Impactive Capital sees a structural shift creating upside for this wastewater company

Company: Advanced Sanitation Systems (WMS)

a job: Advanced sanitation systems is a manufacturer of on-site stormwater and wastewater solutions. The company and its subsidiary Infiltrator Water Technologies provide on-site stormwater and wastewater drainage products used in a wide range of markets and applications, including commercial, residential, infrastructure and agriculture, while providing customer service. Its Pipe segment manufactures and markets thermoplastic corrugated pipe throughout the United States. Its Infiltration segment is a provider of plastic leach field chambers and systems, septic tanks and accessories, primarily for use in residential applications. Its International segment manufactures and markets products in regions outside the United States, with a strategy focused on its owned facilities in Canada and those markets it serves through its joint ventures in Mexico and South America. The Allied Products segment manufactures a range of products complementary to their piping products.

Stock market value:: $11.98 billion ($144.10 per share)

Activist: Influential Capital

ownership: 2.14%

Average cost: unavailable

Activist’s comment: Impactive Capital is an activist hedge fund founded in 2018 by Lauren Taylor Wolfe and Cristian Alejandro Asmar. Impactive Capital is an active ESG investor that launched with a $250 million investment from CalSTRS and now has nearly $3 billion. In just seven years, they have made a name for themselves as AESG investors. Wolff and Asmar realized there was an opportunity to use tools, particularly on the social and environmental side, to increase returns. Impactive focuses on positive systemic change to help build a more competitive and sustainable business over the long term. Impactive will use the traditional operational, financial and strategic tools used by activists, but will also implement environmental, social and governance (ESG) change that they believe is important to the business and drives company profitability and shareholder value. Impactive looks for high-quality companies that are typically complex and mispriced, where they can underwrite at least a high or low 20% internal rate of return over a three- to five-year holding period, and have active engagement with management to set up multiple ways to win.

What is happening

On October 21, Impactive said they had agreed to this Position in Advanced Sanitation Systems.

backstage

Advanced Drainage Systems is the market share leader in on-site wastewater and plastic stormwater management solutions. The company is a leader in the development and manufacture of plastic drainage products, primarily using high-density polyethylene (HDPE) and polypropylene. Recycled materials accounted for 46% of inputs purchased by WMS in fiscal year 2025, making it one of the largest recyclers in North America. The company has three main business lines: (1) piping – storm and drainage pipes, 56% of FY25 revenues; (2) Associated Products – Products complementary to piping offerings such as storm chambers, structures and fixtures, 26%; (3) Infiltrator – chambers, tanks and advanced wastewater treatment solutions, 18%. Among its three segments, the company has a $15 billion addressable market and is the industry leader with 75% to 95% market share across its segments.

There’s a lot to like about WMS, because it’s a very high-quality, well-managed company with a long history of double-digit growth and secular tailwinds. As a result, WMS has a strong track record, having grown earnings per share nearly 10x since its IPO, and has a 28% CAGR for earnings per share with returns on invested capital consistently above 20%. Management also focuses heavily on shareholder value and is a heavy allocator of capital, increasing dividends and launching buybacks in most years where it does not see a compelling M&A opportunity.

Despite this, the company’s stock price performance has been lackluster over the past two three-year periods, resulting in the company’s stock underperforming. Russell 2000and its stock was rerated to a P/E in the low to mid 20s. The reason for this is two-fold: investor concerns about cyclicality in construction spending and margin pressure. However, Impactive Capital believes that both concerns appear overblown or misplaced and that management has built this business to protect its top line from market volatility and make margin expansion structural rather than cyclical.

Regarding the cyclicality of construction spending, construction spending is down 3% year-to-date, as rising interest rates and concerns about affordability dampen residential and non-residential construction spending, making this the worst year for construction in the past two decades aside from the global financial crisis. But the company’s revenues have not decreased and are not expected to decrease for several reasons.

First, PVC pipe was stealing market share from concrete and steel. Only about 20% of the market in 2010, plastic now exceeds 40% due to being 20% ​​cheaper than alternatives and offering superior performance.

Second, through the 2019 acquisition of Infiltrator and the upcoming acquisition of National Diversified Sales, WMS has increased its exposure to the residential repair and remodeling end market, adding flexibility to its revenue streams. This would also make WMS a natural beneficiary of the rebound in existing home sales, which are currently at 15-year lows.

Third, billion-dollar storm events have increased fivefold since the 1980s, necessitating increased investment in resilience and more sophisticated stormwater infrastructure. The company also has a wide moat, thanks to its high brand loyalty from contractors, its vertical integration and excellent distribution network.

As for margin concerns, there are concerns that weakness in construction could lead to margin pressure. However, this is something else that the administration has taken a lot of steps and adopted many initiatives to avoid. Over the past six years, the company has diversified its business toward higher-margin allied and infiltrated product offerings, both of which have adjusted operating margins in the mid-50s, while pipelines are around 30%.

Additionally, one of the largest input costs is oil and resin, and WMS has a unique way to mitigate these costs. The company switches between recycled resins and virgin resins depending on the price of oil. So, when oil goes up, they use recycled resin, and when it goes down, they switch to virgin resin and get better margins. WMS is the only company among its competitors that can do this on a large scale. Furthermore, when construction is poor, oil and resin prices tend to fall. Therefore, the loss in net profit can be offset in net profit as the decline in resin prices is more than enough to offset end-market weaknesses (e.g., construction spending is down approximately 3% year-to-date, and resin prices are down 15% to 20%). As a result, adjusted EBITDA margins for pipelines and related products have expanded about 8 percentage points since 2020, but some fear this will eventually return to normal.

However, Impactive believes that this shift is structural rather than cyclical and that WMS will not only avoid margin pressure, but may see gross margin expansion of 100 basis points over the next 12-24 months; Something that is not taken into account in consensus futures estimates.

As a result of this confluence of factors, influential models that WMS will return EPS growth in the mid-teens and forecast a three-year total return and IRR of 69% and 19%, respectively, and a bullish case of 146% and 34%, respectively.

Ken Squire is founder and president of 13D Monitor, an institutional research service on shareholder activism, and founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist investments.