BOYD GROUP INCOME FUND BYD.UN
April 05, 2017 - 7:52pm EST by
vincent975
2017 2018
Price: 84.00 EPS 0 0
Shares Out. (in M): 20 P/E 0 0
Market Cap (in $M): 1,650 P/FCF 16.6 14.5
Net Debt (in $M): 60 EBIT 134 156
TEV ($): 1,739 TEV/EBIT 13.0 11.1

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  • Canada
 

Description

 
How would you like to own the only publicly-traded company in a rapidly consolidating space at a discount to
recent private equity transactions? From 2006 to 2016, Boyd was the best performing stock on the TSE. Despite this already outstanding result, I believe there is more upside left in the shares.
 
At the price of C$84.00, the shares trade for ~11x 2018E EBIT. Using 2017 estimates, I calculate the shares trade
for ~12x EBITDA, whereas a competitor was recently purchased for 15.2x pro forma adjusted EBITDA.
 
The North American auto repair market is highly cash generative and recession-resistant as repairs are non-
discretionary and mostly paid for by insurance companies. Boyd has the opportunity to continue to grow same store
sales from increased repair spending but mostly from market share capture and additional acquisitions of single sites
and multi-shop operators (MSOs).
 
Business Description
Boyd is an operator of 362 non-franchised North American collision repair centers. These body shops provide repair
services to insurance companies, individual vehicle owners and fleet/lease customers. Two other smaller businesses
consist of retail auto glass operations (42 centers) and a third party claims administrator (Gerber National Claim
Services*) which acts as a middleman between the customer and the fleet management and insurance segment for
emergency roadside assistance (i.e. first notice of loss, glass and other services). These smaller units account for
10% or less of revenues. The Canadian listing is a misnomer as >90% of Boyd's revenue is from its US operations.
 
*GNCS cites 5,500 and 4,600 affiliated glass provider locations and emergency roadside service providers.
 
For the main business of collision repair, the drivers of revenue include accident frequency and the cost of repairs.
Both claims frequency and repair severity has climbed as a function of increased miles driven, congestion,
additional registered vehicles and more distracted driving (https://www.wsj.com/articles/smartphone-addicts-behind-the-wheel-drive-car-insurance-rates-higher-1487592007). The severity of damage has also risen due to more
sophisticated automotive technology and complexity in new cars (high recent SAAR means more new cars which
means increased claim severity and higher likelihood of repair; collision avoidance technology is an offset).
 
Insurance
The key advantage Boyd maintains over smaller players is access to Direct Repair Programs (DRPs). These are
preferred programs (i.e. referral arrangements) with insurance companies that drive volume to more sophisticated
national body shop networks. It is a symbiotic relationshipas companies like Boyd offer insurers higher customer
satisfaction, quicker repair times (reduced length of car rental) and lower average cost of repairs through economies
of scale and best practices (e.g. repairs higher percentage of damaged parts versus replacing). As a result, insurance
carriers recommend these locations to customers looking for a body shop after an accident. These national, regional
and local DRPs provide an opportunity to drive market share wins as insurers seek to consolidate repairs with fewer
shops to reduce cost and complexity and add consistency.
 
From the insurer’s perspective, this is an important point of contact with the customer. Many customers view the
repair process as an extension of the insurance company. A significant portion of customer satisfaction with the
insurer is determined during this phase. A good result (high quality and quick turnaround) leads to better customer
retention, which ultimately reduces customer acquisition costs for the insurer.
 
To explain the process a bit further, I’ll provide an example. The average driver gets into an accident every seven
years. The claims process begins when the driver calls his/her insurance carrier. In most cases, the insured selects an auto body shop from a list of recommended centers provided by the carrier as part of its DRP. In many cases, instead of sending out an adjuster, the shop completes the estimate and paperwork for the insurer. Immediately or shortly after the repairs are completed, the insurance company remits payment to the body shop. Again, being part of these programs allows Boyd to win share at the expense of smaller operators and to rapidly increase volumes at newly-acquired shops. The acquired shops also benefit from re-branding, new contracts with vendors replacing existing arrangements and general operational improvements.
 
Industry
US collision repair spending is expected to increase ~1% annually over the next five years (per CCC). This is
slightly lower than recent trends. The breakdown of this spending is as follows: Labor (45%), parts (41%), paint
and other materials (10%) and other miscellaneous (4%).
 
The collision repair industry is highly fragmented. Most shops are small independents - family-owned or single site
operations. In recent years, the trend has been slightly growing total collision revenue* spread over a few number of
shops. For example, in 2006, total sites approximated 45,000 compared to ~33,000 today. Over the same timeframe,
revenue per site rose almost 50%. Large MSOs control an estimated 21.5% of the US$36+ billion market but
account for only ~6.5% of total locations. This results in plenty of remaining consolidation opportunities. Outside of
Boyd, the larger players include Service King (Blackstone and Carlyle), Caliber Collision (OMERS and Leonard
Green) and Abra Auto Body & Glass (Hellman & Friedman).
 
*Comprised of paint and body repair (~80%), glass repair and replacement (~10%) and other.
 
Why do smaller players sell?
There are several reasons but a few include reduced volumes as larger MSOs gain market share, required capital
expenditures due to more complex jobs (including aluminum repairs  where equipment can cost $50,000-$100,000) and succession issues.
 
More on Company
Boyd added 58 locations in 2016 and reported same store sales growth of 5.3% compared to 5.6% and 7.2% in 2015
and 2014, respectively. This compares to the 5-year and 10-year averages of 4.7% and 4.5%. The company has
reported 16 straight quarters of same store sales growth. The average Boyd facility (including glass operations)
generates approximately 3x the revenue compared to the industry average.
 
For new shops, Boyd employs the "Wow Operating Way" initiative to drive operational process improvements,
specifically cycle times and customer satisfaction. These best practices are rolled out to all new locations within a 3-
9 month timeframe. Due to relatively high fixed costs, incremental volumes show a high contribution margin. As
such, gross margins at mature stores are higher compared to new or recently-acquired sites. As these newer facilities age, we should see overall margins improve.
 
In recent years, Boyd added more corporate development resources to help drive M&A activity. Management's
growth target is to double the business over the next five years (started in 2016) through same store sales,
acquisitions and new site development (e.g. 7 start-ups and brownfields added in 2016). Boyd targets 25% pre-tax
ROIC (defined as EBITDA/invested capital implying 4x pro forma EBITDA). Typically, larger MSOs sell for ~7x
EBITDA whereas single sites receive 4x-5x (seller’s) EBITDA. When rolled into a larger system, the multiples are
estimated to be ~2x lower on a synergistic basis after factoring in incremental volumes, improved vendor terms
(parts, paints, rental cars, etc.) and the upgrading of under-invested facilities.
 
The business is capital light as most repair facilities are leased and maintenance capital expenditures are estimated at ~0.8% of sales. Additionally, this industry operates with negative working capital due to short-term receivable
cycles from insurers*. This serves as another source of cash flow as the company grows. Therefore, Boyd’s
acquisitions are largely funded with internally-generated cash.
 
*In general, an estimated 50% of receivables are collected before the car leaves the shop, with the remaining received in <1 month.
 
Capital Structure
The capital structure is straightforward. Total debt of C$171 million is comprised of bank borrowings (C$33
million), convertible debentures (C$58 million - captured in dilute share count), seller notes (C$68 million) and
capital leases (C$12 million). The company is conservative and the balance sheet is under-levered (<1x) relative to
peers leaving significant “dry powder” (>C$350 million) for acquisitions. Management indicated comfort with net
leverage of ~2x.
 
Total shares outstanding consist of two components - units outstanding (publicly-traded) and Boyd Group Holdings
Inc. ownership of A shares which can be exchanged for units. There is a good description of this in the annual report.
Total diluted share are 19.6 million for an enterprise value of C$1.7 billion.
 
Net Debt C$60 million (convertible bond captured as equity)
Minority Interest C$29
Market Capitalization C$1,650 (0.7% dividend yield)
Enterprise Value C$1,739
 
Financials
The shares sold off after the 4Q conference call when management guided to “very modest” same store sales growth
in 1Q due to warm and dry weather*. In 4Q, SSS grew 4.5% and the company reported revenue and EBITDA of
C$360 (+15% yoy) and C$33 million (+14% yoy), respectively. For the year, Boyd reported 30 bps improvement in
EBITDA margins and 210 bps since 2012 to ~9%.
 
*An estimated 40%-50% of US collision locations are in markets experiencing this weaker weather-related demand.
 
Previously, management mentioned EBITDA margins could exceed 10% at the right levels of utilization. In 2006,
opex as a percentage of sales was 39.1% compared to 36.8% in 2016. This margin improvement should continue in the years to come.
 
I calculate that current run-rate EBITDA plus modest same store sales growth and acquisitions similar to 2016 results in 2017E EBITDA of ~$146 MM. Netting out normalized maintenance capex* leaves UFCF of $134 million.  Rolling the numbers forward a year and factoring in additional acquisitions gives me EBITDA and UFCF of >$170 and >$155 million, respectively.
 
*2017 guidance of $25-$28 million accounts for IT infrastructure and specialized equipment (aluminum repairs) relating to new technologies.
 
Valuation
Using the 2018 numbers, the shares trade for 11x UFCF. I think this is a cheap creation multiple considering the
inorganic and organic expansion opportunities plus expected same site growth totaling in the mid-teens. Another source of potential value is the untapped balance sheet. Boyd is clearly under-levered. Compared to other players, the balance sheet offers the opportunity to complete a large transaction or a series of smaller deals without having to raise equity.
 
 
On its most recent call, the CEO noted the purchase of a minority stake in Caliber Collision for 15.2x a “generously adjusted normalized EBITDA. This is not far off from other similar transactions. Service King, owned by Blackstone and Carlyle is reportedly expected to generate “upwards of $2 billion” in a sale process that was reportedly initiated. If we capitalize EBITDA at a 15x multiple, the shares are worth over C$105/share and C$125 if we roll forward a year. At 12x 2018E EBITDA, the shares are worth ~C$100.
 
Risks
1. Declines in insurance claims as a function of reduced collisions and repairable automobiles
 
Crash avoidance technology expected to reduce accident frequency by ~20% over the next 25-30
years but spending per accident expected to partially offset
 
Collision avoidance technology, driverless vehicles and other safety improvements; if every car
went autonomous (100%), it would take 15+ years to replace existing fleet
 
Increased replacement of more complex technology rather than repair which has higher margins
 
2. Roll-up model
 
The roll-up model is often questioned but in this space it works well as larger players have years of experience
consolidating and a distinct competitive advantage relative to smaller competitors.
 
3. SAAR, general economic conditions (unemployment) and miles driven (higher gas prices)
 
4. Loss of DRP relationships (top five insurance customers represent 49% of sales)
 
5. Integration issues; ability to retain technicians
 
6. Increasing competition for acquisitions; scarcity of medium-sized MSO deals
 
7. Declines in used car prices which insurers tie to their “actual cash value (ACV) calculation. This makes it
more likely a “total loss” will be declared leading to more non-repairs (~15% of accident classifications)
 
8. Multiple compression
 
9. Canadian dollar strength
 
10. Equity issuance to fund acquisitions
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

-Acquisitions
-Sale of Service King providing another private market valuation data point
-Takeout by private equity? Merger with PE player (back door listing for currently private player)
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    Description

     
    How would you like to own the only publicly-traded company in a rapidly consolidating space at a discount to
    recent private equity transactions? From 2006 to 2016, Boyd was the best performing stock on the TSE. Despite this already outstanding result, I believe there is more upside left in the shares.
     
    At the price of C$84.00, the shares trade for ~11x 2018E EBIT. Using 2017 estimates, I calculate the shares trade
    for ~12x EBITDA, whereas a competitor was recently purchased for 15.2x pro forma adjusted EBITDA.
     
    The North American auto repair market is highly cash generative and recession-resistant as repairs are non-
    discretionary and mostly paid for by insurance companies. Boyd has the opportunity to continue to grow same store
    sales from increased repair spending but mostly from market share capture and additional acquisitions of single sites
    and multi-shop operators (MSOs).
     
    Business Description
    Boyd is an operator of 362 non-franchised North American collision repair centers. These body shops provide repair
    services to insurance companies, individual vehicle owners and fleet/lease customers. Two other smaller businesses
    consist of retail auto glass operations (42 centers) and a third party claims administrator (Gerber National Claim
    Services*) which acts as a middleman between the customer and the fleet management and insurance segment for
    emergency roadside assistance (i.e. first notice of loss, glass and other services). These smaller units account for
    10% or less of revenues. The Canadian listing is a misnomer as >90% of Boyd's revenue is from its US operations.
     
    *GNCS cites 5,500 and 4,600 affiliated glass provider locations and emergency roadside service providers.
     
    For the main business of collision repair, the drivers of revenue include accident frequency and the cost of repairs.
    Both claims frequency and repair severity has climbed as a function of increased miles driven, congestion,
    additional registered vehicles and more distracted driving (https://www.wsj.com/articles/smartphone-addicts-behind-the-wheel-drive-car-insurance-rates-higher-1487592007). The severity of damage has also risen due to more
    sophisticated automotive technology and complexity in new cars (high recent SAAR means more new cars which
    means increased claim severity and higher likelihood of repair; collision avoidance technology is an offset).
     
    Insurance
    The key advantage Boyd maintains over smaller players is access to Direct Repair Programs (DRPs). These are
    preferred programs (i.e. referral arrangements) with insurance companies that drive volume to more sophisticated
    national body shop networks. It is a symbiotic relationshipas companies like Boyd offer insurers higher customer
    satisfaction, quicker repair times (reduced length of car rental) and lower average cost of repairs through economies
    of scale and best practices (e.g. repairs higher percentage of damaged parts versus replacing). As a result, insurance
    carriers recommend these locations to customers looking for a body shop after an accident. These national, regional
    and local DRPs provide an opportunity to drive market share wins as insurers seek to consolidate repairs with fewer
    shops to reduce cost and complexity and add consistency.
     
    From the insurer’s perspective, this is an important point of contact with the customer. Many customers view the
    repair process as an extension of the insurance company. A significant portion of customer satisfaction with the
    insurer is determined during this phase. A good result (high quality and quick turnaround) leads to better customer
    retention, which ultimately reduces customer acquisition costs for the insurer.
     
    To explain the process a bit further, I’ll provide an example. The average driver gets into an accident every seven
    years. The claims process begins when the driver calls his/her insurance carrier. In most cases, the insured selects an auto body shop from a list of recommended centers provided by the carrier as part of its DRP. In many cases, instead of sending out an adjuster, the shop completes the estimate and paperwork for the insurer. Immediately or shortly after the repairs are completed, the insurance company remits payment to the body shop. Again, being part of these programs allows Boyd to win share at the expense of smaller operators and to rapidly increase volumes at newly-acquired shops. The acquired shops also benefit from re-branding, new contracts with vendors replacing existing arrangements and general operational improvements.
     
    Industry
    US collision repair spending is expected to increase ~1% annually over the next five years (per CCC). This is
    slightly lower than recent trends. The breakdown of this spending is as follows: Labor (45%), parts (41%), paint
    and other materials (10%) and other miscellaneous (4%).
     
    The collision repair industry is highly fragmented. Most shops are small independents - family-owned or single site
    operations. In recent years, the trend has been slightly growing total collision revenue* spread over a few number of
    shops. For example, in 2006, total sites approximated 45,000 compared to ~33,000 today. Over the same timeframe,
    revenue per site rose almost 50%. Large MSOs control an estimated 21.5% of the US$36+ billion market but
    account for only ~6.5% of total locations. This results in plenty of remaining consolidation opportunities. Outside of
    Boyd, the larger players include Service King (Blackstone and Carlyle), Caliber Collision (OMERS and Leonard
    Green) and Abra Auto Body & Glass (Hellman & Friedman).
     
    *Comprised of paint and body repair (~80%), glass repair and replacement (~10%) and other.
     
    Why do smaller players sell?
    There are several reasons but a few include reduced volumes as larger MSOs gain market share, required capital
    expenditures due to more complex jobs (including aluminum repairs  where equipment can cost $50,000-$100,000) and succession issues.
     
    More on Company
    Boyd added 58 locations in 2016 and reported same store sales growth of 5.3% compared to 5.6% and 7.2% in 2015
    and 2014, respectively. This compares to the 5-year and 10-year averages of 4.7% and 4.5%. The company has
    reported 16 straight quarters of same store sales growth. The average Boyd facility (including glass operations)
    generates approximately 3x the revenue compared to the industry average.
     
    For new shops, Boyd employs the "Wow Operating Way" initiative to drive operational process improvements,
    specifically cycle times and customer satisfaction. These best practices are rolled out to all new locations within a 3-
    9 month timeframe. Due to relatively high fixed costs, incremental volumes show a high contribution margin. As
    such, gross margins at mature stores are higher compared to new or recently-acquired sites. As these newer facilities age, we should see overall margins improve.
     
    In recent years, Boyd added more corporate development resources to help drive M&A activity. Management's
    growth target is to double the business over the next five years (started in 2016) through same store sales,
    acquisitions and new site development (e.g. 7 start-ups and brownfields added in 2016). Boyd targets 25% pre-tax
    ROIC (defined as EBITDA/invested capital implying 4x pro forma EBITDA). Typically, larger MSOs sell for ~7x
    EBITDA whereas single sites receive 4x-5x (seller’s) EBITDA. When rolled into a larger system, the multiples are
    estimated to be ~2x lower on a synergistic basis after factoring in incremental volumes, improved vendor terms
    (parts, paints, rental cars, etc.) and the upgrading of under-invested facilities.
     
    The business is capital light as most repair facilities are leased and maintenance capital expenditures are estimated at ~0.8% of sales. Additionally, this industry operates with negative working capital due to short-term receivable
    cycles from insurers*. This serves as another source of cash flow as the company grows. Therefore, Boyd’s
    acquisitions are largely funded with internally-generated cash.
     
    *In general, an estimated 50% of receivables are collected before the car leaves the shop, with the remaining received in <1 month.
     
    Capital Structure
    The capital structure is straightforward. Total debt of C$171 million is comprised of bank borrowings (C$33
    million), convertible debentures (C$58 million - captured in dilute share count), seller notes (C$68 million) and
    capital leases (C$12 million). The company is conservative and the balance sheet is under-levered (<1x) relative to
    peers leaving significant “dry powder” (>C$350 million) for acquisitions. Management indicated comfort with net
    leverage of ~2x.
     
    Total shares outstanding consist of two components - units outstanding (publicly-traded) and Boyd Group Holdings
    Inc. ownership of A shares which can be exchanged for units. There is a good description of this in the annual report.
    Total diluted share are 19.6 million for an enterprise value of C$1.7 billion.
     
    Net Debt C$60 million (convertible bond captured as equity)
    Minority Interest C$29
    Market Capitalization C$1,650 (0.7% dividend yield)
    Enterprise Value C$1,739
     
    Financials
    The shares sold off after the 4Q conference call when management guided to “very modest” same store sales growth
    in 1Q due to warm and dry weather*. In 4Q, SSS grew 4.5% and the company reported revenue and EBITDA of
    C$360 (+15% yoy) and C$33 million (+14% yoy), respectively. For the year, Boyd reported 30 bps improvement in
    EBITDA margins and 210 bps since 2012 to ~9%.
     
    *An estimated 40%-50% of US collision locations are in markets experiencing this weaker weather-related demand.
     
    Previously, management mentioned EBITDA margins could exceed 10% at the right levels of utilization. In 2006,
    opex as a percentage of sales was 39.1% compared to 36.8% in 2016. This margin improvement should continue in the years to come.
     
    I calculate that current run-rate EBITDA plus modest same store sales growth and acquisitions similar to 2016 results in 2017E EBITDA of ~$146 MM. Netting out normalized maintenance capex* leaves UFCF of $134 million.  Rolling the numbers forward a year and factoring in additional acquisitions gives me EBITDA and UFCF of >$170 and >$155 million, respectively.
     
    *2017 guidance of $25-$28 million accounts for IT infrastructure and specialized equipment (aluminum repairs) relating to new technologies.
     
    Valuation
    Using the 2018 numbers, the shares trade for 11x UFCF. I think this is a cheap creation multiple considering the
    inorganic and organic expansion opportunities plus expected same site growth totaling in the mid-teens. Another source of potential value is the untapped balance sheet. Boyd is clearly under-levered. Compared to other players, the balance sheet offers the opportunity to complete a large transaction or a series of smaller deals without having to raise equity.
     
     
    On its most recent call, the CEO noted the purchase of a minority stake in Caliber Collision for 15.2x a “generously adjusted normalized EBITDA. This is not far off from other similar transactions. Service King, owned by Blackstone and Carlyle is reportedly expected to generate “upwards of $2 billion” in a sale process that was reportedly initiated. If we capitalize EBITDA at a 15x multiple, the shares are worth over C$105/share and C$125 if we roll forward a year. At 12x 2018E EBITDA, the shares are worth ~C$100.
     
    Risks
    1. Declines in insurance claims as a function of reduced collisions and repairable automobiles
     
    Crash avoidance technology expected to reduce accident frequency by ~20% over the next 25-30
    years but spending per accident expected to partially offset
     
    Collision avoidance technology, driverless vehicles and other safety improvements; if every car
    went autonomous (100%), it would take 15+ years to replace existing fleet
     
    Increased replacement of more complex technology rather than repair which has higher margins
     
    2. Roll-up model
     
    The roll-up model is often questioned but in this space it works well as larger players have years of experience
    consolidating and a distinct competitive advantage relative to smaller competitors.
     
    3. SAAR, general economic conditions (unemployment) and miles driven (higher gas prices)
     
    4. Loss of DRP relationships (top five insurance customers represent 49% of sales)
     
    5. Integration issues; ability to retain technicians
     
    6. Increasing competition for acquisitions; scarcity of medium-sized MSO deals
     
    7. Declines in used car prices which insurers tie to their “actual cash value (ACV) calculation. This makes it
    more likely a “total loss” will be declared leading to more non-repairs (~15% of accident classifications)
     
    8. Multiple compression
     
    9. Canadian dollar strength
     
    10. Equity issuance to fund acquisitions
     
     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    -Acquisitions
    -Sale of Service King providing another private market valuation data point
    -Takeout by private equity? Merger with PE player (back door listing for currently private player)

    Messages


    SubjectUsed Car Pricing
    Entry04/06/2017 11:04 AM
    MemberPop4Pres
    Thanks for the interesting idea. We've actually been doing some work on this name as well. We like the idea of an unlevered roll-up that actually converts revenue to FCF and trades at a reasonable multiple. 
     
    I do have a quick question with respect to used car pricing and cars deemed a total loss, though. It's my understanding that when a car is in a serious enough accident to potentially be sent to collision repair, that the insurance company has to make a determination with regard to whether to repair the car or deem it a total loss and write the customer a check for the value of the car. I assume the value of the check written to the customer is based on the used car value of the car that was totaled. So if used car prices go down (which appears to be happening), do the insurance companies deem more cars to be total losses (as it's cheaper to write the customer a check than pay for the repair) and thus collision repair volumes decline? If true, this would obviously a cyclical element and not a secular flaw in the business, but it would certainly affect when the best time to enter the investment may be. 
     
    Or am I misunderstanding the mechanics of what happens with cars deemed total losses?
     
    Thanks in advance! 

    SubjectRe: Nice write-up
    Entry04/06/2017 10:25 PM
    Membervincent975

    Hi LuckyDog,

    Thank you re: nice write-up.

    Others may disagree, but I've always viewed VIC write-ups as a starting point for an investment. It's then up to the reader to do his or her own due diligence and perhaps follow-up with some specific questions.

    My report described the company, industry and discussed the valuation. You asked me over 20 questions, many of which are multi-part and very in-depth. They read like a due diligence list an investment banker sends a company or what a senior analyst sends a junior analyst. I don't think it a realistic "ask" for me to reply to all of these questions.

    My advice is to flip through the company's presentation, read the annual report, conference call transcripts and analyst reports (specifically the RBC initiation and prior VIC reports) and call the CFO.

    Best,


    Vincent  

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