Description

Summary of Investment Thesis:  (i) scale business, excellent management and sponsor; (ii) historically grows ~7% organically plus material M&A; (iii) asset light (capex <1.5% of revenue), clean balance sheet (~1.75x leverage) and high FCF (target 80% FCF conversion); (iv) core recurring revenue base and multiyear margin improvement story (>200bps); (v) trades at a significant discount to peers and this is before M&A which estimate could be 25-30%+ accretive to EPS

History/Business: 

• Market-leading provider of safety and specialty services; scale business with 2021 guided midpoint revenue and EBITDA of $3.7 billion and $412M, respectively; ~89% of revenue is US-based; 13K employees
• 90+ year old family company built up organically and via M&A, aging principal owner/founder was looking for a permanent home for the business and found it via a merger with J2, a SPAC run by Martin Franklin and Jim Lillie; the deal was signed in September of 2019 for an enterprise value of $2.9 billion; importantly Mr. Franklin and his partners co-invested approximately $100 million of their own money in the deal at the same price as the SPAC holders
• The founder/owner did not run the company, rather the current CEO Russ Becker has been in the role since 2002, presided over the last 2 decades of growth and owns ~$55M of stock; the rest of the senior management team also stayed with the company post acquisition and there is material inside ownership both personally and via ESOP
• Company was and remains below the radar: (i) as a new public company, (ii) was OTC listed due to legacy UK SPAC structure before formally moving to NYSE, (iii) added to the Russell 2000 and 3000 indices mid-2020, (iv) sell-side has selectively initiated on the company, (v) company has started attending conferences and recently had their first Investor Day (comprehensive deck and replay on IR site)
• Safety Solutions: (52% of revenue, 57% of pre-corporate EBITDA)
  • #1 provider of Fire Protection and Sprinkler Services in North America per industry source ENR (Engineering-News Record); services provided are design / install / inspect / repair / maintain the fire / sprinkler / alarm systems in all types of buildings; large installed customer base plus recurring revenue from aftermarket service contracts with high renewal rates; fire safety is an acyclical market growing at 9% per year per the NFPA
  • Recurring service contracts (statutorily code-mandated/regulated inspections and repairs) are ~1/2 of segment and higher margin; management estimates that $1 of inspection work typically leads to $3-$4 of higher margin maintenance and service work; have national footprint to service national/regional customers plus a large local business; most of the business is retrofit vs. new construction
  • Small project size and short contract lengths limit both contract risk and raw material/input mismatch risk; average project size in Safety Solutions is $10,000; 2021 guided organic growth = 8%
• Specialty Services: (40% of revenue, 38% of pre-corporate EBITDA):
  • Provides infrastructure services and specialized solutions; Top 5 Special Services Firm in North America per industry source ENR (Engineering-News Record); 57% of segment serves growing, acyclical and well-funded telecom market; offering includes installation, maintenance and repair of critical infrastructure such as telecom infrastructure/5G/transmission, underground electric, gas, water, sewer, specialty construction projects/plant maintenance and diversified civil construction
  • Perform diverse services for large customers doing project work and servicing the installed base of their customer’s assets/facilities; much of the work is done under quasi-recurring Time & Materials arrangements and/or Master Services Agreements (MSAs)
  • Small project size and short contract lengths limit both contract risk and raw material/input mismatch risk; average project size in Specialty Services is $70,000; 2021 guided organic growth = 6%
• Industrial Solutions: (8% of revenue, 5% of pre-corporate EBITDA):  legacy non-core business, largest remaining business is energy pipeline integrity work and maintenance
• Company has diverse customer base and end-markets; not dependent on traditional non-res construction; largest customer <5% of revs; end-market mix:  25% telecom/utilities, 18% commercial/education/entertainment, 14% industrial/manufacturing, 10% integrity/transmission, 8% distribution/fulfillment, 8% government/infra, 6% healthcare, 5% high tech, 6% other
• COVID:
  • I believe that strong performance through the period shows quality of management and resilience of the business; 2020 revenues were down ~8% and EBITDA down only 3% from $393M to $381M
  • Company work was largely deemed essential; some work was delayed and some building access was restricted but did not face material project cancellations; contract backlog up YOY and business back to normal
  • Cost structure is highly variable as is largely people; management put in a material cost reduction plan and also showed the ability to manage / flex their workforce; benefitted from the subset of the workforce in unions as are able under the contract to flex headcount up and down without incurring severance

Thesis/Catalysts:

• Scale business, excellent management and sponsor; historically grew ~7% organically plus material accretive M&A; asset light (capex <1.5% of revenue), high FCF yield (target 80% FCF conversion)
• Medium term EBITDA margin target recently taken up from 12%+ to 13%+; key drivers are mix in backlog, price and levering SG&A (see bridge analysis in investor day deck)
• Balance sheet clean:
  • Debt:  ~1.75x net levered, all bank debt, low cost of capital ~3%
  • Equity:  remaining warrants from the SPAC were all exercised in 1Q21; majority of dilution from SPAC sponsor promote occurred in 2020
• M&A:  important key driver of the stock from here, have material excess capital + M&A is a core competency of management + an excellent sponsor with decades of M&A expertise/building large businesses
  • Balance sheet flush with $745M of cash (including recent warrant proceeds) + leverage capacity + annual FCF generation
  • Potential areas of interest:  Fire & Life Safety, HVAC Services, Elevator/Escalator repair and maintenance, Utility and Telecom services; in fragmented Fire Safety market, are many superregional/regional/local companies and several sizable private equity backed comps
  • International:  in October 2020, purchased SKG, a leading European Fire Safety business; operates very similar to core APi (regulated markets, etc.) and will serve as a platform company to build upon in Europe
  • Have robust pipeline of bolt-ons of up to ~$100M revs (looking at ~15 deals) and also looking at more transformational deals with $100M-$1B revs; deals will have similar characteristics to current Safety Solutions/Specialty Services segments (adjacent building services can add to existing service offering with recurring/regulatory drivers)
  • Assuming the company pays similar multiples as have in the past, I estimate the use of this capital to be 25-30%+ accretive to EPS
• Infrastructure beneficiary:  if bill passes would augment organic growth
• Valuation:
  • On 2021 and 2022 consensus, trades at 12.1x and 11.0x EBITDA and 18.7x and 16.2x earnings, respectively; I believe this is 3-4x cheap to comps on EBITDA at 7-8x on earnings
  • Consensus does not include M&A (25-30%+ accretive) and does not assume material margin expansion (management targeting 200bps+ in medium term)
  • Assuming moderate margin expansion and the multiple gap compresses due to continued performance and more coverage, at 14.5x EBITDA, would be $27.25 stock, up 28%; assuming successful M&A and same multiples would be a $32 stock, up 50%

Important Disclaimer

The information contained herein (the “Information”) represents the views of the author as of the date submitted based on public information published or disseminated by the companies referenced below, including, but not limited to, through SEC filings, investor relations materials and public conference calls, or other third parties as of such date.  Securities of the companies discussed herein have been and are currently portfolio holdings of the author or clients of the author’s firm.  The Information does not constitute investment advice or a recommendation, and it is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or other asset or to participate in any trading or investment strategy.  Furthermore, not all relevant facts and information may have been considered in developing the Information and such Information is subject to change.  The author has no obligation (express or implied) to update any or all of the Information or to advise you of any changes to the Information; nor does the author make any express or implied warranties or representations as to the completeness or accuracy of the Information or accept responsibility for errors.  You should not rely on the Information, in whole or in part, without conducting your independent verification as to its accuracy.  The Information contains forward-looking statements, including observations about markets and industry and other trends as of the date hereof. Forward-looking statements may be identified by, among other things, the use of words such as "expects," "believes," “targets,” or "estimates," or the negatives of these terms, and similar expressions. Forward-looking statements reflect the views of the author as of such date with respect to possible future events. Actual results could differ materially from those in the forward-looking statements as a result of factors beyond the control of the author and you are cautioned not to place undue reliance on such statements.  The Information may not be reproduced or disseminated in any manner without the express written consent of the author.

Catalyst

M&A activity, Infrastructure Bill passes, margin targets reached