onurdongel
Published on the Value Lab 25/7/22
Skyline Champion (NYSE:SKY) can do no wrong. We invested in this company for the first time years ago just as it was supposed to emerge from the red. Emerge it did, now fully profitable and able to produce strong growth regardless of supply chain constraints. Pricing has been the biggest boost to the company’s results while unit volumes still grew. The backlog continues to grow at ever higher average prices. Things look really good for the company and a low multiple doesn’t reflect its markets’ resilience nor the capacity for continued growth.
Q4 & FY Update
The FY results paint a good picture, in part because supply chain issues became more severe as the operating year went on. However, key figures that measure performance against these challenges show that even sequentially into the Q4, the company executed superbly on production.
Fortunately, we were able to increase production during the quarter, allowing us to improve our delivery times to our customers to 35 weeks at the end of the quarter, compared to 43 weeks at the end of the third quarter.
The company was able to reduce delivery times, and they similarly raised utilization rates in their facilities to 72%, up 4% from the prior quarter. Total deliveries of modular homes was up 10% YoY and 13% sequentially, showing that a peaking supply chain environment of summer 2021 wasn’t enough to diverge sequential and YoY figures for the company.
In addition to a 13% increase in deliveries, backlog also grew about 10% during the quarter showing the excellent demand environment that benefits from the convergence of factors that favor affordable housing, including the need to save on materials with conveyor belt manufacturing and concerns around the financing environment requiring lower ticket units.
For the FY net sales grew 55% and EBITDA 163% with 6.5% added to the margins. A lot of this growth was driven by pricing due to low double-digit volume growth being reported, which by looking at the profitability figures can be surmised to be easily outpacing production inflation. In the Q4, similar net sales growth was visible as for the FY at 43% YoY growth with 7% added to the Q4 gross margin YoY. Moreover, with a pretty large contract with FEMA coming in accounting for about 13% of the backlog right now, where FEMA contracts require more specs and therefore mean higher prices, the backlog continues to grow with the favorable pricing environment baked in.
Final Remarks
Our feeling is that if supply chain issues haven’t hit the company so far, they might never. The monetary authorities are trying to crimp demand and tackle inflation, which will eventually have to tackle supply chain bottlenecks for inflation to truly unwind. In doing so, the environment where product availability is a key risk should eventually pass. The bigger concern then becomes macro issues for the SKY end-markets. However, with modular housing positioned as an affordable option our concerns are limited in this regard, and the growth in backlog at nice prices should provide a good cushion for revenue as SKY keeps building unit volume growth thereafter. Moreover, the latest order trends continue to indicate that consumer worries haven’t affected their markets as of May.
Our new orders — incoming orders are matching production right now in April and May. So they are actually higher than they were in the third quarter. So demand remains good overall.
Mark Yost, CEO of SKY
Moreover, the company reports an increase in cash buyers into the market. So the delta in demand isn’t from levered buyers that will be an evaporated market as interest rates continue to rise. With a government channel to boast as well as healthy end-markets and backlog, the company trading at 14x PE seems low given growth can be assured for at least another year just with backlog liquidation. With end-markets favored in the current environment we think SKY might be a strong pick again.
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