Category Archives: Company Analysis

RediShred Capital Corp – $KUT.v

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.

Ticker: KUT.v

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)

Background

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.

Competition

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.

Senior Mgmt

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.

Board

  • 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.

Growth Prospects

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.

Risks

  • 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.

Summary

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?

Thanks,

Dean

*I am long shares on KUT at time of writing.

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Macro Enterprises – $MCR.v

Here is a quick idea for those interested.

Company: Macro Enterprises

Ticker: $MCR.v

Price: $2.40

MC: 75 mi CAD

EV: 80 mil CAD

Background

Macro Enterprises Inc., together with its subsidiaries, provides pipeline and facilities construction, and maintenance services to companies in the oil and gas industry in western Canada. It is involved in the construction, alteration, repair, and installation of pipeline and facility pressure piping, and structural steel facilities, as well as provision of pipeline integrity digs services. The company was founded in 2006 and is headquartered in Fort St. John, Canada.

As noted above, they are heavinly dependent on Western Canada. Construction activity here relies on more traditional O&G, pipeline, and LNG facilities and related infrastructure.

Managment & Operations

Frank Miles founded Macro in 1994. He is the current CEO and comes acrross as quite conservative on how the business is run. They traditionally have low debt loads and reinvest cash generated into the business.

Compensation seems reasonable for a company this size.

The company is based in western Canada and has a local presence. They employ local workers including unionized and first nations. The company has worked in western Canada for many years and has experience with the terrain, seasons and various building conditions.

Large construction company’s must have a strong safety record which MCR possesses. The repeat business with large clients is a testament to the work they have put in build relationships. The specialized work can lead to margins above industry peers.

Construction companies like this are interesting as they can be lumpy and tend to provide an opportunity.

You can see the share price take off in 2013. This corresponds with the increase in business activity and the company’s profitability. The company’s earnings continued until 2016 when construction activity in western Canada dried up. It loosely tracks the price of oil produced in Alberta, Western Canadian Select (WCS) which is delivered at Hardisty as well as the natural gas price.

For those unfamiliar, Alberta’s oilsands produce nearly 3 million barrels per day. The oil produced is “land-locked” and is sent via pipeline, rail and truck. Continued production with limited pipeline capacity and the heavy crude being less ideal for refiners to process has led to WCS trading at a discount to WTI.

Ownership

The CEO owns 9.2 mil shares or about 27% of the outstanding shares. Mike Nielsen (VP) also owns over 1% of the company. Other holders of note are Gate City Capital at 11.7%.

Balance sheet

As expected the majority of assets are comprised of fixed assets. PPE (net of depreciation) has historically been over 40% of stated assets. I think it’s important to monitor working capital as well.

In order to win business, MCR needs a large modern inventory of equipment. Though salvage prices likely fluctuate during boom/bust times, the use of tangible book value I believe provides a decent proxy for replacement value at a minimum. They also have significant real estate and maintenance facilities that it likely understated on the balance sheet.

Income Statement & Cash Flow

Now that we have that out of the way, below is a quick look at the income statement in ttm for MCR. I don’t think looking at this business (or really any business) on a quarterly basis is a good idea.

Earnings are lower than the recent peak but are not quite as low as the previous downturn when the was EBIT negative. As with many cyclical companies, there tends to be floor in the valuation based on trangible assets.

Downside Price

The chart shows the company can trade at well under tangible book value during downturns. It goes as low as 0.50 P/TB in 2016, but hovers around 0.60. I think this represents the downside potential if activity does not return (or return for some time).

Though the company does lose money, they do not tend to bleed a ton of cash for an extended period.

At a stated value of $3.32 per share and a multiple of 0.60 gives us a downside potential of $1.99 or approximately 20%.

Upside

I think it’s important to make an estimate of what the potential is if activity returns. Looking at previous cycles to get an indication of where MCR could trade provides an upside scenerio.

In 2019 EV/EBITDA hasn’t been much higher than 3x. It’s pretty much the same story for 2014/15. The chart is hard to read as they trade at high multiples of EBITDA in downturns.

EV/Rev can be another indicator and also apears to be trading below mean, but higher than the lows.

The company recently stated that they anticipate 2021 to have at least 250mil in rev. We can take an estimate of what EBITDA will be based on history. I get about 36mil using previous gross margins and operational cost requirements. There are few estimates from analysts stating 32-34mil in EBITDA in 2021. Any additional increase in revenue will mean even more upside.

TMX Pipeline Expansion

The Canadian government purchased the in 2018 from Kinder Morgan.

Therer has been some interesting developments frecently with their JV and Trans Mountain. MCR has written off the JV in the quarter ending Dec 2020. They are still entitled to recieve 20 mil in cash by end of Q2 2021. I have no opinion on the matter other than what has been stated by MCR management. There was a contract signed with Trans Mountain in Feb 2021 for an initial value of over $50 mil CAD. I think this bodes well for their ability to win contracts as the expansion continues.

I believe that the TMX expansion continues (even if it’s over budget). There really isn’t a reason to replace MCR as a contractor at this point in the project. The increased capacity will be a major benefit to Canada as a country as oil is a largest portion of our trade and the oilsands are the 3rd largest proven reserve of oil in the world.

Risks

  • Activity could remain lower (or go lower), particularly in western Canada.
  • The business could perform well, but may not reach the multiples that I have indicated.
  • The tangible book value of the assets that I am relying on for my downside scenerio could be worth less than stated.
  • MCR may win contracts with the TMX expansion, but margins may be lower than previous projects that I am using to benchmark my analysis on.
  • One must acknowledge the polical risk with pipelines and hydrocarbons in general. Decisions made by political leaders are not always based on sound economic decisions and you never know if the TMX could end up in the political crosshairs.
  • Environmental reasons specific to the work MCR provides specifically. Here is a recent example.
  • There is no dividend to support the share price if earnings don’t materialize.
  • There is not a meaningful NCIB presence.
  • The CEO (Frank Miles) has been at this for 30 years. If he decides it’s time for a transition, there could be some additional uncertainty in the business.

With a 4:1 upside to downside ratio, I think MCR is worth a position here. The CEO runs the business conservatively and has skin in the game.

NGTL is of particular interest to MCR as will connect natural gas from BC and AB to major LNG export points. I think a project win from the NGTL pipeline project(s) would propel the shares higher as this would ensure meaningful equipment utilization for MCR.

Big thanks to UV for the collaboration on MCR.

Anyone else own or have an opinion on MCR? Stockhouse has some good information on MCR.

Thanks,

Dean

*the author is long shares of MCR.v at time of writing.

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URBANA Corp – $URB.to & $URB/A.to

Another two weeks since posting…. a couple started but I don’t think they are good enough to publish yet.

Another very simple idea. Hat tip to DD for the help and data collection.

I originally posted about Urbana 10 years ago here in March of 2011. I ended up selling about 6 months later and posted about it here. Originally, I was overly attracted to the discount to NAV. I don’t believe I appreciated the growth potential in NAV on a per share basis.

Background

Price – $2.99

Shares – 44.2 mil

Market Cap – $134mil CAD

Here is URB/A vs. the TSX over the last 5 years

Urbana Corporation is an investment fund launched and managed by Caldwell Investment Management Ltd. For its equity investment the fund primarily invests in public equity markets of United States and Canada. The fund primarily focuses on U.S. financial companies and Canadian resource companies for equity investments. The fund also focuses on private equity investments.

Private company and start-up investments are usually vetted by the board and generally at arm’s length from Urbana.

Fund Perf

When looking at the performance of the fund, I am thinking about the growth in NAV. Despite the fees and annual dividend, the NAV has grown at quicker pace than the TSX. Below is the average performance in NAV growth.

Discount to NAV

Despite the performance the, shares are trading near the largest discount to NAV in the last 15 years.

Share Structure

There are two classes of shares. 10 mil voting/common shares and 38.9 mil class A or non-voting shares. The share repurchases are from the A shares. There is more liquidity in the A class shares.

They have bought back about half the shares since 2009.

Ownership

As mentioned the Caldwell family owns the majority of the voting shares.

EdgePoint has been selling some class A shares. This could weigh on the shares, but they could also arrange a block trade and buyback the shares.

Portfolio

Portfolio as of March 12, 2021

They are fairly concentrated. The largest 5 public equities make up 34% of assets. The top 5 private investments make up 32% of assets. The largest holding is the Canadian Securities Exchange at 13% of assets. They have had the position for many years and Brendan Caldwell is on the board. The CSE recently announced record trading volume and capital raised in Jan 2021. The marked value of their holdings was recently raised in 2020.

Mineral Properties

The company has a some mineral claims that are carried at zero value. There are 44 claims for 2,852.7 acres. So far, they have not commented on if/when this claim will be crystalized. The last time there was an update was in 2017.

Pros

  • Continue to buy back shares at a discount to NAV.
  • Pays an annual dividend. If the dividend is maintained it yields just over 3%.
  • The Caldwell family about $18 mil worth of the company and should be incentivized to have the shares perform.
  • Potential value in mineral properties.

Cons

  • There is a 2% investment and advisory fee (used to be 1.5%).
  • Dual class share structure.
  • Private investments may not be liquid and can be subjected to judgement by management.

As mentioned, simple idea. I’m comfortable parking some cash here in the A shares. Not a huge position, but enough to move the needle if it runs one way or another.

For those interested, you can hear the Chair & CEO share his thoughts on an audio podcast here.

Am I the only one holding some URB/A?

Thanks,

Dean

*the author is long URB/A

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