Description

Securitas is a global provider of monitoring and security solutions listed in Stockholm with a market cap of $5.3bn US.  Company is second largest security services provider (Allied Universal private is the largest).  Company provides specialised guarding and mobile services, monitoring, consulting, and investigative services to a diverse customer base – guarding services is ~75% of revenue while solutions business is ~22% of business. Customer base is concentrated in North America (43% of rev) and Europe (43%) and include governments, airports, logistics offices, banks, shopping centers, hotels, manufacturing & mining, industrials, hospitals, residential sites, and high-tech & IT firms.

History of the company starts in the 1930s as a local securities firm which grew over time via acquisitions.  The company embarked on a transformational acquisition in 2022, largest in its history,  where it acquired Stanley for $3.2bn or 13x EBITDA (inclusive $50MM in synergies).  Stanley at that point was the third largest global electronic securities firm with 7,800 security professionals and >500,000 customers.  The strategic rationale for acquisition was to increase security solutions and electronic security (higher margin and higher growth) to around 1/3 of overall group revenue (at that point, ~20% of revenues was solutions).  Rationale can be seen in the following graphic from their investor day ppt from 2022 (next investor day will be in March), the goal is to increase exposure to the solutions and technology segments which bring higher growth and margin businesses.  

And the ultimate goal is to bring up overall growth of the company and bring margins up to the 8-10% range.

While rationale maade sense, the issue was that they paid a full price for the company and also resulted in leverage rising to 3.5x net debt/ebitda compared to group target of 2.5x.  Given the full price + leverage, market did not like the deal and share price dropped from 120 SEK/s in 2021 to 70 SEK/s in summer of 2022.   The market is also skeptical on the group's path towards 2025 targets or the ability of sustained cash improvements.  

Looking at company performance, company announced revenue growth of 8% YoY in last earnings release and brought margins up to 6.8%, a 30bp increase YoY despite revenues growing at a slower pace (due to some dispositations - sold non-core assets in Argentina which were low margin in nature).  Operating leverage also accrued to the business where acquisition and business mix is bearing fruits - technology and solutions businesses generated 1/3 of revenue and > 50% of operating profit; mgt expects this segment to growth in the 8-10% range outpacing the lower margin guarding business; thus benefitting margins. Looking at operating margins by geography, there was expansion across all 3 geographical segments.

The change in business mix toward a higher share of higher-margin technology and solutions sales is a key driver of margin expansion.  Technology and solutions businesses generates ~1/3 of group revenue but >50% of the group’s operating profit. Over the next few years, Securitas expects its technology and solutions sales to deliver organic growth in the 8-10% range, significantly outpacing its lower-margin guarding businesses.  You can see the impact of this at each of the segment levels where operating margins have gone up on a sequential basis - company attributes the margin improvement to contribution from the tech and solutions business:

Here's the US segment:

Here's the Europe segment:

And here's LatAm:

On the debt overhand issue where it is at 3.1x net debt  - this is where we have the biggest differentiated view than the market and where we think mkt allows us to buy this business at a discount.  As the company continues its integration of Stanley and "non-recurring" costs start fading, we believe that this issue will become less of a concern. We expect non-recurring costs to drop significantly in 2024; our estimate is that this will drop by > 50% from from > 1.3bn to ~500mn.  You can see a hint of this based on their last quarterly results - cash generation tends to be strong in Q4 due to seasonal variations.  As you can see, FY 2023 FCF improved to 4.9bn from 3.4bn SEK.  If we are right on the operating margins trajectory in 2024, cash flow generation will be stronger in 2024 than 2023, and as a result, the balance sheet deleveraging will be much higher than market expectiations. As such, while still maintaining its dividend policy, we see the company delevering the balance sheet below 3x by end 2025.  

Stock is currently trading at 98 SEK/s and trades at 8.7x consensus 2025 EPS. Prior to the acquisition, given the defensible nature of the business, company traded at an average of 13x (peak of 18x and low of 7x).  Using average of 13x against 12 SEK results in 50%+ upside from today, and that’s using very conservative margin expectations. 

Catalyst

Margin expansion driven by mix shift towards tech and solutions segment w/ balance deleveraging