Unifirst UNF
November 11, 2017 - 11:38am EST by
2017 2018
Price: 149.80 EPS 5.28 6.42
Shares Out. (in M): 20 P/E 20.7 17.1
Market Cap (in $M): 3,037 P/FCF 20.7 17.1
Net Debt (in $M): -350 EBIT 171 207
TEV (in $M): 2,688 TEV/EBIT 15.7 12.9

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UNF: Transformational oligopoly market structure emerging, new CEO, ~20%+ upside to Consensus FY 2019E EBITDA, 36-58% 1-year share price upside, 54-78% 2-year share price upside, ~100%+ 2-year upside in the event of tax reform and/or deployment of unlevered balance sheet, very low existing hedge fund ownership

Unifirst Corp (“UNF”) is currently the third largest player in the uniform rental industry with over 275,000 customers in 45 States, Canada, and Europe.  UNF operates 225 customer service, distribution, and manufacturing facilities and has leading market positions in 368 of the top 382 MSA in the US and all major markets in Canada.

The uniform rental industry is characterized by “hub and spoke” businesses that reap significant synergies from acquiring adjacent competitor locations through route consolidation.  While for decades the uniform industry has included a number of high quality businesses, three weeks ago, the industry officially became an oligopoly, transforming the industry’s remaining players into truly special, “Buffet-esque” businesses.  

    • August 16, 2016: Cintas Corp (“CTAS”) announces acquisition of G&K Services (“GK”) for $2,201MM (deal closed March 21, 2017).

    • September 19, 2016: UNF announces acquisition Arrow Uniform for $122MM (deal closed same day as announcement).

    • October 16, 2017: Aramark (“ARMK”) announce acquisition of AmeriPride for $1,000MM (deal close expected before end of calendar year 2017).

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Source: UNF Investor Relations Presentation supplemented with Management commentary and our estimates

Pro Forma for ARMK’s announced acquisition of Ameripride, the top 3 players will now control an estimated 90% of the market.  The closet analogy we can find in the public markets today of this favorable market structure is in the processed potato industry, where the top 3 players (Lamb Weston [“LW”], McCain, and Simplot) control a similar industry share to CTAS, ARMK, and UNF pro forma for these recent deals.  However, we believe that the top 3 uniform rental companies are actually higher quality businesses than LW, Simplot, and McCain today since (1) no uniform rental customer represents >1% of revenue for UNF, while LW has large French fry customers like McDonald’s (11% of LW total sales) that exert significant market power, and (2) uniform rental companies enjoy 5-year customer contracts, whereas processed potato customer contracts are generally only 1-3 years in duration.

The sellside appears to understand the oligopolistic pricing power and strong market positions of both CTAS and LW, forecasting continually expanding margins for each company through 2020 and assigning high EBITDA multiple based valuations to each business. Meanwhile, for UNF, not only does the sellside expect no margin expansion, but also analysts have not even bothered to project out to 2020 (fiscal year ending August 31). Of the 6 analysts that cover UNF, only 1 has a buy rating on the name, even though UNF trades at a 3.5-4.5 turn EBITDA multiple discount to both CTAS and LW on FY 2018 numbers.