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Thesis:  good/underappreciated business; industry consolidator who has taken market share from mid-teens to ~40%; mgmt has guided a forward FCF yield of ~9% for 2019 and ~12% on a guided 2019 run rate basis; should help the company quickly de-lever to target of less than 4x Adjusted EBITDA; I believe there are several levers to pull to continue both organic and inorganic growth; CEO and several board members made open market purchases in March 2019; I believe the controlling shareholder is aligned with a solid management team

Business:

·      Specialty rental company, provides portable temporary modular space and storage solutions (offices, workspaces, classrooms, etc.) to variety of construction/commercial/industrial/other users (company has very good disclosure and presentation decks on its IR site that shows/describes the product, end markets, etc.)

·      Owns, delivers, installs and leases its units (both unfurnished or furnished); has fleet of 160K units and 50K customers served out of ~120 branches, is 100% North American business of which >90% is in the US; average unit is on rent for 30 months; standard initial lease terms are for 11 months for modular space units (6 months for portable storage units) and then typically continue month-to-month

·      Good revenue visibility on rental fleet over a very diverse end customer base; units typically last 20-plus years, unit economics are good with quick payback and ~20-25% IRRs (higher when rented furnished as discussed below); units are necessary for customer’s businesses but typically represent a very small portion of their project cost; what matters most to customers is having portfolio of the right fleet available at the right time, gives WSC a scale and density advantage with a large branch network and salesforce (cost to ship/deliver the units is high so local availability is key); furthermore, once a unit is on site, switching out mid-job is disruptive and expensive creating price power upon renewal (I estimate that the cost to have an existing unit removed and a new one delivered/installed would be several multiples of a customer’s average rent cost of $500-$600/month)

Background:  

·      Convoluted start as legacy WSC was public and then LBO-ed by private equity firm TDR Capital, LLP (“TDR”) who combined legacy WSC with its European competitor Algeco in an effort to form a global business; this didn’t work as is really a more local business so limited synergy; TDR then formed a SPAC and importantly contributed additional fresh capital to buy back the North American WSC business in 11/2017 for ~$1.1B (9.0x trailing, 7.9x forward Adjusted EBITDA at the time) which was how the current WSC platform was created and got public

·      Several deals followed:  bought smaller independent Tyson OnSite (“Tyson”) in January 2018, value not disclosed; bought regional player Acton Mobile (“Acton”) in April 2018 for $235M, management has described these deals as very accretive/easy to integrate as is largely branch and fleet consolidation, regional infill and headcount reduction; I estimate that these deals were done at less than 6x pro forma synergy Adjusted EBITDA based on mgmt disclosure and the multiple paid for larger comp ModSpace discussed below

·      Biggest deal was in August 2018, bought Modular Space Holdings (“ModSpace”) for $1.1B, deal was 10.4x Adjusted EBITDA, and after synergies + NPV of NOL, WSC paid an estimated 6.6x Adjusted EBITDA; notably, ModSpace and Williams Scotsman International, Inc. attempted an announced $1.75B merger in 2016 that fell through, ModSpace was highly levered and subsequently went through a prepack bankruptcy; ModSpace was less well managed, had overbuilt supply and correspondingly was known to be aggressive on price/lease rates; the ModSpace deal was very accretive to WSC, 80% of the synergies are expected to be in place by end of 2019 and are again largely related to taking what was 186 combined branches down to ~120

·      Company has large NOLs >$900M plus ongoing benefits from accelerated depreciation and therefore pays little/no cash tax; mgmt expects this to be the case for the next 5-7 yrs

Strategy/Levers to Grow Earnings:

·      Price:  I believe the company’s ability to get favorable pricing will be even better with ~40% share; furthermore, ModSpace, Acton and Tyson did not have the same dynamic pricing tools, and the avg monthly rent for similar units in their fleets was below WSC (should benefit as these come up for renewal and roll to market); base case estimates below assume low single digit “Average Monthly Rent” growth

·      Volume:  the fleet is only operating at approximately ~75% capacity utilization in the United States, this is due to some excess supply at WSC but more so from ModSpace; prior peak CapU was 82% and the practical max is 85% as are some units always in transit/refurb or in the wrong geographies; in addition, as the largest buyer, WSC should have a good feel for what is in the pipeline in terms of supply; base case numbers assume flat/slightly up “Units on Rent” count, view volume as optionality upside

·      VAPS:  this is industry terminology for “Value Added Products” which in this business just means leasing a unit furnished with furniture, appliances, Wifi, ramps, TVs, etc.; this sounds easy but it hasn’t been a focus until recent years, comes with substantial incremental margins (management estimates the IRR on unit goes from ~20% to ~25% if VAPS included), and makes sense as a customer more likely than not would prefer to take the units “Ready to Work” rather than having to go buy/set up all this stuff themselves; furthermore, ModSpace and Acton were less focused and thus 2-3x underpenetrated in VAPS vs. WSC; using mgmt’s estimates which simply assume that the over the next 3 years, on the same fleet/same CapU/same penetration, that if the VAPS/unit/month (as the fleet rolls/releases) converges to the level currently charged to new customers, this alone would represent ~$140M revs

·      Synergies:  2019 should benefit from the realization of 80% of the $70M announced synergies by 4Q run rate with the remainder in 2020; these numbers are largely branch and HQ related and do not include future opportunities like sourcing, procurement, logistics, better refurb, better install/delivery, etc.

·      M&A:  should be more deals to do, any competing bidder likely smaller and/or private equity backed and would be hard to compete with WSC given scale/synergy opportunity; there are many smaller fragmented independents like Tyson and there are 7 larger regionals like Acton left (2 are divisions of public companies McGrath and General Finance and the other 5 are private); de-levering and a higher stock price should make larger deals more likely/doable

·      Refi high cost debt:  approximately $800M of high cost bonds to refi, the 7 7/8% Secured Notes ’22 and the 10% Unsecured Notes ’23 are both callable this year

Summary:

·      Company expects to have almost tripled Adjusted EBITDA (2019E vs. 2017) via good management and smart deals and stock was starting to reflect this value creation but got caught up in the 4Q18 selloff and has not fully recovered despite continued good numbers

·      Guidance this year should be achievable driven by (i) already in process rental pricing growth, (ii) VAPS mix and (iii) ModSpace synergies; author base case estimates for 2020 and 2021 only assume the remaining synergy realization + moderate future lease renewal price increases + continued VAPS penetration; better pricing/penetration (more in line with recent reported performance), higher CapU, more M&A and cheaper debt refinancing are all upside optionality

·      As shown in summary below, the stock trades around 9.2x 2019 Adjusted EBITDA (8.8x when NOL included) and with an attractive FCF yield; using management’s projected Adjusted EBITDA run rate exiting 2019, it trades around 8.2x Adjusted EBITDA (7.8x incl. NOL); note that what I believe is the most comparable company Mobile Mini (MINI) trades around 10.9x 2019 EBITDA, (it is more of portable container storage player than modular space provider); using base case estimates and assuming the stock just holds the 9x multiple, rolling forward one year stock price target would be >$20 per share and >$24 in two years

Risks:  (i) end markets are diverse but serve some cyclical industries (although energy and natural resources exposure is much lower than in the past at approximately 10%), (ii) levered >5x trailing Adjusted EBITDA and need to get down to less than 4x target, (iii) ROIC on book value still low due to below optimized CapU, (iv) high fixed cost exposure in a downturn, this is partially mitigated by in-place leases (most projects don't stop), shutting down capex, and downsizing the fleet by selling the assets to customers rather than picking up and re-leasing, (v) some leftover warrants from SPAC/deals but I believe the dilution is manageable

Catalysts:  (i) continued price/VAPS realization, (ii) de-lever and/or refi high cost debt, (iii) more accretive M&A, (iv) increased synergy target

Catalyst

Catalysts:  (i) continued price/VAPS realization, (ii) de-lever and/or refi high cost debt, (iii) more accretive M&A, (iv) increased synergy target