Summary
- WillScot is a Phoenix-based company focused on the development, design, manufacture, and sale of objects and solutions for workspaces and forms of physical storage.
- I am optimistic about the incoming changes in the organization. Scale opportunities, successful dynamic pricing, and cost reduction of transportation could bring significant free cash flow growth.
- It is also worth noting that WillScot expects to benefit from the infrastructure bill. In a recent quarterly report, management remarked tailwind for H2 2023 and into 2024.
WillScot Mobile Mini Holdings Corp. ( WSC ) continues to deliver scale opportunities from its recent merger, and is going through a business transformation with sale of business segments. In my opinion, future successful dynamic pricing and cost reduction of transportation could result in more FCF margin expansion in the coming years. Considering the recent guidance given for 2023, I am not afraid of potential risks from new transportation regulations, total amount of debt, or drastic changes in the price of energy. I believe WSC stock is undervalued.
WillScot: Wide Range Of Products And Services For Many Target Markets
WillScot is a Phoenix-based company focused on the development, design, manufacture, and sale of objects and solutions for workspaces and forms of physical storage . The company sells to the whole world through different channels, and has branches in Mexico, Canada, Europe, and the United States.
Source: Company's Website – WillScot Essentials
Among the products and services, the modular units stand out, which are easy to install and move, and due to their condition as prefabricated objects, they offer a large number of uses and direct applications. These are made of aluminum or wood, and include everything from small and portable warehouses to large storage infrastructures. Usually, these objects are prepared to house internet connections, conditioning devices, and plumbing elements for storage. These products stand out due to their low cost and high application capacity.
WillScot also offers the transfer and installation together with the subsequent maintenance in the package of services that it offers to its clients. Among these products, we find modular offices made with panels, modular unit spaces, removable classrooms, and storage facilities of different sizes. These are covered by another area of ??its business segment that manufactures aluminum containers as well as modular lockers for application in all types of establishments and work areas.
Source: Company’s Website
Its solutions are manufactured to be applied immediately under the Ready to Work concept, and have served different clients in the education, construction, and various industrial and government markets among others, for more than 40 years. I believe that the number of target markets is one of the most appealing features of WillScot. If one of the markets doesn’t perform, the company may have other clients in other sectors . As a result, revenue growth would not suffer that much.
Source: Quarterly Earnings Presentation
It is also worth noting that WillScot expects to benefit from the infrastructure bill. In a recent quarterly report, management remarked tailwind for H2 2023 and into 2024. Besides, the Inflation Reduction Act is also expected to drive demand in manufacturing, which may enhance the company’s revenue generation.
Source: Quarterly Earnings Presentation
In addition, WillScot offers value-added services, which include the rental of products that accompany the comfort and experience of its customers. The profits come from the costs of moving, distributing, installing, and maintaining its modular structures.
Lastly, with regard to its products, the company also develops specialized objects for the storage of liquids and solids in the United States, which come together with filtering systems or specific developments for each substance to be stored. These include gases or chemicals for example.
Long-Lived Assets All Over The Country, Double Digit EBITDA Growth Expected, And Optimistic 2023 Guidance
WillScot’s assets are expected to be used for more than 20 years, and the company believes that it is easy to make revenue projections for close to 30 months. Besides, it is worth noting that the location of the company’s assets is quite diversified. All these features make the company quite appealing for finance professionals as, in my view, financial modeling becomes easy.
Source: Quarterly Earnings Presentation
Finally, I believe that investors may want to have a look at the guidance given in a recent presentation. The company expects 2023 revenue close to $2.325-$2.475 billion, adjusted EBITDA of $1-$1.05 billion, and net capex close to $300-$380 million. I believe that the numbers are quite optimistic.
Source: Quarterly Earnings Presentation
Balance Sheet
As of December 31, 2022, the company reported cash of $7.390 million with trade receivables of close to $409 million, inventories of $41 million, and prepaid expenses and other current assets of $31 million. The total current assets stood at $521 million.
The total amount of current assets is below the current amount of liabilities, which is not ideal. With that, I expect total free cash flow close to $490 million in 2023, so I don’t believe that the company will suffer a liquidity crisis anytime soon.
Source: Quarterly Release
The company also reported rental equipment worth $3.077 billion along with property, plant, and equipment of $304 million and operating lease assets worth $219 million. Goodwill stands at $1.011 billion with intangible assets worth $419 million. Finally, long term assets would stand at $5.3 billion with total assets of $5.82 billion.
Source: Quarterly Release
The list of liabilities included accounts payable worth $108 million, accrued expenses of $110 million, and accrued employee benefits close to $56.340 million. Current portion of long term debt stood at $13.324 million with total current liabilities of $561 million.
Source: Quarterly Release
The long term debt stood at $3.06 billion together with deferred tax liabilities of $401 million. On the other hand, the operating lease liabilities were around $169 million with other non-current liabilities of $18.537 million. Finally, long term liabilities stood at $3.70 million with total liabilities of $4.26 billion.
Source: Quarterly Release
Assumptions In My Financial Model: Cost Reduction Of Transportation, New Products, And Dynamic Pricing
Under a conservative case scenario, I assumed successful expansion of value-added services and cost reduction of transportation thanks to economies of scale and new alliances. In my view, as soon as WillScot grows its financial figures, management will be able to renegotiate with providers, and may obtain better financial terms and prices. In the last annual report, the company discussed potential VAPS offerings through new product introductions:
VAPS have been the most prominent growth driver in our modular business for almost a decade. We believe this growth opportunity could be substantially larger if we successfully penetrate more of our modular space, ground level office and portable storage units and continue to expand our VAPS offerings through new product introductions. Source: 10-K
I also believe that the company’s dynamic pricing announced in the last 10-K will most likely bring significant FCF margin expansion. In this regard, in my view, investors will do good by reading the following lines.
We continue to advance multiple pricing strategies across our fleet to drive revenue growth. Leveraging our expertise developed in our Modular segment, we plan to implement dynamic pricing, customer segmentation, and contract standardization in our Storage segment. Source: 10-K
Besides, I am optimistic about potential incoming scale opportunities, logistics improvements, and operating efficiencies from the recent merger . The merger was signed in 2020, but management included a lot of initiatives in the most recent annual report:
The Merger provides us with increased scale, numerous operational best practices from both the legacy WillScot and legacy Mobile Mini businesses, and a state-of-the-art SAP ERP platform, all of which we believe will significantly improve our operating efficiency over time. To improve our logistics capabilities, we are implementing algorithm-based route optimization processes to minimize mileage, fuel cost and emissions. Source: 10-K
Finally, it is worth noting that the company executed several sales of business segments, which may enhance the company's balance sheet in 2023. If investors like the results, I would be expecting stock demand.
On September 30, 2022, the Company completed the sale of its former Tank and Pump Solutions segment.
On January 31, 2023, the Company completed the sale of its UK Storage Solutions segment. Source: 10-K
Cash Flow Model
I foresee 2033 net sales of $5.260 billion together with a 2033 net sales growth of 6%. In addition, 2033 EBITDA would stand at close to $2.452 billion with an operating profit of $1.578 billion and an operating margin of 26.40%. 2033 net income would be close to $1.158 million with 2033 FCF of $1.414 billion and FCF/sales close to 26.88%. With a conservative WACC of 11%, I expect a net present value of future FCF of $5.237 billion.
With a conservative EV/EBITDA of 14.9x, I obtained a 2033 terminal value of $36.536 billion, which implied a net present value of approximately $11.592 billion. The company traded at more than 24x EBITDA in the past, and currently trades at less than 16x EBITDA. Hence, I believe that EV/EBITDA of 14.9x appears reasonable.
Source: YCharts
With cash of $7 million and debt of $3.076 billion, I obtained an enterprise value of $16.830 billion, equity value of $13.754 billion, and a target price of $65.8.
Source: Internal Estimates
Source: Internal Estimates
A Lot Of Competitors And A Fragmented Market
Competition in the modular applications market is high and fragmented, both by region and by product. McGrath RentCorp ( MGRC ), PODS, United Rentals ( URI ), ATCO Structures & Logistics, BOXX Modular, and 1-800-PACK-RAT in the United States and Wernick Hire and Elliot in the United Kingdom are the main competitors when it comes to providing services application of modular devices. To this, small companies with a regional scope that serve local customers must be added.
Something similar occurs in the liquid and gas storage service, but the competitive offer, in this case, is covered mainly by local providers, without predominant companies at the national level. They include United Rentals, Rain For Rent, Adler Tanks, and Sprint/Republic Services.
Risks
Beyond the risks on the integration and management of future acquisitions, I believe that the sale of business segments could be detrimental. If WillScot loses key personnel, or some employees decide to leave the company, revenue growth may decline more than expected. As a result, financial advisors may lower their FCF expectations, which may diminish WillScot's fair valuation.
WillScot has to comply with a significant number of government regulations with respect to transportation, safety, and equipment weight. I believe that changes in the regulatory framework could diminish WillScot's profit margins. If management has to work with more drivers to transport the same amount of storage units, FCF/sales will likely decline.
We operate in the US pursuant to operating authority granted by the US Department of Transportation (the “DOT”). Our drivers must comply with the safety and fitness regulations of the DOT, including those relating to drug and alcohol testing and hours of service. Such matters as equipment weight and dimensions are also subject to government regulations. Our safety record could be ranked poorly compared to peer firms. Source: 10-K
The company believes that a generalized decline in energy prices could damage the demand for modular buildings in the energy sector. Considering the exposure of the company to this particular industry, I would be expecting less revenue growth for WillScot. Very recently, management offered commentary in this regard:
A decline in global or local energy prices may materially adversely affect demand for modular buildings within the energy and resources sector. The levels of activity in these sectors and geographic regions may also be cyclical, and we may not be able to predict the timing, extent or duration of the activity cycles in the markets in which we or our key customers operate. A decline or slowed growth in any of these sectors or geographic regions could result in reduced demand for our products and services, which may materially adversely affect our business, results of operations and financial condition. Source: 10-K
Conclusion
WillScot offers a significant number of products and services in many regions in the United States, and offers a lot of revenue predictability. The company is going through a period of business transformation, which included a merger and recent sale of business segments. I am optimistic about the incoming changes in the organization. Scale opportunities, successful dynamic pricing, and cost reduction of transportation could bring significant free cash flow growth. Even considering potential risks from new transportation regulations, total amount of debt, changes in energy prices, or failed integration of businesses, I believe that WillScot appears undervalued.
For further details see:
WillScot Mobile Mini: Beneficial Guidance After Sale Of Business Segments