Boyd Group Income Fund ("Boyd Group" or the "Company") is a Canadian-listed income trust that operates the largest network of automobile collision repair shops in North America.  The Company currently trades for roughly 9x projected 2012 cash EPS (cash EPS defined as reported operating EPS plus a favorable D&A/capex spread of roughly C$3mm).  This is an extremely attractive multiple for a business with strong long-term demand dynamics driven by secular industry changes, material incremental growth potential through roll-up opportunities, strong free cash flow characteristics, outstanding cash returns on both invested capital (>20%) and equity (>40%), and a financially conservative management team.

Boyd Group has over 160 locations, split roughly 75%/25% between the United States and Canada.  These locations, spread among 13 states and four Canadian provinces, operate under a number of different brand names, including Boyd Autobody & Glass, Gerber Collision & Glass, True2Form Collision Repair Centers, and Cars Collision Center.  The Company is currently in the process of standardizing a number of its brand names, particularly those that are the result of recent acquisition activity (True2Form and Cars), which will lead to more uniformity in its national brands.

The North American automobile collision repair industry is highly fragmented.  With total annual industry revenues estimated between $30 and $40 billion, the top 10 operators have an aggregate market share of less than 5%.  As a result of this fragmentation, insurance companies, which pay for the vast majority of collision repair, have historically had to deal on a local level with an overwhelming number of small, independent operators.  This dynamic, however, has begun to change in recent years with the introduction by insurance companies of Direct Repair Programs ("DRPs").  Through a DRP, the insurance company steers their policyholder to an approved repair provider.  By running a higher percentage of repair business through these approved providers, insurance companies can typically ensure both a higher level of quality control and more consistent pricing, while decreasing their administrative overhead.  The growth of DRPs has been a consistent driver of market share shifts over the last several years to the larger operators like Boyd Group, providing a nice boost to same store sales.   SSS results can be volatile Q to Q as a result of weather (i.e. particularly inclement winter weather drives growth in accident incidence, thereby benefiting Boyd, for instance); however, this volatility tends to average out over multiple seasonal cycles.  SSS growth for Boyd Group over the last few years has typically hovered in the mid-high single digit range, primarily as a result of market share gains.

From its founding roughly 20 years ago, Boyd Group has been built through a combination of both organic growth and acquisition.  The Company went through some growing pains in the 2005-06 time frame, at which point it ceased all acquisition activity and refocused its energies on optimizing the existing operation.  Concurrently, it worked to improve its balance sheet by halting dividend distributions and devoting free cash generation to paying down debt.  At the time, this was viewed by the existing shareholder base as a materially negative development.  The Canadian income trust structure was originally designed to incent the underlying companies to pay out a significant portion of their cash flow as dividends (similar to a U.S. REIT structure), so many of the income trust shareholders put a high premium on dividend yield, and were disappointed with Boyd Group's dividend discontinuation.

Although shareholders were unhappy, management's conservative approach to the dividend policy facilitated a reasonably rapid improvement in the Company's financial profile.  The Company reinstated a dividend in late 2007, and consistently increased it in-line with continued improvements in financial performance through 2009.  At this point, management felt that the Company's financial health put it once again in a position to look externally for growth opportunities.  As a result, the Company subsequently sourced and closed two material acquisitions: True2Form Collision Repair Centers in August 2010, which added 37 new locations, and Cars Collision Center in June 2011, which added another 28 locations.  Both of these acquisitions have brought a material base of new locations into the Company that, at the time of acquisition, had been operating at profitability levels materially below Boyd Group's corporate average.  As best practices, purchasing efficiencies, and corporate overhead leverage are gradually realized, improving profitability at the acquired locations should provide a decent tailwind to continued earnings growth.  More recently (early 2012), Boyd Group closed on a smaller multi-location deal in Florida, Master Collision Repair, Inc. ("Master").  Master brings an additional eight locations into Boyd Group, in a particularly attractive market with very little competition from other large multi-location collision repair providers.  On its most recent earnings call (4Q 2011), Boyd Group management commented that while there are not seeing a significant number of large multi-location deal opportunities, the environment for small to mid-sized deals is "as favorable as we've ever seen it", and pricing on these deals has been consistently improving.

Working capital needs for Boyd Group's business are modest.  Parts are typically ordered as-needed for repair work, which ensures only a limited required investment in inventory, and with 90% of revenue generated from insurance companies (as opposed to individuals) receivables are paid promptly.  Moreover, in exchange for exclusivity with its paint supplier, Boyd Group receives prepaid rebates from this supplier that further reduce net working capital requirements and contribute to cash flow.  These favorable working capital dynamics, in addition to limited ongoing capital expenditure needs, help drive a consolidated cash return on invested capital of over 20%, and a cash return on equity of over 40%.

Returns on Boyd Group's growth investments are attractive as well.  The Company generally targets a 25% pre-tax return (or 20% after-tax) within the first couple of years for both organic growth opportunities and acquisitions.  The Company targets a 6-10% annual growth rate in greenfield locations, with an additional growth boost from acquisition activity.  Boyd Group's exclusive paint supplier has typically provided favorable financing on acquisitions in exchange for its exclusivity, helping ensure that these acquisitions are accretive to earnings, cash flow, and intrinsic value.  A portion of this supplier financing is typically forgivable, effectively providing a subsidy and a net reduction in purchase price to Boyd.

Boyd Group has a favorable spread between its D&A and capex of somewhere between C$3mm and C$6mm (C$0.23-$0.46/shr).  Amortization of acquisition-related intangibles currently runs at roughly C$2.5mm/annum.  Management has historically guided to a maintenance capex level of 80bp of sales, which would have equated to a bit less than C$3mm in 2011.  Compared to a 2011 depreciation charge of C$6.3mm, this would imply a roughly C$3mm favorable spread between depreciation and maintenance capex.  The favorable spread is driven by depreciable lives for the Company's relatively simple PP&E (paint booths, buildings) that are materially shorter than those assets' economic lives.  Note, as well, that unlike investment pitches that rely on "maintenance" capex that bears no real-world relationship to a company's actual capex, Boyd's capex in each of the last few years has been running materially below the actual level of capex.  This gives me comfort that the favorable spread is real, and sustainable.

For 2012, I'm modeling C$440mm in revenues.  While this represents a health 23% growth rate over reported 2011 revenues, roughly 80% of the growth can be accounted for by annualization of the June 2011 Cars Collision Center acquisition, the early 2012 Master acquisition, and already-completed single location acquisitions in 2012 (three year-to-date).  A 5% SSS comp accounts for the balance.  On margins, I'm assuming little lift in 2012 (20bp, to 7.0% EBITDA margins) given the relatively material amount of ongoing M&A integration activity.  This yields about $31mm in EBITDA, $24mm in EBIT, and $22mm in pre-tax.  I'm using a blended tax rate of 26% (despite having most of its operations in the U.S., the Company retains a material tax benefit from its income trust structure), to yield $16mm in net income.  On 13.3mm shares, this yields C$1.20 in reported EPS.  The favorable D&A/capex spread adds another C$0.23/shr for a cash EPS number of C$1.43/shr.  Versus the current C$12.00 share price, you're buying the Company at just 9x cash EPS.

With respect to potential risks, there are several.  1) The collision repair business is economically sensitive.  Although market share gains in recent years for Boyd Group have masked this sensitivity, in times of economic hardship consumers tend to repair their cars less, and drive fewer miles, both of which decrease demand for collision repair services; 2) Near-term, results for Boyd Group will likely be somewhat weak.  The extremely warm winter weather will negatively impact Boyd's SSS in its cold weather markets (Chicago, Denver, U.S. northeast) for 1Q 2012 (and possibly into 2Q 2012), and it's likely to post down comps (as guided on its most recent 4Q 2011 earnings call); 3) Last of all, input cost inflation is a concern.  Paint costs have been rising in recent years, and price increases generally lag, as insurance company reimbursement levels are typically based on a survey of regional repair cost average, which typically lag input cost increases.