|Shares Out. (in M):||51||P/E||23||10.5|
|Market Cap (in $M):||2,238||P/FCF||23||10.5|
|Net Debt (in $M):||1,457||EBIT||264||434|
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Introduction: Brink’s (“BCO”) is a cash logistics company best known for its signature red trucks that pick up and safeguard hard currency from financial institutions (banks, ATMs) and retail (big box and large national chains). BCO was previously written up by another member, and you can refer to that write-up for additional background.
Thesis: BCO has been especially hard-hit during this Covid pandemic for several reasons: (1) exposure to the retail sector; (2) high leverage; (3) significant operations in LatAm which exposes BCO to FX translation effects as well as to economies that may not be managing the epidemic as well as it should (e.g. Brazil); and (4) fears of a precipitous decline in cash usage due to virus transmission. While these are clearly risks, the market is more than discounting this into the share price. BCO is very much near the “eye of the storm”, yet it stands apart from other Covid-afflicted industries such as travel and hospitality: we don’t know when and how many people will travel and what social-distancing restrictions will be in place for flights or hotel stays. In contrast, with BCO, cash is still being used worldwide and therefore secure transportation of this cash will be required. Put another way, BCO will recover much faster than the typical travel/hospitality stock as shelter-in-place conditions are relaxed over time, though I recognize opinion about what reopens when vary. Nevertheless, BCO has the wherewithal to survive Covid, and has 40%+ upside from these levels as conditions normalize. Also of note, BCO has recaptured relatively less of its share price declines vs. worse situated names.
o End Market Sales Mix: ~45% Retail, ~45% financial institutions, ~10% government/other
o Within retail, ~44% is deemed “essential services”, ~45% are open with limited operations (15% of the 45% are fast food and national chain restaurants), and ~11% are temporarily closed.
o Among financial institutions, 50% of revenue is comprised of top 25 Tier 1 banks
o Estimated operating Income mix by geography, pre-allocation of corporate costs:
o North America: 36%, South America: 42%; ROW: 22%
o US: 20% of OpInc; Mexico: 14%; Brazil: 17%; Argentina: 13%
o Sales by function:
o 51% “core services” consisting of cash-in-transit (“CIT”) and ATM services
o 42% “high value services” consisting of:
§ 14% money processing: cash counting/sorting, primarily outsourced by banks and other financial institutions
§ 14% Brink’s Global Services: transportation of jewelry, precious metals, electronics, and pharma. This business is a “gem” for BCO. These services require significant logistics expertise, sometimes with state-of-the-art BCO facilities built adjacent to existing customer infrastructure. BGS has 50%+ market share in many countries, and has near-100% share in others. Operating margins estimated to be between 15%-25%, well above Company average.
I will address each of the key concerns about this business:
1. Exposure to Retail.
It is important to note BCO has limited exposure to small mom-and-pops. 44% of retail sales (~20% of total sales) are considered essential services such as supermarkets, pharmacies, gas stations, convenience stores, and healthcare. In the US, 30% of customers are from customers with 100+ locations. Essential services customers will be largely unaffected.
The remaining 56% of retail consists of ~45% operating in limited capacity, and ~11% as closed. This is a tailwind for BCO as SIP restrictions begin to loosen.
It’s important to note that within retail, BCO gets paid on a per-pickup basis rather than on a dollar volume basis. While decremental margins may take a hit given the importance of route density, ~60% of total costs are variable consisting mostly of labor. Drivers are paid on an hourly basis, so one less pickup also results in a corresponding reduction in labor and transportation cost. BCO started implementing cost cutting efforts in early April (so, the benefit of these savings will be realized in 2H’20). I estimate annual decremental margins to be only ~30%, better than Street estimates.
Lastly, 56% of customers consist of financial institution and government customers. These customers tend to be much stickier than retail, and provides some support for BCO during this crisis
2. Leverage. BCO has net debt of $1.9Bn, or a trailing net leverage of 3.0x. In February, BCO announced the much-anticipated acquisition of competitor G4S’ cash logistics assets (primarily in Eastern Europe). While this was a good acquisition for BCO, the timing could not have been worse as it tacked on additional leverage to consummate the deal. That said, in a FY20 downside case (20% haircut to FY19 sales, and 30% decline in EBITDA, net leverage will be 4.5x (4.1x as defined in the credit agreement). While high, BCO has $800m+ of liquidity which should enable BCO to weather 2020 just fine.
3. Exposure to LatAm. As of this writing, Argentina has been managing the pandemic about as well as the US (not great, but not bad) with early lockdowns implemented. In contrast, protracted recoveries may occur in Mexico and Brazil. Given economic weakness in these countries, there has been a currency flight away from local currencies, leading to a strengthening dollar and weakening local currency. This is causing a meaningful currency headwind for BCO – possibly an incremental $30m+ beyond the original $55m anticipated hit to FY20 EBITDA. A few things to note on LatAm:
a. BCO operates in a duopolistic industry with itself and Spain-based Prosegur taking the lion’s share of the market. As such, BCO enjoys pricing power, and has historically been able to raise price in downturns, where security takes on renewed importance (crime levels in LatAm are generally higher than in the US).
b. BCO LatAm enjoys HSD to DD top line growth and 20%+ operating income margins in LatAm, higher than overall company average.
c. LatAm transacts primarily in cash, rendering BCO’s services much more essential. Despite currency exposure, LatAm has historically been a strength for BCO, and
As these economies re-open, BCO will enjoy dual tailwinds – businesses returning, and a calming/reversal of FX trends.
4. Cash Usage in Society. Bears will always cite this as a key concern, and unfortunately it is the reason BCO will never enjoy a multiple akin to the best route-based businesses, even if BCO does everything right. However, the imminent “death of cash” is overblown: Globally, volume of cash in circulation has been increasing. In the US where cash still accounts for 33% of all transactions, notes in circulation has been increasing at 3%-5% per annum. Mexico boasts 90% cash usage; Brazil 50%+; Argentina 70%+; France 70%+ (structurally, it makes sense why cash is king there). In Brazil and Mexico for example, 30%-35% of ecommerce transactions are executed using cash vouchers – printable barcodes which are scanned at gas stations and post offices where the purchase is then completed via cash. In LatAm, where BCO generates 45%+ of its OpInc, half the population in LatAm is unbanked/underbanked (per the World Bank). It seems unlikely that major businesses will disallow the use of cash given the implicit discriminatory effects this would have on certain customers. Recall that BCO gets paid per pickup, so even if use of cash declines, businesses will still need cash to be picked up and stored.
With respect to this fear of cash as a transmitter of Covid, research indicates this fear is overblown to the extent it does exist broadly. Unfortunately, misleading headlines may lead some people to act on perception rather than reality in the near term. Looking beyond certain urban centers, customer behavior will likely not change materially in the next few years. Cash isn’t going away anytime soon. And that’s enough for BCO to do well.
Given the challenging times, investors can take some comfort that this leadership team under Doug Pertz will take the right steps. Based on our research, Doug received stellar marks for his leadership and ability as an operator over the course of his career. BCO’s turnaround pre-Covid is the most recent testament: BCO was well on its way to improving operating margins to match its peer Loomis - US operating margins nearly tripled to 10% in the last two years, and was on its way to 13%+ margins under the leadership of Doug Pertz. Ultimately, I expect BCO will get there.
Looking beyond Covid, I’d call out a couple other potential opportunities:
1. Retail/back office automation: Large retailers such as TGT and WMT started automating their retail back office via smart safes (branded as CompuSafe under BCO) and cash recyclers. These two products are very similar; recyclers are larger in size and serve more like an internal ATM.
a. Description: Smart safes are typically placed in the back office of retail locations (restaurant chains, grocers, chain retailers, gas stations, etc.). Cash is deposited in the safe, and only BCO is able to take cash out. Technology features include currency recognition and counterfeit-detection. Smart safes and recyclers are very similar; recyclers are larger in size and serve more like an internal ATM.
b. Value Proposition: Once deposited, electronic interface with banks allow for same-day credit, even if the cash remains on premise. Customers save anywhere from 20%-40% from a combination of interest received via this same-day credit, by reducing number of employees to handle cash – ~2 employees per store, and by reducing risk of theft.
c. Benefit to BCO:
i. Customer Stickiness: By selling CompuSafe, BCO can provide data for its customers – how much cash is used or deposited at which locations, and how much in sales any given location is doing. Customers find this data valuable for cash forecasting. This reliance creates a level of customer captivity, and a subscription-based recurring revenue stream, with contract tenor of five years.
ii. Efficiency/Cost Saves: An existing customer who uses CompuSafe would reduce route frequency and therefore save on labor and truck depreciation.
This remains a vastly underappreciated opportunity with a $2Bn annual TAM in the US. I estimate US revenues were ~$150m ($250m globally), but has the potential to be a $300m+ annual business. Covid will only delay, not curtail, this opportunity.
2. Cannabis. BCO cites transportation of cannabis (and the associated cash) as a $1.6Bn (legal) global opportunity. Canada could be instructive of BCO’s prospects in the US: Canada legalized marijuana in October 2018. Soon thereafter, BCO signed an exclusive multi-year agreement with Canopy Growth to provide secure logistics and cash management services from farm to store, including international shipments. Should Cannabis become legal at the federal level, BCO could be a key beneficiary.
-Re-opening of retail and gradual loosening of shelter-in-place conditions
- BCO has recaptured less of its decline than many relatively worse-off industries across travel, leisure, and events which offers an appealing technical opportunity
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