By Laura Kreutzer
Private-equity firm returned more than 12-times its debut fund’s initial investment
An initial public offering has enabled midmarket firm SunTx Capital Partners to cash out from its investment in Construction Partners Inc., a road-construction company focused on the southeastern U.S.
But, SunTx’s own executives aren’t ready to part with their investment just yet.
“Infrastructure has gone from being hard to sell to sexy,” said Ned Fleming III, managing partner at Dallas-based SunTx, which targets investments in companies across the southern U.S.
Mr. Fleming and other partners at the firm continue to hold shares in Construction Partners, which ranks among SunTx’s earliest deals. SunTx’s team helped form the company back in 2001 and took it public in May. The investment generated a more than 12-times return for investors in SunTx’s debut fund, which owned the majority of the firm’s stake in the company, said one person with knowledge of the investment.
Construction Partners, of Dothan, Ala., has asphalt mixing plants and road construction teams that operate throughout five Southeastern states. The company generally focuses on smaller paving projects with an average size of $1.7 million, according to a research report published in May by Baird Equity Research. Robert W. Baird & Co. acted as an underwriter for Construction Partners’ IPO.
Stock investors have been slow to warm to the newly public company. Construction Partners’ shares priced at $12 each in its IPO, below a $15 to $17 expected range. The share price hasn’t risen much above $14 since the IPO and closed Wednesday at $12.38.
But Andrew Wittmann, a senior research analyst at Baird Equity Research who covers the stock, said appearances can be deceiving. Mr. Wittmann said that because of the way the IPO was structured, the company ended up selling more primary shares than anticipated and generated a healthy amount of cash even at the $12 share price. At the same time, Construction Partners’ smaller size and the fact that it only sold a small portion of its stock in the IPO limit the trading volume of the stock.
“Anyone who bought this in the IPO is really making a commitment to this company and the management team,” he said.
Mr. Wittmann said Construction Partners’ focus on many smaller projects across multiple states differentiates it from many other publicly traded road-construction companies and can insulate its revenue in the event that a single job goes awry.
“Lots of small projects should give you more predictable results,” he said. “If something goes wrong on a $2 million project, you won’t even see it on the income statement.”
The company’s scale and creditworthiness also give it an advantage over the small family-owned paving companies that it tends to bid against, Mr. Wittmann said. Most local governments require construction contractors to buy what are known as surety bonds as insurance in the event that a contractor doesn’t complete a job. Because of Construction Partners’ scale, it often can secure such bonds more easily than many family-owned operators.
“They’re able to get that much more creditworthiness and are viewed as a reliable constriction partner,” he said.
Mr. Fleming, who also serves as Construction Partners’ chairman, said in a June 4 earnings release that the business is targeting annual revenue of more than $1 billion by 2022 from $568.2 million in fiscal 2017. The company plans to expand partly by building more asphalt mixing plants and acquiring smaller competitors. It recently bought Scruggs Co., a road-building company based in Hahira, Ga., for $51.1 million.
Although Mr. Fleming said he sees opportunities for the company to expand into other parts of the U.S., he added there still is plenty of room for growth in the South.
“There is so much opportunity in the Sunbelt,” he said.