Spruce Point Capital Management Announces Investment Opinion: Releases Report and Strong Sell Research Opinion on Construction Partners, Inc. (Nasdaq: ROAD)

NOTE TO EDITORS: The Following Is an Investment Opinion Issued by Spruce Point Capital Management

Illustrates That ROAD's Business Is Facing Increased Pressures Resulting in Organic Revenue Growth Failures, Weakening Backlog Quality, Return on Capital and Free Cash Flow Conversion

Provides Evidence from Freedom of Information Act Requests That Contracts Awarded from ROAD's Largest Customer – the Florida Dept. of Transportation – Appear to Have Declined by Approximately 22% In 2024

Provides Evidence That ROAD's Recently Completed Acquisition Expansion into Texas of Lone Star Paving Is Not Nearly as Strong as Portrayed

Believes That ROAD's Valuation Is Excessive from Enterprise Value Miscalculations, Weak Aggregate Holdings, Poor Transparency and Cyclically Unsustainable Margins and That the Share Price Could Have 35% – 50% Potential Long-Term Downside Risk

Spruce Point Capital Management, LLC ("Spruce Point" or "we" or "us"), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed report entitled, "An As-Faulty Investment," that outlines why we believe and estimate that shares of Construction Partners, Inc. (NASDAQ:ROAD) ("ROAD" or the "Company") face up to 35% – 50% potential long-term downside risk, or $46 – $60 per share. Download and view the report and its Full Legal Disclaimer by visiting www.SprucePointCap.com for additional information and exclusive updates.

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Spruce Point Report Overview

Construction Partners, Inc. is a vertically integrated producer of asphalt and provider of road paving services to state departments of transportation and commercial clients. The Company operates 93 hot-mix asphalt plants across eight states in the Southeast region including Florida, Georgia and Alabama. The Company recently expanded into Texas in November 2024 with the acquisition of Asphalt, Inc. doing business as Lone Star Paving ("LSP") in a cash and stock deal valued at approximately $1 billion. As of the fiscal year ended September 30, 2024 (FY24), the Company reported $1,823 million and $220.5 million of revenues and Adjusted EBITDA, respectively. In fiscal year FY25, LSP is expected to contribute $530 million and $120 million of revenue and Adjusted EBITDA, respectively.

The concerns we outline in our report include:

• We believe that ROAD's business is under greater pressure than is widely understood, which is masked by poor transparency and aggressive financial presentation methods.
  • ROAD has made frequent changes to its market leadership claims. Initially, it cited leadership in up to 33 distinct local markets, then shifted to claiming it had "growing" relative market share (without citing the number of markets) and now just says it has high and enhanced relative market share (no longer claiming growth).
  • ROAD no longer appears on ENR's 2024 Top 50 Domestic Heavy Contractors list after reaching #14 in 2023. ROAD also no longer appears on ENR's 2024 Top 100 Contractors by New Contracts list after reaching #94 in 2023.
  • ROAD infrequently provides guidance as to how much of its revenue growth is expected to be organic. However, in the recent instances that it has commented on organic growth goals, we find that the Company has been falling short of its projections.
  • ROAD's growth strategy has relied on acquisitions, and it has completed 34 deals since its IPO in 2018. Recently, private equity investment into the sector has increased and consolidation is occurring. For example, Atlantic Southern Paving and Rose Paving, two private equity-backed platforms in ROAD's geographic markets, recently merged to accelerate their national growth ambitions.
  • ROAD's contract mix is getting worse while also taking longer to complete on average, which could indicate that it is stuck with underperforming jobs. ROAD saw a material jump in small jobs in the $0 - $1 million range (and a decrease in the percent of jobs $5 million+) while average contract length has increased from four to six months at the low end.
  • In 2018, ROAD touted its "Attractive Financial Profile with High Return on Capital" by showing Free Cash Flow (FCF) Conversion and Return on Capital Employed (ROCE). However, by 2023, ROAD's FCF Conversion definition markedly changed, and it ceased to provide a chart showing ROCE. Using management's original FCF Conversion and ROCE definitions, we see both metrics have declined.
  • ROAD recently discussed cash flow timing issues while making a change to its revenue recognition policy that appears beneficial to its results. ROAD's Days Sales Outstanding ("DSO") is eight days above industry peers and close to both Granite Construction Inc. and NV5 Global Inc. Both companies recently disclosed material weaknesses of internal controls.
  • Despite aggregates being a key input into asphalt production and a valuable resource, ROAD does not report proven or probable reserves or provide depletion expense which would give investors insights into the quality and sustainability of its aggregates. In addition, ROAD does not report volumes (tons) or realized prices of products sold.
    
    
    
    
• ROAD's biggest customer is the Florida Department of Transportation ("FDOT"), but evidence suggests that contract awards are poised to materially decline.
  • Just a few years ago, Florida was contributing under 10% to total revenue but recently approached 14% in FY24. While ROAD's total revenue growth was ~16.6% in FY24, Florida's growth exceeded 48%.
  • However, based on our recent Freedom of Information Act ("FOIA") request with FDOT, we believe Florida revenue is poised to decelerate. We find that the calendar year 2023 was a spectacular contract award year, totaling 30 for a combined value of $275 million. However, this creates a difficult comparison for 2024 where 29 awards totaling $215 million were received, a -22% year-over-year decrease. Contracts typically average six to nine months, which suggests that in FY25 ROAD may start experiencing financial shortfalls.
  • Starting in FY23, ROAD began disclosing its gross margins increased due to completion of new backlog with more favorable margin. Given that this margin expansion coincided with increases in material revenue from Florida, it is highly likely to be related. Therefore, it is also likely that margins may contract as new Florida contract awards decline.
  • We estimate the impact to the Company's EBITDA in FY25 from a decline in Florida contract awards to be $10 - $15 million or approximately 3% - 5% of EBITDA. Furthermore, we do not believe the market has adequately factored in this scenario.
    
    
    
    
• We believe ROAD's levered acquisition expansion to Texas and Oklahoma is problematic and deflects attention away from Florida.
  • On October 21, 2024, ROAD announced it would acquire Asphalt, Inc. LLC d.b.a Lone Star Paving ("LSP") based in Austin, TX for $654 million in cash and 3 million Class A shares for an enterprise value of approximately $1 billion. LSP is expected to contribute $530 and $120 million of revenue and Adj. EBITDA in FY 2025, thereby valuing it at 1.9x and 8.3x sales and Adj. EBITDA. The market has reacted favorably to the deal, which even closed early, and has enabled ROAD's share price to ascend to new highs.
  • However, we express concerns with this acquisition. Notably, ROAD illustrates that LSP's backlog is increasing. However, when we compare the realized revenue to prior year backlog, we estimate that LSP's conversion has been declining sharply for three consecutive years and is below 1x. Therefore, we believe investors should heavily discount the quality of LSP's backlog.
  • Lone Star's Adj. EBITDA margins are set to decline in 2025 by 150 basis points. Moreover, its largest producing aggregate facility by tons has recently experienced regulatory enforcement actions by the Texas Commission of Environmental Quality, and in 2024 it received 36 inspection citations from the federal Mine Safety and Health Administration (MSHA). These compliance challenges give us considerable hesitation that LSP's projected margin can be achieved.
  • We also express concerns with LSP's revenue reporting accuracy and relationship claims with the Texas Department of Transportation ("TXDOT"), its largest customer. For example, ROAD makes conflicting claims that TXDOT is either 13% or 14.8% of 2023 revenues. Even more concerning, based on a FOIA request, we have found only one direct purchase order between LSP and TXDOT since 2022. LSP may just be a subcontractor with limited direct customer experience as a prime contractor. LSP recently disclosed that as of September 30, 2024, that its largest customer is now 25% of revenue, which we assume is still TXDOT.
  • While ROAD's marketing of LSP indicates it owns all the assets at their locations and there is a significant embedded value of aggregate reserves, there are reasons to question this claim. The aggregates are not on the balance sheet within PP&E (just inventory), and it does not report depletion expense. LSP also disclosed a big increase in material purchases from two vendors in 2023.
  • In early January 2025, ROAD announced its expansion into Oklahoma through the acquisition of Overland Corp. While not providing any financial details, our review of recent Oklahoma DOT contract tenders indicate that Overland is frequently underbid by local incumbents Cummins Construction Co. and APAC (owned by CRH plc) which leads us to question their competitive positioning.
    
    
    
    
• We believe the market miscalculates ROAD's enterprise value and its valuation reflects a misunderstanding of its business and financial prospects. We see 35%–50% downside potential.
  • Given the LSP deal, we believe many market models and data service providers fail to accurately calculate ROAD's equity and enterprise values, which leads to an incorrect valuation. ROAD just issued 3 million shares, the single largest issuance since its 2018 IPO – yet, insiders have been selling stock and reducing control. Adjusted for the transaction, ROAD trades as if it is a premium construction materials company despite inferior margins. Given the premium multiple and Net Debt / Adj. EBITDA of 3.4x (the highest among peers), we believe ROAD must execute perfectly to avoid share price contraction.
  • ROAD is covered by a roster of five lower tier brokers offering a consensus price target of $103 per share, implying just 11% upside to target. However, we do not believe they have conducted a forensic examination of the Company and may not be privy to our FOIA documents showing headwinds in Florida and concerns in Texas. Valuing ROAD's shares in-line with industry peers and its long-term average multiple suggest 35%–50% long-term potential downside risk ($46 – $60 per share). We expect ROAD's share price to meaningfully underperform its industry peers and the overall U.S. equity market.

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Please note that the items summarized in this press release are expanded upon and supported with data, public filings and records, and images in Spruce Point's full report. As a reminder, our full report, along with its investment disclaimers, can be downloaded and viewed at www.SprucePointCap.com.

As disclosed, Spruce Point and/or its clients have a short position in Construction Partners, Inc. (NASDAQ:ROAD) and owns derivative securities that stand to net benefit if its share price falls. Following publication of the report, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial opinion. For additional important information, please review the "Full Legal Disclaimer" contained in the report.

About Spruce Point

Spruce Point Capital Management, LLC is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities.

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Daniel Oliver

Spruce Point Capital Management

[email protected]

(914) 999-2019