2023-04-20 15:04:59 ET
Summary
- GDI is a provider of janitorial and facility management services consolidating a highly fragmented industry.
- The company offers stable and predictable revenues that have proven to be resilient in times of recession.
- Shares are trading at a discount on both a historical and relative valuation basis at 10.5x EV/EBITDA.
(Note: all '$' figures are CAD, not USD, unless stated otherwise.)
Investment Thesis
GDI Integrated Facility Services Inc. ( GDI:CA ) is a consolidator in the janitorial and facility services industry growing revenues and EBITDA at a 17.5% and 25.3% CAGR, respectively. Over the years, GDI has pursued a roll-up strategy of acquiring smaller operators in the janitorial services space, which is a highly fragmented industry with several small operators. With shares trading at the low end of their historical valuation range and shares priced at a discount relative to its peers at 10.5x EBITDA, I believe shares of GDI look attractive today.
Company Overview
GDI Integrated Facility Services is a North American provider of janitorial services, building maintenance, and security services. The company provides its services to a wide range of customers including hospitals, schools, airports, office properties, malls and manufacturing facilities just to name a few. It operates under the 'GDI' brand, along with 'Ainsworth', 'IH Services', and a few other labels of smaller companies it has acquired over the years. A key part of GDI's growth over the years has been its aggressive M&A of consolidating what is a very fragmented industry.
Revenue Segmentation
When we look at the revenue segmentation of the company, much of the company's revenue comes from its janitorial services segment (57%), which includes floor cleaning and finishing, carpet cleaning and dusting, and window cleaning, where the company first began nearly a century ago in 1926 before becoming a leading facility services provider. Its second largest segment of technical services (39%) includes building systems controls and maintenance management services which include HVAC, electrical, energy performance optimization, and equipment maintenance. Finally, its complementary services segment is focused on selling and distributing sanitation supplies as well as rental and repairs of cleaning equipment. By geography, 56% of revenues are generated from Canada and 44% are generated from the United States.
Stable and Predictable Revenues
One of the reasons I like GDI's business is that much of the company's revenues are recurring and predictable due to entering into long-term contracts with many of their customers. For example, a client may contract GDI to do their janitorial work on a regular schedule. For hospitals and shopping malls where there is several square footage of space and significant traffic, demand for janitorial services are constant and regular. Even for technical services like HVAC and lawn maintenance, while most of the revenues are categorized as 'on-call services' and are not 'recurring', they are 're-occurring' in that demand is predictable year to year. If you're an established business, you're probably not going to go without air conditioning or have your lawn overgrown to save a few bucks.
Another reason I like GDI's business is that facility maintenance services are recession resilient. During the period from 2008-2010 in the great financial crisis, GDI was able to grow both its top and bottom line while maintaining EBITDA margins at around 6%. In fact, the company was able to reduce its overall debt load each year and had a net debt / EBITDA ratio of 0.9x by 2010, so I would say GDI is likely a business you'd want to consider if you believe we are heading into a recessionary environment.
One important point of differentiation for the company is that GDI has been focused on integrating new technologies to its business . For what is traditionally a blue-collar business with little room for innovation, GDI has developed a number of technologies that increase efficiency, improve accuracy, enhance safety, and manage performance. Some of its innovations include FotoFinish (which requires cleaners to submit photo evidence of their task completion on a daily basis, increasing accountability), Voila (a staff replacement and app), and various robotics that reduce labour costs and provide better cleaning abilities. I view these innovations as critical for GDI to maintain its competitive edge as its commitment to these new technology help it to differentiate itself from competitors and win new business.
Industry Analysis
GDI operates in the facility services industry, which is highly competitive and fragmented. According to IBISWorld, in Canada, where GDI generates most of its revenues, the industry's four largest operators account for less than 1-% of the market. As a result, the industry is highly fragmented and most companies have an extremely low market share. The janitorial services industry's low start-up costs ensure that small operators keep entering the industry during periods of increased demand (e.g. COVID-19).
A key growth driver over the last few years has been the COVID-19 pandemic. With the return back to offices and increased focus on sanitation, hygiene, and healthy living, GDI has been a beneficiary as a provider of cleaning services, with increases in both recurring/contractual and on-call revenues increasing consecutively in 2021 and 2022. That being said, IBISWorld projects industry revenue to increase at an annualized rate of just 2.2% to $9.6 billion by 2026, a decelerating growth from the 9% and 4% increases in 2021 and 2022 illustrating how the bump in growth we saw from COVID-19 is not expected to continue.
Historically, the facility services industry has experienced growth in recent years driven by an increasing trend towards outsourcing non-core business functions and a growing demand for energy-efficient and sustainable services. With GDI's expansive presence across North America and focus on environmental stewardship, I believe they are poised to continue to benefit from these trends going forward and should be a cleaning provider of choice to large, established companies with multiple operating locations. As the industry becomes increasingly competitive, companies that can provide high-quality, innovative, and cost-effective services like GDI are likely to succeed.
Financials
GDI's financials are impressive. Since 2017, GDI has grown revenues and EBITDA at 17.5% and 25.3% CAGR, respectively. With the low organic growth of the industry, much of GDI's growth has been through acquisitions of other industry players.
For the most recent fiscal year end, the company's annual revenue growth of 36% was 9% organic growth and 27% inorganic growth (acquisitions). When looking by segment, organic growth for the janitorial division was flat while most of the growth came from the technical services segment (up 20%), with the technical services segment now operating at pre-COVID-19 levels and operating with strong backlog. Complementary services is where we can expect to see more organic growth going forward. Organic growth was up 39%, which was mainly driven by a new facility management services business model launched at the beginning of last year.
GDI has made a number of acquisitions over the years in an effort to consolidate the industry, which have been funded through a combination of cash generated from operations and debt financing. The company's current financial position remains solid with Net debt/EBITDA of 2.8x and a Debt/Equity ratio of 84%, so I would say that the balance sheet appears to be in good shape. The company has long-term debt of $345 million with an average rate of 5.78%, with $140 million of available room on its credit facility. Given that the pace of acquisitions slowed in 2022 and that the company's financial position and leverage ratios have improved, I expect GDI will resume the pace of acquisitions this year, should it continue to find attractive opportunities. While GDI does not pay a dividend and has not announced intentions to do so, I believe this could be a possibility in the future given their increasing cash flow.
Valuation
Based on two analysts with 12-month target prices on GDI's stock, the average target price is $57.00, with one hold rating with a target price of $54.00 and one buy rating with a target price of $60.00. The midpoint of these target prices implies about 26.7% upside from the current share price.
As shown by the chart below, GDI is trading at 10.5x EBITDA, at the low end of its historical valuation range. For the cleaning services industry, multiples for the sector sit in at 13x EBITDA. With the low organic growth of the industry, I don't think it's surprising to see a multiple below that of the overall market.
For the comparable companies analysis below, I included companies in the janitorial, facility management, and other related services to gauge GDI's relative valuation. The average EV/EBITDA of the peer group came in at 12.0x with a Debt/Equity of 0.57 and a 5-year revenue CAGR of 0.67%. Given that GDI beat on all the metrics with the exception of Debt/Equity, I believe that GDI is trading at an unfair discount on a relative valuation basis for an industry consolidator growing at double digits.
When comparing GDI to what I believe to be its closest peer, ABM Industries ( ABM ), ABM is trading at a better valuation than GDI at 8.2x EV/EBITDA, however due to spending over $1 billion in the last two years on acquisitions, it has more debt on its balance sheet ($1.5 billion) balance sheet. GDI has been also been growing much faster due to its smaller size and better growth opportunities, which I believe warrants a higher valuation compared to ABM.
Conclusion
In summary, GDI is an industry leader consolidating the highly fragmented facility services industry. The company has demonstrated that its acquisition strategy is working with margins expanding and has been managing its balance sheet appropriately. Growing faster than industry peers, GDI is trading at a discount to its peer group and is at the low end of its historical valuation range. With stable and predictable revenues that are recurring in nature, GDI displays defensive characteristics while also providing growth potential. If you're looking to hold a recession resilient stock with long-term potential, GDI is one such company I would consider today.
For further details see:
GDI Integrated Facility Services: An Industry Consolidator At A Fair Price