Even a cursory glance at the last 3 years of financial statements from Brink's (BCO) show growth in excess of what could be expected from a cash-in-transit company.
A look at the share price shows that this growth hasn't come at the cost of shareholders, but rather to their benefit. The initial growth resulted in a 170% return, most occurring during 2017. In 2018 the price halted as troubles in South America & overly-optimistic markets caused the stock to take a breather.
Brink's recently revealed their outlook for aggressive reinvestment in 2019.
The guided Capex at 6% of sales would be in excess of anything seen previously. Additionally, the M&A spend is also guided to be material as the "strategy 1.5" phases out into its' last phase. There is also talk of $20-30 million in OpEx at the start of "strategy 2.0".
At this point, Brink's is entirely driven by cash-markets and capital allocation. While the future of cash is hard to analyze, we have more information when looking at the capital allocation of Brink's.
The Two Dynamics: Get It and Place It.
There are two dynamics at play in analyzing the shareholder returns on capital allocation from management. How difficult it is to acquire capital (the cost of capital) and the opportunities for placing the capital (the return on capital). Given that 2019 will be a peak year for Brink's on capital reinvestment, It makes sense to look at each of these.
As a rule-of-thumb reinvested FCF is less risky than debt-funded expansions. Not only for the obvious reason of increased leverage, but also due to the fact that many planners use post-acquisition EBITDA projections for the new leverage numbers.
Post-Dunbar acquisition management guides $600 million in EBITDA for FY19. On High-Single-Digits revenue growth (~$3,750m revenue) and 16% EBITDA margins you get $600m.
Given that management incorporates almost 110bps of margin improvement into this projection, this won't be an easy target to hit. In spite of this, it should be noted that 16% EBITDA margins isn't a great margin profile in the CIT-industry and is therefore usually reachable. A lot of this expansion will be from expected cost-cutting. While investors shouldn't bet the farm on exactly 16% EBITDA-margins, Brink's has room to improve margins materially in 2019.
At $600m in EBITDA, we can expect roughly $80m in interest expenses, $65m in taxes, and $45m in guided restructuring charges. That leaves the company with $410 million to allocate.
There is $1 billion in available credit capacity on a revolver, partly available through a refinancing of a term A loan. Brink's currently has $1.5 billion in debt and a total capacity of $2.5 billion. At an EBITDA of $600 that is equivalent to 2.5x forward Debt/EBITDA currently and a capacity of 4.16x Debt/EBITDA when fully drawn.
While Brink's does carry around $300m in cash & equivalents, there are also substantial unfunded retirement benefits. While there are definite liquidity benefits to holding cash instead of funding retirement benefits, this is not the same as having "ready" cash. It improves the financial profile of Brink's in terms of both liquidity and interest expenses, but the associated cost is the expected CAGR on retirement benefits.
Borrowing is almost always available, the real question is the impact on credit ratings. Brink's is currently rated Ba1 by Moody's, which sits just at the edge below Investment grade and the upper rungs of speculative credits.
Moody's estimates that roughly $600m is available under current revolver taking leverage constraints and such under consideration. $600 million is a turn of EBITDA, which would put the leverage at 3.5x at the end of 2019 and considerably higher pre-integration of acquired companies.
Given that management guidance is not guaranteed and that Moody's would consider a downgrade given "a) sustained Debt/EBITDA of 3.5x" or "d) aggressive financial policies, including the use of debt proceeds to increase shareholder returns". It seems unlikely that Brink's would risk a downgrade and potential credit trouble by drawing more than $500m in capital.
That leaves the total available capital of ~$900 million as an upper-bound within management guidance. Most of the capital will be available at roughly 500bps in interest, as most of the current debt is.
The first post is guided CapEx of $220 million. Roughly $170 million (4.5% of sales) is maintenance CapEx, while the remaining $50 million are growth investments. The growth investments largely go towards upgrading the fleet into single-manned trucks. Given the tight labor market prevalent across most security and transport verticals, the investment will insulate Brink's from cost pressures facing peers.
Brinks also holds a steady $0.15 dividend per quarter policy, which will require 60 cents for each of the 50 million shares outstanding, or roughly 30 million. The investments so far add up to $250 million.
Management was rather unclear on acquisition guidance on the Q4-CC.
So far management has 160m of non-debt funded capital to play with. For perspective 2018 had $520 million of acquisitions and 2017 had $225 million.
An aggressive (but doable) estimate would be $350 million in acquisition spending, given that:
a) This is roughly the amount by which management expanded credit capacity from 2017 to 2018.
Given that management will have to pay off $30 million in principal due on long-term debt as well as the $80m Rodoban acquisition, ($110 million) and some capital leases - the expansion in revolving credit capacity would yield almost constant liquidity.
b) Management expects 8% sales growth from acquisitions (I assume this excludes rolling gains from acquisitions closed late-2018). Translated nominally this amounts to around $280 million. Most CIT businesses sell at 1.20-1.35x sales depending on asset quality and routes. These numbers yield roughly $350m in spending.
Adding these numbers of spending, $30m in capital return, $170m in maintenance CapEx, $50m in Growth CapEx, $350m in acquisitions, you end up at $600 million in total spend on $410 million generated, for an additional debt of roughly $190 million. On adjusted year-end EBITDA of $600 million that amounts to roughly 0.33x turns of EBITDA upwards, which is still within Moody's bounds.
The recent years of acquisition and integration has yielded bountiful rewards for patient shareholders.
In general, management has been able to acquire operators at 6 to 6.5 times EBITDA when they're small and remove roughly a turn of EBITDA in synergies. Selling at ~8.5 EV/EBITDA themselves, there exists some multiple arbitrage in aggregating unsafe single contracts into a large base with higher credit quality.
For the larger acquisitions, management has acquired $120 million in EBITDA for $1.1 billion. These figures end up at a rather expensive 9.16x EBITDA. Given that EBITDA generally translates to sub-50% FCF, this is in excess of 18x FCF. Management has generally managed to extract synergies previously, and expect another $60m in synergies in 2019. They will invest roughly $50m to do this. If they manage to hit their targets (as they've mostly done) it would result in a $180m on $1.15bn, or a 6.4x EV/EBITDA. At a 45% conversion to FCF, we'd be looking at roughly 14x FCF. Both are below the multiples awarded to almost all peers.
Roll-ups often fail in the long run due to complications in back-office tasks, culture, or simply over-cutting costs to hit targets for further expansion. It's therefore quite reassuring to see that Brink's will stop the heavy investments in 2020, which I presume will lead to more focus on integrating already acquired outfits.
I expect that Growth CapEx and acquisitions will be done at +7-8% levels of immediate return growing low-single to mid-single digits in the medium term, which therefore outperforms most portfolio returns. Removing maintenance Capex total investments, the capital allocation can be broken down into debt and equity investments.
|Taxes, Interest, and Working Capital||-$290m|
|FCF to Invest||$210m|
|Acquisitions and Capex in excess of maintenance.||-$400m|
As demonstrated above the acquisitions and reinvestments will be half debt-funded and half funded by cash-flow attributable to equity holders (i.e. equity).
With debt at current levels (~450bps) and a cost of equity at 10%, we end up with a ~7% hurdle-rate.
If management successfully integrates routes with synergies, the NPV return be materially in excess of 7%. If they do not manage this feat, the return will sit around the hurdle rate, if the acquisitions follow the previous ones outlined earlier.
Brink's remains the most obvious capital allocation / roll-up play within the CIT-space for 2019. At current prices I still sit on the sidelines.
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.