REV GROUP INC REVG
February 10, 2017 - 11:11am EST by
quads1025
2017 2018
Price: 27.52 EPS 1.02 1.48
Shares Out. (in M): 66 P/E 27 18.6
Market Cap (in $M): 1,800 P/FCF 35 20
Net Debt (in $M): 0 EBIT 107 154
TEV ($): 1,800 TEV/EBIT 17.5 12.1

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Description

Investment Thesis

REV Group, Inc. (REVG) is a designer, manufacturer and distributor of specialty vehicles and related aftermarket parts and services.  Formerly known as Allied Specialty Vehicles, REVG the product of a “roll-up” strategy by American Industrial Partners, a private equity firm.  The Company is the result of the amalgamation of 9 acquisitions completed over a 10 year period.  Seeking liquidity in their investment, American Industrial Partners took the Company public on 01/26/17, selling 12.5mm shares at $22.00 per share, above the original range of $19.00-$21.00.  Although since the IPO REVG shares have appreciated over 20%, they still present an attractive long opportunity and should be driven upward by two near-term catalysts: (i) initiation of sell-side research coverage, which appears highly likely given the Company intends to continue to be an industry consolidator and investment banks will want to win their M&A advisory and financing business, and (ii) the potential announcement of a value accretive acquisition, a possibility given REVG has an essentially debt-free balance sheet to utilize.

 

Company Description

REVG has three segments:

·      Fire & Emergency (40% of Revenues) – manufactures a wide range of fire apparatus and ambulance products.  Fire & Emergency products are sold to municipal fire departments, EMS providers, and private fleets.

·        Commercial (35% of Revenues) - manufactures transit and shuttle buses, Type A school buses, mobility vans and other specialty vehicles including sweepers and terminal trucks distributed both through dealers and direct.  Commercial products are sold to municipalities, schools, and commercial and industrial customers.

·         Recreation (25% of Revenues) - manufactures motorized RV products.

 

Investment Merits

·         Market Leading Position – REVG believes it is a market leader in each of the fire and emergency, commercial and recreation vehicle markets.  According to the Company, approximately 72% of its revenues in 2016 are in markets in which it believes it holds the first or second market share positions.  The Company believes it is the largest manufacturer by unit volume of fire and emergency vehicles in the United States.  REVG also believes its Commercial segment is the #1 producer of small- and medium-sized commercial buses as well as Type A school buses in the United States.  Within the Recreation segment, REVG is one of the top producers of Class A diesel and gas motorized RVs with a 14% market share.

·        Attractive Growth Drivers – The market for REVG’s Fire & Emergency vehicles is projected to be driven by two main factors: (i) legislated changes requiring shorter replacement cycles will create a source of recurring demand for products as in-service vehicles achieve mileage or age limits and (ii) significant pent-up demand exists for fire and emergency vehicles given purchases following the 2008 recession have been below historical replacement rates.  The market for REVG’s Commercial vehicles is projected to be driven by increasing urbanization within the US which will require greater use of commercial buses.  The market for REVG’s RV segment is projected to be driven by the growing aged population in the US, a long-term demographic trend.

·       Margin Expansion Potential – Under the leadership of CEO Tim Sullivan, who joined the Company in 2014, REVG’s EBITDA margins have expanded from 3.6% in 2014 to 6.6% in 2016.  Management is confident they will be able to drive margins to 10% over the next three years.  In particular, management has identified >$50mm in “cost of quality” savings that can be made over the next three years.  Management is currently implementing quality control manufacturing practices that should reduce $22mm in costs from scrap/replacement/repairs and $30mm in warranty costs.  With a revenue base of ~$2.0bn, $50mm in savings in these initiatives alone equates to an EBITDA margin improvement of 2.5%.

 

·         Accretive M&A Potential – Post the IPO, REVG effectively has a debt-free balance sheet.  Management is comfortable having a Net Debt / EBITDA leverage ratio of 2.0x.  Management commented that one of the reasons they want to have such an unleveraged balance sheet immediately following the IPO is that they are looking at many attractive M&A opportunities.  With >$130mm of EBITDA, a willingness to increase leverage to 2.0x, and the discipline to only acquire companies at <5.0x EV/EBITDA pre-synergies, REVG could utilize its balance sheet to make accretive acquisitions of meaningful scale which could drive the stock upward.  

 

Financials

        2014 2015 2016 2017E 2018E 2019E
                   
Revenues                
Fire & Emergency   $ 567.7 $ 620.2 $ 768.1 $ 937.0 $ 1,002.6 $ 1,072.8
Commercial     654.4 702.0 679.0 706.2 734.4 763.8
Recreation     499.0 412.9 478.1 492.4 507.2 522.4
Corporate and Other   0.0 0.0 0.8 0.0 0.0 0.0
  Total     $ 1,721.1 $ 1,735.1 $ 1,926.0 $ 2,135.6 $ 2,244.2 $ 2,359.0
                   
Revenue Growth, %              
Fire & Emergency   N.A.   9.2% 35.3% 22.0% 7.0% 7.0%
Commercial     N.A.   7.3% 3.8% 4.0% 4.0% 4.0%
Recreation     N.A.   (17.2%) (4.2%) 3.0% 3.0% 3.0%
Corporate and Other   N.A.   N.A.   N.A.   0.0% 0.0% 0.0%
  Total     N.A.   0.8% 11.9% 10.9% 5.1% 5.1%
                   
EBITDA                
Fire & Emergency   37.5 63.3 85.2 107.8 135.4 171.6
Commercial     34.3 39.1 53.4 63.6 77.1 95.5
Recreation     2.0 1.5 11.0 0.0 0.0 0.0
Corporate and Other   (12.3) (13.8) (22.4) (22.5) (22.5) (22.5)
  Total     61.5 90.1 127.2 148.8 190.0 244.6
                   
EBITDA Margin, %              
Fire & Emergency   6.6% 10.2% 11.1% 11.5% 13.5% 16.0%
Commercial     5.2% 5.6% 7.9% 9.0% 10.5% 12.5%
Recreation     0.4% 0.4% 2.3% 4.0% 5.0% 6.5%
Corporate and Other   N.A.   N.A.   N.A.   N.A.   N.A.   N.A.  
  Total     3.6% 5.2% 6.6% 7.0% 8.5% 10.4%
                   
Depreciation and Amortization 18.9 19.1 24.6 30.0 33.0 34.0
Share-Based Compensation 0.9 3.2 19.7 12.0 3.0 3.0
Other Items     0.0 0.0 0.0 0.0 0.0 0.0
                   
Operating Income   41.8 67.8 82.9 106.8 154.0 207.6
  Margin, %   2.4% 3.9% 4.3% 5.0% 6.9% 8.8%
                   
Interest Expense   26.2 27.3 29.2 0.7 0.0 0.0
Other Income / (Expense) (10.8) (5.7) (10.5) 0.0 0.0 0.0
                   
Pre-Tax Income   4.8 34.8 43.2 106.1 154.0 207.6
                   
Income Tax Expense / (Benefit) 3.3 11.9 13.1 38.2 55.4 74.7
  Rate, %     68.9% 34.3% 30.2% 36.0% 36.0% 36.0%
                   
Net Income     $ 1.5 $ 22.9 $ 30.2 $ 67.9 $ 98.5 $ 132.9
  Margin, %   0.1% 1.3% 1.6% 3.2% 4.4% 5.6%
                   
EPS - Diluted         $ 1.02 $ 1.48 $ 2.00
                   
Pro Forma Shares Out - Diluted       66.4 66.4 66.4

 

Valuation

At REVG’s current share price of ~$27, a fully diluted share count of 66.4, and an essentially debt-free balance sheet, the Company has an EV of $1.8bn.  Based on the above financial projections, the stock is trading at (i) 9.5x 2018E EV/EBITDA and 7.4x 2019E EV/EBITDA, and (ii) 18.2x 2018E EPS and 13.5x 2019E EPS.  REVG’s closest comparable is Oshkosh Corp. (OSK) which based on consensus estimates is currently trading at (i) 9.4x 2018E EV/EBITDA and 8.1x 2019E EV/EBITDA, and (ii) 18.0x 2018E EPS and 14.6x 2019E EPS.

Assuming REVG achieves the financial projections above and trades at a 1-year forward multiple of 16.0x, below the multiple at which both it and Oshkosh are currently trading, the stock could reach $32 on 2019E EPS of $2.00, representing 18% upside from current levels.  True, that type of return is not incredibly interesting in and of itself, but it’s not a bad of an outcome either.  More upside exists if the Company executes on its M&A strategy.  Management has stated that they will only purchases businesses for <5.0x EV/EBITDA pre-synergies.  Given REVG is trading at a much higher multiple than that (9.5x 2018E EBITDA), every time they complete a transaction, it will be value accretive given the multiple differential.

 

 

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

Catalyst

There are two potential catalysts to drive the stock upward in the near-term:

1.  Initiation of sell-side research coverage, which appears highly likely given the Company intends to continue to be an industry consolidator and investment banks will want to win their M&A advisory and financing business

2.  The potential announcement of a value accretive acquisition, a possibility given REVG has an essentially debt-free balance sheet to utilize.

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    Description

    Investment Thesis

    REV Group, Inc. (REVG) is a designer, manufacturer and distributor of specialty vehicles and related aftermarket parts and services.  Formerly known as Allied Specialty Vehicles, REVG the product of a “roll-up” strategy by American Industrial Partners, a private equity firm.  The Company is the result of the amalgamation of 9 acquisitions completed over a 10 year period.  Seeking liquidity in their investment, American Industrial Partners took the Company public on 01/26/17, selling 12.5mm shares at $22.00 per share, above the original range of $19.00-$21.00.  Although since the IPO REVG shares have appreciated over 20%, they still present an attractive long opportunity and should be driven upward by two near-term catalysts: (i) initiation of sell-side research coverage, which appears highly likely given the Company intends to continue to be an industry consolidator and investment banks will want to win their M&A advisory and financing business, and (ii) the potential announcement of a value accretive acquisition, a possibility given REVG has an essentially debt-free balance sheet to utilize.

     

    Company Description

    REVG has three segments:

    ·      Fire & Emergency (40% of Revenues) – manufactures a wide range of fire apparatus and ambulance products.  Fire & Emergency products are sold to municipal fire departments, EMS providers, and private fleets.

    ·        Commercial (35% of Revenues) - manufactures transit and shuttle buses, Type A school buses, mobility vans and other specialty vehicles including sweepers and terminal trucks distributed both through dealers and direct.  Commercial products are sold to municipalities, schools, and commercial and industrial customers.

    ·         Recreation (25% of Revenues) - manufactures motorized RV products.

     

    Investment Merits

    ·         Market Leading Position – REVG believes it is a market leader in each of the fire and emergency, commercial and recreation vehicle markets.  According to the Company, approximately 72% of its revenues in 2016 are in markets in which it believes it holds the first or second market share positions.  The Company believes it is the largest manufacturer by unit volume of fire and emergency vehicles in the United States.  REVG also believes its Commercial segment is the #1 producer of small- and medium-sized commercial buses as well as Type A school buses in the United States.  Within the Recreation segment, REVG is one of the top producers of Class A diesel and gas motorized RVs with a 14% market share.

    ·        Attractive Growth Drivers – The market for REVG’s Fire & Emergency vehicles is projected to be driven by two main factors: (i) legislated changes requiring shorter replacement cycles will create a source of recurring demand for products as in-service vehicles achieve mileage or age limits and (ii) significant pent-up demand exists for fire and emergency vehicles given purchases following the 2008 recession have been below historical replacement rates.  The market for REVG’s Commercial vehicles is projected to be driven by increasing urbanization within the US which will require greater use of commercial buses.  The market for REVG’s RV segment is projected to be driven by the growing aged population in the US, a long-term demographic trend.

    ·       Margin Expansion Potential – Under the leadership of CEO Tim Sullivan, who joined the Company in 2014, REVG’s EBITDA margins have expanded from 3.6% in 2014 to 6.6% in 2016.  Management is confident they will be able to drive margins to 10% over the next three years.  In particular, management has identified >$50mm in “cost of quality” savings that can be made over the next three years.  Management is currently implementing quality control manufacturing practices that should reduce $22mm in costs from scrap/replacement/repairs and $30mm in warranty costs.  With a revenue base of ~$2.0bn, $50mm in savings in these initiatives alone equates to an EBITDA margin improvement of 2.5%.

     

    ·         Accretive M&A Potential – Post the IPO, REVG effectively has a debt-free balance sheet.  Management is comfortable having a Net Debt / EBITDA leverage ratio of 2.0x.  Management commented that one of the reasons they want to have such an unleveraged balance sheet immediately following the IPO is that they are looking at many attractive M&A opportunities.  With >$130mm of EBITDA, a willingness to increase leverage to 2.0x, and the discipline to only acquire companies at <5.0x EV/EBITDA pre-synergies, REVG could utilize its balance sheet to make accretive acquisitions of meaningful scale which could drive the stock upward.  

     

    Financials

            2014 2015 2016 2017E 2018E 2019E
                       
    Revenues                
    Fire & Emergency   $ 567.7 $ 620.2 $ 768.1 $ 937.0 $ 1,002.6 $ 1,072.8
    Commercial     654.4 702.0 679.0 706.2 734.4 763.8
    Recreation     499.0 412.9 478.1 492.4 507.2 522.4
    Corporate and Other   0.0 0.0 0.8 0.0 0.0 0.0
      Total     $ 1,721.1 $ 1,735.1 $ 1,926.0 $ 2,135.6 $ 2,244.2 $ 2,359.0
                       
    Revenue Growth, %              
    Fire & Emergency   N.A.   9.2% 35.3% 22.0% 7.0% 7.0%
    Commercial     N.A.   7.3% 3.8% 4.0% 4.0% 4.0%
    Recreation     N.A.   (17.2%) (4.2%) 3.0% 3.0% 3.0%
    Corporate and Other   N.A.   N.A.   N.A.   0.0% 0.0% 0.0%
      Total     N.A.   0.8% 11.9% 10.9% 5.1% 5.1%
                       
    EBITDA                
    Fire & Emergency   37.5 63.3 85.2 107.8 135.4 171.6
    Commercial     34.3 39.1 53.4 63.6 77.1 95.5
    Recreation     2.0 1.5 11.0 0.0 0.0 0.0
    Corporate and Other   (12.3) (13.8) (22.4) (22.5) (22.5) (22.5)
      Total     61.5 90.1 127.2 148.8 190.0 244.6
                       
    EBITDA Margin, %              
    Fire & Emergency   6.6% 10.2% 11.1% 11.5% 13.5% 16.0%
    Commercial     5.2% 5.6% 7.9% 9.0% 10.5% 12.5%
    Recreation     0.4% 0.4% 2.3% 4.0% 5.0% 6.5%
    Corporate and Other   N.A.   N.A.   N.A.   N.A.   N.A.   N.A.  
      Total     3.6% 5.2% 6.6% 7.0% 8.5% 10.4%
                       
    Depreciation and Amortization 18.9 19.1 24.6 30.0 33.0 34.0
    Share-Based Compensation 0.9 3.2 19.7 12.0 3.0 3.0
    Other Items     0.0 0.0 0.0 0.0 0.0 0.0
                       
    Operating Income   41.8 67.8 82.9 106.8 154.0 207.6
      Margin, %   2.4% 3.9% 4.3% 5.0% 6.9% 8.8%
                       
    Interest Expense   26.2 27.3 29.2 0.7 0.0 0.0
    Other Income / (Expense) (10.8) (5.7) (10.5) 0.0 0.0 0.0
                       
    Pre-Tax Income   4.8 34.8 43.2 106.1 154.0 207.6
                       
    Income Tax Expense / (Benefit) 3.3 11.9 13.1 38.2 55.4 74.7
      Rate, %     68.9% 34.3% 30.2% 36.0% 36.0% 36.0%
                       
    Net Income     $ 1.5 $ 22.9 $ 30.2 $ 67.9 $ 98.5 $ 132.9
      Margin, %   0.1% 1.3% 1.6% 3.2% 4.4% 5.6%
                       
    EPS - Diluted         $ 1.02 $ 1.48 $ 2.00
                       
    Pro Forma Shares Out - Diluted       66.4 66.4 66.4

     

    Valuation

    At REVG’s current share price of ~$27, a fully diluted share count of 66.4, and an essentially debt-free balance sheet, the Company has an EV of $1.8bn.  Based on the above financial projections, the stock is trading at (i) 9.5x 2018E EV/EBITDA and 7.4x 2019E EV/EBITDA, and (ii) 18.2x 2018E EPS and 13.5x 2019E EPS.  REVG’s closest comparable is Oshkosh Corp. (OSK) which based on consensus estimates is currently trading at (i) 9.4x 2018E EV/EBITDA and 8.1x 2019E EV/EBITDA, and (ii) 18.0x 2018E EPS and 14.6x 2019E EPS.

    Assuming REVG achieves the financial projections above and trades at a 1-year forward multiple of 16.0x, below the multiple at which both it and Oshkosh are currently trading, the stock could reach $32 on 2019E EPS of $2.00, representing 18% upside from current levels.  True, that type of return is not incredibly interesting in and of itself, but it’s not a bad of an outcome either.  More upside exists if the Company executes on its M&A strategy.  Management has stated that they will only purchases businesses for <5.0x EV/EBITDA pre-synergies.  Given REVG is trading at a much higher multiple than that (9.5x 2018E EBITDA), every time they complete a transaction, it will be value accretive given the multiple differential.

     

     

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

    Catalyst

    There are two potential catalysts to drive the stock upward in the near-term:

    1.  Initiation of sell-side research coverage, which appears highly likely given the Company intends to continue to be an industry consolidator and investment banks will want to win their M&A advisory and financing business

    2.  The potential announcement of a value accretive acquisition, a possibility given REVG has an essentially debt-free balance sheet to utilize.

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