TRG | The Bottom Line – 5/24

TRG this week initiated coverage on Knife River (KNF), a vertically integrated heavy materials producer. KNF made its debut as a public company on 5/31/23 after spinning out of MDU Resources. The company operates ~200 quarries (top 10 U.S. aggregates producer) across 14 states (mostly in the Northwest, TX, and CA), as well as ~111 concrete plants and ~56 asphalt plants. The secular trend of the reindustrialization of the U.S./North American market is one that TRG believes has a long tail for growth (10 years at least) and is one which there will be greater differentiation of “winners.” Overall, we contend that through a combination of company specific initiatives and broader secular trends, KNF is one of those “winners.” KNF’s margin expansion is a significant lever for growth. In our opinion, KNF was an “orphaned asset” under the MDU umbrella, and now as an independent entity, KNF has a greater ability to focus on value creation. To that end, KNF has already hit its 15% EBITDA margin bogie two years early (original target was 2025). The next stop is 20%+, which we believe will come from a mix of pricing, cost control, and mix shift to materials focused from both organic and acquired efforts. Based on EV/EBITDA range of 11x-13x, KNF’s 12-month fair value range is $103-$123, the mid-point being $113.