GDI.TO - GDI Integrated Facility Services

[lakespring]

Hello all, first post here. I wrote this to my blog in support of my current job/intern search, but am posting this here to receive feedback and connect with smarter individuals (improve my networking). Interested in hearing thoughts and counter points to the thesis! I'd like to think that my hero, Allan Mecham, would have owned GDI at the right price in his earlier days.

 

https://valuetemperament.wordpress.com/2019/07/23/gdi-integrated-facility-services-tsx-gdi-to-cleaning-up-the-mom-and-pops/

 

Brief:

GDI Integrated Facility Services is a provider of outsourced facility management services, mainly operating in the subsegment of Janitorial services with a long-term plan snowballing into a full-fledged IFS vendor. Owner-operators, owning 36% of the shares, have generated revenue and EBITDA CAGRs of 24% since 2004. This is supported with a strong balance sheet, where leverage ratios are well below 3x, ranging from 1.5-2.7x. The business is recession-resistant and grew at a 15% CAGR through the Great Recession. The industry is boring, overlooked but very sticky; GDI's long-term customer retention rate is 96-97%, allowing for historical organic growth rates between 5-7%.

 

GDI's growth via consolidation is underpinned by two big inevitables: 1) a higher proportion of occupiers outsourcing IFS functions in order to reduce the inflating cost of occupancy, and 2) the continued shift of global real estate assets owned by sophisticated institutions, who demonstrate a strong preference for a one-stop-shop vendor.

 

Cheers.

[Cigarbutt]

I had looked at GDI some time ago and decided to pass (more to come in this post) but, after reading your thoughts, will look into it again and will post if applicable.

From memory, I liked the fixed asset-light model growing in a fragmented market. The CEO has acted as an owner-operator (acquire, integrate, adept at obtaining new contracts and maintaining old ones) but I had questioned the long-term moat. I felt their debt level to be quite high and their margins/pricing power to be quite low. Something which I liked was the potential to add specialized (technical) services to their basic janitorial offer. Also, valuation parameters like EV over EBITDA assumed more of the same for a long time. Their franchise model component also raised questions.

 

Thanks for the idea. Will look into it.

Edit: Welcome!

[KJP]

Hello all, first post here. I wrote this to my blog in support of my current job/intern search, but am posting this here to receive feedback and connect with smarter individuals (improve my networking). Interested in hearing thoughts and counter points to the thesis! I'd like to think that my hero, Allan Mecham, would have owned GDI at the right price in his earlier days.

 

https://valuetemperament.wordpress.com/2019/07/23/gdi-integrated-facility-services-tsx-gdi-to-cleaning-up-the-mom-and-pops/

 

Brief:

GDI Integrated Facility Services is a provider of outsourced facility management services, mainly operating in the subsegment of Janitorial services with a long-term plan snowballing into a full-fledged IFS vendor. Owner-operators, owning 36% of the shares, have generated revenue and EBITDA CAGRs of 24% since 2004. This is supported with a strong balance sheet, where leverage ratios are well below 3x, ranging from 1.5-2.7x. The business is recession-resistant and grew at a 15% CAGR through the Great Recession. The industry is boring, overlooked but very sticky; GDI's long-term customer retention rate is 96-97%, allowing for historical organic growth rates between 5-7%.

 

GDI's growth via consolidation is underpinned by two big inevitables: 1) a higher proportion of occupiers outsourcing IFS functions in order to reduce the inflating cost of occupancy, and 2) the continued shift of global real estate assets owned by sophisticated institutions, who demonstrate a strong preference for a one-stop-shop vendor.

 

Cheers.

 

Thanks for bringing a new idea and very through analysis to the board.  Posts like yours are more useful than 99% of what's posted on here.  That being said, here's some constructive criticism/questions:

 

1) Don't bury the lede.  At the end of the day, it doesn't sound like you'd buy at current prices.  But it takes alot of reading to get there.

 

2) Be careful with excess jargon and hype.  In the intro you refer to "flywheels" and "subscription-like revenues."  But this is not Amazon; it's a business that cleans toilets, and as you acknowledge later on, there appears to be no operating leverage in the business, i.e., no economies of scale. 

 

3) Question:  How are you calculating ROIC and why is 12-13% based on that method of calculation either good or warrant a 14x EBITDA/20x NOPAT multiple?

[lakespring]

@Cigar. Yes, GDI's "moat" is on the unusual side. When everything is sourced through the quality of one's reputation, it's logical to think the moat is weaker, I mean it is tougher to measure in this space as well. That, and the pricing power risk, is mitigated by their track record and the inevitables - I wouldn't expect all of GDI's clients to vacuum and wash their own carpets en masse in turmoil. To be fair, I wouldn't have been able to align with GDI's value proposition had I not studied Rollins and FirstService. Their models are similar, albeit Rollins and FirstService are better businesses imo. Their franchise business is small, though it is interesting as a market penetration strategy, I mean Modern did get Walmart out in BC.

 

Here's a short reddit link I found discussing MCC:

 

Glad you liked it, I'm looking to be more sharing my idea base and improve!

 

@KJP.

 

1) You are correct and I will note my disclosure earlier in the piece or in my brief next time. I take a watchlist-driven approach to portfolio management, and have not built a position yet at current prices specifically to mitigate any honeymoon effect or DIY bias I may have present. That being said, I'd be happy to own the business on sale.

 

2) Will keep note of that, I suppose it's a habit (good or bad) to recognize businesses in such a sense; I'll be wary to not over pattern recognize these things. I tend to focus on good-to-great businesses that have a reinforcing feedback loop, of varying strengths of course.

 

3) ROIC was calculated based on EBITDA + reorganization costs - mainEX over invested capital. Though a crude measure, the 12-14x EBITDA is anchored as a 1-2 turn premium to ABM's valuation, who is still in process of completing their restructuring program. In comparison to an average business of similar valuations, 14x EBITDA would be justified by GDI's recession-resistant characteristics, retaining a larger amount of back-loaded earnings power in turmoil and management's capital allocation ability. The case for GDI to consistently grow at a GDP-plus rate for a long-time is quite high. Hence the justification.

 

Mind you, in I'd currently prefer not to pay up for such characteristics. There are better prices that meet my hurdle rate with high conviction.

[KJP]

 

3) ROIC was calculated based on EBITDA + reorganization costs - mainEX over invested capital. Though a crude measure, the 12-14x EBITDA is anchored as a 1-2 turn premium to ABM's valuation, who is still in process of completing their restructuring program. In comparison to an average business of similar valuations, 14x EBITDA would be justified by GDI's recession-resistant characteristics, retaining a larger amount of back-loaded earnings power in turmoil and management's capital allocation ability. The case for GDI to consistently grow at a GDP-plus rate for a long-time is quite high. Hence the justification.

 

 

It appears that your ROIC is pre-tax.  Does a pre-tax ROIC of 12.7% suggest a good business, or do they need to lever to get a good ROE? 

 

Something much more in the weeds, but I think useful to think about for companies that are rollups is whether only looking at returns on tangible capital (as your calculation appears to do) may overstate true returns on capital, because it doesn't account for the portion of historical acquisitions that are written off via amortization of intangible assets arising from purchase accounting.  That is capital that was invested in the business, but it would not show up in invested capital as its amortized.

[writser]

You repeatedly mention “customer enlightenment”. Is that something you came up with yourself or did you copy that from a company press release? Consider me a priori skeptical of a toilet cleaner whose edge is enlightening customers.

 

In general after reading your write-up I get the feeling that you are trying very hard to hype a boring, mediocre company. Some of it reads more like stuff I’d expect in a company presentation rather than a VIC writeup. Davis says this, David notes that, David says the large competitor is shit, David says all capex is growth capex.

 

Take a step back: this is a company stuffed with debt and crammed in a tax shell by a PE company to be sold to unsuspecting investors. Your bear case is a 40% higher valuation than what the PE shop paid, if I read your post correctly. On top of that paying people to clean toilets scales badly and this is a business with no barriers to entry whatsoever.

 

I mean, your post is obviously solid and you put a lot of work in it but are you trying to write an enthusiastic sell-side report or a alpha-generating analysis for a fund on the buy side? If your goal was the first I’d say you did very well. For the second I’d tone it down a little.