We believe that the shares and warrants of NRC Group (NRCG and NRCG.WS) could increase 80%+ and 5-fold, respectively, over the next 6-12 months (or sooner). To accomplish this, we expect nothing heroic: merely that the company, which has exceptional revenue visibility, achieves its well-defined targets for the remainder of 2018 and 2019, and that its enormous multiple disparity with peers closes. Given our view that guidance is conservative and will be raised, we expect dramatic multiple expansion, particularly since the company is growing faster than its emergency services/waste management peers.
NRC Group recently became public via a SPAC with Hennessy Capital Acquisition Corp 3, and thus is on relatively few investors’ radar screens. We believe it shares many attributes with Hennessy’s first SPAC, which is now BlueBird, one of the 3 largest school bus companies, and one of the best performing SPACs of the last 3 ½ years, with shares up 80%, although down from their recent highs. As a newly minted SPAC, NRC became public at a discount to comps. However, recent non-fundamental trading (related to de-SPACing, and not broader market turmoil) has caused shares and, especially warrants, to trade lower – creating an especially compelling, and we think, short-lived, opportunity to buy a finite quantity of shares and warrants at a deep-discount to fair value. We think near-term catalysts, beginning with 3Q earnings, will quickly move shares higher.
We believe NRC is an extremely attractive company, with
· high moats/barriers to entry,
· exceptional customer diversity and retention,
· significant incremental margins,
· low capital intensity,
· solutions that solve challenges that are likely to intensify going forward,
· many acquisition targets available at multiples well below public valuations (and a history of successful integration),
· significant insider ownership,
· guidance that will almost certainly prove too low,
· accelerating revenue and EBITDA growth in 2019 and likely 2020 – well above that of peers,
· NOLs, acquisition expenses, SPAC expense, and other tax shields, that should result in no cash taxes through 2020 if not 2021,
· largely non-discretionary well-diversified, customer-spend, with limited impact from macro events,
· optionality if a disaster strikes – creates potential upside (i.e. Hurricane Michael),
· meaningfully discounted valuation versus slower growth peers.
(As an aside, during our due diligence, we spoke with the management of the SPAC sponsor and NRC’s management, including its M&A team. We also spoke to most of the Board to get a sense of capital allocation priorities and views on warrants. We also spoke with several sell-side analysts to get perspective on the industry and company – we’re optimistic some of these analysts will pick up coverage).
NRC’s full investor presentation can be found here.
We will briefly discuss:
1. NRC’s 3 business segments.
2. Why the EBITDA bridge is too low, and numbers are going higher.
3. The rationale for going public via SPAC and insider alignment.
4. Blue Bird as a case study for short-term SPAC trading dislocation.
5. Valuation/comps
1. NRC’s 3 business segments.
NRC has 3 segments, Standby Services, Environmental Services, and Waste Disposal Services.
Source: NRC Group October 2018 Investor Presentation, Pg. 10
Each of these businesses has a high degree of regulation and licensing, creating high barriers to entry.
The company’s Standby Services business is an extremely attractive segment that resulted from government legislation enacted post-Exxon-Valdez (OPA-90) which requires onshore and offshore facilities and vessels carrying oil or a derivative to have a plan for worst case discharge. NRC gets paid for being on standby, with 75% of incremental revenue flowing through to EBITDA. Should there be an accident, NRC does even better, as they get paid for the clean-up and remediation work. Under prior ownership, the company generated over $600 million (versus the $360-$380 million in 2018 estimated revenue) from the Deepwater Horizon disaster. The Standby segment has over 2,000 customers, servicing over 20,000 assets, with 99% customer retention. Over 80% of customers have 5-year+ contracts, and 60% have 10 year+ contracts, resulting in exceptionally high recurring revenue, and revenue visibility. Mexico has recently passed similar regulations, and NRC has won all its bids, although management has guided to a 25% win-rate, which strikes us as unduly conservative. NRC’s one major US competitor, MSRC (a group formed by the industry) is not licensed outside of US territories. Mexico could become a $50 million annual revenue opportunity according to NRC management over the next 5 years. Finally, in speaking with NRC management they noted that they have not raised pricing in over 5 years and acknowledged that there is a room for price increases (a very minor cost to customers) which would fall entirely to the bottom line.
Environmental services entail high frequency, non-discretionary, small ticket suite of recurring services across a broad base (3000+) of customers.
Source: NRC Group October 2018 Investor Presentation, Pg. 39
According to the company, almost 75% of customers repeat from year-to-year, with virtually no customer loss – some customers simply don’t have an incident in a given year. Having built out a national presence via acquisitions, the company is well positioned to increase its national accounts and deepen its relationships in existing accounts. A stricter regulatory environment should also drive growth. NRC has a network of 150 Independent Contractors (“ICNs”) who fill-in when NRC is not adequately equipped for a certain job – or the job is too large. These ICNs are well-known by NRC and are potential acquisition candidates, which provides NRC the benefit of integrating a company they know well, and for which they likely don’t have a competing bid.
The final segment for NRC is Waste Disposal Services which has broad waste disposal capabilities servicing the Texas energy market. Again, this is a highly-regulated segment where spending is largely non-discretionary.
Source: NRC Group October 2018 Investor Presentation, Pg. 40
NRC’s major growth in Waste Disposal through 2020 will be in new landfills. NRC’s first landfill in Karnes is now running near full utilization, generating $15mn in EBITDA versus a build-out cost of $15 million. The company recently received permits ahead of schedule for 2 additional landfills in the Permian Basin, in Reagan County and Coyanosa, which should be up and running in early 2019. These sites were selected in response to customer location demand. A 4th site in Andrews should be permitted in early 2019, ahead of plan, with NRC only guiding to revenue and EBITDA in 2020.
Source: NRC Group October 2018 Investor Presentation, Pg. 41
2. Why the EBITDA bridge is too low, and numbers are going higher.
While our thesis does not rely on numbers going higher, we’re confident that they will. Management provided the EBITDA bridge from 2018 to 2019 shown below: