Description

BV Elevator Pitch

BrightView Holdings, Inc. (“BrightView,” “BV” or the “Company”) is the largest provider of commercial landscaping and snow removal services. Roughly ~75% of LTM revenues and ~80% of pre-corporate LTM EBITDA is generated by the Company’s Maintenance Services segment, which largely consists of recurring, non-discretionary contracted services to corporate campuses and HOAs (85% contract renewal rate in each of the last two fiscal years).

BrightView went public in late June at $22 / share and used all proceeds from the offering for debt paydown. Notably, KKR and MSD (the “Sponsors”) did not sell any shares in the IPO.

Since then, BV is down ~(35%). Most of the decline came in the immediate aftermath of reporting Q3 numbers in early August (the Company’s Fiscal Year Ends 9/30). While the numbers were effectively in line with the initiations I have been able to get my hands on, I think the market was surprised by the slight organic decline in the Maintenance Services, which management attributes to deliberate “pruning” of unprofitable contracts that are rolling off (but clearly could’ve been better communicated in the roadshow).

At current levels, which represents an ~12% FCF yield on my FY ‘19 estimates, I believe BV offers ~60% near-to-medium term upside (through spread compression to a 7% NTM FCF yield, which is still higher than nearly all service comps) and a double over the next 3 years (mid 20s IRR) through a combination of (i) debt paydown, (ii) continuing to add route density through accretive acquisitions, (iii) buybacks once the Company achieves its ~3x leverage target, and (iv) multiple expansion (but still well below peers) as the market becomes more comfortable with the durability of BV’s recurring service business model.

BV has the ability to be a long-term compounder via further consolidation of the fragmented commercial landscape space as it uses its scale and density to onboard local maintenance competitors doing 8-10% EBITDA margins onto its platform at ~15% EBITDA margins.

Finally, management is aligned with shareholders and highly incented to get the stock price up as named executive officers have an aggregate ~2.5mm options whose exercise price is equal to the IPO price or ~55% above current levels (the CEO also ~$11mm worth of stock vs an $850k base salary).

Company History

BrightView was formed in 2014 via a merger of the two largest commercial landscape providers, Brickman Group and ValleyCrest Companies. KKR first bought Brickman from the Brickman family and Leonard Green in December ‘13 for $1.6bn and then acquired ValleyCrest in June ‘14 for $900mm from MSD, who rolled a significant portion of their proceeds into the combined entity. BrightView is ~10x the size than the next largest landscaping competitor though still controls just ~3% of the market.

In the first couple of years following the transaction, the Company experienced significant management turnover due to standard friction in merging two large players with different operational approaches (Brickman was more process driven while ValleyCrest was more “entrepreneurial”) coupled with KKR’s ultimately misguided effort to centralize customer-facing sales functions. This centralization lead to increased customer churn and was discontinued in ‘16, returning these functions back to the branch level. At that time, the Company also brought in industry-outsider Andrew Masterman as CEO (previously at Precision Castparts).

The Company operates two segments Maintenance Services and Development Services:

Maintenance Services ($1.8bn of LTM Revenue / $289mm of LTM Mgmt Adj EBITDA):

Maintenance Services is a recurring, B2B services operation where profitability is really a function of route density, which as the proverbial 800 lb gorilla, BrightView has in spades and enables is to earn EBITDA margins that are often ~500 bps higher than the competitors it is acquiring. BrightView’s bread and butter is providing year-round landscaping (lawn mowing, mulching, gardening), irrigation and snow removal largely to corporate clients and HOAs. These services are fairly non-discretionary and sticky (~85% renewal rates). To be clear, BrightView does not participated in the more competitive and higher churn single family residential markets.

BrightView operates ~215 maintenance branches, that are generally concentrated near major metropolitan areas. The average branch does ~$8mm in revenue with ~100 customers across ~250 sites being serviced by 6-12 crews (each crew consists of ~10 FTEs). Outside of large corporate clients (“BrightView Enterprise Solutions”), sales are done at a branch level. In comparison to mom and pop competitors, BrightView can offer its employees a career path and benefits.