Does BrightView Have A Bright Future?

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About: BrightView Holdings (BV)
by: Christopher VanWert
Summary

The first publicly traded landscaping business has a large amount of debt.

It won’t be as big an issue as the market thinks.

The date where this will come to light should be 2023 and after given their debt schedule.

Introduction and Summary of the Company

Brightview holdings ($BV) is a unique company, the first public landscaping company that is far and above the largest commercial landscaping business in the United States by revenue. Originally the company was forged by KKR (Kohlberg Kravis Roberts & Co. Inc.) through mergers and acquisitions of large private landscaping companies with the end goal of using economies of scale to drive down costs.

Brightview holdings Specializes in high-end commercial landscaping. They do everything from development, to tree care to maintenance. Their goal is to be the catch-all for commercial landscaping services. The business is divided into two groups with maintenance services being 75% of their revenue and development services encompassing the rest of the 25% of revenue. This is a great sign for consistency in revenue as development is not reoccurring while maintenance will only dwindle if the customers are unsatisfied with the company’s work or the company fails to price their service at the right level.

Taken from Prospectus

Opportunity

The current investor sentiment has been negative for BrightView based on its debt load. When KKR performed the many mergers and acquisitions to create BrightView a large amount of debt came with it ($1.141 Billion). It also doesn’t help that most of their assets (71%) are intangible assets and goodwill from the mergers and acquisitions which are expected to grow with it's recent acqusition of Emerald Landscape Company.

While goodwill is only tested for impairment during it's fourht quarter, BrightView is amortizing 10% of their intangibles each quarter. Their Amortization is accounting for about $25 to $31 million a quarter and ~$105 million a year. A direct result of these write offs is a low income from operations and a negative net income. The situation for BrightView is better than it seems once we look at the free cash flow.

Created by author from 10-k

This winds up giving us an EBITDA/Interest ratio of 1.48. A comfortable range is 2-3 which does make this investment a bit risky, but not on the verge of bankruptcy that it’s evaluation now is pricing in (which would be an EBITDA/Int of <=1).

BrightView is also committed to paying down their debt as they used the proceeds of the IPO to refinance and reduced their debt load.

Risks and Debt

There are a couple of risks that need to be addressed before backing BrightView and again the biggest one is the mountain of debt it has.

Taken from 10-k

This debt schedule shines some light into what the current situation looks like and it’s not that bad. The company is well-financed for the next 3 years before it needs to roll over or refinance its long-term debt. The backing of KKR in the company’s creation also helps reduce some of the worry as it’s a possible re-financer or network for refinancers the company can leverage.

Created by Author using data from 10-K

The current ratio and quick ratio are both on the bottom end of acceptable but are in the right range of being solvent and able to keep functioning properly.

Valuation

With a distinct lack of historical financial data, I relied on the company’s free cash flow to come up with a r

easonable evaluation. Using this as the basis for the evaluation also makes the most sense in this case as it’s the crux of the investment thesis.

Created by author using data from 10-k

Created by author using data from 10-k

Created by author using data from 10-k

Created by author using data from 10-k

I used a growth rate expectation of 3.7% as it’s the current analyst expectations for the year (sourced from Finance.yahoo.com). It’s also more conservative from their 10-K growth rate of 7.70% or their 9 months ended 10-Q growth rate of 6.81% but still in line with expectations given the slow down in mergers and acquisitions activity (with the exception of Emerald Landscaping company).

The beta for the weighted average cost of capital is only over the time period that BrightView has been publically traded. As more data becomes avaible I'd except this to fluxuate more as we're working with less than a year's worth of data.

While the model did give us an evaluation of $20.58 this doesn’t consider the probably that the debt causes issues in BrightView’s future. Given the company’s history with KKR, a majority of revenue coming from reoccurring sources and its current debt schedule the chance of bankruptcy is not as high as the level of debt implies.

A look at using a multiple evaluation method on the free cash flow tells us that the company is currently valued around 17.5 and the model would put us at almost 25 times free cash flow. Both of these multiples are on the high side of market averages, but we don't have another publically traded company in the same or a similar sector to compare it to.

Conclusion

BrightView is a leader in its industry that is saddled with a large amount of debt. However, the company has a large amount of free cash flow that the market is underpricing with its current share price. The price of the risk associated with BrightView is too high for where the financial fundamentals place the company. I believe that this is a good time to buy BrightView as the market begins to recover.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.