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shares WillScot Mobile Mini Holdings Inc. (NASDAQ: WSC) Have completed their round trip as initially optimistic about the purchase McGrath Rentals (MGRC) has disappeared.This deal makes sense Leverage appears to be controllable. Over time, this increases the company’s presence in turnkey space solutions, giving the company greater market power.
While I’ve grown to appreciate the company and its business model, I’m still keen to keep a close eye on the business and stock.
Turnkey space solutions
WillScot Mobile describes itself as an industry leader in turnkey space solutions, providing turnkey logistics, space solutions and storage solutions. The company claims to be a leader in the North American market for flexible space solutions.
Typical solutions and applications include trailers and flex units for events, classrooms and other temporary facilities Example. The company owns and manages 130 million square feet of turnkey space in North America, employs approximately 5,000 people, and operates nearly a thousand trucks to deliver equipment to the right location.
With a fleet of approximately 370,000 vehicles and more than 80,000 customers, the company offers a wide range of products to a wide range of customers, achieving exceptional diversification.
About 40% of sales come from the construction and infrastructure sector, with its services primarily used by subcontractors and residential and non-residential contractors. Commercial and industrial is also a large customer market, together accounting for approximately 40% of sales, from customers active in the manufacturing, professional services, trading and wholesale sectors. All of this is supplemented by natural resource and government customers.
The company claims that the unit economics of portable storage containers and modular spaces are very interesting, with a payback period of 3-4 years, while maintenance or reinstallation costs are relatively low, and residual values often exceed 50% of the original equipment cost.
As announced in 2020, the merger of WillScot and Mobile Mini gave the company a huge boost, creating a leading business in its current form.
well done
Since the start of the pandemic, a $20 stock has risen to the $40 mark in late 2021 and peaked at $50 in early 2023 before falling to $43 per share. That’s not saying much, as we first have to look at the 2023 results, released in February this year, to get some perspective.
company grown up Sales will grow 10% in 2023, reaching $2.36 billion. More than three-quarters of sales come from general leasing, and about 18% come from delivery and installation fees, plus sales proceeds.
The nature of the business results in very high profit margins, with reported gross margins of nearly 59% and depreciation charges of up to $265 million. The company reported strong operating profits of $673 million, with net income from continuing operations of $342 million after tax and interest costs. On a basis of 202 million shares, this equates to $1.69 per share.
The balance sheet is relatively large given the asset-rich business model, with reported total assets of approximately $6.1 billion, including approximately $3.4 billion of leased equipment. Net debt was reported to be just over $3.55 billion. Given EBITDA of $1.06 billion, leverage was reported to be approximately 3.3x.
The company has 202 million shares trading at $43 per share, giving it an equity valuation of $8.7 billion and an enterprise valuation of just over $12 billion. The business is valued at about 5 times sales and 11-12 times EBITDA, as the premium multiple to equity is 25 times earnings.
These premium valuations will decline slightly as the company guides adjusted EBITDA to further improve to $112.5 to $1.200 billion by 2024. At the midpoint, EBITDA is expected to grow 10% to $1.16 billion, with sales expected to rise 8% to $2.56 billion. Net capex is expected to be in the range of $250-300 million (up from $185 million in 2023), while depreciation expense in 2023 is $265 million.
getting bigger
At the end of January, WillScot Mobile Mini declare acquisition McGrath Rentalsis a California-based rental company, and the deal is intended to expand the company’s footprint, customer base and equipment base. McGrath is particularly strong in the education sector and has relatively little exposure to construction and commercial clients.
McGrath investors can choose a cash deal of $123 per share, or receive 2.8211 WillScot Mobile Mini shares, as long as the total consideration is 60% cash and 40% stock. The deal and net debt values the business at $3.8 billion, which looks like a fair valuation considering the business generated about $800 million in sales. After paying a relatively modest premium, this valuation is broadly in line with WillScot Mini’s own sales multiple.
Based on 2023 figures, EBITDA is expected to jump to $1.4 billion, including an expected $50 million in run-rate synergies expected to be realized within approximately 24 months of the transaction. The deal values the company at 9.5 times EBITDA, including synergies. This represents an EBITDA contribution of $400 million from synergies arising from the transaction.
Net debt is expected to be $6.1 billion and leverage is 4.3x, above the targeted leverage target range of 3.0-3.5x, which should be achieved within 12 months of closing. This is because forward-looking EBITDA will rise and retained earnings will allow for some deleveraging.
Now?
McGrath’s deal is really about going big, as the relative multiples WillScot Mobile Mini Holdings Corp. is paying are essentially fair. While there’s potential for $50 million in synergies, the pre-tax price is about 20 cents, which is pretty good. The company said it expected growth from the deal but could not quantify the impact because synergies will take time to materialize.
Amid all this, the organic business should be well on track to post a profit of $1.85 per share this year. Additionally, synergies could push this number toward the $2 per share mark, but even in that scenario, the stock trades at only a 20x P/E ratio.
Note that the focus of the business is growth, not shareholder returns, as M&A plays a key role in this, while investors must forego dividends. While the capex portion is large, it’s not as bad as I initially feared because the unit economics of the business are really quite compelling.
WillScot’s stock price, which had given up all of its pre-deal gains of around $43 per share, hit the $50 mark before recovering. Against this backdrop, I am engaging in a balancing act. With earnings per share of around $2, the resulting price-to-earnings ratio is around 20, marking a slight premium with considerable leverage on the balance sheet.
All things considered, I’m keen to keep a close eye on the WillScot Mobile Mini Holdings Corp. business and learn more about this deal, but for now, I see no reason to get involved in WSC stock.
