Description

SUMMARY

Mirion Technologies is a recent de-SPAC that bucks the stereotypes. It’s a high-quality business with a durable competitive advantage, fantastic management, and incentives that I’d describe as benign for a SPAC deal. As with GSAM’s inaugural SPAC, Vertiv, this is not a classic “sell the sizzle” SPAC.

Like Vertiv, Mirion was a former LBO and long-time debt issuer that has supported grizzly levels of debt in the past; but with proceeds used for a combination of debt reduction and M&A dry powder—along with a very favorable cost of debt post-refi—the company went public with ample interest coverage of 6.4x (before synergies) and will immediately generate solid FCFE, which can be reinvested for above-market returns for years to come.

Mirion sets itself apart in terms of management strength and pedigree (I am a big Tom Logan fan, to say nothing of chairman Larry Kingsley), the high-margin niche product portfolio with a durable moat, and the non-correlated market drivers that I believe will flip in perception from a risk factor to a strength. In my view, the company is underpriced relative to its peer group (Fortive, Thermo, Ametek, IDEX, Danaher, Mettler, Badger Meter, etc.), and the discount is unwarranted.

BUSINESS

Mirion was founded in earnest in 2003 through the combination of 3 companies, backed by ACAS. At a high level, they’re a global leader in products that measure ionizing radiation – spectroscopes, dosimeters, and radiation monitoring systems. These products are used by nuclear plants, in nuclear medicine, medical imaging, military and civilian defense, and sundry industrial applications.

The company’s product portfolio comprises a wide range of highly specialized products that are mission critical to its customers, with high potential costs of failure; and the bulk of its offerings represent a negligible line item in its customers’ total budgets. This dynamic is furthered by its focus on industries that are heavily regulated, with complex and localized operational requirements, and high real and perceived switching costs.

At a very high level, Mirion makes products that measure and analyze ionizing radiation. These products have diverse applications across stable markets like healthcare (e.g. radiation therapy), nuclear power (e.g. in-core detectors), life sciences (e.g. lab dosimetry), and safety and defense (e.g. homeland security).

Mirion ostensibly competes with small, non-core segments of multi-industrials like Ametek and Fortive, but in practice primarily competes with niche product specialists. As the best capitalized pure-play operator in in this niche, Mirion is the natural industry consolidator, and has a disciplined approach to M&A. Furthermore, management has a strong track record of executing on its stated synergy targets to drive highly accretive (MSD) synergized multiples.

FINANCIALS

To parrot the marketing materials, Mirion has persistently achieved above-market organic growth since inception, which it has supplemented with a steady stream of tuck-in acquisitions (averaging LDD enterprise pre-synergy multiples and MSD synergized multiples).

What I’ll add is that my estimate of organic growth has exhibited negligible correlation to the typical measures of global and regional industrial production.

In terms of cyclicality, 70%+ of Mirion’s sales come from replacement, maintenance, and recurring business -- as an example, in the nuclear segment (where Mirion has dominant share), a new build gets a bolus of equipment sales during the 3-5 year construction period, when detectors and monitoring systems are first installed. This comprises ~200 units per build. Initially, every fuel cycle (18-24 months), 1/3 of these sensors get replaced; as the plant ages, the maintenance cycle begins to require more comprehesive refurbishment spend. Then at decommissioning, you get upwards of a decade of ongoing use and replacement of monitoring systems. Health and life sciences similarly relies heavily on single-use dosimeters, as well as recurring revenue from a small but fast-growing software suite.

Acquisition targets tend to be small, niche businesses to infill geographies or service capabilities—less frequently, the company will do a more sizeable bolt-on, where there is a strategic directive being fulfilled and/or where there are clear cost saving opportunities (e.g. Canberra in 2016 for $362mm / 16.1x pre-synergy / 8.2x marketed PF / 5.5x realized; Sun Nuclear in 2020 for $270mm / 13.8x pre-synergy / 10.0x marketed PF). This compares to Charterhouse’s 2015 acquisition of Mirion at 11.4x trailing, Mirion’s 2016 acquisition of Canberra at 16.1x, and Mirion’s 2020 acquisition of Sun Nuclear at 13.8x. Bolt-on acquisitions tend to be margin dilutive immediately post-close, and then margin tends to revert back to its prior highs.

When I think about normalized earning power, gross margins are in the low-40% range. COGS is 70% variable (85% materials, 15% direct labor), and half of raw material purchases have some form of fixed pricing. Despite higher R&D spend than its peers, EBITDA margins are in the mid-20% range before synergies.

By segment, medical segment earns outsized margins relative to industrial + defense, but admittedly both numbers bounce around slightly as acquisitions are folded in and digested. The way to think about this—and management has been consistent on this point for a while—is that for every 4% of organic growth (i.e. ~1 average year), EBITDA margin should expand by 1 point.

Following a feverish syndication process, the term loan (4.3x marketed EBITDA, 14x ex-synergies) tightened from initial talk at L+350/50/99 to L+275/50/99.5 – resulting in a very modest $27mm cash interest run-rate. And capex is modest, at ~3-4% of sales in a typical year. Management says ~1/2 of capex is maintenance. Working capital isn’t a significant driver of FCF in most years. All told, at the low end, I’d expect a ~3% FCFE yield in the near term, but double that amount within a couple of years.

GROWTH

The company’s present end market exposure is 44% medical / life sciences, 39% nuclear, and 17% diversified industrial (a big chunk of which is military and civilian defense). It’s clear from the marketing materials and recent mix of acquisitions that management sees the greatest tailwinds on the medical side. There’s a chart that shows nuclear contributing 70% of sales in 2005, and I’ve heard some skepticism about Mirion’s advantages on the medical side given its heritage in nuclear. One mitigant is that the company has been executing on this strategy for a decade now, with fantastic returns on capital and incrementals. The other is that Tom Logan original came to Mirion via Global Dosimetry Solutions, which to understanding was more focused on the medical dosimetry side.

From a capital efficiency standpoint, the company has persistently earned outsized returns on capital (~25-30% ROIC, ~40-50% ROIIC – using my calcs, not the ferkakte one from the IR deck), owing to a lack of viable substitute products, high switching costs where substitutes do exist, and modest capital requirements across its footprint.

As the company looks to widen its competitive advantage, Mirion has also developed a portfolio of software solutions to complement its hardware offerings. Although software only represents a single digit percentage of consolidated sales, it is fast-growing and will importantly enhance the stickiness of its hardware business.

VALUATION

Mirion isn’t optically cheap. The acquisition was dene After accounting for warrants and promote, its fully diluted EV is about $3bn today (18x EBITDA inclusive of pre-acq numbers, and 16x fully synergized). It’s still 15x management’s 2023E EBITDA, which I’ll only tepidly defend by pointing out that Vertiv has done pretty nicely against its SPAC projections.

However, as organic growth persists in the MSD area, supplemented by accretive tuck-ins, and Mirion’s stickiness and pricing power become fully appreciated by the market, I think the market gets more comfortable with the nuclear exposure, and the company gets re-rated toward the high end of the multi-industrial compounder bro spectrum—so call it 25x.

A reasonable downside to Mirion’s valuation is probably that it investors latch onto BWXT as the pure play comp, and this trades in the low teens enterprise multiple. That’s overly punitive in my view, owing to Mirion’s superior margin profile and its long runway of accretive acquisitions. Obviously you’re cushioned in this case by the reasonable and “fair” promote structure (1/3 at each of $12 / $14 / $16, with a 5-year expiry)

MANAGEMENT

CEO Tom Logan has run the firm since inception in 2003, and has the unique combination of deep industry-specific knowledge, execution capabilities, and capital discipline that one looks for in a prospective industrial compounder. The company’s segments run in a siloed manner, with commercial decisions made at the division level and capital allocation done by Logan’s team.

Notably, Larry Kingsley (Pall, IDEX, Danaher) recently took over as Chairman through the acquisition by GSAH. Mirion operates and allocates very much in the same mold as Danaher, and Kingsley’s appointment validates that comparison in my view—as does his personal investment in the PIPE. One point of clarification: while he’s been referred to in some media (and IIRC some early marketing materials) as the Executive Chairman, he’s not going to be an employee but I suspect he will be much more actively involved than most Chairmen.

Catalyst

• Mirion continues to acquire regional/niche businesses with dominant market share of low-TAM businesses at attractive yields, continues to execute on cost savings, and clips the arb on its very attractive cost of debt
• The market stops looking at BWXT as a comp and appreciates the durable competitive advantages across multiples industries that the company enjoys
• Nuclear power segment eventually gets a significant rerating if modular reactors gain wide acceptance