Description

BV Elevator Pitch

BrightView Holdings, Inc. (“BrightView,” “BV” or the “Company”) is the largest provider of commercial landscaping and snow removal services. Roughly ~75% of LTM revenues and ~80% of pre-corporate LTM EBITDA is generated by the Company’s Maintenance Services segment, which largely consists of recurring, non-discretionary contracted services to corporate campuses and HOAs (85% contract renewal rate in each of the last two fiscal years).

BrightView went public in late June at $22 / share and used all proceeds from the offering for debt paydown. Notably, KKR and MSD (the “Sponsors”) did not sell any shares in the IPO.

Since then, BV is down ~(35%). Most of the decline came in the immediate aftermath of reporting Q3 numbers in early August (the Company’s Fiscal Year Ends 9/30). While the numbers were effectively in line with the initiations I have been able to get my hands on, I think the market was surprised by the slight organic decline in the Maintenance Services, which management attributes to deliberate “pruning” of unprofitable contracts that are rolling off (but clearly could’ve been better communicated in the roadshow).

At current levels, which represents an ~12% FCF yield on my FY ‘19 estimates, I believe BV offers ~60% near-to-medium term upside (through spread compression to a 7% NTM FCF yield, which is still higher than nearly all service comps) and a double over the next 3 years (mid 20s IRR) through a combination of (i) debt paydown, (ii) continuing to add route density through accretive acquisitions, (iii) buybacks once the Company achieves its ~3x leverage target, and (iv) multiple expansion (but still well below peers) as the market becomes more comfortable with the durability of BV’s recurring service business model.

BV has the ability to be a long-term compounder via further consolidation of the fragmented commercial landscape space as it uses its scale and density to onboard local maintenance competitors doing 8-10% EBITDA margins onto its platform at ~15% EBITDA margins.

Finally, management is aligned with shareholders and highly incented to get the stock price up as named executive officers have an aggregate ~2.5mm options whose exercise price is equal to the IPO price or ~55% above current levels (the CEO also ~$11mm worth of stock vs an $850k base salary).

Company History

BrightView was formed in 2014 via a merger of the two largest commercial landscape providers, Brickman Group and ValleyCrest Companies. KKR first bought Brickman from the Brickman family and Leonard Green in December ‘13 for $1.6bn and then acquired ValleyCrest in June ‘14 for $900mm from MSD, who rolled a significant portion of their proceeds into the combined entity. BrightView is ~10x the size than the next largest landscaping competitor though still controls just ~3% of the market.

In the first couple of years following the transaction, the Company experienced significant management turnover due to standard friction in merging two large players with different operational approaches (Brickman was more process driven while ValleyCrest was more “entrepreneurial”) coupled with KKR’s ultimately misguided effort to centralize customer-facing sales functions. This centralization lead to increased customer churn and was discontinued in ‘16, returning these functions back to the branch level. At that time, the Company also brought in industry-outsider Andrew Masterman as CEO (previously at Precision Castparts).

The Company operates two segments Maintenance Services and Development Services:

Maintenance Services ($1.8bn of LTM Revenue / $289mm of LTM Mgmt Adj EBITDA):

Maintenance Services is a recurring, B2B services operation where profitability is really a function of route density, which as the proverbial 800 lb gorilla, BrightView has in spades and enables is to earn EBITDA margins that are often ~500 bps higher than the competitors it is acquiring. BrightView’s bread and butter is providing year-round landscaping (lawn mowing, mulching, gardening), irrigation and snow removal largely to corporate clients and HOAs. These services are fairly non-discretionary and sticky (~85% renewal rates). To be clear, BrightView does not participated in the more competitive and higher churn single family residential markets.

BrightView operates ~215 maintenance branches, that are generally concentrated near major metropolitan areas. The average branch does ~$8mm in revenue with ~100 customers across ~250 sites being serviced by 6-12 crews (each crew consists of ~10 FTEs). Outside of large corporate clients (“BrightView Enterprise Solutions”), sales are done at a branch level. In comparison to mom and pop competitors, BrightView can offer its employees a career path and benefits.

Roughly two-thirds of BV branches are “Evergreen” markets (e.g., FL or TX) where year round landscaping is required. While the remainder operate in “Seasonal” markets (e.g., NY or CO), where the Company provides snow removal services during winter months. Snow removal accounts for ~11% of LTM revenue and is somewhat volatile on a year to year basis depending on snowfall. Snow Removal services grew ~30% in FY ‘18 after snowfall hit 87% of its 10 year rolling average (in the markets BV services) vs just 64% in FY ‘17 but is still (20%) below FY ‘15 levels when snowfall was 112% of the 10 year average.

Development Services ($584 of LTM Revenue / $73mm of LTM Mgmt Adj EBITDA):

BrightView operates 22 branches / nurseries that provide project-based landscape architecture and development services for new facilities and large redesigns. Customers in this segment are property developers or general contractors with average revenue per project of ~$1mm. Given the size, jobs are usually bid out and often take several years to complete. Development work often serves as the top of the funnel for future maintenance work but is itself largely tied to commercial or large scale residential construction and is therefore more cyclical. BV often competes in this segment with construction firms so wins based on its horticultural focus.

BrightView’s business is relatively low capital intensity with management forecasting capex to be 2.5-2.7% of revenue allowing the Company to operate at attractive 10%+ EBITDAX margin. Working capital is also modest (<10% of revenue) comprised mostly of AR (management is focused on reducing DSOs from where they currently sit in the low 50s). Together these attributes have enable BrightView to achieve mid 20%s CROICs (Unlevered FCF / NWC + Gross PP&E).

After taking a couple of years to combine the Brickman and ValleyCrest operations, the Company has redoubled its consolidation efforts, spending ~$160mm to acquire~$190mm of annualized revenue since the beginning of FY ‘17. BrightView’s “strong-on-strong” acquisition strategy is based primarily on increasing maintenance density in existing regions which are accretive to both the target and ultimately BrightView’s margins.

Why the Opportunity Exists

1. Broken IPO with limited float and relatively high leverage for a public company

The BV IPO priced at the bottom end of its range ($22 - 25 per share). At the IPO price, the Company traded at ~11x ‘18E Mgmt Adj EBITDA. Given this was solely a primary issuance aimed at debt paydown (reducing leverage by over 1.7x turns), the free float only represents ~27% of shares outstanding (with KKR, MSD and management owning 57%, 13% and 3%, respectively). At current prices, the float only has a capitalization of just ~$400mm, which is tough for many larger institutions to get excited about.

Despite the significant debt paydown, BrightView is still ~4x levered on the Mgmt Adj EBITDA or 4.4x on my numbers (which exclude the SBC, Severance and IT Infrastructure addbacks) making it effectively a public LBO during a period of rising rates. In August, BrightView refinanced its $1.0bn TL at L+2.5% getting a 50 bp reduction in rate and extending maturity until August ‘25. While 3 month LIBOR has increased only ~10 bps since the IPO (vs a ~40 bp increase in the 10 yr TSY yield), BrightView is exposed to a rising rate environment (though I would expect they swap some portion of their floating exposure under the new TL as they did previously).

In addition, the Company stumbled a bit out of the gate reporting a messy Q3 that while seemingly in-line on a revenue and EBITDA perspective, highlighted some organic choppiness in the business that were perhaps not well-communicated during the roadshow process. In particular, the Company reported a (0.7%) YoY organic revenue decline in Maintenance Services. Management attributed this to deliberate “pruning” of unprofitably contracts that it views as “addition by subtraction.” However, management noted that it expects the negative impact to continue over the next few quarters, which will likely make organic growth within Maintenance Green more difficult in FY ‘19 (vs Street estimates of 1-2% growth). That being said, it seems like an overreaction that a ~$5mm EBITDA impact should justify to a ~23% decline in TEV that BV has experienced since reporting Q3. The Company also did not give forward guidance, which perhaps disappointed some.

2. Lack of a perfect public comp and misperception that landscaping must be tied to housing

I believe BV has been a victim of the broader building materials / housing sell off over the last couple of months and an unfair association with SITE in part because it lacks a true public comp. Despite being a “landscape supplier,” I believe SITE is an inappropriate proxy for BV since >50% of SITE’s revenue is derived from residential construction. BV does not participate in this segment and thus I believe, should be compared to other recurring B2B service providers.

While BV is not in the same business quality category as a ROL or SERV, nor does it posses the organic growth runway of an FSV (see aaron16’s excellent write up), I do think it deserves to trade at a such a significant discount to the more capital intensive ARMK or UNF. The only comp that trades anywhere near BV, is ABM (the janitorial services provider) and I believe BV is a vastly superior, higher margin business.

Ultimately, I believe a 7% FCF yield, which would equate to ~11.3x EBITDA or ~14x EBITDAX is reasonable, if not conservative relative to the comps below.

3. PE overhang

KKR and MSD collectively still own ~70% of BV. Like any PE owner, they will ultimately want and need to exit. That being said, I think a secondary offering is highly unlikely anywhere near current levels given the post-IPO trading performance. In light of this, I think the Company (and its Sponsors) is highly incented to get the stock above the IPO levels in order to allow the Sponsors to begin to sell down. The IPO price of $22 / share is ~55% above current levels.

4. Messy financials / limited operating history as an SEC reporter / year-to-year snow variability  

Unlike the comps cited above, by virtue of being a private company (without public bond financials) and one that came together in its current form only four years ago post merger, BrightView has a limited operating history as an SEC reporting entity. Moreover, the limited operating history that the Company does have, include a change in fiscal year end and a number of addbacks. While this is certainly not uncommon for PE-controlled IPOs, I believe it has created a barrier to entry from some institutional investors (coupled with the size). I think this is correctable over time (see ARMK, where investors seem to have no problem giving them credit for an egregious amount of addbacks).

This issue has been compounded by the variability in the Maintenance segment due to year-to- year variances in snow fall. All things being equal, I have no problem assigning a slightly lower multiple to a business subject to phenomena relative to those that do not but highlight MTN as an example of a business subject to exactly the same factors where the market seems to have gotten comfortable with variability due to snowfall.

Note: I do not give the Company credit for all of the addbacks in its Covenant EBITDA as I exclude the stock-based comp, severance and IT infrastructure addbacks.

5. Labor exposure / visa concerns

BrightView has ~19k employees and labor accounts for ~40% of COGS. Management noted on the Q3 call that it has been experiencing “5-6% wage inflation over the last few years.” The Company has largely been able to offset this via pricing (1.75 - 2% over the same period) and it is noteworthy that YTD Q3 Maintenance EBITDA margins have increased 100 bps despite wage pressure.

In 2017, ~1,600 BV employees made use of the H-2B visa program, which has become an increasingly politically sensitive topic in the Trump administration and has posed problems for the landscaping industry. Management noted that this has contributed to a “10-12 employee shortfall” per branch. That being said, I understand the BV has less exposure to this issue than other landscapers (less than 10% of BV employees come via the program). While the Company has been thus far able to pass through wage-related price increases, this nonetheless represents a risk that I believe the market has been focused on.

Model Summary and Returns

I think the model / its assumptions should be able to stand on their own but there was just a couple of things I wanted to highlight:

• I assume $40mm of annual acquisition spend over the next three years. In a given year, I assume that $40mm of spend generates $48mm of revenue at 9% margins initially, improving to 15% in year 2 (e.g., FY ‘19 acquisitions generates $7.2mm of FY ‘20 EBITDA). This implies a ~5.6x buyer’s multiple in-line with the 5-6x historical norm

• For FY ‘19, I assume 5% snow revenue growth to approach something close the 10 year average snowfall and then 1% pricing growth from there. While I think in reality, there will be much more variability than this, I think the assumption of the historical average for any given year is fair

• After the Company achieves its 3x targeted leverage ratio, I assume that free cash flow not used for acquisitions is used for buybacks (hence the decline in share count beginning in FY ‘20)

Risks

1. Leverage

As discussed, BV is ~4x levered on its Covenant EBITDA and ~4.4x levered on my numbers. Management is focused on reducing this to ~3x in the next “12-18 months,” which I believe to be more than manageable for a company with these sort of cash flow characteristics. Additionally, with the recent refinancing, the Company does not have any material maturities (outside of the $150mm Receivables Financing Facility) until 2023. Nonetheless, I acknowledge the Company’s leverage is a risk.

2. Development cyclicality

The Development segment, which represents ~20% of pre-corporate EBITDA, is tied to new commercial construction. That being said, there is typically a lag between when a development project is signed and when the Company recognizes the final revenues associated with it. As such, it should help cushion the pace of decline if a recession were to hit (but would be slower to recover coming out of a recession).

3. Wage inflation / shortage of low skill labor

Discussed above

4. Sponsors dump their positions

Given their 70% stake, should the Sponsors exit at current levels or haphazardly, it would almost certainly create a negative technical for the stock. That being said, I view this as relatively low likelihood given the experience and savvy of the Sponsors involved.

Catalyst

1. FY ‘19 Guidance (particularly FCF guidance, which should highlight the current cheapness)

2. 10k / Lapping messy financials

3. Continued accretive M&A / deleveraging