The Corona crisis has led and will likely lead further to some pretty decent
buying opportunities with a beneficial risk/reward relation. Today, I will
present you a company I have already been following for some years yet always
considered it too expensive – a fact that has changed now with the drop in its
share price.
K-Bro Linen is the largest provider of laundry and linen services in
Canada, and one of the largest in the UK. According to its own website, K-Bro
has an international reputation for excellence and dependability in providing
the most highly efficient, environmentally conscious and cost-effective laundry
and linen services. The contracts with is clients are typically multi year
contracts and provide not only visibility but also stable and recurring
revenues. Sounds boring, right? That’s exactly how long-term investing works.
K-Bro’s business can be divided into two parts: services for healthcare
and hospitality. Of its total revenue of C$252 million in 2019, roughly 55% was
generated in the healthcare segment and thus 45% in the hospitality segment. No
rocket science is needed to figure out that the healthcare business has
presumably been doing pretty well, whereas the hospitality segment must be
under strong pressure due to COVID-19.
Valuation
K-Bro shows a low leverage with an equity ratio of more
than 55% and also low debt ratios compared to EBITDA. With a current market
capitalisation of approx. C$280 million, the P/B ratio is 1.4x. The P/E (EPS
was slightly above C$1 in 2019) is not super cheap; however, this is partly
because of increased depreciation and not fully used capacities at its
facilities. And this is where it gets interesting: First, the company recently
completed large facility expansion projects in Vancouver as well as Toronto
with total costs of more than C$90 million. This now decreases the future
capital investment program significantly and free cash flow generation will be
accelerated. Second, K-Bro’s facilities offer
substantial unused utilization rates in Canada, being between 50% to 75%. If
the company is able to increase its utilization rate, cash flow and hence
earnings will rise disproportionately due to operating leverage and its cost
structure.
What’s next?
The company’s strategy should be simple: making better use of its
existing facilities by winning additional clients and consolidate the market
either locally or globally. In 2017, K-Bro acquired seven facilities in the UK
and aims to further consolidate the European market.
It is clear that 2020 will be a difficult year for K-Bro due to its
hospitality segment. On May 7th, the company is likely to provide an
update regarding the current situation. Nevertheless, with its strong balance
sheet and partially undrawn credit lines, K-Bro will survive this crisis and
who knows, there might even be some potential takeover candidates out there strapped
for cash. K-Bro can be hold for the long-term and is expected to perform nicely
over the years.
Current Price
C$26.41 per share
