|Shares Out. (in M):||13||P/E||9.5x||8.6x|
|Market Cap (in M):||164||P/FCF||9.5x||8.6x|
|Net Debt (in M):||28||EBIT||16||24|
Boyd Group Income Fund ("Boyd Group" or the "Company") is a Canadian-listed income trust that operates the largest network of automobile collision repair shops in North America. The Company currently trades for roughly 9x projected 2012 cash EPS (cash EPS defined as reported operating EPS plus a favorable D&A/capex spread of roughly C$3mm). This is an extremely attractive multiple for a business with strong long-term demand dynamics driven by secular industry changes, material incremental growth potential through roll-up opportunities, strong free cash flow characteristics, outstanding cash returns on both invested capital (>20%) and equity (>40%), and a financially conservative management team.
Boyd Group has over 160 locations, split roughly 75%/25% between the United States and Canada. These locations, spread among 13 states and four Canadian provinces, operate under a number of different brand names, including Boyd Autobody & Glass, Gerber Collision & Glass, True2Form Collision Repair Centers, and Cars Collision Center. The Company is currently in the process of standardizing a number of its brand names, particularly those that are the result of recent acquisition activity (True2Form and Cars), which will lead to more uniformity in its national brands.
The North American automobile collision repair industry is highly fragmented. With total annual industry revenues estimated between $30 and $40 billion, the top 10 operators have an aggregate market share of less than 5%. As a result of this fragmentation, insurance companies, which pay for the vast majority of collision repair, have historically had to deal on a local level with an overwhelming number of small, independent operators. This dynamic, however, has begun to change in recent years with the introduction by insurance companies of Direct Repair Programs ("DRPs"). Through a DRP, the insurance company steers their policyholder to an approved repair provider. By running a higher percentage of repair business through these approved providers, insurance companies can typically ensure both a higher level of quality control and more consistent pricing, while decreasing their administrative overhead. The growth of DRPs has been a consistent driver of market share shifts over the last several years to the larger operators like Boyd Group, providing a nice boost to same store sales. SSS results can be volatile Q to Q as a result of weather (i.e. particularly inclement winter weather drives growth in accident incidence, thereby benefiting Boyd, for instance); however, this volatility tends to average out over multiple seasonal cycles. SSS growth for Boyd Group over the last few years has typically hovered in the mid-high single digit range, primarily as a result of market share gains.
From its founding roughly 20 years ago, Boyd Group has been built through a combination of both organic growth and acquisition. The Company went through some growing pains in the 2005-06 time frame, at which point it ceased all acquisition activity and refocused its energies on optimizing the existing operation. Concurrently, it worked to improve its balance sheet by halting dividend distributions and devoting free cash generation to paying down debt. At the time, this was viewed by the existing shareholder base as a materially negative development. The Canadian income trust structure was originally designed to incent the underlying companies to pay out a significant portion of their cash flow as dividends (similar to a U.S. REIT structure), so many of the income trust shareholders put a high premium on dividend yield, and were disappointed with Boyd Group's dividend discontinuation.
Although shareholders were unhappy, management's conservative approach to the dividend policy facilitated a reasonably rapid improvement in the Company's financial profile. The Company reinstated a dividend in late 2007, and consistently increased it in-line with continued improvements in financial performance through 2009. At this point, management felt that the Company's financial health put it once again in a position to look externally for growth opportunities. As a result, the Company subsequently sourced and closed two material acquisitions: True2Form Collision Repair Centers in August 2010, which added 37 new locations, and Cars Collision Center in June 2011, which added another 28 locations. Both of these acquisitions have brought a material base of new locations into the Company that, at the time of acquisition, had been operating at profitability levels materially below Boyd Group's corporate average. As best practices, purchasing efficiencies, and corporate overhead leverage are gradually realized, improving profitability at the acquired locations should provide a decent tailwind to continued earnings growth. More recently (early 2012), Boyd Group closed on a smaller multi-location deal in Florida, Master Collision Repair, Inc. ("Master"). Master brings an additional eight locations into Boyd Group, in a particularly attractive market with very little competition from other large multi-location collision repair providers. On its most recent earnings call (4Q 2011), Boyd Group management commented that while there are not seeing a significant number of large multi-location deal opportunities, the environment for small to mid-sized deals is "as favorable as we've ever seen it", and pricing on these deals has been consistently improving.
Working capital needs for Boyd Group's business are modest. Parts are typically ordered as-needed for repair work, which ensures only a limited required investment in inventory, and with 90% of revenue generated from insurance companies (as opposed to individuals) receivables are paid promptly. Moreover, in exchange for exclusivity with its paint supplier, Boyd Group receives prepaid rebates from this supplier that further reduce net working capital requirements and contribute to cash flow. These favorable working capital dynamics, in addition to limited ongoing capital expenditure needs, help drive a consolidated cash return on invested capital of over 20%, and a cash return on equity of over 40%.
Returns on Boyd Group's growth investments are attractive as well. The Company generally targets a 25% pre-tax return (or 20% after-tax) within the first couple of years for both organic growth opportunities and acquisitions. The Company targets a 6-10% annual growth rate in greenfield locations, with an additional growth boost from acquisition activity. Boyd Group's exclusive paint supplier has typically provided favorable financing on acquisitions in exchange for its exclusivity, helping ensure that these acquisitions are accretive to earnings, cash flow, and intrinsic value. A portion of this supplier financing is typically forgivable, effectively providing a subsidy and a net reduction in purchase price to Boyd.
Boyd Group has a favorable spread between its D&A and capex of somewhere between C$3mm and C$6mm (C$0.23-$0.46/shr). Amortization of acquisition-related intangibles currently runs at roughly C$2.5mm/annum. Management has historically guided to a maintenance capex level of 80bp of sales, which would have equated to a bit less than C$3mm in 2011. Compared to a 2011 depreciation charge of C$6.3mm, this would imply a roughly C$3mm favorable spread between depreciation and maintenance capex. The favorable spread is driven by depreciable lives for the Company's relatively simple PP&E (paint booths, buildings) that are materially shorter than those assets' economic lives. Note, as well, that unlike investment pitches that rely on "maintenance" capex that bears no real-world relationship to a company's actual capex, Boyd's capex in each of the last few years has been running materially below the actual level of capex. This gives me comfort that the favorable spread is real, and sustainable.
For 2012, I'm modeling C$440mm in revenues. While this represents a health 23% growth rate over reported 2011 revenues, roughly 80% of the growth can be accounted for by annualization of the June 2011 Cars Collision Center acquisition, the early 2012 Master acquisition, and already-completed single location acquisitions in 2012 (three year-to-date). A 5% SSS comp accounts for the balance. On margins, I'm assuming little lift in 2012 (20bp, to 7.0% EBITDA margins) given the relatively material amount of ongoing M&A integration activity. This yields about $31mm in EBITDA, $24mm in EBIT, and $22mm in pre-tax. I'm using a blended tax rate of 26% (despite having most of its operations in the U.S., the Company retains a material tax benefit from its income trust structure), to yield $16mm in net income. On 13.3mm shares, this yields C$1.20 in reported EPS. The favorable D&A/capex spread adds another C$0.23/shr for a cash EPS number of C$1.43/shr. Versus the current C$12.00 share price, you're buying the Company at just 9x cash EPS.
With respect to potential risks, there are several. 1) The collision repair business is economically sensitive. Although market share gains in recent years for Boyd Group have masked this sensitivity, in times of economic hardship consumers tend to repair their cars less, and drive fewer miles, both of which decrease demand for collision repair services; 2) Near-term, results for Boyd Group will likely be somewhat weak. The extremely warm winter weather will negatively impact Boyd's SSS in its cold weather markets (Chicago, Denver, U.S. northeast) for 1Q 2012 (and possibly into 2Q 2012), and it's likely to post down comps (as guided on its most recent 4Q 2011 earnings call); 3) Last of all, input cost inflation is a concern. Paint costs have been rising in recent years, and price increases generally lag, as insurance company reimbursement levels are typically based on a survey of regional repair cost average, which typically lag input cost increases.
|Entry||03/24/2012 05:04 PM|
|Why do you suppose after all these years the top 10 collision repairers have only 5% of a tens of $billion industry revenues. Why has not insurers who you say pay most of the bills driven consolidation? One would think major insurance companies would long ago have caused a major roll up co to have been created. What share of collision repairs go through new car dealerships who either do the repairs or more likely refer them to a favored collision shop. What share of auto repair is done by top chains, e.g. Midas (just bought by a competitor), Two Guys etc and new car dealers?|
|Subject||RE: Excellent idea|
|Entry||03/24/2012 07:08 PM|
Here's a link to an overview of the marketplace that will hopefully help answer some of your questions:
In terms of the drivers of the fragmented nature of the marketplace, the best I can do is speculate. I believe that a large % of auto body repair is done by dealerships. Notwithstanding the rise of national chains like AutoNation, auto dealerships are still overwhelmingly a very local business. You have multi-location operators in given cities, but not many operators that own franchises in multiple cities. Hence, this piece of the collision repair market has historically tended to fall into the single and small multi-site operator category (and, as such, has been off limits for consolidation purposes).
Ironically, I think that the auto manufacturers themselves have also been somewhat responsible for the fragmentation. Auto manufacturers have been certifying mechanics for a long time, but certification of auto body repair shops and technicians is a much newer phenomenon. As a result, there hasn't been a real defined set of processes and standards; this sort of standardization definitely provides incentive for the establishment of national chains and brands and is helping drive market share consolidation.
Historically, insurance companies have viewed their core competency as underwriting, not repair, although on the margin there have always been insurance-owned repair shops.
I don't know off the top of my head what consolidation looks like in the mechanical repair market (i.e. Midas). However, I think it's fair to say that there are more economies of scale (compared to collision repair), due to the need for significantly higher inventory levels in the business (as compared to collision repair), and hence I would expect this market to be significantly more concentrated than collision repair. If you think about mechanical repair, it can be pretty well bifurcated into routine maintenance (brakes, tires, batteries, exhaust), and non-routine maintenance (drivetrain, suspension, electrical). The national chains are overwhelmingly focused on the routine maintenance items, due to their relative mechanical simplicity, as well as the sheer volume of work that needs to be done. These characteristics make tech training reasonably simple and inventory management straightforward for these chains. The higher value-added work tends to be done by dealers, as there is a lot of brand-specific knowledge necessary to do it properly.
|Entry||04/03/2012 06:50 PM|
You're right with respect to pricing. Pricing is driven by the insurance companies. Typically, collision repair operators are reimbursed on the basis of average pricing for a given type of repair in a certain region (as calculated, I believe, through some sort of random sampling). So, the benefit to the insurance companies is a combination of better quality outcomes and reduction in administrative overhead. There has been a real lack of quality standards in collision repair historically (unlike mechanical repair, where technician certification is a longstanding practice, driven primarily by the auto manufacturer brands themselves). It is only with the emergence of regional and national collision repair brands that some level of standards has begun to be implemented, and an ISO-type focus has emerged. On the administrative front, the regional/national chains are able to implement much more robust ERP systems that ease billing, collections, and provide connectivity to the insurance companies to track the vehicles through every step of the process. I'm not sure if you've dealt with an auto claim in the recent past, but I got rear-ended not long ago. My carrier is Geico. I was able to track pricing estimates, approvals, and the entire repair process in real-time through the web. It was a quantam leap from where things were 10 years ago (for instance). Although much of this IT implementation is driven by the insurance companies, the single and small multi-site operators just don't have the scale to implement the necessary systems to interface. The insurance companies would much rather deal with, and negotiate with, a smaller group of suppliers whom they have confidence in. The proof is really in the pudding on this one: the gains in market share for the regional and national chains over the last five years have been impressive.
Chains that Boyd buys and brings in-house definitely get a bump on the profitability front, although the scale of this can differ materially (my understanding), and is not always disclosed. As you might expect, single locations typically see a much larger bump than larger multi-location tuck-ins. This profitability improvement is due to a combination of overhead leverage, and purchasing leverage on parts and paint. As indicated earlier, pricing is being driven by the insurance companies typically based on regional averages, so if the collision repair operator can drive a more efficient COGS, that will in large part accrue to them (as opposed to the insurance company). The margins for the repair operators are not egregious in any sense, so they don't represent much of a target for the insurance companies to use to seek greater profitability for themselves. Mgmt of Boyd has pointed to EBITDA margin increase targets on the order of a couple hundred basis points for some of their larger acquisitions.
I believe the valuation discrepancy you point to (between purchase multiples for small/single locations, and Boyd's multiple) is a function of several factors. First, as discussed, the inherent bump in profitability per location Boyd's can drive after integrating the acquired business. Second, with Boyd I think the EV reflects the market's expectation that they will continue to create value through their M&A program (i.e. paying for future growth driven by their scale, ability to finance acquisitions accretively, etc.). Third, improved revenue prospects for an acquired location (versus standalone) as a result of regional/national chains like Boyd taking share from the independents (i.e. each location becomes more valuable, as the future stream of revenue and cash flow is higher under Boyd's ownership). Lastly, and possibly most significantly, I think you are definitely seeing muliple arbitrage between the small, local, private market, and the regional/national public markets. For a single (or small multi-location) location owner, the market to sell their business is highly inefficient. They are a limited number of buyers, and information flow is inefficient. Boyd can exploit this inefficiency, and by purchasing the standalone business, immediately get a favorable multiple arbitrage since the public market will (presumably) value the cash flow stream more highly. I don't think this is much different than what you would expect in any roll-up strategy, i.e. the ability to tuck in low-multiple private market businesses to a higher multiple public company, and get the benefit of the inherent multiple expansion.
|Subject||RE: RE: question|
|Entry||04/03/2012 06:52 PM|
Sorry, forgot to answer the paint question. The supplier is PPG.
|Entry||04/10/2012 08:11 PM|
The fundamentals of this roll up story seem to make sense - it seems like the major change the tipped the balance towards scale was the certfication program you mentioned that happened about 5 years ago for repair guys, though it had been around a long time for routine maintenance stuff.
This seems like a national level story then and there must be a lot of other people like Boyd doing similar things - i.e. the other multiple-location operators must all be in acquisition mode?? Are there any other public comps?
|Subject||RE: A couple of thoughts...|
|Entry||04/10/2012 09:14 PM|
I think the WPO - one newspaper town is an interesting one though I'd say the position for autobody repairs is weaker because:
1) local monopolies don't seen nearly as strong - even small towns have multiple car dealers/body shops?
2) customer concentration issue with car repair means that if they are super profitable, they will get squeezed on margins. Can still be very profitable but not insane profitable like local newspaper monopolies.
The ROE is already very high, could it go even higher or does the playing field overall become tougher, forcing the mom and pops basically out of business. You are right about the positive dynamic causing the consolidation but I think you are ignoring the "pass-through" benefits to the customer of these efficiencies, why would Boyd, et al. be able to capture all of these for themselves?
|Entry||04/11/2012 12:33 AM|
You bring up an interesting and critical point as far as competition is concerned. The short answer is no, as Boyd currently has no true pubic/private comparable competitor within any of its local markets and/or within the industry as a whole. Boyd has the biggest, best, and most efficient garage network (i.e. low cost operations, best margins, unmatched scale, superior IT etc.), an unmatched level of geographic diversification and hands down the best management team in what is an extremely fragmented industry with highly attractive consolidation economics - so they pretty much stand alone at this point in their quest to consolidate what is ~$30B niche market. While its true that their a many other quality MLO's in existence, none of them are public or geographically diversified - in fact, in almost every instance they are the dominant shop in a specific city where Boyd does not currently compete and will not compete.
In other words within the local markets where Boyd is dominant their competiton consists almost entirely of mom & pops, who lets be frank, don't have a prayer here - so this is David vs. Goliath type of situation except that David doesn't stand a chance in this case. This is also a situation where I think where management get's it strategically, and because this consolidation opportunity is essentially a high return land grab at this point, they have no incentive/desire to compete with the few worthy competitors in the few areas of the country where real competition actually does exist. I mean why compete, when you can focus on attractive markets with zero real competition. That, and if they want to enter a market where a real comp exists they will just buy them and be done with it (which is a no brainer considering how accretive the acquisition would be given what is a considerable private public arbitrage).
And to your question about other MLO operators and whether they are all in acquisition mode, you would think so but the answer is actually no, and there are very good reasons for this - other quality MLO's just don't have (1) the requisite executive level experience or skill set to get it done (as Boyd's team is the only team in the industry with any real experience in acquiring/successfully integrating other operators) and (2) the requisite access to capital necessary to pull it off even if they did. So again, Boyd stands alone as the biggest (by many orders of magnitude), best, and only publicly traded garge shop in existence with the requisite DRP relationships, acquisition experience, IT and service capabilites, and last but not least the financial wherewithal to lead the charge - and all things considered, it doesn't really seem possible in my mind that this will ever change. At least for the next 5 or so years.
Ultimately I think its really too little and too late at this point, as the mom and pops are toast for obvious reasons, and the train has left the station for the few other players that could have lead this roll-up in another life - as with every additional network acquisition Boyd does the few real potential comps fall farther and farther behind. Like with any network effect business, the bigger Boyd gets the better, so its ultimate value to insurance carriers should grow in tandem with its size. That said, I admit that just because there isn't a true competitor in existence at the moment, that doesn't mean there never will be, and in truth I wouldn't be at all surprised if one (someway/somehow) emerges as the economics of the roll-up and wide open runway here become better understood. Even then though I wouldn't fear it, as its safe to say they would have to be borderline insane to focus on Boyd's markets when they could just focus their attention on the abundence of low hanging fruit available elsewhere. I mean if a MLO management team (probably in conjuction with a PE sponsor) is smart enough to see - and go after - the massive and high return runway here, odds are they are also smart enough to realize attacking the Walmart of the industry on their home turf isn't the wisest way to go about building their business.
|Subject||RE: RE: A couple of thoughts...|
|Entry||04/11/2012 12:59 AM|
Agree that the position of the auto body garage shops is weaker than that of the newspapers, like all analogies, the comparison only goes so far. Yet, I think the salient point that needs to be realized here is that Boyd possesses a truly symbiotic relationship with both its customers and suppliers at this point, and at minimum it it will in all liklihood be a very, very long time before this dynamic would/could change (if ever). I say this because the insurance carriers that hold all the strings here are seeking to reduce the cost and complexity of their distrubution networks and hence realize that Boyd's success is fundamental to the acievement of their own success. So I think its crucial to realize this reality and the fact that the carriers realize that their soft sponsorship of Boyd is part of the solution here, not the problem.
Think about it, so far the carrier’s have benefitted to a very meaningful degree by having many parts of the claims submission, evaluation, and payment process automated/improved upon, which in turn (again) directly reduces their average processing expense per-claim and hence their COGS. So what we have here is a situation where by working only with a small number of trusted providers, carriers are (1) able to permanently/materially lower their cost structures while (2) simultaneously raising the quality of the repair and overall level of customer service provided to policyholder’s and (3) significantly reducing their overall supply chain complexity.
Thats a win, win, win, so I seriously doubt they would start to really squeeze hard the very network that is so critical to the achievement of those goals. They want, indeed they need Boyd to succeed. So at the end of the day, I just don't see it happening as such short sighted actions just don't make an inch of sense give the incentives here and would in fact be shockingly dumb from a long-term point of view. Of course crazier things have happened but again, I just don't see it as a likely outcome.
|Subject||RE: RE: RE: A couple of thoughts...|
|Entry||04/11/2012 07:00 AM|
AAOI and rjm,
I agree that margin expansion seems like it should be a layup for Boyd's. Presumably, they may give some margin back to the insurance companies in order to drive incremental volume, but volume growth from insurance carriers and margin expansion should absolutely not be mutually exclusive. I can't remember whether I've mentioned it previously, but management to-date has been fairly cautious with respect to guiding towards material margin expansion expectations, so I have taken the same approach in my assumptions. However, I do believe that their reticence to do so is born more from caution than any fundamentally different beliefs in how this story unfolds over the next few years.
With respect to comps and the overall competition environment, I would point you again to the following report that I posted:
It is now a couple of years old, but is the best overview I've seen. I would suggest downloading it, as opposed to reading it online, as I tried to highlight a couple of points in the document regarding overall MLO business volume (on page 3), and in the online version this just appears as a big yellow blob. Page 14 includes some detail on competitive MLOs. As you will see, most of these are parts of dealer networks. The other independents mentioned are Caliber, ABRA, Sterling, and Service King.
Hope that helps.
|Subject||RE: RE: RE: RE: A couple of thoughts...|
|Entry||04/11/2012 08:17 AM|
|Yeah, I've spent a fair amoun of time with management talking through the possibilities and think they are playing it right, better to keep expectations low. I just wanted to highlight that aspect of the story because it's a big piece of the longer-term picture. I've linked an updated version of the same report from Oct. 2011. Hard to get good feel for the industry any other way - for me at least, it was an instrumental read as far developing critical insights and connecting all the dots as far as Boyd's ultimate potential. http://www.romans-group.com/pdfs/A%20Profile%20of%20the%20Evolving%20Collision%20Repair%20Marketplace%20Collision%20Week%20Oct%205-7%202011.pdf|
|Subject||RE: RE: RE: RE: RE: A couple of thoughts...|
|Entry||04/11/2012 09:41 AM|
That's great, thanks for the link. I hadn't seen the update.
|Entry||04/12/2012 02:42 PM|
That industry report is great - how did you find that originally?
One question - On page 14 it shows the national regions and % of collision repairs that are done by MLOs (big guys vs. mom and pops). Do you have any idea why the Northeast is 6% vs ~25% for the rest of the country and has gone down? The consolidation dynamic seems to run in reverse there and I can't figure out why that would be.
I have some guesses but would be great to hear your thoughts.
|Subject||RE: National trends|
|Entry||04/12/2012 03:34 PM|
I was originally pointed to the report by Boyd management. I don't have a definitive answer as to the regional market share dynamics and changes, but my guess is that both are driven by the presence of dealer groups (as opposed to pure collision repair operators) in the MSO base. I believe that the report is measuring market shares for MLO groups with >$20mm in revenue. The domestic auto manufacturer bankruptcies, and subsequent forced pruning of the dealer networks, probably sank a few multi-dealer operators below the $20mm threshold. I would also bet that the materially lower MLO presence in the NE is a function of dealer dynamics as well, that is, the dealer networks are probably much more tightly in the NE, making it more difficult to build multi-location dealer operations that meet the $20mm threshold.
Would be interested in any thoughts you might have.
|Subject||RE: Agreement with US mgmt team member?|
|Entry||05/03/2012 06:46 AM|
I do not know anything more than what is disclosed in the annual, but will post additional detail to the extent I get any.
|Subject||RE: RE: Author Exit Recommendation|
|Entry||03/24/2013 06:54 AM|
I actually still have a modestly-sized position in my portfolio, but it's certainly a lot smaller than when I initially put it on. Since VIC requires you to either be "in" or "out" on a position, I decided that I'm closer to out than in at this point.
I've got a fair value in the mid-high 20s, however, a significant amount of the remaining upside is dependent on the company's ability to source additional accretive MSO deals going forward. They've done a lot over the past 12 months, so have their work cut out in terms of integrating those acquisitions, and management commentary implies that valuations may be creeping up given heightened expectations from sellers and a handful of other consolidators looking for the same deals. So, bottom line, seems as if there are some modest incremental headwinds in this regard.
The base business continues to perform decently. This past quarter saw the first positive comps in five quarters (I think...working from memory here). Appears that the company continues to take share. Cash generation is substantial, and would seem to imply continued upside based solely on the value of the existing business, but this is due in part to the funky tax provisions structure. Effective tax rate will creep up over time and eat into that cash flow even with positive comps.
Hope that helps. Bottom line is that this continues to be a moderately priced business with good returns on capital, strong cash flow, and in a good position to continue consolidating, but the road to continued substantial upside gets a bit more difficult from here.
|Subject||RE: RE: RE: Author Exit Recommendation|
|Entry||03/24/2013 06:56 AM|
Meant "funky tax structure", not "funky tax provisions structure". Guilty of overusage of fancy words, as well as lack of caffeine.
|Subject||RE: RE: RE: RE: Author Exit Recommendation|
|Entry||03/24/2013 10:55 AM|
Appreciate the reply - and the idea! Thanks