largest independent providers of IT services to the US federal government. These services include growth areas such as cybersecurity,
cloud computing, IT infrastructure, and software development (examples such as transition to cloud, 24x7x365 IT services support for
organizations, SAP implementation, setting up backend infrastructure, integrating next-generation tech offerings). The Company has more
than 5 decades of government partnership and long standing relationships with its customers (20-30 years in many cases). The Company
provides outsourced contractor services work to government entities such as the DoD and State Department. CSRA has thousands of
contracts with the largest being only 7% of revenue. Medium contracts ($10-100MM) are the largest contributors to revenue at 44% vs.
large contracts (>$100MM) at 32% and small contracts (<$10MM) comprise 23%. The Company is focused in highly differentiated
services in IT (75-80% of revenue) rather than its peers who participate heavily in lower quality SETA work.
CSRA is a public LBO trading at an inexpensive HSD/LDD entry levered FCF yield. CSRA believes it can maintain its market leading
margins and leverage its LSD organic revenue growth into HSD EPS growth through deleveraging and capital returns, driving an all-in
mid-teens equity return. Given the strong and relatively stable recurring FCF generation of the business, CSRA could financially engineer
value over the long term by levering up at cheap rates and returning capital to shareholders through debt repayment, dividends, and share
repurchases. There is a long runway for bolt-on M&A where CSRA would be buying sticky customer contracts/relationship and niche
technical capabilities which can help build scale and leverage its fixed cost structure. This is an industry where indirect wrap rates and
overhead absorption are helpful in establishing cost advantage and winning business (scale begets scale). Management plans to return 90%
of its FCF to shareholders through debt repayment and share repurchases/dividends (currently 1.6% yield). Therefore, the downside from
poor capital allocation (overpay for M&A) is somewhat limited in the medium term.
Revenue growth of 2-3% CAGR is driven by retaining/successfully recompeting existing business while more aggressively pursuing new
business. Currently, there are $16Bn submitted bids. Assuming a 25% win rate, CSRA could win $4Bn of new revenue which translates
into $800MM annual run-rate vs. current revenue base of $5Bn. CSRA also claims that it has $6Bn of pending adjudications, $15Bn+
contract backlog, and $50Bn pipeline of qualified business. CSRA will stay in the high end, complex, and sticky IT modernization work,
which is in very early innings of adoption by government agencies. In fact, IT budget lines are growing for the government, not shrinking.
The 2-3% revenue CAGR assumes very little share gain despite the market being very fragmented and the current environment lending
itself to natural consolidation to scaled players. EBITDA margins should be maintained/expand marginally due to fixed cost absorption,
synergies from its SRA merger, mix shift to higher fixed price IT contracts where investment is already sunk, and continued efficiencies.
CSRA believes it can keep SG&A flat/down as % of revenue over the next few years. FCF conversion is well over 100% of adjusted net
income given working capital improvement (better DSOs) and D&A > capex mismatch. Per share FCF should grow 8-10% based on debt
pay down (>3x net financial leverage but 4x including pension and capital leases) and share repurchases.
Government services have proven to be relatively stable through history and countercyclical. Because there will always be wars and threats
to national security, the private sector is needed as outsourced labor and for its specific expertise. This allows the government to be
flexible with its labor so that it is not overly burdened with pensions/benefits while allowing it to retain needed technical services. For
these reasons, it is not in the government’s best interest to squeeze margins despite its monopsony status. Not to mention that numerous
contractors that we have spoken with all confirm that the government is a mess, disorganized, and individually silo-ed. Margins have been
relatively stable through history and are largely in equilibrium. The fear is that CSRA’s margins are much higher than its peers (430 bps
differential) and, therefore, not sustainable. However, taking this view would miss the fact that CSRA’s business skews to higher end, more
technical capabilities rather than lower quality “butts in seats” type work of its peers. The Company argues that 75-80% of its revenue is
derived from better than average growth and more “differentiated” IT solutions (think Accenture but strictly in government vertical;
margins are comparable between ACN and CSRA). Also, it is worth noting that CSRA has superior contract mix due to its relative
overweight to T&M and fixed price contracts. 45% of revenue is from fixed price, more than double that of peers. These contracts have
EBIT margins that are high-teens and vastly superior to the single digit margins of cost-plus. While the contractor is exposed to cost
overruns, a good operator such as CSRA can manage its projects well and earn above normal margins with better processes, technology,
infrastructure, and program managers. Of the 430 bps differential, CSRA states that 200 bps is due to higher end services while 230 bps is
due to contract type. The Company has in a disciplined fashion culled and restructured bad contracts from its portfolio. Over time, the
business is shifting towards next-generation IT which should driver higher fixed price content.
The business has proven to be relatively stable holding EBITDA flat over the last three years despite big budget resets due to
sequestration, continuing resolution, and Iraq/Afghanistan ending. CSRA has recurring 5 year average contracts and 85-90% recompete
win rates (top 25 contracts actually have average tenure of 10 years) across a highly diversified contract base. The biggest single contract is
only 7% of revenue. This is a customer relationship business where CSC has been doing business with these customers going back 20-30