|Shares Out. (in M):||1||P/E||0.0x||0.0x|
|Market Cap (in M):||604||P/FCF||0.0x||0.0x|
|Net Debt (in M):||0||EBIT||0||0|
Buy Ahern Rentals Senior Secured Second Lien Notes @ 65: likely to be fulcrum security in bankruptcy restructuring of Ahern Rentals. Buying cheap to comps and as the equity, will benefit from secular industry trends in the equipment rental industry over coming years plus company specific operating leverage which has not been showing up in historical numbers due to mismatch between increase in operating cost base (due to build out of branch base beginning in 2009 ) and revenue potential (as branches both take time to ramp up and were established during the recession when utilization and pricing and therefore revenue were depressed).
Ahern is a Nevada based corporation which operates in the equipment rental industry. The company is privately owned with 97% of the company controlled by Don Ahern and 3% by John Paul Ahern Jr. The company is structured as an S Corp so does not pay taxes (shareholders are taxed directly on their respective shares of income. Accordingly, no provision or liability for federal and state income tax is included in Ahern’s financial statements).
As of 9/30/12, the company’s rental fleet included 37,750 total rental units which included 20,063 high reach units, including fork lifts, boom lifts and scissor lifts (~50%+ of total fleet is in what is referred to as “AWP”, Aerial Work Platforms which are used primarily to lift people to different vertical reaches). The remainder of the fleet is comprised of 17,687 general rental units including backhoes, skid steers, skiploaders, trenchers, compressors, generators, light towers, welders, lawn and garden equipment and hand tools. The AWP portion is a concentrated/specialized fleet which supplies a diverse fleet of AWP’s whereas the general rental units is a more diverse and less specialized offering to balance the AWP niche.
Like other equipment rental companies, the key drivers of performance are utilization (i.e. another way of capturing their volume – namely how much their fleet is in use) and rate (price). Utilization is a key data point which almost all the rental companies use to measure their performance. An alternative productivity measure is known as Dollar Utilization which reflects revenue (a function of time utilization and rates) divided by the original cost of the equipment. While not factoring in the costs of operating the rental fleet (such as maintaining a sales force, branches with branch managers and mechanics, maintenance of the machines), dollar utilization does capture the extent to which the company is earning a return on their investment in the fleet (since it is calculated over the original fleet cost, namely the total capex spent to generate that revenue).
Historically, Ahern was a Las Vegas centered rental company that benefitted from the boom in the nonresidential build up in Las Vegas. Projects such as the construction of City Center led to great demand for construction rental equipment. From talking to former and current industry executives, Don Ahern effectively dominated the Las Vegas market through maintaining low pricing and due to a concentrated foot print, was able to maintain profitability as he leveraged fixed overhead (fewer branches since operating in a more contained region) and maximized utilization of his fleet. This made it difficult for competitors to enter the market.
In 2008/2009, realizing that the boom years in Vegas was coming to an end, Ahern embarked on an ambitious growth plan to expand its national footprint. The idea according to some observers was to take machinery which was not being efficiently used in Vegas due to low demand and send it to other parts of the country where demand would be higher. This entailed a significant increase in the total branch count of the company which rose from 43 branches at the end of 2007 to 71 at the end of 2009 and 74 branches across 22 states as of 9/30/12. The company opened 24 branches in 2009 alone. As a reference point for the materiality of these branches openings, while LTM 9/30/12 rental revenue of $332mm actually exceeded the prior peak reached in 2008 of $330mm, LTM EBITDA was $100mm compared to $150mm at the 2008 peak. Much of this has to do with the increased branch footprint which has led to a de-leveraging of the fixed operating cost base which according to some industry participants we spoke to was precisely what fueled Ahern’s pre-recession success in Vegas (i.e. fewer branches meant that if the fleet was able to reach attractive utilization levels, the same cost base could generate revenue leading to higher margins whereas with a larger branch footprint but not necessarily larger fleet, much of the new costs associated with the new branches goes unabsorbed). Cost of rental equipment (effectively the cash COGs component of the core business of renting out equipment) averaged $125mm between 2007 and 2008, the two peak years whereas per Ahern’s 11/30/12 projections for 2012 (which we assume is in line with LTM), is expected to be approximately $169mm, an increase of $44mm. This is a point which we think is important to an investment in Ahern and is discussed further below.
The combination of a large debt load stemming from extensive capex spending in the years leading up to the recession, combined with the downturn in the overall equipment rental industry and in particular, non-residential construction spending which is the primary driver of equipment rentals for Ahern, as the economy crashed during the recession led to financial strain at Ahern. EBITDA troughed in mid-2010 which makes sense even though that would appear to lag the recession as projects in place pre-recession were still being completed when the recession hit hard in 2008/2009. Ahern struggled to rent equipment purchased during the periods of growth (2004-2007) when the economy slowed during the recession. To adapt to the slowdown in Las Vegas as noted above, Ahern engaged in several initiatives including:
1) Redeployment of fleet from Vegas to other markets
2) Opening of 24 branches in 2009-2010 in new markets
3) Cost reductions
4) Reduced capex
5) Focus on customers in segments other than non-residential construction
Nonetheless, the pressures from the recession and though not highlighted by Ahern in their bankruptcy filings, it seems obvious to us that the pressures from an unabsorbed and increased fixed cost base due to more branches pressured the company in the 2009-2010 period. The company struggled along throughout 2010 and 2011, hiring Oppenheimer as a financial advisor in July 2010 to assist in extending Ahern’s Revolver. The company engaged in several other capital structure initiatives in an effort to stay afloat but ultimately was unable to refinance its Revolver which came due on 8/21/11. After several months of failed negotiations, in December of 2011, Ahern filed for bankruptcy in the Bankruptcy court for the District of Nevada.
Brief Overview of Industry Dynamics
The equipment rental industry is a highly fragmented industry with several large national player including Ahern. According to RER, an industry trade magazine, Ahern is the 7th largest equipment rental company in the United States (http://rermag.com/2011-rer-100.pdf). The industry is a local industry in which companies with branches in a given local are generally competing with each other – i.e. China is not a relevant competitor here and a branch in Texas is unlikely to compete with a branch in Florida for the same project given the logistical difficulties and costs of moving large machinery. That being said, the larger a company is and the more branches it has, the better positioned it will be to maximize its fleet utilization. Many of the equipment rental companies have sophisticated IT systems which enable branches to tap into the company wide fleet to help ensure the fleet is deployed to the locations where demand is highest. Ahern touts its “Floating Fleet” model whereby its fleet is not dedicated to any one particular branch but is rather floated based on demand as just described. While this is the optimal way to maximize utilization, from our research, this does not appear to be unique to Ahern and this is pretty much the norm among the larger players that benefit from large branch footprints.
In the non-residential construction segment where Ahern primarily operates, contracts are relatively short term in nature lasting from several days to several weeks to at times several months. The most attractive part of the industry is generally accepted as the Industrial segment whereby rental companies provide fleets to large industrial clients such as chemical or manufacturing plants which have recurring needs for equipment. These are large facilities and lead to long term contracts which help provide attractive revenue visibility. In its bankruptcy filings, Ahern claims it is making a push into this part of the industry but there is little hard data which confirms whether it has been successful yet. United Rentals (URI), the Industry leader in size, acquired RSC in part to take advantage of RSC’s attractive Industrial exposure.
The larger companies benefit in several regards: 1) they have larger branch footprints so can maximize fleet utilization by shifting the fleet from low demand centers to high demand centers; 2) their national presence enables them to cater to some of the national accounts (i.e. companies which have multiple locations and require equipment at more than one site and therefore are incented to interface with a single company rather than smaller local companies at each of their respective locations); 3) volume purchasing discounts enabling them to acquire their fleets a costs materially below smaller independent/mom & pop operations
Ahern clearly has a specialized focused in the AWP space. Other companies also have high percentage of their fleet in AWP but Ahern along with NES seem to be defined most by their concentrated exposure to AWP.
Why specialize in Aerial?
AWP is an attractive part of the equipment rental sector as the units typically have longer useful lives (10-12 years compared to 8-10 years for other types of equipment). Aerial is also one of the newest entrants to the construction equipment scene having taken off beginning as late as the 1980s (beforehand, construction workers would often rely on ladders). Back hoes in contrast have been around much longer. AWP has gradually gained greater acceptance by construction companies over the last 25+ years. When the rental industry was marked by consolidation in the early 2000s, AWP’s got the funding which previously was not as available to this newer entrant to the construction space. Aerial also has high rental penetration and low ownership. One industry executive from NES, which is PE backed but similar in size and focused on AWP to Ahern, noted that when people speak of rental, they generally bucket everything together but you need to separate out Aerial since it has different rental penetration. A JLG (one of the two major manufacturers of AWPs for the domestic market) product manager commented once to this exec that 90% of their production goes to the rental market. The reason for the high rental penetration stems in part from the diversity of AWPs. In aerial you may need a 19 footer for one project but then that same 19 footer may not be able to fit into a building where you need a 10 footer and at the same time will not be of use for the project where you need a 50 footer. It is tremendously beneficial to construction companies to be able to limit their owned fleet while retaining the benefits of the diverse aerial needs they may have through the rental channel. Anecdotally from another source which highlights the extent of rental penetration in Aerial: Aerial manufacturers do not have a dealership network anymore – use of rental channels became well over 50% of aerial equipment sold in the US, so since that is the pipeline they opened their network up and said no need to have robust dealership network. Someone who wants to buy now buys through the rental equipment company.
There are pros and cons to having a concentrated fleet/focus like Ahern has with AWP (granted half its fleet is in general equipment). On the pro side, much of construction work is delegated to a general contractor who then subcontracts out the work to various contractors – i.e. someone who will take care of the windows, someone who will lay the foundation, someone who does the electrical wiring. Each of these sub-contractors has their own specific equipment needs. They only need someone that can provide their niche projects. Accordingly, the sub-contractor that needs AWPs would prefer to rent from a company that has depth in AWP and could care little about a company that has some AWPs but offer s a much broader array of equipment since all it needs are AWPs. On the flip side, many industry observers note that Ahern is at a disadvantage when it comes to trying to gain some of the national accounts when going head to head with companies like URI (even ignoring URI’s much larger footprint) since Ahern cannot offer as diverse a fleet offering as URI. Other companies certainly do have concentrated focus such as Maxim Crane with cranes, Neff with backhoes and NES like Ahern with Aerial.
While Ahern does not breakout more specifically its non-Aerial fleet, one former executive at a competitor who follows the industry closely estimated that 30% of the total fleet is in Material Handling equipment which is used to lift heavy loads of material. Some would classify this as aerial but the sense we got was that between classic AWP’s used to lift people and Material Handling units used to lift heavy loads of material, Ahern has an extremely concentrated fleet offering comprising nearly 80% of its fleet.
Two industry trends are worth noting. The first is the overall trend over the last several decades in which there has been a shift from ownership to renting within the construction space. Dan Kaplan who formerly ran Hertz’s Equipment Rental division has pioneered the analysis in this regard with industry organizations such as the ARA following suit. In the August 2012 edition of RER (an industry trade magazine), Kaplan wrote an article in which he presented data showing that the percentage of rental penetration in North America has risen dramatically from 20% in 1998, to 38% in 2005 to 51% in 2011. Per Kaplan’s estimates, much of the benefits from this increased rental penetration have already been born out, particularly in the last few years as penetration rose from 40% in 2009 11% to 51% in 2011 but is only expected by Kaplan to get to 53% by 2015. This is the secular argument for why this cycle in equipment rental can certainly eclipse the last (i.e. higher percentage renting) though the benefits on a % basis have mostly played out. The % penetration however is critical given the cyclical components of the industry as outlined in the second point on the industry, namely its leverage to non-residential construction.
As noted, second, are general trends in non-residential construction: The general rule of thumb is that non residential construction lags residential construction/housing starts in a recovery by 18 months. The thinking is that first the houses are built then infrastructure such as office building, hospitals, bridges etc. are built afterward. While this is debatable, what is clear is that per US Census data for Non Residential spending put in place, spending peaked in the 2008 time frame with the latest October data point on a seasonally adjusted basis approximately 17% below the peak and is only up approximately 4% YoY. Accordingly, without getting into the nitty gritty of how much growth there will be on the non res side in coming years, it is clear that things have not fully come back and there is an argument to be made that as we have seen strong recovery on the housing/home builder company side, non res will follow suit with the usual lag leading to “several years of plenty” for the equipment rental industry which feeds off of the non-residential sector. From a cyclical standpoint, we are likely in the third inning of the overall recovery and while we have certainly not peaked are not at trough levels either. The combination of increased rental penetration and growing non-residential construction spending over the coming years will prove to be a powerful tailwind for the overall equipment rental industry.
Situation Overview – Ahern Bankruptcy & Capital Structure
As noted, Ahern filed for bankruptcy in December 2011. The company was granted several extensions of its exclusivity right to file a plan of reorganization with the last and final extension ending on November 30, 2012. Prior to filing its plan and disclosure statement with the court, Ahern discussed the terms of the proposed reorganization with the various creditor groups, primarily the First Lien Term Loan Lenders led by Goldman Sachs entity Liberty Harbor and the Majority Second Lien Notes Holder led by Platinum Equity. The plan is a great read (1335 on the docket), primarily for what is blatantly an attempt by Don Ahern to maintain control of the company without fully repaying the creditors above him.
In a nutshell, without getting into all of the details of the bankruptcy law, the plan gave the first and second lien holders options to receive cash payouts of ~80 and 50 cents on the dollar respectively OR to receive loans with egregiously low interest rates (4.25% for the First Lien Term Loans – had been 16% paper) and in the case of the Second Lien Notes, a 2% coupon paper with no cash interest for 5 years and cash interest between years 5 and 7 when the note would mature.
Needless to say, both groups fired back that this plan violated the rule of Absolute Priority in which no class junior to a class can receive a recovery if a class senior to it is impaired. The first and second lien holders made the compelling case that the securities offered by Ahern were in no way equivalent value to their securities and as such the plan was in violation of the Absolute Priority rule and was not confirmable. In a 12/7/12 hearing, the judge overseeing the case sided with the first and second lien holders and noting that he did not “think there’s good faith progress towards reorganization being made,” decided to end the exclusivity which Ahern had had up until 11/30/12.
With exclusivity ended, the judge has opened up the case to the creditors to present their own plans which will likely provide for much more favorable treatment of each of their classes. The end of Ahern’s exclusivity was a critical juncture in the case and a major catalyst for allowing the value particularly in the second lien’s claim to be unlocked.
So what is Ahern worth?
In its disclosure statement, Ahern’s financial advisor Oppenheimer pegged Ahern’s valuation (EV) at between $680mm (low case) and $790mm (high case). Stripping out $610.4mm of claims, leads to implied equity value of $69.6mm and $179.6mm. This compares to assets available for distribution in a liquidation of between $300mm and $392mm with orderly liquidation value of its fleet pegged at $245.1mm as projected on 3/31/12.
This valuation is likely aggressive as it assumes full value for the debt as well as residual equity but there is certainly a case to be made for full value to the second liens (at current price in the mid 60s) through owing the equity.
The capital structure/claim structure of Ahern is rather straightforward (using balances per 11/30/12 disclosure statement):
|DIP - Assumed to be refinanced with Exit Financing||$219|
|First Lien Secured Term Loans||$112|
|Second Lien Secured Loans -Secured Portion (9.25% Notes)||$19|
|Second Lien Secured Loans -Unsecured Portion (9.25% Notes)||$218|
|Total Debt -Principal||$573|
|Plus Accrued Interest on Second Liens||$31|
The DIP was used to refinance the Revolver early on in the bankruptcy. Ahern has been cash flow positive and cash flow has been used throughout the bankruptcy in part to reduce the outstanding balance under the DIP which in the January 2012 MOR was at $239mm compared to $228mm in the October 2012 MOR.
As noted, majority of first lien is controlled by a Goldman Sachs entity and the second lien is majority held by Platinum Equity with other holders including Nomura and Del Mar.
The two best public comps are URI and HEES (though HEEs has more of a distribution business model with sales of a equipment as a percentage of total sales much higher than it is for other players in the space). The best comp is likely NES which is private with Hertz’s Rental Equipment business a good comp as well. Both URI and HEES trade at north of 5.0x 2013E EBITDA. Ashtead Group a UK based equipment rental company which owns Sunbelt, a US based competitor in the equipment rental sector (and which comprises the majority of Ashtead revenue) trades north of 6x 2013E EBITDA. Neff Corp was acquired in a 2007 deal for $900mm+ which off of Adj. EBITDA per Neff filings of $150mm for FY 2006, implies a 6.0x multiple.
Here is what valuation looks like on an EBITDA basis:
|2013E EBITDA ($mm):||$120||$120||$120||$120||$120|
|Total Enterprise Value||$480||$540||$600||$660||$720|
|Plus Cash Generated from Business*||$0||$0||$0||$0||$0|
|Less Admin claims (Professional) from BK**||($5)||($5)||($5)||($5)||($5)|
|Total Value Available to Second Lien||$475||$535||$595||$655||$715|
|*Ignores any cash build/paydown of liabilities between now and confirmation|
|**4x Company E 3/31/13 earned but not paid of 3/31/13 per Liquidation Anaylysis ($1.28mmm)|
|Priority Claim Pool:|
|First Lien Secured Term Loans||$112||$112||$112||$112||$112|
|Other Claims -Secured & Other (Exc. GUC)||$3||$3||$3||$3||$3|
|Value Available to Secured Notes:||$142||$202||$262||$322||$382|
|Second Lien Secured Loans -Secured Portion||$19||$19||$19||$19||$19|
|Second Lien Secured Loans -Unsecured Portion*||$218||$218||$218||$218||$218|
|General Unsecured Claims||$3||$3||$3||$3||$3|
|Total Second Lien Claims Pool||$240||$240||$240||$240||$240|
|Recovery to Second Lien:||59%||84%||109%||134%||159%|
|Capped Return to Second Lien||100%||100%||100%||100%||100%||100%|
|Value to Second Lien (w/ Capped Return)||$142||$202||$240||$240||$240|
|Recovery to Second Lien:||59%||84%||100%||100%||100%|
|Value Remaining for Equity||$0||$0||$22||$82||$142|
|*Excludes Accrued Interest of $31mm; uses Principal claim (deficiency of $218.2mm)|
|Sensitivity Analysis: Second Lien|
|Mid Cycle EBITDA|
It is obvious that recovery is highly sensitive to small movements in both multiples and EBITDA. I used $120mm for EBITDA despite $130mm as presented in the plan (which seems certainly attainable given LTM EBITDA of $100mm and overall industry growth expectations from various industry observers – see URI 2012 Investor day transcript opening discussion for one), since some of EBITDA is actually the non-cash gain on sale from the sale of assets. An important accounting point with regard to almost all of the rental companies is that they tend to over depreciate their assets and often book a gain on sale when they sell their equipment several years after purchase. The GAAP accounting is generally presented with the sale price as revenue, book value of the asset as a corresponding cost leaving the gain (difference between sale and book value) as Gross Profit. This is non-cash obviously and is back as a use of cash in Cash Flow from Operations with the cash received from the sale generally showing up as a cash inflow in Cash Flow from Investing. EBITDA as a cash metric is somewhat inflated for most rental companies. It should be noted, however, that the multiples for URI/HEES are most likely off of the higher EBITDA number which means if adjusted would lead to even higher multiples off of 2013E EBITDA.
What is clear is that using a haircut to management EBITDA (for reasons just explained) at $120mm versus management projection of $130mm and 5.0x in line with comps, the bonds are more than covered. Even at a discount to comps and using 4.5x, the bonds provide meaningful upside to a purchase in the mid 60s.
EBITDA as bad Metric
Given the capital intensity of the business and in particularly the cyclical nature of the capex (capex spending is higher in growth years when the industry is doing well leading to lower free cash flow conversion off of EBITDA and higher in slower periods as companies scale back capex), EBITDA multiples are not an ideal valuation metric for this industry. Something closer to EBITDA-maintenance capex would be a better way to value companies across the industry (itself tricky to calculate as maintenance capex in this industry is more akin to the replacement capex necessary to keep the fleet current as rental companies are constantly selling older portions of their fleet and buying newer equipment which is different than the way maintenance capex is typically thought of in other industries, namely the minimal capex say a manufacturing company requires to maintain its plants at a level necessary to generate normalized earnings with organic growth but without looking at spending which is growth oriented – i.e. building a new manufacturing facility).
Two alternative approaches are as follows:
1) Valuing the company off of some multiple of economic EBIT – namely EBITDA less a depreciation which reflects the capex required to maintain the fleet as current (i.e. some baseline akin to maintenance capex in this industry). Assuming 2013 EBITDA of $120mm and removing net capex of $70mm, gets you ~$60mm in economic EBIT. URI and HEES trade at north of 9.0x 2013E EBIT. Applying a similar 9.0x multiple to Ahern’s $60mm in economic EBIT yield an Enterprise Value of $540mm (not entirely apples to apples since using book EBIT for URI/HEES and economic EBIT for Ahern but close enough since capex for every one of these businesses fluctuates based on the cycle and no company is ever on the same capex schedule as another company which inherently makes apples to apples comparisons difficult across the industry). Removing $333mm of claims ahead of the second liens leaves $207mm of value for an 86% recovery.
2) FCF yields – using plan projections (which can admittedly be debated as too aggressive – see discussion below), 2013-2017 FCF, defined as Operating Cash Flow less Cash Flow from Investing averages to $34mm a year. Applying a range of return requirements still yields attractive recovery to the second liens as the fulcrum security taking the equity in the reorganization:
|FCF Based Valuation|
|Required FCF Yield||8.0%||9.0%||10.0%||11.0%||12.0%||13.0%||14.0%|
|Total Second Lien Claim Pool||$240||$240||$240||$240||$240||$240||$240|
|Recovery to Second Lien||177.3%||157.6%||141.8%||128.9%||118.2%||109.1%||101.3%|
No matter which valuation methodology is employed, it seems there is ample upside for Ahern if an investor buys the second lien notes with downside protection provided by where we are in the cycle (i.e. likely early innings of full recovery), low hanging fruit for Ahern earnings power to grow (see below), and an in place LTM EBITDA of $100mm.
Risks & Mitigants
Q. Ok. So we buy the bond and get the equity. Now what. How do we get out?
A. This is arguably my biggest concern, namely the potential for Ahern to be a value trap. Ahern is likely too small to be an attractive post reorg equity in the public markets so there does remain the potential that this becomes an illiquid private or public company. That being said, we have heard numerous indications that there is both interest for the Ahern assets from PE as well as other bidders. Additionally, there are natural synergies that would exist for Ahern to merge with some of the other national players either with AWP focus such as NES (PE backed) or with other focuses which together with Ahern would enable the creation of a more diverse and formidable competitor to URI (i.e. there is desire for a strong # 2 to URI and Ahern can certainly participate in that).
Q. What happens to Don Ahern? Can this business run without him?
A. This business can definitely run without Don Ahern and according to most people we spoke to would be better off. The equipment rental industry is driven largely by relationships and Don had great relationships in Las Vegas but from what we have heard, Ahern has not yet established solid relationships in the new locations it has entered in the last few years. Its success rather has been a continuation of what it did well in Las Vegas – namely winning business through low pricing. With or without Don Ahern, an improved focus can be placed on relationship building and the branches that have been established can continue to be strengthened. Of greater concern is Don Ahern’s desire to stay involved in the company. There have been proposals in the past by the creditors which involved Don Ahern maintaining some portion of the equity though how it would be structured now would obviously be in a manner attractive to the second liens, especially now that Ahern has lost much of the bargaining power he had while the company had the benefit of plan exclusivity.
Q. Does Ahern deserve to trade at a discount to comps? Are the other companies better than Ahern?
A. Obviously valuation hinges on the right multiple and how Ahern will perform over the coming years. One can easily say, why not just own URI (which I think could be compelling in its own right given the RSC acquisition and FCF build it will have even in the growth stage of the industry when net capex is usually higher than when times are slow as noted above) at a multiple turn higher (albeit 25% higher given we are talking low multiples here!). Looking back historically at various return metrics might support this very case, namely that Ahern has in fact underperformed. I think, however, Ahern’s underperformance can be explained and that there is reason to believe Ahern will perform better going forward than it did historically. Not to mention the argument that owning the worst player in a cyclical industry as the industry is turning from the trough and benefiting from cyclical/secular tailwinds as the equipment rental industry is today is often a recipe for successful investing.
One way to compare companies is to look at returns on Net PP&E as an indication of ROI – The calc we looked at is EBITDA-Capex/Net PP&E of prior year.
Here is how Ahern stacks up against 3 comps (as noted HEES is not a great comp but is included nonetheless):
|Financial Comparison - Ahern & Comps|
|Rental Equipment EBITDA||105||145||179||194||119||121||148|
|Rental Equipment PP&E (E for 2010 & 2011)||263||392||518||546||473||376||282|
|EBITDA - Net Capex||7||-33||-12||83||103||126||150|
|EBITDA/Net Rental PP&E -YE||39.8%||37.0%||34.6%||35.6%||25.1%||32.1%||52.4%|
|EBITDA/Net Rental PP&E -Average||44.3%||39.4%||36.5%||23.3%||28.4%||44.9%|
|Cumulative FCF 2005-2011||424||45||>Spent lot Capex||462||462|
|Smoothed out per year (7 years)||61||11||116||156|
|Annual over Avg Fleet||15%||3%||28%||37%|
|Rental Equipment EBITDA||1,244||1,396||1,470||1,359||920||910||1,159|
|Rental Equipment PP&E||2,319||2,561||2,826||2,746||2,414||2,280||2,617|
|EBITDA - Net Capex||804||858||919||999||889||708||593|
|EBITDA/Net Rental PP&E -YE||53.6%||54.5%||52.0%||49.5%||38.1%||39.9%||44.3%|
|EBITDA/Net Rental PP&E -Average||57.2%||54.6%||48.8%||35.7%||38.8%||47.3%|
|Cumulative FCF 2005-2011||5,770||3,580||3,189|
|Smoothed out per year (7 years)||824||895||797|
|Annual over Avg Fleet||32%||34%||32%|
|Rental Equipment EBITDA||144||211||241||246||149||138||181|
|Rental Equipment PP&E||308||440||578||554||437||427||451|
|EBITDA - Net Capex||68||90||170||243||205||112||118|
|EBITDA/Net Rental PP&E -YE||46.7%||47.9%||41.8%||44.3%||34.2%||32.3%||40.2%|
|EBITDA/Net Rental PP&E -Average||56.3%||47.4%||43.4%||30.1%||31.9%||41.4%|
|Cumulative FCF 2005-2011||1,006||571||678|
|Smoothed out per year (7 years)||144||143||170|
|Annual over Avg Fleet||31%||30%||36%|
|Hertz Equipment Rental Segment||12/31/05||12/31/06||12/31/07||12/31/08||12/31/09||12/31/10||12/31/11|
|Rental Equipment EBITDA||459||623||682||622||394||352||416|
|Rental Equipment PP&E, Net (Revenue Earning Equip)||2,076||2,439||2,698||2,190||1,832||1,704||1,787|
|EBITDA - Net Capex||-280||-46||168||559||490||290||12|
|EBITDA/Net Rental PP&E -YE||22.1%||25.5%||25.3%||28.4%||21.5%||20.6%||23.3%|
|EBITDA/Net Rental PP&E -Average||27.6%||26.5%||25.5%||19.6%||19.9%||23.8%|
|Cumulative FCF 2005-2011||1,192||401||1,350|
|Smoothed out per year (7 years)||170||100||338|
|Annual over Avg Fleet||8%||4%||18%|
If we just look over the 7 year period, URI & HEES have ROIs (defined again as EBITDA-Capex/net PP&E in the 30% range whereas Ahern is half of that at 15%; Hertz actually lags all 3 at 8%. A lot has to do with timing of capex as Hertz scaled back a lot of its capex in the later years leading to materially higher return on net PP&E in the 2008-2011 period.
At first glance, Ahern looks like the dog. Ahern definitely underperformed but the numbers show two things:
1) Ahern spent a lot in the 2005-2007 period, seemingly expecting the boom years to last forever. This crushed FCF in those periods which drives down the return in the calculation.
2) Second, as noted above, while Ahern scaled back capex during the downturn along with all of its peers, it was also engaged in a massive platform growth in which it materially grew the total number of its branches thereby materially increasing its fixed cost base. Even when FCF should have been higher due to Ahern being in the point of the cycle in which capex is scaled back, the added fixed cost base kept EBITDA down thereby reducing Ahern’s overall returns. If we add back $40mm to give some credit for a “what if” treatment of those costs assuming they can be leveraged through increased revenue without materially increased costs, we can crudely see that Ahern’s returns are far more attractive than one might have thought as they approach the 37% range. Obviously to truly benefit from the fixed costs the fleet will have to grow but this is precisely what is projected per Ahern’s projections which have dramatic ramp up in capex over the coming years to make up for the last few years where the fleet did not really grow while at the same time showing positive free cash flow.
Q. Are the projections simply too rosy?
A. Unlike other instances where management is incentivized to sandbag the numbers, here, Don Ahern is incentivized to show the highest numbers he can justify in order to argue for residual equity value after paying off all of the creditors in some form or another. That being said, the growth projections seem in line to below industry expectations in the early years. Much of the growth in the later years will come from the larger fleet size. As discussed above, there are two basic drivers of revenue growth: rate and utilization. On those fronts, Ahern has been lower on the rate side (anecdotally which provides upside if they raise rental rates in line with peers) but has actually performed impressively on the utilization side: Time Utilization for its Aerial fleet was 66% in the LTM 9/30/12 period with 44.6% dollar utilization. This compares reasonably favorably to URI’s Aerial fleet which in the 9/30/12 quarter had Time and Dollar utilization of 74.8% and 42.4% respectively. On a utilization basis, Ahern is still is several hundred bps below which is a potential source of revenue growth - namely increased fleet utilization. Many of its newly opened branches are just now entering the three year old phase where according to some industry execs we spoke to is when branches really ramp up as the sales force needs time to establish relationships and win over customers. The third component of growth is simply adding equipment. While overall industry growth (utilization/rates) may slow, Ahern can benefit from its existing cost base through its various branches by sticking to its projected capex plan, adding to its fleet and increasing revenue (without a one for one corresponding increase in cost since much of the costs are fixed – i.e. branch managers, maintenance staff, sales people at the branches) leading to increased margins and a growing EBITDA.
Additionally, Ahern has done a great job diversifying outside of Las Vegas. Las Vegas now represents 12% of sales compared to 37% in 2005. The diverse geographic exposure further cements Ahern’s ability to generate increased revenue relative to the prior peak as it has a larger footprint which can support a larger fleet base.
Q: Ahern has not spent on capex so presumably has an older fleet compared to comps?
A: Ahern’s fleet is in the 60 months+ range which is 12 months+ more than comps (best estimate from various sources we have spoken to). The fleet age should come down as it sells older equipment and replaces with brand new equipment in coming years as part of its capex program. On top of that, while the fleet is older in age, what really matters is wear and tear and Ahern’s fleet has not been utilized to the same degree that its competitors’ fleets have over the last few years so while not entirely comparable, an underutilized 60 months old fleet is in many senses similar from an economic/value standpoint to a 44 months old fleet which has been used much more.
|Historical and Estimates per Disclosure Statement (all projected and Historical 2006-LTM 9/30/12 Revenue, Adj. EBITDA per Company, Fleet Capex)|
|*May be rounding differences from numbers in Plan|
|Equipment rentals and related||180||237||293||330||250||247||301||332||327||349||384||410||437||460|
|Sale of rental equipment||11||17||25||20||12||24||11||14||14||27||40||46||42||41|
|Sale of new equipment and other||12||12||22||32||22||22||21||22||21||18||20||21||23||24|
|Cost of equipment rental operations exc. D&A||75||92||114||135||131||169||165||175||182||189||195|
|Depreciation, rental equipment||37||54||73||91||92||77||79||82||84||89||94|
|Cost of rental equipment sold||8||11||17||12||9||7||17||26||29||25||24|
|Cost of new equipment sold and other||10||9||17||26||18||15||13||15||16||17||18|
|Total Costs & Expenses||130||167||222||264||250||268||274||297||312||320||330|
|Cost of equip rental etc as % of Equip Rentals||41.8%||38.8%||38.9%||41.0%||52.4%||51.5%||47.3%||45.6%||44.4%||43.2%||42.4%|
|Non rental equipment depreciation||4||6||7||9||10||11||12||13||14||16||17|
|Less Cash Expenses:|
|Cost of equipment rental operations exc. D&A||75||92||114||135||131||169||165||175||182||189||195|
|Cost of rental equipment sold||8||11||17||12||9||7||17||26||29||25||24|
|Cost of new equipment sold and other||10||9||17||26||18||15||13||15||16||17||18|
|Total Normalized Cash Expenses||124||150||196||231||217||257||261||285||299||305||311|
|Company Provided Adj. EBITDA||80||117||145||150||68||53||77||102||105||132||159||178||197||213|
|Adjustments for Sale of Assets*|
|Less Sale of rental equipment||(11)||(17)||(25)||(20)||(12)||(24)||(11)||(14)||(14)||(27)||(40)||(46)||(42)||(41)|
|Plus cost of rental equipment sold||8||11||17||12||9||17||6||8||7||17||26||29||25||24|
|Net Adj. on equipment sold*||(3)||(5)||(8)||(7)||(3)||(7)||(5)||(6)||(6)||(10)||(14)||(16)||(17)||(18)|
|Memo Adj. EBITDA||77||111||137||143||64||46||72||96||99||122||144||162||181||196|
|Memo Adj. EBITDA Margin % -off Equip Rental Sales||42.7%||46.9%||46.6%||43.4%||25.7%||18.5%||23.9%||28.9%||30.2%||35.0%||37.6%||39.4%||41.3%||42.6%|
|Memo Adj. EBITDA Margin -off total sales %||37.7%||41.8%||40.2%||37.4%||22.6%||15.6%||21.6%||26.1%||27.3%||31.1%||32.6%||33.9%||36.0%||37.3%|
|*Removing the book profit on the sale of equipment; the cash received (close to being equal to sale of rental equipment) on Cash Flow|
|Statement (though not always 100%; shows up in the Cash Flow Statement as Net against Capex|
|Remove back Gross Profit on Equip Sold||(3)||(5)||(8)||(7)||(3)||(6)||(10)||(14)||(16)||(17)||(18)|
|Less Reorganization costs||0||0||0||0||0||8||13||0||0||0||0|
|Less Other, net||(0)||(0)||0||0||0||1||0||0||0||(0)||(0)|
|Change in WC||3||11||(6)||(36)||5||(3)||(1)||(6)||4||2||(33)|
|GAAP Cash Flow from Operations||52||93||91||66||35||NA||NA||NA||61||91||123||154||171||153|
|*Cash interest for historical (per SEC filings); book interest per projections per Company 11/30/12 plan|
|Cash Flow from Investing|
|Fleet Capital Expenditures*||(110)||(195)||(217)||(131)||(28)||(45)||(90)||(150)||(175)||(175)||(130)|
|Proceeds from Sale of Equipment||12||17||26||20||12||14||27||40||46||42||42|
|Fleet Capital Expenditures (Net)||(98)||(178)||(191)||(111)||(16)||5||2||(13)||(30)||(63)||(110)||(129)||(133)||(89)|
|Purchases of other Property and Equipment||(11)||(14)||(23)||(20)||(14)||0||0||0||0||0||0|
|*for Historicals, includes line items "Purchases of rental equipment" and "Purchases of other property and equipment)|
|FCF Memo Adj. EBITDA-Net Capex)||(21)||(67)||(54)||32||48||51||74||83||68||59||35||33||48||107|
|FCF (OCF less Net Capex)||(46)||(85)||(100)||(45)||19||NA||NA||NA||31||28||13||25||38||65|
|FCF (OCF less CFI)||(69)||(99)||(122)||(65)||5||NA||NA||NA||31||28||13||25||38||65|
|*Proceeds from Sale of Equipment more or less matches Sale of rental equipment on Income Statement|
|Implied Other (Primarily Debt)||70||107||136||73||(4)|
|Operating Data per 11/30/12 Disclosure Statement|
|Average High Reach Time Utilization||73.0%||72.5%||69.7%||67.0%||55.0%||57.3%||65.6%||66.2%|
|YoY Rental Rate Trends (MD&A of SEC Filings)||11.0%||4.0%||3.0%||-4.0%||-15.0%|
|"Debtor’s Time Utilization and Dollar Utilization metrics follow a similar pattern as its revenue and EBITDA, illustrating strength in the 2005 and 2006 timeframe, declining significantly during the economic recession, and rebounding strongly since June of 2010 as the Debtor’s business has recovered."|
|Definitions per 11/30/12 Disclosure Statement|
|Time Utilization measures the number of total high-reach units on rent for the Debtor’s primary equipment category, compared to the total number of high-reach units available for rent.|
|Dollar Utilization measures, for the entire rental fleet, the interaction of changes in rental rates, product mix, average length of rental and time utilization.|
|Dollar Utilization is the annualized ratio of equipment rentals and related revenues on Debtor’s entire fleet of rental equipment for a period of time compared to the average original cost of Debtor’s rental fleet during the same period.|
|Las Vegas as % of Revenue (through 09 from 10Ks; 10-LTM from BK)||37.4%||35.0%||32.0%||29.0%||25.0%||19.0%||12.0%|
|California as % of Revenue (through 09 from 10Ks; 10-LTM from BK)||NA||35.0%||33.0%||30.0%||28.0%|
|New Branches Opened||2||7||6||17|
|Entry||12/17/2012 06:41 PM|
Try Jefferies and/or Imperial - they have each been very focused on trading this name. As an aside, last week they were both working to put together a bidding group (large block from Platinum coming out in this context). Can also look to Cantor which seems to have an axe.
|Entry||12/18/2012 09:43 PM|
Not clear to me how this plays out from creditors standpoint. Second liens may WANT to be equitized and ride the cycle. Also, Don Ahern definitely wants a piece of this so will be pushing, albeit with less leverage than before to figure out a way to work with the creditors and keep himself involved (which would mean no sale). Ahern the person (i.e. Don) had to argue for high value in order to push for retaining his equity. I think the valuation they put forward was a stretch though and unlikely to get that in a sale. Platinum is looking to sell their piece which is majority of the second lien paper so the dynamics will change if/when that sale goes through as a new group of investors will be leading the charge for the second liens. Will be interesting to see how this plays out and what structure the reorg takes.
|Subject||Stay on the Termination of Exclusivity|
|Entry||12/23/2012 08:09 PM|
This case just got even more interesting. On Friday (12/21/12), following a motion by Ahern to have the bankruptcy court stay the order which provided for the termination of Ahern's exclusivity as the company seeks to appeal the bankruptcy judges ruling in the District Court, the bankruptcy judge ruled in their favor. This means that the terminated exclusivity is stayed for now. In the long run, I do not believe this will lead to anything - hard to see how the District Court can side with Ahern on the merits given how ridiculous the plan of reorg was but it does create an annoyance as this will delay things a bit.
|Subject||RE: Stay on the Termination of Exclusivity|
|Entry||12/24/2012 10:10 AM|
Clarification: stay order came from the district judge, not the bankruptcy judge.
|Entry||12/24/2012 06:54 PM|
Yes. Obvious question is why a firm that owns Maxim Crain would exit a position which could lead to them owning Ahern, mix the two companies, have more diverse fleet, emerge as more formidable competitor to URI etc. etc. etc. This should initially raise major flags to a buyer on the other side (i.e. what does Platinum know that we do not...why are they selling, especially if they own Maxim Crain!). The answer which we have gotten is as follows: Platinum had set up a Loan to Own arm a few years back. Thinking on the Loan to Own side was that it could leverage the operational experience of the private equity arm (internal synergies within Platinum). The loan to own arm is the entity within Platinum which has been active in Ahern. That unit is in the process of being wound down. Next question is even if separate units, at the Platinum consolidated level, one would still think the Private Equity arm would be interested in taking over this position. The reality, however, is that Platinum is structured in distinct silos and different funds/entities do not leverage each other or share resources. This may sound extremely counterintuitive (and I think it is somewhat curious that Platinum would not want a more consolidated operation where units can leverage each other) as it implies no entity will benefit from an investment made by another entitiy within the Platinum family. Therefore, with the loan to own unit being wound down, this poisition is being sold and the fact that the private equity arm has experience in the space through ownership of Maxim Crain is not relevant to the wind down of the loan to own arm. This is the explanation we have heard from guys formerly on the loan to own team and while still makes one scratch ones head as to why the Platinum guys are not bidders (maybe they are) given what appears to be an unexpected internal structure, this is at least what appears to be what is happening. At a minimum (without looking as to why Platinum Private Equityis not interested given its Maxim Crain position), their selling the position is completely understandable when taken in the context of the overall winddown of their loan to own book.
|Subject||RE: RE: Platinum|
|Entry||12/24/2012 06:58 PM|
Re price - not entirely certain but mid 60s seems to be where this is being offered/bids are trying to be put together at least for the Platinum piece. Whether Platinum's piece trades in mid 60s is another question. There are obviously other holders involved (outside of Platinum) where one can potentially source the bonds frrom.
|Subject||Ahern 2nd Liens offered in the 86-90 range (+35%)|
|Entry||03/13/2013 06:03 PM|
Update: Bonds have rallied since we recommended the 2nd liens and are now being offered in the high 80s. New plans out from both company and Creditors. Company calls for 100% recovery through mix of take back paper and cash. Creditors plan calls for recovery in 75-80% range through receipt of equity (obv a lot of upside potential through equity which I think explains why it it is trading north of that range as secular thesis for rental continues to play out and companies poised to print FCF at the 'capex heavy' part of cycle. URI has been a great trade and I think has more to go. Ashtead recently put out strong numbers etc).
At 88, 35% upside from recommendation levels mid December when was being offered in 65 range.
|Subject||Bonds to be paid in full|
|Entry||05/24/2013 04:04 PM|
The judge in the case has approved a $415mm bridge to high yield financing (via Jefferies) which together with an ABL will enable the company to pay the 2nd Liens in full. Bonds already quoted close to par and should basically be in that zone given the payout at par. This paves the way for confirmation of a modified version of the the plan the company had put out a few months back and obviously is extremely positive for the bonds.
|Subject||2nd Lien Final Recovery - 113 pts (74% Return)|
|Entry||05/31/2013 05:28 PM|
2nd liens are getting Par Plus. Pool of $268mm in cash which reflects par plus post petition interest (I am excluding here $10mm of legal fee reimbursement). On initial claim of $237mm this is approximately 113%.
Also get $25mm contingent value right (paid out if Change of Control (at least 50%) in 2 yr period following effective date of emergence) which adds another 10 points of potential upside.
All in, on mid 60s purchase nets 113 points = ~74% Return.
|Subject||RE: 2nd Lien Final Recovery - 113 pts (74% Return)|
|Entry||05/31/2013 06:13 PM|
Great job Eal