Mobile Mini ("MINI") is the leading player in the portable storage market. MINI operates a fleet of roughly 260,000 units from 91 branch offices in the U.S., United Kingdom, Canada and The Netherlands. MINI has a variety of products that it offers from portable storage solutions to portable offices. The largest portion of MINI's fleet comprising 80% of the total units are steel shipping containers. Portable offices and van trailers make up the balance of the fleet.
MINI's business model is highly attractive as the average cost of a steel container is $3,500 and it generates average monthly rentals of about $100 per month. These economics provide for a 35 month payback on assets that have a useful life of more than 30 years. Accordingly, the incremental EBITDA margin from renting a container is approximately 70%. Revenues at MINI are roughly 90% leasing and 10% unit sales. The average unit stays out on rent for 33 months.
In 2008, MINI bought out its only competitor of scale for $755 million, Mobile Storage Group. While that transaction left the combined company highly leveraged, the cost synergies from the transaction were massive and resulted in substantial talent upgrades accompanied by much improved operating practices. At the time of the acquisition, Mobile Storage was majority owned by the private equity firm Welsh Carson. The financial sponsor retained a large ownership in the combined company and board representation since the deal's closing.
MINI has no meaningful customer concentration issues as most customers tend to only rent 1 to two units. MINI's largest customer Wal-Mart accounts for under 2% of total revenues. The biggest issue that MINI has been struggling with is end use concentration with construction related users. The table below highlights the customer base shift since 2007:
The drop in construction usage has been significant and has led to overall declining utilization. On the past several conference calls management has highlighted that while the construction sector remains weak it is showing some signs of stabilization. The following are the average utilization trends over the last seven quarters:
Q1 - 2008
Q2 - 2008
Q3 - 2008
Q4 - 2008
Q1 - 2009
Q2 - 2009
Q3 - 2009
I anticipate a slight uptick in utilization in Q4 2009 as the fourth quarter has historically been the best quarter for MINI due to season rental activity with big box retailers. Management believes that they can get utilization back above 80% following the current economic downturn. A longer view of utilization provides some perspective on this estimate:
One of the key stories at MINI is its cash generation. Since completing the Mobile Storage Group acquisition, MINI has focused on generating FCF and paying down its debt. For the first three quarters of 2009, MINI generated $70.2 million in FCF. We see no end to this cash flow generation and management has near religious focus on debt pay down, which is probably not surprising given the significant private equity shareholder who is also a board member. Looking forward, given the current utilization of under 60% there is no need for any significant capital expenditures anytime soon.
The debt structure of MINI is fairly attractive. Currently there is $493.3 million outstanding under a revolver and there is $346 million under two issues of senior unsecured notes. As of 9/30/09, there was $326 million of undrawn ABL capacity under the revolver and the covenants are only an issue if liquidity on the ABL drops below $100 million. Given its free cash flow generation and the current liquidity position this is not a likely issue. Management believes that their business could achieve better than break-even profitability at 40% utilization, which is a huge leg down from here. There are no debt maturities until 2013.
Since the acquisition of Mobile Storage Group, MINI has very much focused on optimizing operations. Key initiatives in this regard are as follows:
Maximizing revenues both rental rates (tested increases on customers who had unit over 12 months with good success) and increasing ancillary revenues for services, such as pick-up and drop-off fees, which are less transparent to customers.
Selling off non-core assets such as van trailers to cull size of fleet and get rid of units that are less attractive.
Repositioning fleet to new markets. MINI recently announced that it was moving underutilized fleet from certain US markets with excess capacity to new "greenfield" markets. MINI continues to be underpenetrated in the northern US and this represents an area of opportunity.
Improving the sales culture through the implementation of salesforce.com and increasing internet sales presence. These new sales activities can largely be funded by reducing the use of yellow page advertising and lowering the use of direct mail.
Implementation of lean six sigma is in early stages.
Focus on unit logistics will be key area of focus going forward. MINI is building out a new internal logistics team and the newest MINI board member has a strong logistics background.
Fix underperforming UK business segment, which appears to lag US operational performance on every level.
The result of these initiatives is easily visible in the numbers. Third quarter margins in 2009 were 41.8% as compared to 41.9% in the prior year. At the same time utilization fell from 75% to 57% in what is largely a fixed cost business. Accordingly, management believes that there will be significant upside in profitability when the economy improves and MINI is able to generate 70% EBIDTA margins on its incremental units.
There is little significant competition in this business. MINI management has said that Mobile Storage was the last real target that they wanted to buy. The remaining competitors are all small mom and pops who lack any scale or sophistication. I would expect MINI to make smaller little tuck-in acquisitions at rock bottom valuations as smaller competitors go out of business.
From a valuation perspective, my 4 year DCF has a $33 price target which assumes an 8.0x terminal EBITDA multiple, utilization of 80%, price increases of 2.25% per year, and mix shift lift as more offices and higher end units become utilized. All my share counts assume full conversion of the convertible preferred. The current FCF yield is approximately 20% (15% assuming conversion of preferred) and I foresee that continuing for the foreseeable future. I project that MINI will generate levered FCF of $90 million in 2009 as compared to an equity value of $475 million.
In addition to Welsh Carson, Shamrock Activist Value Fund is a significant shareholder of MINI and holding roughly 9% of the shares outstanding. Shamrock is an aggressive activist firm who will take board seats and make management changes if necessary. Reference their recent landslide victory at Texas Industries (TXI). While, Shamrock has been fairly quiet at MINI to date, I would assume that they are watching the situation carefully and are involved behind the scenes.
Note: Share count outstanding includes preferred conversion