A First Look At BrightView Holdings

Summary

• BrightView Holdings, Inc.’s share price has more than doubled off its March 2020 pandemic-selloff low, owing in part to its strong cash flow generation.
• The landscaping concern has employed this cash flow to acquire more companies in an extremely fragmented space, achieving ~10x the revenue of the second-largest competitor.
• With still only 2.6% of the market, a return to growth projected in the spring and summer of 2021, significant P/E ownership, and insider buying, BrightView warrants a deeper dive.
• A full investment analysis follows in the paragraphs below.
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Photo by MartinPrescott/E+ via Getty Images

"If you can't explain it to a six year old, you don't understand it yourself.”― Albert Einstein

Today, we take an in-depth look at the leader in a niche we have never examined in depth before. Our analysis follows below.

Company Overview

Based in Blue Bell, Pennsylvania, BrightView Holdings, Inc. (NYSE:BV) is the largest provider of commercial landscaping services in the U.S., with a top line that is approximately ten times that of the next largest competitor. The company operates over 240 branch locations in 32 states and through its partner network provides coverage in all 50 states. It has roots dating back to 1939, when the Brickman Group was formed. Private equity firm KKR & Co. (KKR) purchased Brickman in 2013 and merged it with landscape developer Valley Crest (founded in 1949) to form BrightView in 2014. The company went public in 2018, raising net proceeds of $501.2 million at $22 a share. Collectively, KKR and Michael Dell’s private equity shop MSD Partners (the prior owner of Valley Crest) beneficially own 59.5% of the common stock outstanding after offloading 10 million shares in a June 2020 secondary at $13.40. Shares of BV currently trade just below $17.00 a share, translating to a market cap of $1.75 billion.

Source: February Company Presentation

BrightView operates on a fiscal year (FY) ending September 30th.

Through its two operating segments (Maintenance Services and Development Services), BrightView services ~13,000 office parks and corporate campuses, ~8,000 residential communities, ~450 educational institutions, and a host of public parks, golf courses, hotels, and resorts.

Maintenance Services consists of landscaping services, tree care, irrigation, as well as leaf and snow removal, provided primarily to HOAs (~40% of segment revenue), corporate campuses (34%), and public parks (10%) under contract. The revenue from this segment is recurring and consistent with the biggest variable being the amount of annual snowfall in its geographies. Maintenance Services was responsible for FY20 revenue of $1.74 billion ($163.1 million from snow removal) and FY20 Adj. EBITDA of $250.1 million, representing 74% and 76% of BrightView’s totals, respectively.

Development Services provides project design and management services, landscape architecture, landscape and irrigation installation, tree moving and installation, pool and water features, and sports field services with projects ranging from ~$100,000 to over $10 million with an average size of ~$1 million. This division accounted for FY20 revenue of $610.6 million and FY20 Adj. EBITDA of $80.1 million, or 26% and 24% of totals, respectively.

Domestic Landscaping Market

BrightView competes in a highly fragmented and highly stable U.S. commercial landscape maintenance and snow removal industry that generated 2020E revenue of $68 billion with expectations to grow to $72 billion by 2024. Landscape maintenance comprises $53 billion of this market, which is 47% residential and 53% non-residential. Snow removal accounts for the $15 billion balance, of which 78% was non-residential. These statistics suggest that BrightView services ~$39.8 billion, or 59% of the total addressable domestic market. Highlighting the fragmented nature of the industry is the fact that BrightView is approximately ten times larger than its nearest competitor, but only commands a 2.6% market share. Nearly 500,000 businesses provide landscaping and snow removal services in the U.S., of which ~3/4ths are sole proprietorships. These market dynamics provide significant opportunities for BrightView, the only publicly traded landscaping business, to consolidate through acquisition.

Approach

And this is precisely the strategy the company has adopted, investing a significant portion of its free cash flow into acquisitions at 5x-7x EBITDA. Since 2017, BrightView has purchased 24 landscaping concerns, integrating them onto its platform for synergies that result in accretive returns. The company typically budgets 3% of revenue for acquisitions.

Source: February Company Presentation

From an organic growth standpoint, the company leverages its 240+ branches, which typically generate revenue between $4 million and $14 million annually. These locations are manned by three to four account managers, whose tasks are client retention and customer acquisition. Management has expanded its sales initiative and pursued a digital marketing effort to grow these metrics. For the Development Management segment, 19 branches strategically located near major metropolitan areas and supported by three design centers are charged with winning projects. The totality of the BrightView team consists of ~19,700 employees, of which only ~700 are part-timers.

Managing Covid-19 Impacts

The company has been and continues to be negatively impacted by the pandemic. For FY20, comparable Maintenance Services revenue fell 7.5% with comparable landscaping revenue down $94.2 million, or 6%, to $1.58 billion. This segment was also hit with bad luck as comparable snow removal revenue fell $86.0 million, or 35%, FY20 versus FY19. Part of this shortfall was offset through acquisitions, which added $105.9 million to the division’s top line, for a net 4% drop. The performance on the Development Management side of the business was more impressive; however, with the slowdown in architectural activity during the pandemic, there is a lag effect that wasn’t fully felt in FY20. Owing to this dynamic, this segment logged a 3% revenue increase over FY19. Overall, the company generated FY20 Adj. EBITDA of $271.6 million (netting out corporate overhead) on revenue of $2.35 billion, representing 11% and 2% declines over FY19, respectively. With a focus on conserving cash during the pandemic through operating efficiencies and a $35.2 million net reduction in capex, free cash flow rose 128% to $197.2 million in FY20.

1Q FY21 Results and Outlook

The start to BrightView’s FY21 was more or less a continuation of this trend, when on February 4, 2021 the company reported 1Q FY21 Adj. EPS of $0.12 on revenue of $554.4 million as compared to $0.10 on revenue of $570.7 million in the prior year period, representing a 20% increase and 3% decrease, respectively. Adj. EBITDA improved 1% in the period to $52.4 million. Maintenance Services revenue was essentially flat year-over-year at $418.0 million despite snowfall off significantly in two of its major snow markets: Denver and Chicago. The snow removal subsegment also achieved revenue flatness, a function of 10% new contract growth. Development Services began to realize the impact of the prior months’ pandemic-induced project delays and was down 10% to $137.4 million. Free cash flow before capex in the seasonally slow quarter fell from $7.3 million in 1Q FY20 to $5.1 million in 1Q FY21 as the company spent $7.5 million on personal protective equipment and cleaning supplies related to the pandemic.

Source: February Company Presentation

Management forecasted 2Q FY21 Adj. EBITDA at $49 million on revenue of $575 million based on range midpoints, as pandemic headwinds and the divestment of the company’s tree business projects to a 20-25% revenue decline in its Development Services segment. Otherwise, backlogs indicate that the Development Services unit should return to prior-year levels beginning in 3Q FY21 and the underlying fundamentals of the core contract landscape maintenance business remain strong with a return to growth anticipated in the 2H FY21. BrightView has made four acquisitions since October 2020, which should add $80 million of incremental revenue, and has $400 million of revenue in its M&A pipeline.

Source: February Company Presentation

Balance Sheet & Analyst Commentary

The company held cash and equivalents of $81.6 million with total liquidity of $324.2 million as of December 31, 2020. On the same date, its financial obligations totaled $1.17 billion, putting its leverage at a noticeable 4.0x. However, if the 2Q FY20 snowfall had been normal and the acquisitions in 1Q21 were in line with 1Q20, leverage would have been 3.5x. Management’s longer-term target is sub 3x. The company does not presently pay a dividend, continuing to employ free cash flow to pay down debt and execute acquisitions.

Source: February Company Presentation

Of the seven analyst firms making commentary over the past year or so, there are two Hold and five Buy ratings. Their FY21 consensus Adj. EPS estimate is $1.05 on revenue of $2.42 billion versus the $0.91 earned on $2.35 billion in FY20.

The President of Landscaping Development Thomas Donnelly let his opinion be known with a February 9, 2021 purchase of 5,000 shares at $15.32.

Verdict

Shares of BV have enjoyed a solid move, up approximately 130% off its 52-week low ($6.85), realized during the March pandemic selloff. BrightView is in a position to realize solid synergies with its acquisition model and generate a significant amount of cash flow when economic conditions return to some semblance of normal. It could be hurt by a possible deceleration of office park buildouts owing to the success of work-from-home achieved by many businesses during the pandemic. Either way, the company will grow mostly through acquisition synergies and not rapid organic growth. As such, it should not command a sky-high P/E multiple, although at 16x FY21E EPS – albeit with a current leverage ratio of 4.0 – it should have further upside in a post-pandemic world. However, with 62.4 million shares still owned by private equity interests, any meaningful move will probably be met with a spot secondary.

This name reminds me how Service Corporation International (SCI) rolled up so much of the funeral space in the 70s and 80s when I was reading Peter Lynch. Given the stock's recent large run up, BV probably only merits a small 'watch item' position for now. However, if we ever get a market correction that brings this equity down into the low teens, it may merit a larger stake at that time as the company should have years of growth ahead of it.

"Life is really simple, but we insist on making it complicated.”― Confucius

Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum

Analyst’s Disclosure: I am/we are long BV. 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.