Redishred (TSXV:KUT) Research Update

Highlights:

• Arrowhead is updating coverage on RediShred Capital Corp with a fair value bracket of CAD 4.50 to CAD 5.30 (share price on January 25, 2023: CAD 3.90) based on the Discounted Cash Flow (DCF) method.
• RediShred Capital Corp. (RediShred) reported 50.3% year-on-year (YoY) revenue growth to CAD 14.7 mn in Q3 2022, which was driven by a strong performance from the acquisitions made over the last 12 months and organic sales growth. The organic sales growth was due to the strong US economy, continued investment in sales resources, continued easing of COVID-19 restrictions and higher recycling revenue resulting from increased tonnage and higher recycled paper prices.
• The Corporate Locations segment revenue was reported at CAD 14.1 mn in Q3 2022, up 52.4% YoY. Shredding Sales reported revenue of CAD 10.1 mn, an increase of 42.4% YoY, while Recycling Sales reported revenue of CAD 3.1 mn, grew by 140.0% YoY. Electronic waste sales increased by 29.0% YoY, while Scanning sales declined by 9.0% to 72.9% YoY.
• The company’s consolidated EBITDA grew by 27.4% YoY to CAD 3.6 mn in Q3 2022, while the Corporate Location EBITDA grew by 32.5% to CAD 4.9 mn. The increase in the company’s consolidated EBITDA was attributable to acquisitions completed over the previous 12 months, addition of new scheduled shredding service clients, continuity of demand for unscheduled shredding services and increased paper tonnage and prices. However, margins of the company were also impacted by shortage of drivers and wage inflation, supply chain disruption, particularly for truck parts and truck supplies, and high fuel costs during the quarter. As a result, the total consolidated EBITDA margin declined by c. 400 basis points in Q3 2022 and stood at 25.0% in comparison with 29.0% in Q3 2021. Despite the inflationary headwinds faced by the company during the quarter, net income stood at CAD 3.9 mn as compared with CAD 1.6 mn in Q3 2021.
• The company has increased the price of its scheduled clients by 7-9% in the second half of Q3 2022 to manage the rise in input costs due to inflation. The company is confident to pass-on the price hike. As a result, the company expects to derive its benefit in Q4 2022 and early 2023.
• The company has a positive outlook as it anticipates demand for shredding services to increase significantly, driven by Scheduled sales. The company continues to see marketing leads for both scheduled and unscheduled services increase. The efforts of the sales team have already resulted in encouraging leads conversion rates thereby contributing to top-line growth. The company is also continuing to see interest in its scanning services, as an increased number of businesses look to digitize their physical, paper documents securely and conveniently. The company also expects a strong growth in Electronic Waste with the return of normalcy. Going forward, the company will look to leverage its marketing efforts to tap into the underpenetrated market.
• The company is continuously looking to develop its M&A pipeline through a combination of small, medium and large companies, in order to drive route density, thereby delivering stronger margins and mitigating the risk.
• The company recently acquired Proshred Philadelphia, which offers paper and hard drive shredding, product destruction and paper recycling services for a cost of c. USD 7.1 mn. The acquisition of Proshred Philadelphia provided RediShred with a platform to continue the strong growth seen in Philadelphia. Post-acquisition, the company now had corporately owned locations in the New York, New Jersey and Pennsylvania corridor, allowing for fleet, administrative and sales synergies.