IPO Look: CaesarStone Sdot-Yam Ltd.

Based in Menashe, Israel, CaesarStone Sdot-Yam Ltd. (proposed CSTE) scheduled a $100 million IPO with a market capitalization of $486 million at a price range mid-point of $15 for Friday, March 23, 2012.

CSTE is one of six IPOs scheduled for this week.  See our IPO calendar Nine more scheduled for the week of March 26.

SUMMARY
CSTE is a leading manufacturer of high quality engineered quartz surfaces sold under the premium Caesarstone brand.

CSTE attributes its recent sales and margin growth to the acquisition of the business of its former Australian and U.S. distributors, the transition to direct distribution in Canada, penetration of new markets, increased operational efficiencies, and a change in product mix.

INDUSTRY SUMMARY
In certain markets, including Australia and Israel, engineered quartz surfaces have already significantly penetrated the market and represented 32% and 82% of the total countertop market by volume in these countries in 2010, respectively.

In the United States, which accounted for 20% of global countertop sales to end-consumers in 2010, engineered quartz surfaces have penetrated approximately 5% of the countertop market by volume.

CONCLUSION
Yes, CSTE appears to be a leader in its market, which is fragmented and is expected to experience consolidation. If CSTE can maintain a leader ship role and help increase the "engineered quartz" share of the US market from 5% to anything like the 32% and 82% market share, respectively, Israel and Australia, then CSTE should do well over time.

In the meantime it seems prudent to watch CSTE from the sidelines, to see if its enhanced, direct marketing efforts in the U.S. bear fruit.

At the price range mid-point of $15 CSTE is priced at 17 times 2011 earnings, 2.6 times book value and 4 times tangible book value.

BUSINESS
CSTE is a leading manufacturer of high quality engineered quartz surfaces sold under the premium Caesarstone brand. The substantial majority of CSTE’s quartz surfaces are used as countertops in residential kitchens and sold primarily into the renovation and remodeling end markets.

Other applications for CSTE’s products include vanity tops, wall panels, back splashes, floor tiles, stairs and other interior surfaces that are used in a variety of residential and commercial applications.

Founded in 1987, Caesarstone is a pioneer in the engineered quartz surface industry. CSTE has grown to become the largest provider of quartz surfaces in Australia, Canada, Israel, France and South Africa, and have significant market share in the United States and Singapore.

CSTE’s products accounted for 13% of global engineered quartz by volume in 2010. Sales in Australia, the United States and Israel, the three largest markets, accounted for 34.0%, 23.0% and 14.9% of revenues in 2011, respectively.

CSTE believes that revenues will continue to be highly concentrated among a relatively small number of geographic regions for the foreseeable future.

INDUSTRY
The global countertop industry generated $68.0 billion in sales to end-consumers in 2010 based on average installed price, which includes installation and other related costs. Sales to end-consumers include sales to the end-consumers of countertops as opposed to sales at the wholesale level from manufacturers to fabricators and/or distributors.

The largest countertop markets by sales are Asia Pacific, Western Europe and North America, each with sales to end-consumers of between $16.2 billion and $17.6 billion in 2010. Laminate accounted for the largest portion of global countertop sales by volume in 2010, followed by manufactured solid surfaces and granite. Countertops have both residential and non-residential applications. CSTE believes they are primarily installed in residential kitchens and bathrooms in new construction and home renovation and remodeling projects. In 2010, the majority of countertops were used in residential applications.

The strength, durability and appearance of engineered quartz, as well as the low maintenance it requires, make it ideal for kitchen and bathroom applications, as well as for other applications such as floors, sinks, stairs and walls.

In July 2011, quartz received the highest overall score among countertop materials from Consumer Reports Magazine, a leading provider of third-party consumer product reviews, based on performance in several tests, including resistance to staining, heat, cutting and abrasions, as well as price.

SALES CHANNELS
CSTE has direct sales channels in Australia, the United States Israel, Canada and Singapore. In Australia, we distribute directly to stonemasons and fabricators, and in January 2012, expanded direct distribution to Southern and Western Australia thereby expanding our direct distribution to all of Australia.

Since acquiring its U.S. distributor in May 2011, CSTE now generates the substantial majority of revenues in the United States from direct distribution of products, including in the Mid-Atlantic where CSTE commenced direct distribution in January 2012.

In Israel, CSTE distributes products directly to several local distributors who in turn sell to fabricators.

SALES & MARGIN GROWTH
CSTE attributes its recent sales and margin growth to the acquisition of the business of its former Australian and U.S. distributors, the transition to direct distribution in Canada, penetration of new markets, increased operational efficiencies, and a change in product mix.

GROWTH PLAN
CSTE’s strategy is to continue to be a global market leader in quartz surface products.

CSTE believes that a significant portion of future growth will come from continued penetration of our U.S., Australian and Canadian markets.

CSTE believes there will be consolidation in the quartz surface industry in the future and to remain competitive in the long term, CSTE will need to grow our business both organically and through the acquisition of third-party distributors, manufacturers and/or raw material suppliers.

SEASONALITY
The third quarter of the year exhibits higher sales volumes than other quarters because demand for quartz surface products is generally higher during the summer months in the northern hemisphere when the weather is more favorable for new construction and renovation projects, as well as the impact of efforts to complete such projects before the beginning of the new school year.

COMPETITION
The dominant surface materials used by end-consumers in each market vary. CSTE’s engineered quartz surface products compete with a number of other surface materials such as granite, laminate, marble, manufactured solid surface, concrete, stainless steel and wood. The manufacturers of these products consist of a number of regional and global competitors.

Market Fragmented & subject to increased consolidation
The engineered quartz surface market is highly fragmented and is also served by a number of regional and global competitors.

CSTE also faces competition from low-cost manufacturers in Asia, particularly in Australia, and the United States.Large multinational companies have also invested in their engineered quartz surface production capabilities.

USE OF PROCEEDS
CSTE expects to net $77 million from the sale of 5.66 million shares.Shareholders intend to sell 1 million shares.

$25.6 million of the net proceeds of this offering to pay a special dividend to existing shareholders

$6.5 million of the net proceeds of this offering to pay the balance of the acquisition price for the remaining 75% equity interest in the U.S. distributor, Caesarstone USA, in which CSTE acquired a 25% interest in January 2007. CSTE acquired the remaining interest in May 2011 and the balance of the purchase price is payable following the closing of this offering.