Concrete Batch Plants & Equipment

Concrete Batch Plants & Equipment

Industry Insight

COVID-19 INDUSTRY BRIEF

EFFECTS OF THE CORONAVIRUS ON THE Concrete Batch Plants & Equipment INDUSTRY September 2, 2020

  • Market Dynamics: The primary external factor affecting concrete batch plants and equipment is commercial construction and highway spending, with steel prices also having a material impact. Additionally, the near-zero Federal funds rate since March has helped incentivize investment in the industry.
  • COVID-19 Impacts: As of late March, construction was considered an essential service in roughly 45 of 50 states, but labor, travel, and supply issues slowed activity in the sector during the shutdown period. Since regions began reopening in May, construction activity has rebounded. Monthly U.S. homebuilding rates increased for the third straight month in July with 1.495 million new starts, representing an increase of 17.5 percent over June. July starts increased 22.6 percent over June after falling 26.4 percent to a five-year low in April. Although starts for July remained approximately 7.5 percent below the January peak of 1.6 million, the positive trend bodes well for the industry, at least in the near term. Another positive trend was in the number of building permits for residential construction issued, which produced 3.5 percent and 18.8 percent month-over-month increases for June and July, respectively. However, highway and street production dropped in spending by 1.7 and 2.7 percent for June and July, respectively, as a result of shelter-in-place orders, local outbreaks and decreased public funding. Similarly, educational construction spending, one of the largest public segments, declined in June, albeit at a lower rate of 0.6 percent. Private non-residential construction spending increased slightly by 0.2 percent for June over May. Numbers were also positive for power, manufacturing and office construction, which increased by 0.7, 1.7 and 0.3 percent, respectively.
  • Legislation Status: Growth for the industry is partially dependent upon passage of the “Moving Forward Act,” which is a $1.5 trillion infrastructure and stimulus bill. After House passage on July 1, the bill moved to the Senate where it faces an uncertain future. The Executive Office of the President’s Office of Management and Budget issued a Statement of Administration Policy on June 29 asserting that the Trump Administration opposes passage of the bill because it “is heavily biased against rural America,” “appears to be entirely debt-financed,” and “fails to tackle the issue of unnecessary permitting delays, which are one of the most significant impediments to improving our infrastructure.” If passed, it would likely have a positive impact on public construction spending related to roads and bridges, schools, housing and other public transportation projects.
  • Valuation Outlook: From a valuation perspective, the impact on batch plants and related equipment will depend on how the construction marketplace weathers the current crisis in the medium to long term. In the short term, the market remains somewhat uncertain. However, construction fundamentals and demand for batch plants will likely be stable in the aftermath of the crisis, as there is an expectation that there will be a quick snapback in this industry in all regions except the oil patch once the COVID-19 pandemic passes.
Industry Brief Projected Values – Concrete Batch Plants and Equipment

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Date August 2020

Projected Values - Concrete Batch Plants

Current Trends

  • Although challenged since February, construction spending has been somewhat more resilient than some other types of commercial activity throughout the COVID-19 pandemic.
  • Large operations in the industry have been steadily consolidating through vertical integration. The amount of operations is declining, but this is mainly due to mergers and acquisitions.
  • Growth of the domestic industry is partially dependent upon passage of the federal “Moving Forward Act,” a $1.5 trillion infrastructure and stimulus bill.
  • The near-zero Federal funds rate since March has helped incentivize investment in the industry.

By the numbers

Synopsis

COVID-19 Impacts: Pre-COVID-19, annualized revenue growth projections for 2020 were approximately 0.5 percent for ready-mix concrete manufacturing and 1.1 percent for precast concrete manufacturing sectors. This was largely driven by President Barack Obama’s 2015 Fixing America’s Surface Transportation (FAST) Act, a five-year infrastructure investment legislation. Profit, as measured by earnings before interest and taxes, was expected to reach 4.6 percent of revenue in 2020 based on analysis by IBISWorld. However, the impact of nationwide shutdowns beginning in March drove a significant decline in construction spending in the second quarter of the year, as businesses were shuttered and construction projects halted. Construction spending declined for the fourth consecutive month in June, representing the steepest four-month drop in a decade. However, as of early June, most states had restarted ongoing construction or broken ground on new projects with few restrictions. Some states still have tighter restrictions in place in certain counties, but this is not widespread across the U.S.

Private construction spending has been the hardest hit by the pandemic and as of June 2020, it was 8.0 percent below February 2020 spending levels and 1.9 percent below June 2019 levels on a seasonally adjusted basis. Although public spending was strong from May to June, public construction spending declined by 0.7 percent driven primarily by large cuts in education-related projects as well as highway and street construction. Additionally, state and local governments are facing steep budget deficits. The Associated General Contractors of America (AGC) officials cautioned that “investments in infrastructure and other construction projects are likely to continue falling unless Congress and the Trump administration provide additional, targeted and dedicated infrastructure funding.”

While some states have successfully proceeded with staged re-openings, cases of coronavirus have seen an upswing in many states as of August including California, Florida, Texas and Arizona. Thus, regional construction delays are likely to continue through the end of the year. In most cases, construction and building materials retailers are considered “essential” businesses, which has allowed that segment of the industry to remain operational.

Mixed Results Across Construction Categories: The precast concrete manufacturing industry is heavily reliant on domestic construction markets, with over half the industry’s revenue being generated from sales of precast and prestressed concrete products. Although the construction industry continues to make its way back from pandemic-related shutdowns, private residential construction and single-family homebuilding fell by 1.5 and 3.6 percent, respectively, in June 2020. However, as of June, new multi-family home construction spending had increased by 3.6 percent for the third month in a row based on Census Bureau data. Highway and street production dropped in spending by 1.7 and 2.7 percent, respectively, as a result of shelter-in-place orders, local outbreaks and decreased public funding. Similarly, educational construction spending, one of the largest public segments, declined for June, albeit at a lower rate of 0.6 percent. Private non-residential construction spending increased slightly by 0.2 percent for June over May. Numbers were also positive for power, manufacturing and office construction, which increased by 0.7, 1.7 and 0.3 percent, respectively.

It should be noted that the FAST Act, which authorized $305 billion for highway and related programs, is set to expire at the end of 2020. The FAST Act was the first federal law in over a decade to provide long-term funding certainty for surface transportation infrastructure planning and investment. A decline of future investment could exist if additional legislation is not passed to continue that level of spending in U.S. infrastructure.

Industry Outlook: With the uncertainty around the United States’ management of the pandemic and overall declines in construction spending, the concrete manufacturing industry may be challenged for the short term. The primary external factors affecting concrete batch plants and equipment are commercial and residential construction and highway spending. Although construction has been considered an essential service across much of the U.S., labor, travel, supply issues and the uncontrolled pandemic have slowed activity in this sector.

From a valuation perspective, the impact on batch plants and related equipment will depend on how the construction marketplace weathers the current crisis in the medium term. In the short term, the market would likely be uncertain. However, construction fundamentals and demand for batch plants will likely be stable in the aftermath of the crisis, as there is an expectation that there will be a quick snapback in this industry in all regions except the oil patch once the COVID-19 pandemic passes. Additionally, growth for the industry is partially dependent upon passage of the “Moving Forward Act,” which is a $1.5 trillion infrastructure and stimulus bill. After House passage on July 1, the bill moved to the Senate where it faces an uncertain future. The Executive Office of the President’s Office of Management and Budget issued a Statement of Administration Policy on June 29 asserting that the Trump Administration opposes passage of the bill because it “is heavily biased against rural America,” “appears to be entirely debt-financed,” and “fails to tackle the issue of unnecessary permitting delays, which are one of the most significant impediments to improving our infrastructure.” If passed, it would likely have a positive impact on public construction spending related to roads and bridges, schools, housing and other public transportation projects.

Nevertheless, portable concrete batch plants should continue to grow in popularity and will remain more salable in comparison to stationary plants. Large-capacity plants will be more marketable due to the high portability and overall size. Gordon Brothers anticipates that stationary plants will continue to decline in value in a declining market since they are difficult to remove and not as popular. Furthermore, availability of rolling stock, mixing wagons, silos, hoppers, weight scales and boilers will likely increase as more consolidations and liquidations occur. This could increase supply in the secondary market and lower the market price for these types of assets.

Portable Batch Plants Are Most Marketable: Batch plants combine various ingredients to form concrete. Dry plants measure, mix and load dry ingredients such as sand, crushed rocks, fly ash and cement onto mixer trucks, where water is added and concrete is made en route to a job site. This approach is common when smaller quantities are needed or job sites are further away. Wet plants have a central mixer where wet and dry ingredients are combined on site, creating a more consistent texture. These plants are preferred for larger projects in close proximity.

Batch plants can be stationery or portable. Stationary plants typically have extensive mezzanine steel supports and are difficult to move. Those in use are typically older plants from before portable plants gained popularity. There is not a wide market for stationery plants, and they often are sold piecemeal for components that are easy to remove. Thus, the right of abandonment for liquidation sales is always necessary. Mixers are typically the most valuable machinery, but other common components include silos, bins, hoppers, weight scales and boilers. Portable batch plants, which are erected and taken down relatively quickly and are pulled behind a tractor, are more widely salable.

Concrete batch plants are typically sized in cubic yards per batch. The most desirable plants fill the 10- to 12-cubic-yard capacity of a truck in a single batch. Smaller capacity plants are less marketable. Operators may also own fleets of mixer trucks. These trucks are commonly transacted in the marketplace and can be good collateral depending upon age, mileage, capacity and condition.

Regional Considerations: Seasonality and geography factor into the marketability of concrete batch plants. A longer construction season in warmer parts of the country creates more stable demand in those regions as opposed to colder regions with a shorter season. For example, the Midwest has a higher seasonality factor. Typically, more sales will occur in the winter and early spring as businesses work to make their changes in the “off-season” before contracts are lined up for the year. Also, high concentrations of batch plants in comparison to low concentrations can negatively impact demand in those regions. Some highly concentrated areas in the industry are Texas, California and Pennsylvania. The Midwest also contains higher-than-average concentrations. Therefore, it can be anticipated that the top regions will see the largest change in marketability on the wholesale market for concrete batch plants. Because of these factors, lenders may want to consider a more conservative advance rate on equipment in high-concentrated areas or in regions affected with seasonality issues.

Forms May Add Value: Precast concrete manufacturers fill reusable forms with concrete to make shapes such as slabs, beams, girders, walls and pipe. Some can be quite valuable. For example, concrete pipe, which is used in applications such as waste management systems, storm water management, drainage, telecommunications cabling, electrical cabling and wastewater management, is made with metal pipe forms. Standard size pipe forms are commonly transacted on the secondary equipment marketplace. In some cases, lenders may overlook these forms as a potential source of value on a removal basis. Conversely, casting beds, which are built into the ground and are used to make large products such as beams, typically have no removal value. Appraising these assets on an “in-place” basis will likely result in a higher valuation.



Note: This publication is provided for informational marketing purposes only. The material contained herein should not be regarded as advice, nor relied upon to make financial, operational or other decisions; nor should it be used as a substitute for an asset appraisal. Actual recovery values may vary from transaction to transaction and the recovery values referenced herein are for representative transactions without regard to specific key factors. This material may be redistributed only in its entirety, including notice of copyright. All rights reserved. ©2020 Gordon Brothers, LLC.
 

Reference sources: U.S. Census Bureau, IBISWorld, U.S. Federal reserve, U.S. Department of transportation-federal highway administration, associated general contractors of america, EXECUTIVE OFFICE OF THE PRESIDENT-OFFICE OF MANAGEMENT AND BUDGET, association of oregon counties