Shares of WillScot Mobile Mini Holdings Corp. (NASDAQ:WSC) have completed their round-trip as initial optimism on the purchase of McGrath RentCorp (MGRC) has faded. The deal makes quite some sense, as incurred leverage seems manageable. Over time, this grows the presence of the company in turnkey space solutions, granting the business greater market power over time.
While I have grown more appreciative of the business and its business model, I am keen to keep a close eye on the business and the shares from here.
Turnkey Space Solutions
WillScot Mobile describes itself as the industry leader in turnkey space solutions, offering turnkey logistics, space solutions and storage solutions. The company claims a leadership position in the North American market for flexible space solutions.
Typical solutions and applications include trailers and flex units for events, classrooms, and other temporary use cases. The company owns and manages 130 million square feet of turnkey space across North America, employing some 5,000 staff and operating nearly a thousand trucks to move the equipment towards the right place.
With a fleet of some 370,000 units and more than 80,000 customers, the company offers a wide range of products to a wide range of customers, resulting in superior diversification.
About 40% of sales are generated within the construction & infrastructure segment, with its services mostly used by subcontractors, as well as residential and non-residential contractors. Commercial & Industrial is a huge customer market as well, combined responsible for about 40% of sales, generated from customers which are active in manufacturing, professional services, trade, and wholesale. All this is complemented by natural resources and governmental customers.
The company claims very interesting unit economics with portable storage containers and modular space seeing payback periods within 3-4 years while incurring relatively little maintenance or re-fitting costs, with residual values often seen at over 50% of the original equipment cost.
The company has seen a huge impetus from its merger between WillScot and Mobile Mini, as announced in 2020, creating this leading business in its current form.
Doing Well
Since the start of the pandemic, a $20 stock has risen to the $40 mark late in 2021, as shares peaked in the $50s early in 2023, before now selling off to $43 per share. That does not say much, as we first have to look at the 2023 results, as released in February of this year, in order to get some perspective.
The company grew 2023 sales by 10% to $2.36 billion. More than three quarters of sales are generated from general leasing, some 18% from delivery & installation fees, complemented by proceeds from sales.
The nature of this business carries very high margins, with gross margins reported as high as nearly 59%, ahead of a $265 million depreciation expense. The company posted strong operating profits of $673 million, which after taxes and interest costs comes down to net earnings of $342 million (from continuing operations). This was equal to $1.69 per share based on a share count of 202 million shares.
Given the asset-rich business model, the balance sheet is relatively large, with some $6.1 billion in total assets being reported, of which some $3.4 billion in rental equipment. Net debt is reported at just over $3.55 billion. Given a $1.06 billion EBITDA number, leverage ratios are reported at around 3.3 times.
With 202 million shares trading at $43 per share, the company commands an $8.7 billion equity valuation, with the enterprise valuation just surpassing $12 billion. This values the business around 5 times sales, 11-12 times EBITDA, as equity is awarded a premium multiple of 25 times earnings.
These premium valuations were set to come down a bit as the company guided for adjusted EBITDA to improve further to $1.125 – $1.200 billion in 2024. At the midpoint, EBITDA is seen up 10% to 1.16 billion, with sales seen up 8% to $2.56 billion. Net capital spending is seen between $250-$300 million (up from a net capital spending number of $185 million in 2023) and compared to a $265 million depreciation expense in 2023.
Getting Bigger
Towards the end of January, WillScot Mobile Mini announced the acquisition of McGrath RentCorp, a California-based rental-to-rental company, in a deal set to bolster the footprint, customer base, and equipment base of the company. McGrath is especially strong in education, having a relatively lower exposure to construction and commercial customers.
Investors in McGrath can elect for a $123 per share cash deal or be granted 2.8211 shares of WillScot Mobile Mini stock, as long as the total consideration is split 60% in cash and 40% in stock. This deal and net debt values the enterprise at $3.8 billion, which looks like a fair valuation given that the business generated about $0.8 billion in sales. This valuation is largely in line with the sales multiple of WillScot Mini itself, after a relatively modest premium was paid.
Pro forma EBITDA will jump to $1.4 billion based on the 2023 numbers, including an anticipated $50 million in run rate synergies, which are expected to be realized some 24 months post the transaction. The deal is valued at a 9.5 times EBITDA multiple, including synergies. This suggests a $400 million EBITDA contribution post synergies from the deal.
Pro forma net debt is seen at $6.1 billion, for a 4.3 times leverage ratio, which comes in above the targeted leverage target range of 3.0-3.5 times, a target which should be achievable within 12 months upon consummation of the deal. This comes as forward-looking EBITDA is set to rise, and retained earnings allow for some deleveraging as well.
And Now?
The McGrath deal is really about getting bigger, as the relative multiple being paid by WillScot Mobile Mini Holdings Corp. is largely fair. While $50 million in synergies have potential, it comes in at about twenty cents of a dollar on a pre-tax basis, which would be nice. The company indicates that accretion is expected as a result of the deal, but it failed to quantify this impact, as synergies will take time to show up.
Amidst all this, the organic business should be perfectly on track to post earnings of $1.85 per share so this year. Moreover, synergies could boost this number towards the $2 per share mark, but even in such a case, shares trade at a low twenty times earnings multiple.
Note that the focus of the business is on growth, rather than shareholder returns, as M&A plays a key role in this, with investors having to forfeit dividends meanwhile. While the capital spending component is substantial, it is less bad than I feared from the outset, as the unit economic of the business is quite compelling indeed.
Shares of WillScot have given up all the gains from a pre-deal price of around $43 per share, after which shares rose to the $50 mark and have subsequently come back. Given this background, I am performing a balancing act. With earnings power around $2 per share, the resulting earnings multiple in the low-twenties marks a small premium amidst quite some leverage taken on the balance sheet.
Weighing it all together, I am keen to keep a close eye on the WillScot Mobile Mini Holdings Corp. business and learn more about this deal, but for now, see no reason to get involved with WSC stock here.
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