Go Modular

The UK housing crisis is not unique in advanced economies where the gap between “have-yachts”(asset rich older generations) and “have-nots” (asset poor younger generation) has grown to extremes not seen since the 1930s. The more specific structural challenge for the UK is that the traditional process of housing planning and construction is going to leave the country with a deficit of 500,000 much needed homes over the next 5 years. The political and societal pressures are growing by the day and one senses something has to change. Modular house construction apart from its speed and cost advantages could be a huge assist in making up this annual deficit of 100,000 homes. Indeed, Savills in their 2020 “Modern Methods of Construction”  Report  (MMC) suggested modular construction as a proportion of total house build should grow from 6% to 20% by 2030.

Go Modular plans to add to its 200 house building capacity as this demand kicks in but from the one manufacturing facility the management is projecting over £6m of revenues in 2023 growing to more than £9m in 2024. This growth rate is consistent with the overall market expansion and Go Modular’s own 74% CAGR achieved from 2019 through to 2022. The company’s  market USP seems to be its flexibility and ability to deliver bespoke designs but with lead times up to 35% faster and costs up to 20% lower. Average profit margins in the 10-15% range appear to be in line with industry norms. So we have plans, revenues, profits, market growth and a USP.

The one-liner…..

Go Modular designs/builds houses in factories for later assembly on site with big speed and cost advantages to meet an annual UK house-build shortfall of 100,000 homes.

Stats for your besties….

• Global modular construction market will grow from $70 billion to $130 billion by 2030 per consultancy McKinsey.
• Cost savings from a modular approach would be up to $22 billion
• Just 3% of the US construction market is modular.
• But… there are already more than 170 players in the US modular construction market.

The Problem

50,000 buildings are knocked down/removed each year in the UK. The national housing stock needs a run rate of 300,000 homes built annually. Most projections indicate only 200,000 of the 300,000 will be built based on current planning and construction lead times. There is a 100,000 annual home deficit which needs to be filled with new solutions and practices.

The Solution

Modular construction is not a new solution. After WW2 150,000 homes were built in module assembly processes off site. Go Modular, however, believes the current acute shortage of required housing can be addressed with their proprietary design technology, significantly faster lead times and cost savings.  Go Modular can also deliver superior technical solutions with additional qualitative and sustainability benefits through reduced waste, eco-friendly materials and energy savings.

How will Go Modular make Money?

Go Modular uses a traditional manufacturing business model delivering product at average prices of £1,500 to £1,850 per square metre of space/module. Profit margins are projected to be in the 18 – 22% range.

The Opportunity

• Only 7.5% of houses built in UK use modular methods vs 20% in Germany and a whopping 80% in Sweden.
• Go Modular(GM) are projecting 2022 revenue levels of £3.9m growing to over £13m in 2025
• Modulex Modular Buildings plc, a UK company supplying steel modular structures in India, was recently acquired for $600m.
• The global construction market is expected to be worth $15 trillion by 2030 and that global market is looking for faster, more cost-efficient and ESG-friendly solutions.

Financials

• Revenues for the February 2022 to January 2023 period exceeded £5.3 million with a small profit of £45k.
• We have not had full sight of the GM balance sheet but funding to date has been mainly through equity capital and £570k of R&D tax relief.
• Company is targeting operating margins of 18-22% and EBITDA levels close to £1 million by 2025.

The Team

Dare we say the founding team is surprisingly “shy”? The investor deck features the two founders/directors Erik Kudlis and George Lujans referenced at a bottom of a slide in tiny font and the campaign video only features Erik. LinkedIn profiles are very thin with no significant previous start-up exit success. However, the team’s design and execution track record gives comfort with 700 modular houses designed and built with a value over £60 million.

Valuation

The company is offering equity at a valuation (pre money) of £19.3 million. The company is barely profitable and the multiple on the last 12 months’ revenues of nearly 4x could be considered “punchy” for a business model with volatile input costs, execution risk and average mid-teen profit margins. This is not an asset-lite SaaS (software subscription) model! One needs to believe in the growth trajectory of revenues projected to hit £13m in a few years and the entire modular space finally being embraced by consumers. 

Other Considerations

Yes, Warren Buffett owns the largest modular construction player – Clayton Homes – in the USA. But even he must agree modular construction accounting for just 3% of total house build in the US is a little underwhelming. We note the GM founder, Erik Kudlis, has vast experience in that market but will the UK be any different in terms of slow growth? Buffett might own the biggest player but there appears to be 170 other US competitors. In the UK or Europe it might not be much different. Go Modular can be considered a tiny manufacturer up against multiple competitors and some real giants like Laing-O’Rourke, Skanska and Bouygues. Let’s just say manufacturing is all about scale, unit costs and execution. Irrespective of market growth in modular construction, the Go Modular execution strategy will need to be very tidy.