2015 | 2016 | ||||||
Price: | 40.69 | EPS | 0 | 0 | |||
Shares Out. (in M): | 45,948 | P/E | 0 | 0 | |||
Market Cap (in $M): | 1,869 | P/FCF | 0 | 0 | |||
Net Debt (in $M): | 793 | EBIT | 0 | 0 | |||
TEV (in $M): | 2,663 | TEV/EBIT | 0 | 0 | |||
Borrow Cost: | Available 0-15% cost |
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For more background on the company, read jujuiris15 idea published in 2010. The stock has gone up a lot in last two years, largely because of change in leadership and some other actions taken by the new managment. I believe some of these action have actually helped the competition in a fragmented industry.
Investment thesis : Mobile Mini (MINI)
1
•
Peak valuation, potentially because of where the US is in
business cycle; MINI is trading at double of replacement
value which can affect equity in case of impairment/appraisal.
•
Aggressive depreciation and disclosure modifications around
asset composition and refurbishment expenses, which hide
asset age profile and inflate earnings.
•
MINI’s poor disclosure hide real economics of sale
transactions from fleet as filings show average cost per units
is $2,411 while average cost of a refurbished unit is about
$3,500. Either MINI is cherry picking units or there is a high
blend of non-refurbished units.
•
Sellside is assuming 50% EBITDA margin and the stock price
reflects 10% FCF growth till 2025. It is unlikely that MINI can
post 10% growth in a fragmented industry with oversupply and
with its high cost structure.
•
Upside/Downside ratio for MINI does not justify investing in
the stock as on the upside MINI can capture 11% of gain while
lose 90% of value in the downside scenario.
Recommendation: Sell
•
MINI is one of the world’s largest providers of
portable storage solutions, with a total fleet of about
213,500 units in 2014.
•
Mobile storage solution industry is highly
fragmented and mature, with oversupply of
containers. Small companies have been underpricing
MINI by 10-30% in a commodity market, taking
customers away from MINI
•
Compared to small operators MINI has high fixed
cost structure and significant financial leverage that
leaves little scope in terms of pricing power
•
Sellside and MINI’s management do not consider
utilization rate in calculating MINI’s economics,
which would increase payback period by 1-2 years.
Moreover, MINI’s ROA has been significantly lower
than its cost of capital over the entire business cycle.
•
MINI has been growing through roll-outs and
acquisitions. MINI’s recent major acquisition of ETS
produces significantly less operating margin (17.1%)
and free cash flow than MINI’s (23.2% in 2014)
legacy steel container business. Further, the recent
decline in energy prices could impact the newly
acquired business significantly.
Agenda
•
Business description
•
Evaluation of Mobile Mini’s business
•
Scenario embedded in Mobile Mini’s stock price
•
Valuation of Mobile Mini’s stock
•
Investment recommendation
2
Business description and industry at a glance
3
Mobile Mini (MINI)
• MINI was founded in 1983 and follows a
strategy of focusing on leasing rather than
selling portable storage units.
• Mini is one of the world’s largest providers of
portable storage solutions, with a total fleet of
about 213,500 units in 2014.
• As of 2014, the company operates in 115
locations across the United States, as well as
four locations in Canada and 17 locations in the
United Kingdom.
• Mini’s has more than 80,000 customers across
various industries, including construction,
consumer services and retail, industrial,
commercial and governmental markets.
• Mini has expanded by acquiring the fleet assets
of small local portable storage businesses. The
company’s most significant acquisition remains
its merger with Mobile Storage Group in 2008.
Industry at a glance: Key statistics
• Major demand driver is residential market which
makes up the industry’s largest revenue source (80.0%
of all revenue), with demand dependent on existing
home sales and housing starts.
• Second major demand source is retail sector. Strong
demand from retail markets increases the need for
higher stock levels, and, therefore, boosts industry
revenue.
• Major market segmentation in 2014
§ Short term residential customers (60.2%)
§ Long term residential customers (19.8%)
§ Commercial clients (16.4%)
§ Others (3.6%)
§ The industry is in the mature stage of its life cycle.
Over the 10 years to 2019, the industry’s is expected to
grow at an average annual rate of 2.8% vs. project
GDP growth of 2.7%.
Source: IBIS World
Fragmented industry structure
Source: IBIS World * Metropolitan cities
4
• The Mobile Storage Services industry has a low level of market share concentration.
• In 2014, the top four firms in the Mobile Storage Services industry are expected to
account for an estimated 18.4% of the industry’s revenue.
MINI
PODS
Door-to-Door
Founded
# of US states (location)
Fleet size
# of customers
Financials (2014)
Revenues (in $ mn)
Growth %
Operating income (in $ mn)
Operating margin %
1983
28
213,500
80,000
445.5
9.6
99.4
22.3
1998
48
140,000
239mn
632.3
10.5
76.9
12.2
1996
20*
170mn
232.6
4.4
34.6
14.8
Agenda
•
Business description
•
Evaluation of Mobile Mini’s business
•
Scenario embedded in Mobile Mini’s stock price
•
Valuation of Mobile Mini’s stock
•
Investment recommendation
5
Low pricing power and cyclical growth
6
•
MINI operates in a fragmented market with commodity offerings where local mom-and-pop operators
underprice MINI by 10-15% on rent and about 30-40% on delivery charges. (See appendix 1)
•
MINI has increased prices by 14% in last six quarters. The net effect is decline in total units on rent by
0.2% despite high utilization of 72.8% in Q4 2014 vs. 68.8% in Q3 2013.
•
With cost cutting pressure in retail and in oil and gas, Mini’s pricing strategy is benefiting competition.
•
During the recession, the slowing US economy and depressed real estate markets hit the Mobile Storage
Services industry particularly hard. Industry revenue contracted steeply in 2009 as a result, falling 11.1%.
•
MINI’s revenue has significant exposure (88%) to construction, retail, and industrial and commercial markets,
which are cyclical in nature.
•
US economy is facing mid-cycle expansion which is benefiting construction and limited consumer spending
with potential slowdown in activity in late phase.
•
Following a nine-month stretch of positive billings in 2014, the Architecture Billings Index (ABI) reflects
positive growth in commercial construction for approximate next nine to twelve months.
•
MINI is a capital intensive business with significant book value reflected in fleet and goodwill
•
With high fixed cost structure, cyclical nature of business, and high competitive intensity, MINI’s ROCE has
fluctuated significantly from 3.9% to 6.6%.
•
MINI’s high fixed cost structure and CAPEX intensity is also visible from declining incremental operating
margin since last three years (27.2% in 2012, 22.7% in 2013, and -14.2% in 2014), resulting from investing in
fleet through acquisitions, rollups, and maintenance.
•
MINI’s suppliers are shipping and container companies reselling containers in aftermarket
•
Container industry has been facing several more years of oversupply, warned Maersk’s CEO Andersen in
mid-2014. Alphaliner, is reported as stating global carriers are due delivery of 1.8m TEU of capacity, which is
an 8% growth in supply. This far outstrips the reported 6.7% forecasted growth in 2015.
•
High supply of containers can cascade in aftermarket supply, which can affect leasing rates in an already
fragmented industry.
Pricing power
Performance
across cycles
CAPEX
intensity
Competition
intensity
Misleading unit economics and questionable growth
7
•
Sellside and management often quote MINI’s portable storage container’s highly profitable economics
and payback period of three years, which ignores utilization rate. Based on average utilization rate
(2009-14) of 63.5%, MINI’s average payback period for a container is about 4.5 years.
•
MINI does not highlight unit economics of other assets in its fleet. MINI does not provide sufficient
disclosure on other assets to calcualte unit economics of these assets, despite the fact that offices alone
comprise 42% of value of gross book value of MINI’s fleet (includes assets from ETS acquisition).
•
Based on an assumption of 60% of utilization and $1,000/month for wooden offices and $350/month
(charged by comp) for steel offices with $29,000 cost for wooden office and $14,000 for steel offices,
payback period for MINI’s wooden offices is about 4.2 years and about 5.6 years for steel offices.
•
In fact unit economics for MINI’s manufacturing plant and wooden office have been so bad that MINI
stopped buying wooden offices and shut down its manufacturing plant that made steel offices. Renting
these higher priced units make their overall yield look more attractive but have worse unit economics.
•
MINI’s growth has been fueled by rolling up competitors. MINI spends about $8-10mn per year to
acquire small operators at 5-6x EBITDA. In absence of sufficient disclosures, it is hard to determine, how
these roll-ups are working for MINI.
•
ETS’ acquisition (similar to MSG) is at the top of market where investors are still paying companies to
grow at the expense of making money or generating cash. With ETS, MINI decided to expand outside of
its traditional steel storage container business.
•
MINI paid $405 million in cash, or 9x EBITDA, by more than doubling the size of its secured debt load.
The transaction put the $200 million in unsecured bonds below more than $700 million in secured debt
and increased the company’s total leverage ratio to 4.5x.
•
ETS’ business produces significantly less operating margin (17.1%) and free cash flow than MINI’s
(23.2% in 2014; see appendix 2) legacy steel container business. Further, the recent decline in energy
prices could impact the newly acquired business significantly.
Unit economics
and asset profile
Growth through
roll-up and
acquisitions
Doubts on ETS’ acquisition and MINI’s fleet quality
8
•
MINI allocated about 64% ($264mn; see appendix 2) to goodwill for ETS transaction. With
relatively lower operating performance, macro overhang from oil and gas, and integration
difficulties because of unrelated businesses, MINI may have to write down ETS’ goodwill.
•
ETS’ adjusted payback period is at high range (4.2 to 5.6 years; see appendix 3) compared
to MINI’s fleet. Assuming MINI spends another $1,500 to refurbish ETS’ fleet, payback
period will increase by another four months to one year, which would further dilute ETS’
economics.
ETS acquisition
analysis
•
MINI’s sale transactions from fleet shows that majority of units sold are held less than 5
years (see appendix 4), their average cost per units is $2,411. However, average cost of a
refurbished unit is about $3,500 ($2000 for container plus $1,500 for refurbishment).
•
Either MINI is cherry picking units which they bought cheap or there is a high blend of non-
refurbished units.
•
MINI has aggressive assumption of 30 years of life of storage container and 55% of residual
value for calculation of depreciation. MINI’s competition follows 20-25 years of life with
50-63% of residual value for similar assets.
•
McGrath Rentcorp follows 25 years, 62.5% residual value
•
Algeco Scotsman Global S.à r.l.: 20 years with a residual value of 50%
•
General Financial Corporation: 5 to 20 years with a residual value of up to 70%
•
Shipping and container-lease companies depreciate containers for 13-15 years with 50% of
residual value. Usually, mobile storage containers have 25-30% higher life compared to
shipping containers.
•
Since MINI uses 30 years of life compared to industry standard of 20 years, MINI’s
earnings and remaining age of fleet are inflated by lower depreciation. Some Glassdoor
reviews also mentioned aged inventory. Link: http://bit.ly/1wdwCJY
MINI’s fleet
assessment
Other concerns: Poor disclosures and uncertainty about strategy
9
•
MINI has been sharing less information and disclosure than before. Despite a demand for
more transparency from Shamrock Activist Value Fund, MINI has been sharing less
information on assets and leases.
•
For example, MINI’s 2014 10-K lacks information on representative sale prices from fleet which was
last available in 10-K of 2013.
•
Missing information on refurbishment cost per unit by year of purchase, which was last seen in 2009.
•
Missing information on composition and utilization of containers, wooden and steel offices.
•
MINI started increasing price from last six quarters. As MINI’s portable storage fleet has 31
months of lease, a significant part of customers are still on old rates. With increasing cost
pressure in retail, MINI might face higher churn from upcoming leases.
•
Based on Glassdoor reviews and feedback from competition, MINI’s new sales and pricing
strategy have led to high turnover among branch employees for the benefit of competition.
•
Competition in Los Angeles and the Bay Area market confirmed that they are having more
handshakes with customers each week because of MINI’s change in pricing and sales strategy.
•
MINI’s pricing increase is largely cost driven as MINI faces high fixed cost structure
compared to small operators as MINI’s EBITDA margin has declined steadily since peaking in
2009 at 42% and came came in at only 29% in 2014.
•
Although investor’s applauded change in MINI’s CEO by significant change in stock price
since 2013, Glassdoor’s reviews highlight confusion, high turnover, and lack of processes.
•
Some investors and former employee’s do not approve new management’s action.
•
For example, Intrepid Fund highlighted in its commentary that they exited a newly established
bond position in MINI for a loss as the management blind-sided them with ETS acquisition.
•
Former Branch Manager and competition of MINI’s also shared investor’s concern about
inferior economics and macro overhang of ETS’ acquisitions.
Disclosure issues
Duration of lease
and rent-roll
Change in sales
and pricing
strategy
Quality of
management
team
Other concerns: Poor returns and quality of book value
10
•
Under the pretext of growth stock, which is questionable, MINI’s return on assets has been
lower than cost of capital, which is a relevant indicator as MINI is asset intensive while
earnings are affected by low depreciation.
•
MINI’s gross book value per container as of Dec 31, 2014 is about $3,890, while a 40ft
container can easily be purchased for $1,700-1,900 on eBay Link:http://ebay.to/1CLRcDp.
•
Competition highlighted that these containers can be purchased for $1,600-1,800 in bulk while
refurbishing a container costs $300-400, which means that MINI’s 40ft container is valued at
$1,900 to $2,200 and 20ft at $1,800 to $2,000 in the market.
•
If a reappraisal were to happen to MINI, it would have to take impairment on its fleet. Given
MINI has a container fleet with a $640mn in gross book value, 20% would cut MINI’s book
value by $128MM and might also breach financial covenants and affirmative covenants.
•
Overall insider ownership of MINI’s stock is about 1.76% of outstanding stock compared to
more than 7% among competition.
Returns lower
than cost of
capital
Book value vs.
aftermarket
prices
Low insider
ownership
Agenda
•
Business description
•
Evaluation of Mobile Mini’s business
•
Scenario embedded in Mobile Mini’s stock price
•
Valuation of Mobile Mini’s stock
•
Investment recommendation
11
Bull case on MINI’s stock
12
•
Sellside shares MINI’s enthusiasm about three years payback period of fleet container,
which does not include utilization rate as explained previously
•
Sellside has been modeling 80% utilization rate for MINI in 2016 and 21% increase in
yield. These assumptions are aggressive as MINI have not had 80% utilization since it
peaked in 2006 and fragmented competition with high supply of containers would not leave
much scope for further price increase.
•
Although the US economy is in mid-expansion, usual growth in MINI’s target segments is
about 6-7% in next two years while these were projected to grow more than 8% in previous
boom cycle. Moreover, MINI’s revenue grew by 19% five year CAGR before Dec 2006 vs
3.5 in Dec 2014.
•
Management believe in ultimate potential of 50% EBITDA margin from 28.1% in 2014.
These projections are also aggressive. With constant roll-ups and high fragmentations,
MINI’s SG&A are unlikely to come down by half to increase EBITDA margin by twice.
•
Consensus estimates are valuing MINI at 9-10x forward EBITDA in 2016. MINI’s revenue
growth has been slow considering 9-10x multiples. Based on historical multiple 9-10x
implies about 18% five-year CAGR in EBITDA compared to MINI’s -3% five-year in 2014.
•
Based on consensus estimate of $111mn in FCF in 2015 and terminal growth of 3% after 2025,
MINI’s FCF will have to grow by 10% CAGR till 2025 to justify today’s price of $40.31.
•
Other assumptions are WACC of 8.2% and target debt to value of 30%.
•
MINI’s has grown by EBITDA by 10% CAGR in the entire business cycle starting from 2006.
•
It is unlikely that MINI can maintain consistent growth in a fragmented industry with
oversupply and high cost structure. However, since 10% CAGR is the peak growth rate for
MINI, the present stock price looks fairly valued, if MINI can sustain 10% growth in FCFs.
Assumption
about Unit
economics
Reverse DCF
Bull case on MINI’s stock
13
•
Sellside and investors’ assume that MINI has the ability to pay off their debt through
their high cash flow generation. Despite cash generation, MINI’s growth strategy throw
roll-ups as well as shareholder friendly actions like buyback and dividends have been
increasing debt levels consistently. If MINI’s earnings peak in 1-2 years then MINI can
be vulnerable as it would have expanded rapidly at the top of the cycle using leverage.
•
Most initiation report states that MINI’s fleet of fixed assets does not lose its value as it
grow older. However, constant repair and maintenance expenses each quarter tell a
different story.
•
MINI’s scale and brand recognition help the company charge higher prices compared to
the competition. However, container is a commodity product where a low cost operator
has higher flexibility in the market compared to MINI. MINI’s fixed expenses in
managing yards, salaries, and offices lead to a higher cost structure compared to a small
mom-and-pop shop.
Market
assumptions
Agenda
•
Business description
•
Evaluation of Mobile Mini’s business
•
Scenario embedded in Mobile Mini’s stock price
•
Valuation of Mobile Mini’s stock
•
Investment recommendation
14
Valuation of MINI
15
•
As the US economy is in mid-expansion phase, MINI’s earnings are close to another peak
of a business cycle. Hence, I have projected another four years out to complete a full
business cycle. As MINI is a cyclical stock with high leverage, a valuation based on EV/
EBITDA considers multiple scenarios including normalized assumptions to value MINI.
•
Base case scenario considers normalized Forward EV/EBITDA of 10.7x (also sellside consensus)
based on 2006-2014 period (see appendix 5 for multiples in various phases of business cycle) with a
probability of 60%
•
Best case scenario is based on highest Forward EV/EBITDA of 14.2x in Dec 2014 with a probability
of 20%
•
Worst case scenario includes lowest EV/EBITDA of 7.2x in Dec 2008 with a probability of 20%
•
Since MINI’s EV has high component of leverage, a replacement value analysis will help in
understanding MINI’s investment attractiveness from the point of a strategic acquirer.
•
As a final check, analysis of MINI’s stock price based on normalized earnings will help in
ascertaining relevancy of other analysis.
Assumptions
Relevant
methods and
multiples
Valuation based on EV/EBITDA
16
Valuation based on replacement value and normalized earnings
17
•
Based on market rates, MINI’s entire asset base can be replicated for $1.3bn while
MINI’s EV is $2.6bn. MINI’s replacement value raises the question whether one would
pay 200% of liquidation value for an, at best, 4% return on asset business.
•
Importantly for the downside case, MINI’s leverage creates a situation where high
enterprise value and relatively smaller market capitalization (about 70% of EV) can
affect equity owners, in case of macro or company-specific events.
•
Given high expectations for 50% of EBITDA margin, MINI is trading at 17x EBITDA,
which is hugely expensive for a commodity business at mid cycle earnings, considering
the low returns and the leverage.
•
MINI’s average revenue for last six years is about $387mn and operating income is about
$94mn, with an average operating margin of 24.2%.
•
To estimate MINI’s cost of equity, I used a bottom up beta (estimated from the packaging
and container industry) of 0.95. Using the treasury bond rate of 2.17% as the risk free rate
and an equity risk premium of 5.7%, I computed a cost of equity of 7.6%.
•
Since MINI has high leverage, I used management’s guidance of 4x EBITDA for debt
portion. MINI’s existing rating of B2 has pre-tax cost of debt as 7.7% and tax of 39.4%.
•
MINI’s existing market capitalization is about $1.8bn and its debt based on 4x 2015
EBITDA is about $790mn. MINI’s cost of capital is about 6.72%.
•
Applying MINI’s normalized operating margin to 2018 revenues gives $158.6mn, an
estimate that captures both the larger scale of the firm today and its performance over the
years. Since MINI is a mature industry, I assumed 3% growth rate to arrive at 44% stable
period reinvestment rate. These assumptions returned MINI’s value as $15/share.
Replacement
value
Normalized
earnings
valuation
Agenda
•
Business description
•
Evaluation of Mobile Mini’s business
•
Scenario embedded in Mobile Mini’s stock price
•
Valuation of Mobile Mini’s stock
•
Investment recommendation
18
Investment recommendation
19
•
MINI’s unit economics is misleading on portable storage fleet while they do not disclose
information about other assets in the fleet, which might have much worse economics.
Also, standalone economics of MINI’s ETS acquisition seems to be worse than MINI’s.
•
MINI has levered itself immensely to roll-up competition to grow while paying
significant premium (as witnessed by goodwill) and then spending significant money on
refurbishing used ocean going containers. MINI’s business is extremely capital and asset
intensive, which highlights return on assets as the best measure. MINI’s ROA does not
even earn MINI’s cost of capital.
•
MINI’s earnings are not a good measure as MINI’s depreciation schedule is next to
nothing.
•
Based on multiple methods, MINI’s stock price target ranges from $28-$15, showing
about 30-60% decline from existing level.
•
In the best case scenario, MINI’s stock can reach $44, if MINI can grown its EBITDA by
15% each year, which is a highly unlikely scenario.
•
Upside/Downside ratio for MINI does not justify investing in the stock as on the upside
MINI can capture 11% of gain while can lose 90% of value on the downside.
Sell
recommendation
Investment recommendation: Catalyst and risks
20
•
Rent-rolls leading to higher churn within MINI’s existing customers.
•
Change in interest rates can lead to higher cost of debt for floating rate portion of MINI’s
debt. MINI’s acquisition strategy will also lose attraction as assets might not have great
unit economics without cheap leverage.
•
MINI’s asset appraisal can create problem with the lender as the fleet comes in below
value due to reduced valuations on fleet. Goodwill impairment decreases their book
value. Negative covenants prevent them from needed capital expenditures. Given MINI’s
tangible book value is only 40% of MINI’s book value, any impairment in goodwill or
revaluation of MINI’s fleet should have a significant impact on their stock price.
•
Management’s 50% EBITDA margin never materializes as high competition, ageing
fleet, and worse units economics of higher price units put a drag on MINI’s EBITDA.
•
ETS acquisition ends up forcing MINI to write-off goodwill because of unrelated sector
exposure and macro overhang.
Catalyst
•
MINI can be an acquisition target. However, with 4% earnings yield, the economics for a
strategic or PE buyer does not look lucrative. Moreover, there are very few companies in
package and container industry who have the size to acquire MINI.
•
Management can keep paying high dividend to attract investors. However, as MINI is
CAPEX intensive, continuing high dividend can not be a sustainable strategy , especially
with high leverage.
•
Involvement of an activist investor can bring in a new set of investor which can keep the
momentum going for some time.
Risks
Appendix 1: Price comparison of mobile storage providers
21
Appendix 2: ETS Income Statement and Transaction Information
22
Appendix 3: ETS Fleet Economics
23
Appendix 4: Sale prices from MINI’s fleet
24
Appendix 5: Forward EBITDA/PE vs. ROIC
25
1) Missing expectations on EBITDA
2) Asset reappraisal and potential write-offs of goodwill from new acquisition
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