Description

There is a 4 year old well written write-up with quite a bit of discussion, be sure to check it out.

In this write-up I will try to break down shredding business and commodity component (recycling revs).

RediShred (TSX: KUT.V) is a micro cap trading in Canada. Deriving most of its revenues in US, operating an office paper destruction platform which includes 16 corporate locations and 14 franchise locations serving 21 state.

RediShred is a mobile shredding operator, where the client orders one of RediShred trucks to come to its location, gives over the paper which needs to be destroyed, pays for the service and goes back to a cleaner office. Apart from charging customer fixed fee for the service, RediShred sells destroyed paper for recycling.

On surface company has grown revenues and EBITDA by 35% a year. But lets look at it in more detail.

Shredding revenues are ~80% of total revenues, with 60-65% of Shredding revenues being Scheduled (ca. 50% of total revenues), or in other words, recurring. Scheduled sales have grown at a 15% 5Y CAGR, while unscheduled 6% 5Y CAGR, including acquisitions. On a LfL basis, Same Location Service Revenue has grown at 7%+ despite COVID and office shutdowns.

The company doesn’t provide breakdown of EBIT (except recycling/rest), I had to deduct Shredding EBIT from Royalty fees (assuming they drop down at 100% margin, same as recycling). This implies a range of 2 - 9 % EBIT margin (1Q24 11.3% EBIT margin). Keep in mind this is on a consolidated level.

Corporate Location EBIT stands ca. 20 - 27% margin, and 0 – 11% excluding recycling.

Recycling revenue follows Sorted Office Paper (SOP) market prices which are very volatile, ranging from $92/t to $263/t. One interesting point is that previously Recycling EBIT margin was 95%+, while in 2023 it dropped to 88% and 85% in 1Q24.

There is a significant operating leverage in the company as fixed costs base represents ca. 3/4 of costs. Costs can be divided into Corporate location costs and HQ G&A costs.

Corporate location costs are 70%+fixed (salaries, admin), and 30% variable in a sense, as they relate to shredding vehicle and related expenses.

HQ G&A costs are 80% fixed, with majority being salaries. Currently company is undergoing a new CRM implementation which has increased technology costs, which I expect to decrease post-impelentation by ca. 500 kCAD.

G&A as % of sales has steadily decreased as the company acquires and increases revenues, working its operating leverage.

Company has set a target of reaching 9 MCAD of Free Cash Flow in 2024, which excludes lease liability repayments. In my view they are OPEX as required to operate the business, and I exclude them from Organic FCF calcs.

Organic free cash flow includes lease repayments.

Balance sheet is moderately levered, at ca. 2x, 2.1x including earn-out liabilities on BS.

Acquisitions, CAPEX & Returns

Since 2018 company has acquired 15 targets, of which 6 were franchisees and rest independents for a total EV of 83 MCAD. Company selectively discloses data on acquisitions, but recent Security Shredding acquisition was done at 3.9x EV/EBITDA and Safeguard Document Destruction at 4.4x EV/EBITDA.

List of acquisitions

Company itself has commented that typical acquisition is done at 5 - 6x EBITDA for franchisee and up to 4x for smaller independent.

CAPEX has averaged around 10% of revenues and has been stable for the past 6+ years, slightly below depreciation.

Over the 6 year period, ROIIC has been 12%, thus deserving a higher multiple the company is currently trading at.

There is a healthy pipeline for M&A, buying out franchisees and smaller independents still on the market.

Paper market

I was not able to find credible information on office paper demand decrease in US, but backing-out figures from RediShred reporting, during the last 2 years revenue increased by 28% and 11% in 2022 and 23 respecitvely, while tonnage increased by 11% and 1%. Common sense tells Sorted Office Paper (SOP) demand is in structural decline, but at what pace is hard to understand.

In Canada the picture until 2021 looked the following:

I have tried contacting management but received no answer.

Management & Board

Top management has been with the company for over decade and insiders (management + board) has over 20% ownership. Various options have strikes mostly above current share price hence management is highly incentivized to work towards increasing the share price.

Compensation is ½ fixed, ½ variable and the targets are operating profit per and similar metrics. Which exclude recycling revenue which is unpredictable and does not offer a good basis for assessing management skill. 2024 Bonus program includes FCF per share, although the way company reports FCF is not completely accurate in my view.

Valuation

RediShred is trading at 5.7x 2024 guided FCF. Considering the size, growth profile and the runway, we believe this a bargain price and presents a compelling opportunity.
2024 guidance 4.5x EBITDA, but most importantly, it trades at 7.5x EBITDA excluding recycling revenue which some might view as terminally declining and unpredictive, but which nevertheless will continue bringing FCF at 85%+ margins.

We think company can do ca. 13-14 MCAD of FCF by 2028, which would put P/ FCF at 3.7x. Applying a fair multiple of 8x, we expect stock to reach ca. 6/sh, for a 21% IRR.

Catalyst

1. Continue rolling up small competitors

2. Generate FCF