. For Pursuit, the company expects the total unit volume for the FY19 to be just over 400 units. The FY19 net sales growth for Malibu and Cobalt is anticipated to be in mid-teens. The company forecasts the FY19 consolidated net sales growth to be in the range of 35% and 36%. FY19 consolidated gross margin is expected to be flat on a year-over-year basis. For full year 2019, the acquisition and engine expenses are projected to be in the range of approximately $7 million to $8 million. The projection does not include the purchase accounting adjustments for asset step ups. However, FY19 consolidated adjusted EBITDA margin is anticipated to decline slightly year-over-year, mainly due to the inclusion of lower Pursuit EBITDA margin prevailing, currently. The consolidated capital expenditures for FY 19, is expected to be in the range of approximately $17 million to $18 million. 
 

Outlook (Source: Company Reports)

Stock Recommendation: MBUU stock is trading at a price of $36.76, has support at ~$32.20 level and resistance at ~$46.50. The company is growing as its brands continue to perform well as seen in CY18. Cobalt’s addressable market was up approximately 5%. Pursuit’s addressable market is among the fastest growing in marine. MBUU continues with the initiatives for vertical integration and is enhancing the operational performance and the capacity while investing in the future. For FY20, the company is spending additional capital to expand its production capabilities for both Cobalt and Pursuit. MBUU expects that the capital investments and vertical integration initiatives will lead to strong growth in revenue and earnings. The company continues to have competitive advantages and operational excellence, which will help it to outperform and increase the market share within the growing U.S. marine market. Moreover, MBUU is immensely benefitted by the acquisition of Pursuit. The company reported a 21.4% rise in the consolidated net sales per unit in the third quarter 2019, which was achieved mainly on the back of addition of Pursuit models, that have a significantly higher average selling price compared to the company’s other brands. Based on the foregoing, we have valued the stock using the two relative valuation methods, Price-to-Cash flow and PE-based multiple and arrived at the target price in the ambit of $44.86 to $46.67 (double-digit upside (%)). Hence, we recommend a “Buy” rating on the stock at the current market price of $36.76 per share, up 0.34% on 26 June 2019.

 
MBUU Daily Chart (Source: Thomson Reuters)

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