CPRT - MCJ Capital - RediShred Capital: A Way To Compound Capital
2023-11-08 08:15:00 ET
Summary
- RediShred Capital Corp continues to execute its business model despite a drop in share price.
- The drop in share price is due to the decrease in the price of recycled sorted office paper.
- RediShred's active acquisition strategy allows them to consolidate route territories during periods of low paper prices.
The following segment was excerpted from this fund letter.
RediShred Capital Corp ( RDCPF , KUT:CA )
RediShred continues to execute its business model while shares of the company take a pummeling from the market. What’s driving the sentiment in share price? It’s not the record quarter the business reported in August. The culprit seems to be the price of recycled sorted office paper, which is down a little over 50% compared to this time last year.
The business model of RediShred allows for proceeds from recycled paper to drop to the bottom line. When prices for paper are high, RediShred benefits. When prices for paper are low, the company is more dependent on the core service offerings of shredding to generate profits.
This characteristic isn’t limited to just Redishred, it’s present for most operators in the paper shredding industry. However, what is unique to RediShred that you won’t find in other operators, is the company’s active acquisition strategy.
During the trough cycle of paper prices, independent operators feel equal pain of depressed cash flows originating from the lack thereof pricing for recycled paper. This allows RediShred to accelerate its consolidation of route territories as valuations normalize and sellers are more realistic about what prices they’ll sell their business.
In a way, RediShred has a counterbalance to the cyclical exposure of recycled paper exposure. The operations benefit when paper prices are high, and capital allocation benefits when paper prices are low. Higher paper prices equal higher profit margins. Lower paper prices equal faster growth of territory consolidation.
The company has already made acquisitions in both New Jersey and Baltimore this year, and it would be surprising if at least one more acquisition wasn’t completed by year-end.
If we like the business of Redishred, there’s another reason we should welcome the sell-off in share price. Back in May of this year, management announced a share repurchase plan of up to 10% of the total company. This gives management another lever in the capital allocation toolbox. There are some technicalities, because RediShred trades on the TSX Venture Exchange, the company is limited to purchasing 25% of the average daily trading volume.
As of the current market price, the company trades well below a takeout value that similar businesses in the paper shredding vertical have fetched over the years. We’ll hope private equity buyers aren’t paying attention, as RediShred is much more appealing for us to own as a way to compound capital over the long run versus benefiting from a one-and-done special situation takeout.
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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MCJ Capital - RediShred Capital: A Way To Compound Capital