KUT - Redishred

[cma_atk]

Been accumulating shares in Redishred, a roll-up of on-site document destruction providers in the United States (trades in Canada). Boring, un-sexy business but one that earns an attractive mid-teens ROIC with very juicy roll-up economics in a fragmented marketplace. Management is outstanding and insider ownership is high. Revenues have grown high-single digits historically, with real operating leverage driving low-double digit normalized EBITDA growth. Large portion of revenues are recurring (i.e. subscription-like plan to provide services once a month) and COVID impact is largely behind them at this point. Recycled paper prices have depressed profitability of the business in recent couple of years, but even without underwriting a return the business trades at a pretty attractive valuation. At $0.80 / share, I have the business at a shade under 9x PF EBITDA / 12x PF UFCF, without giving any credit to paper price recovery. Best comp, Shred-it, taken out by Stericycle north of 10x not long ago. M&A pipeline quite full, and I wouldn't be surprised to see the business create $0.30+ of value just via M&A in next two years. Would be curious if any shareholders on this board!

[ratiman]

Can you say something about management? Any reason for the big move in January?

[cma_atk]

The CEO seems to be a very shrewd operator and ROIC focused, which I appreciate. They also have some of the best information disclosure of any company I have ever analyzed.

 

The stock traded at inexplicably low levels through Q4, and finally caught a bid through the end of the year. Partially due to a good Q3 print and some momentum in paper prices as well.

[manuelbean]

I was a shareholder for some time, but ended up selling it.

 

Yes, I agree that the level of disclosure is something else. In fact, I've mentioned to the CEO that they post so many metrics that our job becomes harder, not easier.

 

At first, I was very interested in this company. It seemed to me like a great roll up story. Many "old" owners who want out and a company ready to buy them out.

But then I started getting the feeling that Jeff just wants to grow for growth's sake. I know that as long as there is a huge runway ahead of him, the logical path is to go after it, but I didn't quite hear him talk about ROIC, just growth.

 

I find the SSS growth somewhat misleading. The company can just close some locations and move its trucks to nearby locations, still do the same routes, and SSS growth goes up. I came up with my own metric "Same Truck Sales" growth and there are quarters where these have been negative while SSS was positive. The number of trucks per location has been going up so I don't know if the Same Truck Sales growth has been low because the routes aren't mature yet or because of another reason.

 

 

Then there's the paper prices, which no one controls or is able to predict.

 

All in all, I guess I just lost my interest, not due to a single reason, but I just wasn't "feeling it".

 

Here's a few write-ups I did on the company. Some are paywall protected, but you should be able to read the first ones.

 

https://allinstocks.com/stocks-2/redishred/

 

 

 

 

 

 

 

 

 

 

[cma_atk]

I would push back on that pretty hard. There are definitely reasons not to like this stock, but don’t think either of those are on my list.

 

Putting aside that in dialogue with Jeff I have found him willing to discuss the detailed ROIC-based underwriting they do for M&A, you can really just see the answer in the data. Buying businesses at 6x EBITDA, which equates to a mid-teens FCF yield, when that business is growing 8-12% is incredibly accretive. And that math foots to both management’s stated ROIC targets and the long-term top-down ROIC you can do on the whole business.

 

Not sure what you are really getting at with the SSS point - adding a truck to satisfy increased customer demand is a same-store sale, I.e. it’s organic growth. Increased penetration in localities is strictly a positive, even if they have to add trucks to do it.

 

Anyways, think stock work another look here. Company has 9 franchisees coming up for renewal in next three years, so M&A could really accelerate and business could see a step-function change in earnings power. Not to mention normalized Chinese relations under a Dem would be a big tailwind for paper pricing, but that’s icing on the cake.

[Monsieur_dee]

Company I started looking into a few weeks ago. If they are not the low cost provider for shredding. How do they compete with shred it? Considering shred is willing and able to take on SME & shred it locations are all within half hour of pro shred locations? 

What's intriguing me is the M&A opp like you've spoken about. The potential of 15-18 franchisee locations to acquire over next few years & the small mom & pop shredders that will help move the needle for redishred.