Redishred Capital (TSXV: KUT) Research Update

Highlights:

• Arrowhead is updating coverage on RediShred Capital Corp with a fair value bracket of CAD 4.58 to CAD 5.42 (share price on July 18, 2023: CAD 3.89) based on the Discounted Cash Flow (DCF) method.
• RediShred Capital Corp. (RediShred) reported 35.8% revenue growth year-over-year (YoY) to CAD 17.0 mn in Q1 2023. This growth was led by acquisitions in the last 12 months, organic sales growth from new customers, and price hikes implemented during FY 2022 in response to inflation in input costs, fuel prices, and drivers’ wages.
• The Corporate Locations segment reported its revenue of CAD 16.4 mn, a growth of 36.9% YoY. Recycling Sales reported sales of CAD 3.3 mn, up 43.3% YoY, while Shredding Sales recorded revenue of CAD 12.4 mn, up 41.4% YoY. Electronic waste and scanning generated CAD 0.37 mn and CAD 0.38 mn in revenue, respectively. During the quarter, the Same Corporate Location revenue stood at CAD 14.5 mn, an increase of 21.1% over the corresponding period in the previous year.
• The Company’s consolidated EBITDA ascended by 16.5% YoY to CAD 4.7 mn, driven by more robust Same Corporate Location EBITDA growth and acquired EBITDA from acquisitions in the previous year. EBITDA for Total Corporate locations rose by 23.1% from Q1 2022 to CAD 6.1 mn. Due to new customer acquisitions and rising paper prices, the Same Corporate Location segment’s EBITDA climbed by 13.4% to CAD 5.6 mn. The company reported a consolidated EBITDA margin of 27.9%, a decrease of c. 460 basis points (bps). In comparison, the corporate location and same corporate location margins were 37.0% and 38.5%, respectively, as opposed to both being 41.1% in Q1 2022.
• Selling, General, and Administrative (SG&A) expenses stood at CAD 1.8 mn, an increase of 42.9% over Q1 2022, mainly due to increased spending on human resources, technology, operational finance, and marketing to support inorganic and organic revenue growth. Despite this, SG&A expenses, as a percentage of total revenue, remained at 10%, the same as in Q1 2022. Net profit for the quarter stood at c. CAD 0.7 mn as compared with CAD 0.3 mn in Q1 2022.
• The company considers development through acquisitions to be the essential element of its long-term growth plan. The company is in talks with potential acquisition targets in the US. It is actively seeking to purchase prospects through a combination of cash on hand, contingent consideration payable in cash, and debt and equity financing, as necessary.
• The company has a positive outlook as it has anticipated strong demand for scheduled and unscheduled services driven by a higher lead conversion ratio, thereby contributing to top-line growth. Many new businesses are looking to digitize their physical and paper documents securely and conveniently, which will continue favoring Scanning services.
• The Company is still facing inflationary headwinds regarding truck supply, repair and maintenance, efficiency, and labor. However, it is showing signs of improvement as compared with last year. Although the Company has not implemented any price increases in Q1 2023, it may look at a price hike of c. 4-5% in the near future to cope with the inflationary pressures.