Brightview is a buy at $14.50 per share or ~7.5x F2022E EBITDA because we believe the Company will start to show inflecting an organic growth profile thanks to a) a focused investment on the sales capabilities and b) the pass-through of cost inflation in 2022, the company has recently revised their capital allocation priorities to include a share buyback program and the business has consistently generated cash flow despite near-term and medium volatility in their top-line from COVID and a business turnaround.
At 8.5x F2023E EBITDA, BV would trade to ~$25/share or ~70% higher than today’s price
Brightview is the largest commercial landscaper operator in the United States (multiple times bigger than their next competitor). They operate over ~250 branches where they perform landscape services for commercial customers (HOAs, offices, parks, golf courses etc.). The company provides both maintenance landscape services (think lawn moving, edging, flower bed management etc.) and landscape development (installing landscape into newly built commercial and residential properties). The company was formed in the 2010s when KKR bought the then two largest commercial landscape companies, ValleyCrest and Brickman and formed Brightview. Since completing that merger, Brightview has acquired several smaller “tuck-in” acquisitions of landscape companies throughout the US
1)Salesforce investment is starting to pay off. Over the past couple of years, BV has made a concerted effort to hire more salespeople and their systems to drive new business development. That investment manifested itself in two key areas, first Brightview increased their salesforce by 10% and they rolled out a Salesforce CRM across the branches. We believe that we have started to see that investment bear fruit in some of the recently reported numbers (despite the near-term headwinds/volatility from COVID). Below are some of the key data points that we think are showing the improvement
Right before COVID hit, Brightview was on track to announce one of their highest organic growth number in company history. For the quarter ended 3/31/2020, Brightview reported ~2% organic growth in their landscape maintenance division. Prior to this result, the company had been stuck in neutral posting no organic growth
In FQ1 ’21, BV reported that their snow revenue was flat despite snowfall being down ~14% in their regions. The company said that the achievement of flat snow revenue on lower snow activity was a result of increased snow contracts signed during the period
2)Inflation should benefit the top and bottom line.
We believe that Brightview was being intentionally conservative in their initial F2022 guidance for LSD pricing. As we have talked to many participants in the industry, they are all asking their customers for between 5-20% pricing increases to offset labor and cost inflation. As a market leader, we anticipate Brightview to be able to achieve pricing in the middle of this range
The market seems to be missing this. Sell-side estimates have BV’s revenue only growing ~3% in F2022 despite this pricing tailwind, additional contribution from acquisitions done in F2021 and continued return of Brightview’s ancillary business
3)Steady free cash flow generation and improved prioritization of capital priorities
On December 6, 2021 Brightview announced a program to buy-back up to $250MM of stock on the open market
Brightview’s ability to repurchase shares comes from the remarkably steady free cash flow generation the business has demonstrated over the past 5 years. Over the past fiver years, Brightview has generated $730MM of cash or $7/share. The primary use of that capital over the past few years has been to paydown debt or use it for tuck-in acquisitions. We are very excited for Brightview to be able to use their cash to buy back the leading landscaping business in the country for ~7x EBITDA
Free Cash Flow
FCF / share
4)Brightview’s development business is stabilizing and margins should return to normal in F2022. The development business has historically earned low-teens EBITDA margins. In recent quarters development margins have been in the 10% range. We think that the development business will get back to its historical margins for 2 reasons:
Brightview is seeing its development “backlog” strengthen. That has historically been a nice leading indicator for this division to start to grow revenues again
Part of the reason, Brightview’s development business underperformed in F2021 on the margin front is that it is a longer lead time business (meaning that BV commits to project 6 -12 months in advance and then must perform the contract with material prices at the prevailing market rate). This dynamic has caused a near term headwind to development margins. To correct this issue. BV has shortened the commitment window for their development contracts so that the agreed upon price will more accurately reflect the current market rates for materials
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BV should re-rate to a higher multiple as the market realizes that they are going to grow faster than current consensus and they start to show real organic growth for multiple quarters