Redishred Capital Corp.(TSXV:KUT) Research Update

Highlights:

• Arrowhead is updating its coverage on RediShred Capital Corp. (TSXV: KUT) with a fair value bracket of CAD 4.84 to CAD 5.54 (share price on June 22, 2023: CAD 4.09) based on the Discounted Cash Flow method.
• KUT reported a 47.8% year-on-year (YoY) revenue growth during Q4 2022 when the revenue increased to CAD 15.4 mn. Growth during the quarter was accentuated by a strong performance from the acquisitions made during the previous 12 months, organic sales growth, and higher recycling revenue resulting from increased tonnage and higher recycled paper prices. The major factors driving the organic growth were the strong recovery of the US economy, the continued easing of COVID-19 restrictions, and the addition of new client accounts. As a result, KUT ended the year, i.e., FY 2022, with revenue of CAD 57.2 mn, 58.1% up from FY 2021.
• The Corporate Locations segment’s revenue stood at CAD 55.0 mn in FY 2022, a 60.9% rise from the previous year. This impressive growth was underpinned by 47.9% YoY growth from Shredding Services, while Scanning Sales and Electronic sales notched 18.5% and 39.1% YoY growth, respectively. Recycling Sales activities revenue progressed to CAD 11.7 mn, up 163.7% YoY. Franchising & Licensing revenue was reported at CAD 2.2 mn, down 10.4% YoY as the number of franchises decreased by one (acquired by RediShred Capital to become part of the Corporate Locations segment).
• System Sales continued significant growth during the quarter and year when the revenue growth touched higher double-digits, registering a growth of 28.7% and 40.2% YoY, respectively. Performance during the quarter remained impressive across the segment, except for Scanning System Sales, which experienced a decline of 48.7% YoY to end the year with 14.1% YoY growth. The decline in Scanning sales was majorly due to the timing of new scanning projects. Additionally, the company is targeting to drive its Same Location Shredding System Sales to USD 57.0 mn in FY 2023, an increase of 26.7% over the FY 2022 targeted revenue.
• The company reaped dividends from the strategic acquisitions completed over the previous 12 months, combined with higher Same Corporate Location EBITDA growth, which resulted in a consolidated EBITDA growth of 85.2% YoY to CAD 3.1 mn during Q4 2022 with a consolidated EBITDA margin of 19.9% as compared with 15.9% in Q4 2021. EBITDA in FY 2022 stood at CAD 15.3 mn, a 66.7% increase over FY 2021, with the margin increasing to 26.8%, an increase of 140 basis points (bps) over the previous year. Furthermore, the Same Location EBITDA target for the company is CAD 22.1 mn (an increase of 64.9% over FY 2022’s target), with a margin of c. 36% for FY 2023.
• The operating margin expanded by c. 400 bps, driven by higher EBITDA and controlled cost, thereby showcasing a growth of c. 192.0% YoY during the quarter to reach CAD 1.2 mn. However, the company reported a net loss for the quarter, which widened to c. CAD 1.1 mn as compared with CAD 0.8 mn in Q4 2021, majorly driven by higher interest expense, which stood at c. CAD 0.7 mn compared with CAD 0.5 mn in the corresponding period in the previous year, a growth of over 50.0%. Despite this, the company ended the year with a net income of c. CAD 5.9 mn in FY 2022, as compared with CAD 2.1 mn in FY 2021.
• KUT continued its acquisition-led strategy to expand its addressable market. The company acquired the Proshred Philadelphia business from its franchisee on November 01, 2022, for USD 7.1 mn. Proshred Philadelphia generated USD 2.8 mn and USD 2.2 mn revenue in 2021 and 2020, respectively. Post-acquisition, Proshred Philadelphia contributed revenue of USD 0.6 mn in FY 2022 to KUT’s top line. Additionally, during the year, KUT acquired the assets of Mobile Document Destruction (“MDD”), Safeguard Document Destruction Inc. (“SDD”), and Tech Shredders LLC (“Tech Shredders”). These strategic acquisitions helped the company in further scaling and growing its business. The Company is in discussions with other acquisition targets. It actively seeks acquisition opportunities in the US to pursue its long-term growth strategy of development through acquisitions, especially by developing its merger-and-acquisition pipeline through a combination of small, medium, and large companies, which will drive route density, thereby delivering more substantial margins and mitigating the risk. The company increased its target for FY 2023 revenue from acquisitions to USD 5-6 mn from USD 4-5 mn in FY 2022.
• The company’s outlook remains strong as it anticipates substantial demand for both scheduled and unscheduled services driven by a higher lead conversion ratio, thereby contributing to top-line growth. As more businesses look to digitize their physical and paper documents securely and conveniently, Scanning services are set to become a strong growth contributor for the company in the future. KUT also expects strong growth in Electronic Waste with a return to normalcy. However, the company is still experiencing a truck parts supply challenge while the inflationary headwinds in driver wages and fuel pricing have cooled off slightly. The company expects an improvement in FY 2023 as Q1 2023 has seen better truck parts supply than the previous year. The company has already implemented a price increase across the corporate locations in Q3 2022 and will explore further price hikes in FY 2023.