October 30, 2016 - 6:39pm EST by
2016 2017
Price: 121.80 EPS 0 0
Shares Out. (in M): 22 P/E 0 0
Market Cap (in $M): 2,470 P/FCF 0 0
Net Debt (in $M): -370 EBIT 0 0
TEV ($): 2,100 TEV/EBIT 0 0

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Upside / (Downside): +145% / -5%

Variance to Estimates: +10% vs Street EBITDA; +3% vs Street Revenue

Event Path:  Near term organic growth acceleration and quarterly EPS beats with near & medium term industry consolidation opportunities


Key risks:  Economic recession / weakening employment environment (which can be hedged and UNF shares should outperform in that scenario)



Business Description: UNF is a uniform rental company. This is a high quality, stable/recurring revenue and cash flow business as demonstrated by:

  1. low 90% client retention rate with 4-5 year average client contract durations,

  1. flat organic growth in the depths of the “Great Recession”, and

  1. ~20% return on invested capital



Thesis: UNF trades at a steep discount to peers: 7.75x EV / EBITDA vs pure-play peers CTAS 12x and G&K 11.25x. There are three reasons for this discount and several catalysts to drive significant upside to the current stock price:
  1. Organic growth ~1% has been lower than peers 2-5% due to the company’s relatively higher exposure to uniform wearers in the North America energy patch. In 2014, energy uniforms represented ~8% of revenue vs today ~3% (~2-3% drag to organic revenue). Underlying organic growth excluding energy is 3.5%. With the recent inflection in U.S. rig count (+42% above the May 2016 lows and -68% below 2014 peak), standalone organic revenue will accelerate to 4.5% in 2H17 as the company laps the easy energy compares.

    1. Recent industry consolidation will drive upside to this 4.5% growth rate

      1. CTAS just announced the acquisition of G&K for 13.25x EBITDA. CTAS has self-reported that it expects G&K to lose 5-10% of revenue immediately due to execution disruption during the transaction process. Assuming UNF’s market share, this G&K revenue churn represents an incremental +1-3% of growth for UNF for a combined +5.5-7.5% organic growth rate.

  1. With 15% of the market capitalization in net cash on the balance sheet and zero debt, UNF’s capital structure is inefficient. Capital returns are effectively zero, however, the resilient operating cash flows and growing cash war chest provide downside protection and a platform for near-term industry consolidation.

    1. UNF just acquired Arrow which will contribute $65mm of revenue

    1. Due to anti-trust, CTAS might have to shed up to $300MM of revenue to close the G&K transaction (per the publicly filed merger documents)

    1. ARMK is undergoing a portfolio restructuring and may spin it’s $1.6Bn revenue Uniform segment

    1. Private roll up opportunity. Public players represent 46% of the market with a fragmented tail. CTAS/G&K (30% combined market share), UNF & ARMK each with 8%. Given the size of CTAS/G&K (inability to acquire due to anti-trust) and ARMK’s lack of focus in uniform (viewed as non-core), UNF is uniquely positioned consolidate the industry.

  1. Class B shares control 76% of the shareholder voting rights. Despite this dynamic, the CEO (a member of the Class B family), has demonstrated himself as a best-in-class operator as evidenced by this business’s resilience during the recession and ~20% returns on invested capital (so Class A holders are in good hands). There are two points also worth considering:

    1. The CEO is 72 years old and his successor may have a different capital allocation/return approach

    1. 40% of the Class B shares (~10% of total share count) are held by individuals that have no affiliation with the business and want liquidity. To the extent these individuals convert to Class A and sell, the CEO may decide to initiate a buyback to offset the Class B voting dilution




Illustrative Consolidation Opportunity: UNF & ARMK (Uniform segment) Merger of Equals



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Near term organic growth acceleration and quarterly EPS beats with near & medium term industry consolidation opportunities

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