Overview of Construction Partners, Inc.

Construction Partners, Inc. is a civil infrastructure company that specializes in building and maintaining transportation networks. The company operates primarily in the Sunbelt region of the southeastern United States, providing construction products and services for both public and private infrastructure projects.

Public projects, which are funded by federal, state and local governments, make up a significant portion of the company’s business. These include roads, highways, bridges, airports and other forms of public infrastructure. Federal highway spending, which uses funds from the Highway Trust Fund, has historically been a relatively stable part of state and federal budgets.

In addition to public works, Construction Partners also provides construction services to private customers, including commercial and residential developers. The company has a diverse fleet of equipment and a network of strategically located asphalt plants that support both its public and private operations.

Recent Developments

At the end of fiscal year 2024, Construction Partners had a contract backlog of $2 billion, consisting of $1.5 billion in uncompleted work and $0.5 billion in low bid/no contract projects. This backlog represents a solid pipeline of future work.

During fiscal 2024, the company completed eight acquisitions across four states, adding 11 asphalt plants and expanding its operations. Subsequent to the fiscal year, Construction Partners made a major acquisition, buying Lone Star Paving, a vertically integrated asphalt company in Texas, for $654 million in cash and 3 million shares of stock.

To finance the Lone Star Paving acquisition, Construction Partners entered into a new $850 million term loan credit agreement. This new debt, along with amendments to the company’s existing credit facility, provides ample liquidity to support the company’s growth strategy.

In April 2024, the board of directors authorized a $40 million stock repurchase program, which the company has been utilizing to offset dilution from equity compensation awards and repurchase shares opportunistically.

Financial Performance

The following table summarizes Construction Partners’ key financial results for the fiscal years ended September 30, 2024 and 2023:

Metric	FY 2024	FY 2023	% Change
Revenues	$1,823.9 million	$1,563.5 million	16.7%
Gross Profit	$258.3 million	$196.4 million	31.5%
Gross Margin	14.2%	12.6%	1.6 pts
Net Income	$68.9 million	$49.0 million	40.7%
Adjusted EBITDA	$220.6 million	$172.6 million	27.8%
Adjusted EBITDA Margin	12.1%	11.0%	1.1 pts

Revenues for fiscal 2024 increased 16.7% to $1.82 billion, driven by $154 million in revenues from acquisitions completed during or after fiscal 2023, as well as 6.8% organic growth in the company’s existing markets. The increase in revenues, combined with improved gross margins, led to a 31.5% rise in gross profit.

General and administrative expenses increased 19.3% in fiscal 2024, primarily due to higher personnel costs, increased share-based compensation, and expenses associated with the acquired businesses. Despite this increase, net income grew 40.7% to $68.9 million.

Adjusted EBITDA, a key non-GAAP metric that excludes the impact of interest, taxes, depreciation and other one-time items, increased 27.8% to $220.6 million. Adjusted EBITDA margin expanded from 11.0% to 12.1%, reflecting the company’s operational efficiency and ability to leverage its fixed cost base.

Analysis of Strengths and Weaknesses

Strengths:

• Diversified revenue streams from both public and private infrastructure projects
• Strategically located asphalt plants and aggregates facilities that support operations
• Successful acquisition strategy to expand geographic footprint and capabilities
• Strong liquidity position and access to capital to fund growth
• Experienced management team with a track record of operational excellence

Weaknesses:

• Exposure to seasonality and weather-related disruptions that can impact construction activity
• Reliance on government funding for a significant portion of revenues, which can be subject to political and budgetary uncertainties
• Rising costs of labor, materials and fuel that can pressure profit margins if not effectively managed
• Integration risks associated with the company’s aggressive acquisition strategy

Construction Partners’ primary strengths lie in its diversified business model, strategic asset base, and proven ability to grow both organically and through acquisitions. The company’s focus on public infrastructure projects provides a relatively stable revenue stream, while its private construction services offer opportunities for growth.

The company’s network of asphalt plants and aggregates facilities gives it a competitive advantage in its regional markets, allowing it to efficiently source and deliver construction materials. Construction Partners has also demonstrated its ability to successfully integrate acquired businesses to expand its geographic reach and service capabilities.

However, the company’s business is subject to seasonal and weather-related fluctuations that can impact construction activity and profitability. Additionally, a significant portion of its revenues are tied to government funding sources, which can be vulnerable to political and budgetary changes.

Rising costs for labor, materials and fuel also present a challenge, as the company may not always be able to pass these increases on to customers. Effective management of these cost pressures will be crucial to maintaining profit margins.

Finally, the company’s aggressive acquisition strategy, while a strength, also carries integration risks that must be carefully managed to ensure the acquired businesses are successfully combined and contribute to the overall organization.

Outlook and Future Prospects

Looking ahead, Construction Partners appears well-positioned for continued growth and success. The company’s substantial contract backlog, recent acquisitions, and access to capital provide a solid foundation for future expansion.

The Lone Star Paving acquisition, in particular, represents a significant strategic move that strengthens the company’s presence in the attractive Texas market and adds valuable vertical integration capabilities. By owning asphalt production, aggregates facilities, and a liquid asphalt terminal, Construction Partners can better control its supply chain and improve profitability.

The company’s stock repurchase program also demonstrates a commitment to creating shareholder value and managing dilution from equity-based compensation. Prudent capital allocation will be crucial as Construction Partners continues to pursue both organic and inorganic growth opportunities.

However, the company will need to navigate ongoing challenges, such as inflation, supply chain disruptions, and potential changes in government infrastructure spending. Maintaining operational efficiency, disciplined cost management, and a diversified customer base will be key to weathering any economic or industry headwinds.

Overall, Construction Partners’ strong financial performance, strategic initiatives, and experienced management team suggest the company is well-equipped to capitalize on the growing demand for infrastructure investment in the Sunbelt region and beyond. As the company continues to execute its growth strategy, investors can likely expect further improvements in revenues, profitability, and shareholder returns.