Grupo Rotoplas: Mexican HVAC-company growing by monthly subscribers
Rotoplas is a leading water tank manufacturer in Mexico but suffers from poor performance in Argentina.
My dividend investing publication recently sent out an analysis on Mexican Grupo Rotoplas, a manufacturer of water tanks and other HVAC-products. Please find the analysis below.
What can HVAC-companies learn from Rotoplas? The company has an interesting growth business called Bebbia. It sells water purification equipment on a monthly fee. Although Bebbia has still a modest amount of clients, it added a sighnificant amount of new subscribers. Rotoplas says that it grows the best by word of mouth marketing.
Grupo Rotoplas ($AGUA)
🔑 Market leader, turnaround in a secondary market, focus on ROIC, growing subscribtion sales, underlying earnings potential and supporting megatrends.
📉 Mainly bulk products, high WACC, cyclical and country related risks.
Listing: Mexico. Ticker AGUA.
Grupo Rotoplas in a nutshell: The company is primarily a producer of water tanks and cisterns. A large product category in the geographies where public water networks do not provide satisfactory water supply (read more about the application here).
For many years, Rotoplas has been expanding also to other categories such as water purification and water distribution (i.e. pipes, fittings and pumps).
In 2024 Rotoplas had a revenue of MXP 11 201 million ($550 million). The company has 18 production plants, of which 14 are in Mexico. Rotoplas has 3500 employees (200 less compared to year before).
Only 10% of its revenue comes from the U.S. so tariffs should have a limited direct impact on its business. 60% of sales comes out of Mexico and 30% out of other Latin American countries.
Founded: 1978. Listed in 2014.
Investment thesis in brief: Why own a water tank business? They are essential part of water infrastructure. In particular, they are products that are not economical to transport long distances. Rotoplas has strong position, distribution and brand in its home market.
The stock market has reacted sharply on the current market turmoil and negative financial development. Among 60 or so HVAC-stocks Grupo Rotoplas’ shares have declined the most. Its financial development has suffered mainly from the weakness in Argentina, which could be prone to turnaround in the coming years.
Grupo Rotoplas has a strong history of growth and many important features of high quality.
Net sales reached Ps. 11,201 million, 7.8% lower than the previous year. This result mainly reflects the impact of Argentina's economic situation. Excluding Argentina, net sales would have increased by 7.8%.
Share price / Market cap: 10.8 MXP / 5.2 billion MXP (260 M$)
Closest peers: A.O. Smith AOS 0.00%↑
Bull case
Local products and markets: Water tanks are bulky and logistics is a major cost component. Transporting them long distances is not profitable.
Growing subscription business: Rotoplas is aiming to grow its service sales. In 2020 service sales accounted for 5% of revenue. At the time Rotoplas aimed for 15% share by 2025. In 2024 the share was 8%. Service sales includes Bebbia (providing drinking water purification), Reggia (commercial irrigation) and Acuantia businesses in the U.S. and Brazil.
Bebbia is the most promising part. In 2024 Bebbia grew by 25 000 users to 130 000 customers, which is still a very low figure compared to the 35 million households in Mexico. Due to the growth investments Bebbia is still a loss making operation.
We continue to see bebbia growing very aggressively. One of the main drivers is customer satisfaction, because these satisfied customers are referring us to new customers. That is the biggest source of new customers.
Open investor communication: Rotoplas is tracking closely its ROIC, WACC and their relation to each other.
“High” ROIC: Rotoplas is achieving a decent level of ROIC (8-18%) but also the WACC is moving between 10-13%. The downside is that the ROIC has been lower since IPO (17%).
Rotoplas has reacted to the recent revenue and profit decline by reducing workforce by 4% and stricter capital allocation decisions.
Strong historical revenue growth: In 2015 Rotoplas aimed to grow 10% annually. According to QuickFS its 10-year CAGR has been 8.4%. According to Rotoplas its revenue growth rate has been 10.8% since 2016.
Wide and growing distribution network: In 2015 Rotoplas had 25 000 points of sale. In 2024 the number had grown to 32 000. Efficient and loyal distribution is crucial in the success of any HVAC-products but especially with bulky products.
Water scarcity: The major trend driving Rotoplas business is water scarcity in Mexico and its other geographies.
Market perception: In the light of the track record, there could be a possibility that market reaction is short-sighted. HVAC-businesses are inherently cyclical.
Residential construction in Mexico: The residential construction has been subdued in Mexico, and still expected to contract in 2025. Rotoplas performance should be much better in a growing market helped by new construction.
Valuation
Currently Grupo Rotoplas is trading at high multiples due to the weak 2024 earnings. Also, it’s 2025 EPS estimate has been lowered from MXP 4 down to 0.25 MXP.
For 2027 analysts are expecting an EPS of 1.8. Simply applying an 5 year average multiple of 14 on it, would translate to a share price of 25 MXP - more than a double in three years.
Normalized earnings: Over the past decade Rotoplas has realized an average EPS of 0.83.
If the net income margin would return to its 10-year averarge (5% vs. 1.5% LTM), the EPS would be approximately 1.2.
Although the revenue has nearly doubled, practically, the EPS has not grown over a decade (in 2014 EPS was 1.2). SG&A costs have doubler or tripled. Depreciation and amortization has increased tenfold. Further financial analysis here could be required for a larger position, however the increase of the mentioned cost items is likely due to the pursuit of growth.
Compared to 2022-2023 level, operating income has more than doubled in the past decade.
Supported by potential recovery in Argentina, core business growth in Mexico, continued service business growth and profitability and working capital reduction the analyst estimates could be achievable. The company expects lower capital expenditures which should lead to higher ROIC and lower depreciation.
Relative valuation: There are no direct peers to Rotoplas. The universe of around 60 HVAC-stocks trade at an average forward earnings multiple of 22.
Dividend: Typically, Rotoplas has paid a dividend twice per year, one instalment in May and the other one in November.
Target price: There are four analysts following the company with an average target price of 35 MXP.
Bear case
Argentina: Argentina is going through a deep recession. “On a cumulative basis, sales declined by 40.7% in Mexican pesos and grew by 58.5% in local currency.” Excluding Argentina full year sales grew by 7.8%.
Construction sector has not yet recovered, but it is expected to rebound (5%) this year after the sharp decline (-25%).
Mainly bulk products: Rotoplas’ main products, water tanks, can be produced by almost anyone with rotomolding equipment. Therefore Rotoplas is facing intense local competition but as one of the largest players, if not the largest, it can compete effectively, leverage its distribution and
Questionable innovation: Rotoplas’ innovation could be viewed critically. For example Rotoplas’ new PEX-a piping system appears a copy of Uponor’s Quick&Easy product range which had its patent expired in the recent years.
Balance sheet: Working capital increased sharply in 2024.
WACC above ROIC: At the times of weak profitability, company’s weighted average cost of capital has time to time been higher than its ROIC. The nature of the business is relatively cyclical and it’s great that the management has a high attention to the returns on capital and holds itself accountable.
Indebtness: Due to the lower EBITDA, Rotoplas’ net debt to EBITDA ratio stood at 2.6x at the end of the 2024. Typically the ratio has been well below 2x. The company does not have significant debt maturities until 2027.
It’s a challenge: Braking into new categories and solution areas has proved to be very difficult to most companies in HVAC-industry.
Grupo Rotoplas announces Q1 results in 23.4.
Summary
Grupo Rotoplas is an interesting company that taps into several megatrends. In its investor communication it has rather unique emphasis on ROIC building confidence to the management. The stock market might have overreacted in the light of long term prospects and underlying quality. While its growth investments take time to materialise, Rotoplas can benefit from market stabilization in Argentina, working capital reduction and lower capital expenditures and finally turning growth businesses profitable.