Description

EXECUTIVE SUMMARY:

My investment idea is to short The Brink's Company (NYSE: BCO; Market Cap: ~USD 3.6bn), the world's largest Cash Logistics services company. The stock has increased over 150% over the last three years because of Starboard’s activism, leading to a new management team, but Consensus estimates are now pricing in a full turnaround of the Company, matching Mgmt guidance, and not factoring in numerous significant threats, as listed below.  In addition, the stock may not be fairly-priced given its relatively small market cap, and is only covered by three less-than-stellar sell-side firms (Suntrust, Sidoti, and Imperial).

 

Threats

1) Increasing competition in key markets. BCO is relying on its LatAm segment to provide ~48% of ’19 EBIT (growing at 9%/year with sustained 28.8% non-Brazil EBITDA margins), yet competitors are aggressively expanding into LatAm (Loomis – publicly said they can accept ~17% EBITDA margins)

2) Key customers using less Company services. One of its key customer groups, Banks, are aggressively pursuing non-cash digital services and closing branches and downsizing remaining ones

3) Rapid growth of LatAm e-commerce. LatAm e-commerce trails other regions (~3.6% of retail vs. 18% in the UK) but is growing rapidly, and will likely add to decreased brick-and-mortar sales / cash use

4) Shrinking market from exponentially-growing threats. The market is not allocating any likelihood that in key markets such as Brazil, cashless payments are likely because:

- High mobile phone penetration of ~80% High urbanization rates (~86%) (uses cashless payments more)

- High crime rate (i.e. attacks on ATM machines & less cash use)

- Many start-ups (>200) and banks developing mobile banking, wireless payments, etc. to copy Alipay/Tencent Pay

- I estimate that if e-commerce/mobile payments grows to 7% of retail sales, this could decrease cash use in Brazil by 11% and decrease LatAm Revenues by 4%/year

5) New legislation allowing for more substitute products. EU’s PSD II requires banks to open up their accounts infrastructure to third parties, which will accelerate online banking and non-cash payments

 

POTENTIAL RETURN:

My projections point to a stock price at least 23% lower than current levels (based on a probability-weighted average) and over 30% decrease in a more pessimistic case (please see Valuation section below).

 

NUMEROUS POTENTIAL FACTORS FOR ADDITIONAL DOWNSIDE PRESSURE / TAIL RISKS (please see Details below)

- Management plan for US operations improvements appear aggressive

- Roll-up Acquisitions: I modeled full mgmt. guidance of $400mm/yr acquisitions; missing this will subtract future synergy value

- Leases and Pension and other Liabilities - US pension currently funded at only ~88%

- Digital Currencies: Many countries, such as China, Canada, Sweden, etc., are considering digital fiat currencies

- Longer-term risk to cash from wearables and biometrics: Numerous analysts point to potential of wearables and biometrics (fingers, eyes, etc.) which will likely replace cash payments in the future

- Possible Larger economic slowdown, which would affect consumer spending and cash payments: many prominent investors (Klarman, Renaissance, Marks, etc.) warn of current high valuations

 

DOWNSIDE PROTECTION

BCO already has a relatively full valuation at about ~8.5x EV/2018 EBITDA and 18.7x 2018 P/E, similar to peers, despite having ‘17 EBITDA margins 500-1000 bps lower than peers

- The market is pricing in a complete turnaround for BCO and Consensus forecasts pretty much match Company guidance

- Competitor Loomis historically has traded at ~6.0x EV/EBITDA with less market competition

- ATM companies NCR & Diebold trade at ~6-7 EV/EBITDA

 

VALUATION (per share) (vs. 71.20 share price @ May 16, 2018)

PE (FY 2020 12-14x)

$58.73 - 76.75 (-18 - +8%)

 

EV/EBITDA (FY 2020: 5.5-7x)

$51.70 - 77.37 (-27 - +9%)

 

SOTP: (N.Amer: 6x; LatAm: 7-8x; RoW: 6.5x) (EV/EBITDA)

$49.91 - 56.21 (-30 - -21%)

 

DCF (8-9% WACC, -1 to -2% Growth)

$24.62 - 46.53 (-65 - -35%)

 

TARGET PRICE: $54.56 (-23% vs. current) (Probability weighted 40%/30%/30% on EV/EBITDA range and DCF Average)

 

SUMMARY FINANCIALS

TABLE OF CONTENTS

A. COMPANY OVERVIEW

B. INDUSTRY OVERVIEW

C. INVESTMENT THESIS DETAILS

D. VALUATION

E. RESEARCH

F. RISKS TO SHORT POSITION

G. OTHER POTENTIAL FACTORS FOR DOWNSIDE PRESSURE / TAIL RISKS

A. COMPANY OVERVIEW

BCO is a US-based, Cash-In-Transit (CIT) and cash management solution company offering the following main services:

1) Core Services (51% of 2017 revenues; ~12% EBITDA margins ) – provide CIT (cash transport) and ATM services (cash replenishment and maintenance) to mainly Financial institutions and retailer customers

2) High-Value Services (42% of 2017 revenues; ~20% EBITDA margins) – providing transport of valuables (diamonds, electronics, etc.) and Cash Management services (money processing – counting, sorting, etc. and Smart Safes)

- The Company has been promoting its CompuSafe Smart Safe business to investors, which has 20+% EBITDA margins, yet the product will be less than 5% of 2019 total EBITDA (general business: buy a safe for ~USD 6,000, rent to retailer for ~USD 5,000/year); has sold about ~18,900 safes (est growth of ~3,500 safes/year)

3) Other Services (7% of 2017 revenues; ~8% EBITDA margins) – guarding warehouses, airports, etc.

 

Geographic distribution.

BCO’s 2017 geographic distribution was:

- North America (39% of Sales; ~10% EBITDA margins): growing at ~3%/year;

- South America (29% of Sales; ~24% EBITDA margins): market growing at ~5%year vs. mgmt. guidance of 9% organic

(Brazil and Argentina made up 47% & 27% of ‘17 LatAm sales, respectively )

- Rest of World (32% of Sales; ~15% EBITDA margins): Mgmt guidance: 2%/year growth

 

The Company has 1,093 facilities (82% leased) and 12,554 vehicles (i.e. armoured trucks) (40% leased)

- Unions: In the US & Canada, ~1,400 employees belong to unions. Internationally, ~61% of employees are in unions

- BCO has ~62,300 full-time and contract employees, including approximately 7,000 employees in the United States

 

Starboard Activism:

In Oct. 2015, Starboard Value launched an activist campaign highlighting BCO’s history of poor performance and missed guidance versus peers and led a change in Company Management

- Starboard had entered the stock at about $27 per share; and has largely exited its investment at a volume-weighted average share price of ~$60 per share (including about half of their position, ~3.2mm shares, in 2017)

- I believe that if Starboard saw a high probability of BCO stock reaching the consensus target price of ~$99 in a reasonable period of time, they would have maintained their stock position. A Starboard partner joined the BCO Board and likely saw statistics for its key South American business, and was not convinced it could carry BCO’s future valuation

- Competitors are also seeing insider selling: Prosegur IPO’ed Prosegur Cash in March 2017; and Latour Investments (led by billionaire Swedish investor Gustaf Douglas) sold >90% of holdings in Loomis (previously held ~28mm shares or ~8% of Company shares)

 

Review of Management:

BCO’s management appears detailed-oriented and has previously successfully pursued a similar roll-up strategy in the document handling industry. Their March 2017 Investor Day presentation is quite detailed and shows a methodical and reasonable approach to improving BCO. The CEO and CFO both joined in 2016 during Starboard’s campaign.

- BCO’s CEO, Doug Pertz, and CFO previously were employed by Recall Holdings, a somewhat similar business to Brink’s, which provided physical document storage and handling. Recall was spun off from Brambles in Dec. 2013, and after about one year of 12 roll-up acquisitions, was eventually sold to Iron Mountain. During Pertz’s tenure at Recall, the stock increased 85.1%, vs. the S&P ASX 200 index’s 2.5% increase.

- The CEO has been a larger buyer of the stock over the last 2 years, buying ~USD 5.7 mm of stock

- His purchases are relatively substantial given his 2016 salary was ~USD 520,000 (he also had stock and option awards of about USD 7mm); at Recall, Pertz had a base salary of ~USD 976,000 and Share rights of ~USD 2mm

- Note that BCO’s key LatAm business, which has the highest margins and growth potential, is led by Amit Zukerman, a 20+ year veteran of BCO, who was part of the previous mgmt team that grossly underperformed the industry

- The CEO and CFO have a short history with the Investment community (having joined in June 2016), but guidance for FY2017 slightly missed actual results. At their previous Company, Recall Holdings, they announced a sale of the Company a little more than one year of becoming independent and gave little Guidance.

B. INDUSTRY OVERVIEW

- The total market size of the global CIT industry amounts to ~$15.2 billion (source: Freedonia 2017). LatAm represents a substantial proportion of the CIT industry (16%), yet only represents 7% of worldwide GDP (2015). North America, Europe, Asia-Pac, Lat-Am, and Africe/Middle East make up 18%, 31%, 26%, 16%, and 9% of the global market respectively.

- The market is expected to grow at a global growth rate of 4.4% CAGR (in US$) between 2015 and 2020, with the largest growth markets expected to be Latin America (4.0%), Middle East and Africa (5.6%) and Asia-Pacific (8.3%) (Freedonia 2017) North America and Europe are estimated to grow at 1.6% and 2.1%, respectively.

 

Information on Selected Key Markets:

- United States: dominated by Loomis (30% market share), BCO (30%), and Garda (25%); EBITDA margins ~9%

- Brazil: dominated by Prosegur Cash (49% market share), Protege (private) (20%), and BCO (23%); EBITDA margins ~15%

- Argentina: dominated by Prosegur Cash (~65% market share) and Brink’s (~20%); EBITDA margins ~30%

- China: the CIT market is largely police-controlled, where every city has one company which is government-owned and the market is not open for foreign entities; seeing very strong cash substitution

- India: CMS Info Systems (~55% market share, bought by Baring PE in 2015 for USD 368mm), SIS Prosegur (~28%), Brink’s Arya India (BCO tried to sell the business in Jan. 2016 for ~USD 74mm)

 

Business Economics

- The CIT industry has seen significant consolidation with the creation of oligopolistic markets in most regions as companies with larger scale can gain better unit economics, generating a significant barrier to entry. The initial capital required to support a CIT business is significant (for cash centres and armoured vehicles) and players who lack economies of scale will have lower productivity in Cash and higher per unit fixed costs

- Other barriers to entry include clients’ casualty aversion (after several examples of frauds with material losses) and the strict regulatory framework, such as high insurance requirements, of some countries

- Generally, as the market share of a CIT company increases, its operating resources can be deployed much more efficiently, mainly by increasing the density of stops in the routes of armoured vehicles and leveraging the fixed costs of the cash processing infrastructure; therefore, the marginal costs of a market leader are significantly lower than those for smaller players

- Employee salaries are the largest expense, making up over 50% of sales.

 

Contracts

Usually written for 1-3 years. In the key Latin American market, contracts are usually on a countrywide basis.

- Pricing is usually according to one of two different models, or a mix of the two: Fixed price contracts per month or quarter and Variable contracts, based on the cash volume transported and the number of transports

- After reviewing some CIT RFPs online, it appears that contracts in developed countries are usually fixed cost for a specified number of routes (developed markets customers likely view it as a commodity service, thus do not offer % of volume payment)

- Example contract: 2016 UK contract to pick up cash at 40 locations and 1,200 parking machines for ~GBP 466,000/year; Interestingly enough, the RFP mentioned anticipated decreased transported cash levels due to future electronic payments

 

Competition

Loomis: the leading CIT player in Europe and has #1 market positions in the US, Denmark, Finland, Norway, Switzerland, Slovakia, Sweden and Austria (#2 in France, Czech, Turkey, Belgium, UK, and Spain)

- Consensus has Company revenue growing at ~3%/year with ~18% EBITDA margins; Trades at ~8.1x EV/2018 EBITDA or 14x 2018 PE

Prosegur Cash: the market leader in Latin America in terms of revenues with an estimated market share of 57%, with leadership positions in Argentina, Brazil, Chile, Peru, Paraguay, Uruguay, Spain and Germany

- Consensus has Company revenue growing at ~4-5%/year with ~23% EBITDA margins; Trades at ~10.1x EV/2018 EBITDA or 16x 2018 PE

 

Comparable Acquisitions

- Nov. 2012 – Large Canadian competitor Garda security was taken private by APAX Partners and Founder Stephan Cretier for $1 billion (11.6 Forward EV/EBIT, 11.8x LTM EV/EBIT) (Estimated implied EV/EBITDA 8.7x)

- BCO management has given guidance that it will complete roll-up acquisitions at ~8x EBITDA (or 6-7.5x post-synergies)

 

Inflation

High rates of inflation generally have a slight positive impact on the CIT industry as the notional amount of cash in circulation increases and cash tends to move more quickly (higher salaries and currency depreciation is also common). For example, from 2014 to 2016, Prosegur Cash’s revenue only grew at a 1.6% CAGR in euro terms, despite cumulative inflation of 73.8% in Argentina and 18.5% in Brazil and cumulative currency depreciation of 38.1% and 6.4% in Argentina and Brazil, respectively.

C. INVESTMENT THESIS DETAILS

BCO stock has increased close to 150% over the last few years, as Starboard has helped BCO improve operations, but:

- The market is pricing in a full turnaround of the Company despite BCO having significantly lower margins relative to its peers and Consensus forecasts pretty much match Management estimates which will likely be revised down for 2019E estimates or at least for the post-2019 period

 

My thesis mainly doubts the market belief on future South American performance:

1) 2019E South American EBITDA margins – Mgmt has given guidance of 19.3% which will likely face significant threats:

- Mgmt guidance for Brazil of ~13% 2019 EBIT margins implies EBITDA margins of ~28.8% for rest of LatAm

- Specifics: Mgmt 2019 EBIT: Brazil - $56mm and Total LatAm: $178 mm; Mgmt 2019 Revenue: Brazil - $434mm and Total LatAm: $924 mm; (Add ~4% to get EBITDA margin)

- Competitor Loomis has given guidance that it will also continue its Roll-up strategy with a particular focus on South America and existing geographies (specifically, Argentina and Chile)

- In addition, Loomis has said that it will focus on acquisitions allowing for a 12-14% EBIT margin

- Over time, Loomis will likely bid contracts at this 12-14% EBIT margin – threatening BCO’s 19% guidance

- Prosegur Cash also has strong positions in these markets - For example, in Argentina, Prosegur has >60% market share and some customers for 30 years, and ~95% contract renewal rates

- Prosegur Cash also largely controls Banking customers, which often take up higher-margin Value Added Services

- Sellside analysts has LatAm operating margins growing, which I think is unlikely with increasing competition/shrinking market

 

2) Guidance for South American Revenue growth is also very high at 9% 2016-19 CAGR

- Analysts estimate the LatAm region Cash Logistics market to grow at ~4%/year

- Analysts expect Prosegur Cash (LatAm leader) to have LatAm revenue growth of ~6%/year

- In addition, the Cash market faces significant risks such as ATM reductions, Bank branch closures, E-commerce growth, fintech startups (wanting to copy Alipay/Tencent pay)

- My rough estimates below show a potential DECREASE in revenues for BCO’s Brazilian business (largest LatAm market, ~47% LatAm revenues) of ~4%/year (assuming CIT revenues as % of Cash used for Private Consumption)

- This assumes 55% cash used for private consumption expenditures (much higher than the 33% and 12% estimated for China and US in 2020, respectively)

 

D. VALUATION

- Overall, I assume 5% LatAm revenue growth (vs. 9% from Mgmt/consensus and 4% market growth), taking into account various potential factors (see details in next section) which may shrink the market, and 13% LatAm EBIT margins (vs. 19.3% from Mgmt/consensus)

- I also assume all other management projections for other regions (although some appear aggressive; for example, decreasing Vehicle Repair and Maintenance costs by 75%, Please see Additional Factors for Downside Pressure below)

 

For a target price I assume a probability-weighted price based on how investors may view BCO’s prospects:

40%: 5.5x EV/EBITDA in a “perfect” bear market situation with 4%/yr LatAm revenue growth & 11% EBIT margins (SCENARIO PRICE: $51.70/share)

- Note: Loomis has a 5.9x average historical multiple , and I believe the industry is shrinking and getting more competitive (Prosegur Cash has limited trading history, having IPO’ed in 2017)

30%: 7.0x EV/EBITDA with 5%/yr LatAm revenue growth & 17% EBIT margins (SCENARIO PRICE: $77.37/share)

30%: Average DCF value with 8-10% WACC and -1% to -2% perpetuity growth (SCENARIO PRICE: $35.58/share)

TOTAL WEIGHTED-AVERAGE PRICE: $54.56

 

As a model-check, I also benchmarked my LatAm projections versus LatAm market leader, Prosegur Cash, which confirms they may be reasonable:

- My estimates project 13-30% less Sales/Vehicle for BCO vs. Prosegur Cash, but Prosegur has about double the revenue and only 40% more vehicles

 

E. RESEARCH

China provides an example of what may happen in BCO’s Latam markets. China has seen tremendous growth of non-cash payments with some analysts predicting China will be effectively cashless in "five to ten years" (Analysys, 2017)

- Chinese Mobile payments have increased ~10x from Rmb 6 trillion to Rmb 58.8 trillion from 2014 to 2016

- Today, 70% of internet users thought carrying cash was not necessary; 45% of users used WeChat Pay bc they didn't carry cash

- Some predict within five years, Chinese first-tier cities will have full penetration of this cashless trend

 

The large Brazilian market (4th largest Internet population) is attracting many fintech start-ups to threaten BCO’s business:

- Because the five retail banks own 90.2% of all the branches in Brazil, the banking market is a very inefficient and poorly served market with ~32% average lending rates, up to 15%/month

- Nubank – Credit card /digital payments company started by David Vélez, ex-Sequoia partner; Raised $180m from prominent VCs including Sequoia, Peter Thiel’s Founders Fund, Goldman, Tiger, and DST

Founded in 2013, Nubank has already received over 13 million applications for credit cards, and currently has over 2.5 million cardholders. In 2016, the company revenue increased 7x to R$77 million

- In addition, all major mobile carriers in the country have entered partnerships with financial firms to offer mobile payment solutions, with Banco do Brasil joining forces with carrier Oi; Banco Bradesco partnering with America Movil’s Claro; and Vivo, the leading local carrier, making a deal with Mastercard

- Lastly, there are ~210 fintech companies in Brazil (31% focusing on payments)

- Sellside analysts defend the continued use of Cash, but none mention the innovation of Alipay / Tencent Pay

They also cite the high service fees of credit cards & smartphone payments (2-3%) but do not mention the tremendous success cases of Alipay / Tencent pay and their low fees (as low as 0.55%)

 

Nearby South American markets are also seeing tremendous innovations to replace cash. For instance, Colombia has Daviplata which currently has over 2.7 Million active users, and over 60 million transactions that transferred over 1.1 Billion USD in funds.

- The Company’s product reached over 500,000 users in the first year (2011), with ~2.7 million users in 2015

 

Other emerging markets have seen similar fast adoption of cashless payments.

- In Kenya, for example, the share of adults using the M-Pesa mobile-money system grew from zero to 40 percent within its first three years of launching in 2007—and by the end of 2015 stood at nearly 70 percent.

 

Mobile payments can also save merchants money. Chinese merchants are charged much lower payment fees than credit card companies fees (0.6 percent for Alipay and 0.1–2.0 percent for Tencent Pay).

- Also, a point-of-sale (POS) terminal is not required & users simply scan a QR-code with cellphones

 

Cash payments also faces threats from E-commerce, which is rapidly growing in Latin America.

- Online shopping accounts for only 3.6% of Brazil retail sales vs. 8% in the U.S. and 19% in the U.K. and Card payments in Brazil represent ~30% of personal consumption, vs. 45% to 55% in the U.S. and the U.K (Morgan Stanley, 2017)

- E-commerce in Latin America is expected to grow 15% annually through 2019—by as much as 11% in Brazil and 40% in Peru

- Amazon also announced in Oct. 2017 it would expand its Brazilian operations beyond books, likely increasing investments and promotions from local champions, MercadoLibre and B2W

 

E-commerce and digital payments could grow very strongly considering Brazil’s urban population

- In China, urban residents have shown higher usage of digital payments and online shopping – about 65% penetration compared ~47 in rural areas, respectively (CNNIC 2016)

- Brazil has a highly-urbanized population (~86%) and is very young (~83% of the population is under age 55, cellphone penetration of ~80%) thus could see strong adoption of e-commerce/digital payments

 

Banks are also incentivized to move away from physical branch banking & cash handling, and adopt digital banking/payments.

- Mobile payments can lower the cost of providing financial services in emerging economies by 80 to 90 percent, enabling banks to serve lower income customers profitably (McKinsey, 2016)

- This is particularly relevant as Mobile phone ownership is projected to reach over 90% of adults by 2020 in emerging markets

- Banks also benefit from the data trail of digital receipts and expenditures, allowing for better assessment of credit risk, and allowing providers to underwrite loans and insurance policies.

- Providers can also collect digital repayments on an automated basis—and send text messages to prompt borrowers when they have missed a payment. Research in Bolivia, Peru and the Philippines has found that when providers use such SMS “nudges”, household saving rates increase

- Banks generally spend between 39% (mature market banks) and 45% (emerging market banks) of their operating cost on the operation of their physical channel network, with cash handling representing 5-10% of a bank’s operating costs (NCR)

 

Brazilian Banks are downsizing and reducing physical branches and ATM machine counts

- Brazil has one of the most branched systems in the world with ~47 bank branches per 100,000 ppl (vs. Spain and US, respectively: 68 and 32)

- Banco do Brasil, Brazil’s largest bank, offered voluntary early retirement packages to up to 18,000 employees, or nearly 17 per cent of the workforce, and closed 402 branches or about 7.4 per cent of its total while downsizing another 379

- Itaú Unibanco shut down 10 per cent of its branch network over the past three years

- Banco Bradesco closed around 550 brick and mortar branches last year

- Brazilian ATM numbers already match mature European economies and have been decreasing (2015 ATMs per 100,000 adults for Brazil and Spain, respectively: 114 and 117)

 

Mobile banking is expanding very rapidly in Brazil. According to numbers by the Brazilian Banking Federation, the number of banking transactions carried out via a mobile device has gone up from 4.7 billion in 2014 to 11.2 billion in 2015

- Itaú Unibanco’s estimates a 40% increase in operating income from digital clients vs. traditional branch clients

- In 2016, Itaú Unibanco added 631,000 virtual banking clients (up to 1.7 million out of nearly 26 million total clients)

 

Banks and retailer operators are also reluctant to own ATMs due to the large number of attacks on them

- In 2017, there was an average of five attacks a month targeting ATMs inside banks, ~33% higher than 2016. This trend has caused owners of gas stations and supermarkets to often decide against installing ATMs

- The cost of apartments located above banks have even fell because of the risks to ATMs

 

Governments globally generally want to go cashless too. Many governments are promoting cashless payments because cash is expensive to produce, and can increase transparency and prevent tax issues

- Estimates show that cash-related improper tax reporting cost the US government $100-600 billion/year in lost taxes

- Expenses related to production and distribution of cash in the United States amounted to about $1.2 billion in 2012

 

Cash theft is also huge cost to normal businesses. Total cash losses cost retailers $40 billion annually in the US, equivalent to nearly 1% of revenues. Cash theft losses are greater than bad checks, credit card, refund, and internet fraud combined

 

Digital Banking also helps Governments. Governments in emerging economies could collectively save at least $110 billion annually as digital payments reduce leakage in public expenditure and tax revenue.

- Economic gains from digital finance are likely to be far larger than estimates because of additional positive externalities. For instance, as more women gain access to financial accounts, they often spend more on nutrition, education and health care

F. RISKS TO SHORT POSITION

1. Cashless payments may develop slower in Brazil because most sold devices are low-end, with little storage capacity and no NFC abilities. Brazil is also larger than the continental US and there is poor or unstable internet service in many areas.

- >80% of the Brazilian population is urbanized, which should provide sufficient scale for a Mobile Payments player

- Brazil has the 4th largest number of internet users, high cellphone penetration and tremendous interest in Fintech developments (some whom have publicly said they want to copy Asian players, i.e. Alipay and Tencent pay)

 

2. Potential LBO offer – CEO has a private equity background, and PE firms may be attracted to the roll-up opportunity

- PE firms will likely be cautious bc of recent similar LBO failures (i.e. Radio stations, newspapers, Toys retailing, etc.)

 

3. Outsourcing – addit. outsourcing of higher-margin Cash mgmt solutions (~20% EBITDA) (counting, sorting, Smart Safes etc.)

- Loomis estimates the total potential US CMS market to be ~$2.2 billion with ~50% currently outsourced

- The market will likely not be fully outsourced (large banks will keep this function in-house) and Loomis (a consistent & strong operator) has only ~15% US EBITDA margins (with 33% of sales from outsourcing CMS contracts)

 

4. BCO has a LatAm payment service (prepaid cards sold at ~32,000 retail locations in Brazil, Columbia, Panama, & Mexico)

- BCO does not disclose details of this segment after its 2017 restructuring, but in 2016, the segment only produced $2.3mm in EBIT from $90.1mm in Revenue

 

5. Management is an active buyer of stock

- True, the CEO has spent about >$5.7mm buying shares, but the GC and EVP of LatAm are sellers and are Company veterans (vs. CEO joining in 2016) and they likely better understand the LatAm business potential (please see earlier section)

 

6. Management forecasts include Contingency amounts

- My thesis partly rests on the Market realizing BCO faces serious threats (cashless payments, e-commerce, bank branch closings, wearable payments, digital fiat currencies, etc.) and will be re-rated from its current ~8.5x EV/EBITDA multiple and/or provide future guidance lower than its current 2019E targets

 

7. Management is pursuing a M&A Roll-up strategy, which could obscure underlying business results

- Same above comment. Multiple arbitrage benefits may be less beneficial if they spend 7.5x EBITDA (post-synergies)

 

8. BCO has ~200 owned facilities, which could potentially be monetized at a premium

- As of 12/31/17, Land and Building assets were valued at ~$278 million – relatively insignificant vs. ~$4bn market cap.

G. OTHER POTENTIAL FACTORS FOR DOWNSIDE PRESSURE / TAIL RISKS

Management plan for US operations improvement may miss guidance (please see March 2017 Investor Day materials)

- Cost savings seem aggressive. For example, current annual Repair and Maintenance (R&M) per vehicle is $24,000/yr vs. estimated annual R&M per vehicle of $6,000 for new vehicles

- Guidance for ~60% of routes in 2019 being served by a one-person crew – potential Union / Safety problems?

- Consolidate money processing centers – yet still factoring in fuel savings and less R&M costs (with more driving) and no adjustment for additional Labor cost (per hour salary expenses)

 

Roll-up Acquisitions: I modelled full mgmt. guidance of $400mm/yr acquisitions; missing this will subtract future synergy value

 

Leases and Pension and other Liabilities

- The funded status of the primary U.S. pension plan was ~88% as of 12/2017

 

Digital Currencies: Many countries, such as China, Canada, Sweden, etc., are considering digital fiat currencies

 

Longer-term risk to cash from wearables and biometrics: Numerous analysts point to potential of wearables and biometrics (fingers, eyes, etc.) which will likely replace cash payments in the future

 

Possible Larger economic slowdown, which would affect consumer spending and cash payments :

- Special Purpose Acq. Corp. (SPAC) issuances are reaching record highs, showing excess capital in the market

- Consumer confidence is near a 17 year high

- S&P 500 companies trade at ~23x PE, similar to dot-com bubble valuation

- Over 50% of recent US stock returns have come from valuation multiple expansion (Russell Investments, 2/2018)

- Leading investors are worrying about “perilously high valuations” (Klarman), “significant risk that asset prices will correct” (Renaissance), and “100% odds of a recession within the next two years” (KKR)

Note: Special thanks to those fellow Value Investors who also did write-ups on this stock in the past. They were very informative and helpful to me. Please note some sentences (particularly in the Industry section above) may have borrowed from those write-ups.

Catalyst

- Missing/reducing announced South American EBITDA targets

- Loomis announcing acquisitions in South America (very likely given Loomis has said “all of South America is a priority”)

- Announcement of new cashless mobile payment services

- Continued e-commerce growth in key South American markets