It’s been a minute since I update Redishred. You can view my original post here. The share price has performed reasonably well, although it has underperformed the TSX over the last 5 months.
Since posting the company has purchased American Security Shredding. Highlights of the transaction:
Price $5.15 mil including potential earn outs of $3.4 mil for a total potential price of $8.55 mil
Revenue of $4.1 mil in 2020, run rate revenue of $4.6 mil USD
32-35% adjusted EBITDA margins (a bit higher than KUT currently) or $1.4 – $1.6 mil
Using full earn out the transaction is valued at 1.8x rev and 5.7x ebitda
They have also announced and closed a bought deal with the month of December. They raised $8.6 mil at $0.88 per share. This equals about 12% dilution. The raise was clean with no warrants and insiders participated in about 5% of the raise.
My estimate (with stable paper prices) is that KUT can generate $12-13 mil in EBITDA (aka bullshit earnings) as a steady state run rate. I think the most they would be comfortable leveraging the balance sheet is 4x EBITDA. Being overly conservative and removing the entire cost of American Shredding, I believe they KUT has about $25 mil available for acquisitions. This of course doesn’t include any additional earn outs that have to be paid for the Richmond or Atlanta acquisitions. It also doesn’t include any cash generated in the mean time.
Per Share Numbers
Most of the roll-up strategies seem to fail or the share price underperforms investors expectations. Focusing on per share numbers is critical for a company like KUT.
Though the consolidated numbers are growing the per share numbers are not growing as fast. There are a few reasons why I think the per share numbers will grow fast enough to warrant a position.
The pandemic is masking the overall profitability of the business to some degree.
The amount of incremental dilution required to move the needle goes down as corporate location store count goes up. The leverage ratios remain stable, while the dollar amount grows.
At today’s price you are getting KUT for 8-9x EV/2022 est EBITDA. I think they have some additional operating leverage tied to reopen as well they are cashed up and likely to continue the cadence of acquisitions.
Hoping everyone had a happy holiday season. I’m looking to become a little more active on the blog in 2022. The only resolution I have made (which is really a task I have been procrastinating on for 3 months) is to get back on Twitter and have it be a productive use of my time.
TIKR recently announced the end of the free version. I have made the switch over to the paid premium version.
Thoughts on Market Activity
Nothing constructive to add. I have been fairly busy rotating some capital during the last month of 2021.
5.15 mil USD on closing and up to 3.4 mil USD in earnout over 3 years or up to 8.55mil USD total or about 5-6x ebitda
American Shredding actually has slightly better ebitda margins than KUT
These earnouts are a really smart way of deploying capital as it reduces the current capital needed so KUT can scale into the integration and have a larger EBITDA run rate to borrow against, thus reducing the need to do a share issuance
Announced bought deal at 0.88 and closed within the month
Clean raise with no warrants
A little over 10% dilution
*Long $PSD.to, $STC.to, $VLN.to, $KUT.v at time of posting