I have finally filled out a full position in KUT. I thought now would be a good time to write a post on it and welcome feedback.
Price: $0.71 CAD
Shares Outstanding (diluted): 79.6 million
Market Cap: 56.5 mil CAD
Estimated EV: 77.5 mil CAD
Insider Ownership: 25%
EV/Est EBITDA: 8x (my estimated EBITDA)
RediShred Capital Corp., together with its subsidiaries, manages and operates the Proshred brand and business platform in the United States and internationally. It operates through three segments: Franchising and licensing, Corporate Locations, and Corporate. The company grants and manages shredding business franchises under the Proshred trademark; operates in corporate shredding businesses; and supports the franchises. It also provides shredding and disposal of electronic waste services; sells recycled paper and other recyclable by-products, such as metals and plastics; and resale of certain electronics. The company was incorporated in 2006 and is headquartered in Mississauga, Canada.
The company has over 30 locations across the US and they are the 3rd largest destruction company.
The marketplace is highly fragmented with a few large players. KUT focuses on on-site shredding which is different than larger players like Iron Mountain and Shredit who focus on off-site. There are over 700 independent operators in the US, most with less than 2 trucks.
Customers typically subscribe to regular/recurring services. They have approximently 50% of their expected revenue scheduled.
Jeff Hasham is the CEO. He has been the CEO since 2011 and has been a critical part of the business and executing their growth plan. He had a brief stint as the CFO from 2005 to 2008. He owns just above 1% of the common shares. The value of his shares is about 3x his salary. He is also on the board.
Kasia Pawluk has been the CFO since 2011 and has been with the company since 2010. She owns 115k shares which is about 50% of her latest annual salary.
Compensation for CEO and CFO is about 60% salary and 40% variable. The variable is split fairly evenly between short and long term incentives. 75-80% of the variable compensation is based on per share and per location metrics. The targets include balance sheet metrics to prevent the business from being overlevered.
They are quite conservative in their reporting compared to most companies that I follow. They don’t include any subsidies in their reported ebtida metrics. I like management team that are this transparent.
There are some change in control measures as well.
- The board is comprised of 8 members.
- 6 of the board members are independent, including the chair.
- 5 of the board members have franchise or franchise management experience.
- The independent directors own about 15% of the common shares.
- Total non-employee fees totaled a little over 250k in 2020.
They have a few ways to drive profitability.
- Drive same location top line and margins.
- Purchase existing franchise partners or independents.
- Support franchise partners directly.
The primary driver of growth is acquisitions. They either buyout existing franchise partners or independents. Given that the existing franchise partners have increased visibility, the multiples are based on ebitda and/or revenue. They typically range from 5-6x ebitda. Franchises typically run at around 2million in revenue and 30-35% ebitda margins. There are currently 16 franchise partners that are potential acquisitions over the next 2-3 years. KUT makes a logical succession plan for operators that are looking for an exit.
The independents tend to be asset based with more emphasis on post acquisition profitability. As mentioned there are over 700 independents that also provide possible acquisitions. These acquisitions can provide increased route density, streamlining of marketing initiatives, lowering back office functions and potential below market price for trucks.
Acquisitions are paid for with a mix of debt and cash. They also like to use earn-outs as a large portion of the purchase price. I like the approach as it requires less capital upfront and allows to make multiple acquisitions a year.
So far this year they have made 2 acquisitions (if you don’t include the Proscan Massachusetts that was effective December 31, 2020). Both have been at the target multiples mentioned.
In addition to typical shredding and information destruction, KUT has a small Ewaste initiative. This is only available in Kansas and Chicago via their Secure e-Cycle division. This allows businesses to dispose of electronics in an environmentally friendly manner. They also have the potential to refurbish and resell the electronics. To me this demonstrates some entrepreneurial spirit and scrappiness inside the business.
- Paper prices – for recycled paper can be volatile and may cause margins to swing higher or lower in the short term.
- Access to and cost of debt – since they rely on debt to fund acquisitions, if the currently low interest rates rise rapidly it will increase interest expenses.
- Share issuance at inopportune prices – at some point they will likely need some additional capital for acquisitions. If they have a hard time raising capital, this will hurt per share numbers.
- Equipment – they could need to replace a large portion of the trucks in a short time frame and it will soak up some capital that could be deployed towards acquisitions.
- Franchise partners may not want to be acquired – there is a chance that many of the franchise partners will not want to transition under the KUT umbrella.
- Lack of independents to acquire – the independent opportunities may no present themselves. KUT relies on picking up some operators under distress. Increased subsidies may support independents longer than a more typical environment.
- Covid & lockdowns – of course we are in a pandemic. Reopen could be delayed and hurt profitability in the short term.
- Multiples – this is not a brand new sexy business that designs EVs, mines crypto or is disrupting the financial services industry. These types of businesses tend to get lower multiples, especially if they trade on the venture.
To me, KUT sets up as a reasonable bet if you have a longish timeframe. They provide a fundamental service to businesses, customer churn is low and their earn reasonable return on capital under a more typical business environment. The path to higher top line is straight forward and derisks the story from my vantage point. They just need to execute the existing plan and you can see a path to a higher share price a few years out. The management team is well versed on the industry, strong at operations, and compensation is aligned with shareholders interest.
DKAM owns a little over 14% of the common as well.
The CEO did an interview with the SCD team earlier this year. It is worth watching if you are interested in the company.
Q2 results should be out in a couple of weeks and should provide some additional color on what to expect for the remainder of 2021 and how the acquisition integrations are going.
Anyone else own KUT?
*I am long shares on KUT at time of writing.