BrightView Holdings Refocuses On Core Values (NYSE:BV)

Jeremy Poland/E+ via Getty Images BV Pivots Its Strategic Positioning I discussed BrightView Holdings (NYSE:BV) in the past, and you can read the previous article here, published on February 7, 2024. During Q2, the company created opportunities to generate higher returns by operating as One BrightView. Integrating sales and operations at the branch level, it has also allowed for cross-selling opportunities. A strong project backlog conversion should also keep its sales steady. To reduce costs, it is divesting noncore aggregator business. So, I expect the operating margin to expand. However, the unwinding of non-core businesses and an expected lack of snowfall can mitigate revenue growth in the coming few quarters. Cash flow improvement in 1H 2024 and a lower debt-to-EBITDA target should boost investors’ confidence. The stock appears undervalued versus its peers. Despite a few challenges, I think the business conditions are sufficiently stable to retain my “buy” call on the stock. Why Do I Retain My Rating On BV? In my previous discussion on BV published on February 7, I discussed how the company integrated tree and golf services into core maintenance branches and divesting non-core U.S. Lawns franchisee. However, the residential business and economic growth looked unsteady. The stock was relatively undervalued. I wrote: BV has modified its earlier strategy of procuring higher-quality contracts by realigning the organization and divesting the non-core U.S. Lawns franchise business. Plus, it allowed for significant investments in businesses where it can grow profitably. By shifting its focus away from residential construction to commercial business, it aims to regain the lost ground and improve profitability. During Q2, BV realigned its operating structure, removed silos, eliminated inefficiencies, and aligned under One BrightView. It also plans to unwind most of the contracts within the BES business. Despite the expected lower revenues in 2025, I think its operating margin can expand. Its debt-to-EBITDA improved significantly over the past year. Given the undervalued trading multiples, I retain my “buy” rating. The Strategy Tightening Seeking Alpha BrightView reaped the benefits of its strategy of securing profitable growth and cost reductions, which was adopted in the previous quarter, Q1. In Q2, margins grew in all of its operating segments, marking its policy of getting higher returns on investment when operating as One BrightView. A realignment of the operating structure reinforced and revitalized the go-to-market strategy. The new structure helped remove silos, eliminate inefficiencies, and align under One BrightView. So, now, the company’s sales and operations are integrated at the branch level, allowing for cross-selling opportunities. Also, in Q2, the company stressed employee security through the Boots program. In my previous article, I discussed how the company pursued its divestiture strategy by divesting the non-core U.S. Lawns franchise business. During Q2, it unwound its noncore aggregator business known as BES. Investors may note that BES is a noncore, unprofitable subcontractor business originally set up to outsource work to local providers. However, this was not aligned with the goal of One BrightView, and therefore, it unwound most of the contracts within this business. The company estimated that the divestiture process could affect its top line but would not affect its EBITDA. The Medium-Term Outlook In Q2, BV expects FY2025 revenues to decrease by 1.6% from FY2024 to a range of $2.74 billion to $2.8 billion. This considered the effect of BES unwinding and the impact of a more moderate snowfall than expected. Quantitatively, the unwinding of BES and the sale of U.S. Lawns can lower sales by $70 million. Its snow business can generate $215 million in revenues. The snow revenue forecast is at the low end of its previous range. In Development Services, revenues can grow by 2%- 2.5% based on a strong project backlog conversion. The company’s acquisition assumptions are minimal compared to the previous guidance, as it focused on streamlining its operating structure and ensuring stability. Despite lower revenue guidance, BV expects to keep its EBITDA guidance (at the mid-point) unchanged from the previous guidance. This can also translate to a margin expansion. With an adjusted EBITDA of $315 million to $335 million, the margin can expand by 90 to 130 basis points. My Estimates Over the past 15 quarters, its adjusted EBITDA increased by 21% on average. Given the removal of non-core businesses and inefficiencies, I expect the EBITDA growth to stabilize, although its topline growth can decelerate. Over the next four quarters, I expect its adjusted EBITDA to increase by 20%-25%. Economic Indicators FRED Economic Data Quarter-over-quarter, the US GDP growth exceeded the US consumer price index (or, CPI) growth from Q3 to Q4 in 2023. Over a longer period (two years), the US GDP growth rate also outpaced CPI. So, the economic indicators have been conducive to BV’s near-term positive outlook. Residential Market Trends FRED Housing Data The new privately owned housing unit permits declined by 17% from May 2024 to the past two years. They have been on a downtrend over the past few months. The uncertainty over the US economy and a possible recession appears to have put pressure on household sentiment in 2024. On the other hand, public construction spending has remained resilient, increasing by 48% in the past two years, according to FRED data. It has also remained steady in the past few months, far outpacing the dwindling residential market. This validates the company’s approach to concentrate on the real estate market, although a weaker residential market does not bode well for the future. Analyzing The Q2 Performance BV’s Filings As disclosed in the Q2 2024 earnings press release dated May 1, from Q2 2023 to Q2 2024, BV’s year-over-year revenues increased by 3.5% in Q2 2024 following a rise in revenues in the Development Services segment. Higher snowfall led to higher demand in the development business and caused Q2 revenues to rise. The sales growth also reflects the company’s change in business model which now capitalizes on cross-selling into maintenance. Adjusted EBITDA in the Maintenance Services and Development Services segments increased by 29% and 10%, respectively, from Q2 2023 to Q2 2024. The company’s EBITDA margin also expanded due to the continued benefits of the One BrightView initiatives. Improved profitability in the core land maintenance business, increased snowfall, and cost reduction initiatives also boosted its EBITDA margin. Cash Flows And Balance Sheet In 1H 2024, BV’s cash flow from operations doubled compared to a year ago. Although the company’s revenues remained unchanged, enhanced net working capital led to a rise in cash flow. Free cash flows also turned significantly positive in 1H 2024 from a year ago. BV’s liquidity was $480 million as of March 31, 2024. Its leverage (debt-to-equity) of 0.71x was lower than its peers’ average (SITE, JELD, and CENT). The debt-to-EBITDA ratio for Q2 2024 decreased to 2.4x compared to 5.0x in the prior year following the company’s strategy of pursuing profitable growth and investment. This lower leverage reflects a debt reduction. In May, the company offered 17.5 million shares in a secondary offering. The offering consisted of secondary shares sold by KKR. The underwriters distributed the shares to a group of institutional investors led by T. Rowe Price Investment Management Inc. In June, it also extended the receivables financing agreement from $275 million to $325 million and its maturity. Risk Factors BV’s revenues are typically lower in Q1 and Q2 due to the onset of winter. Sales pick up in spring and summer. However, the company’s snow removal services offset the revenue loss during winter. In 2024, the company witnessed lower snow, reducing service demand. During summer, on the other hand, its working capital requirements. As I discussed above, it increased its receivables financing limit in June. However, higher working capital can put a strain on its cash flows. Analyst Rating Seeking Alpha Three analysts rated it a “hold,” according to Seeking Alpha, while two sell-side analysts rated BV a “buy.” Two of the analysts rated it a “sell.” The consensus target price is $13.7, suggesting a 5% upside at the current price. Relative Valuation And Target Price Author Created and Seeking Alpha BV’s forward EV/EBITDA multiple contraction versus the current EV/EBITDA is steeper than its peers’ average (SITE, JELD, and CENT). This implies its EBITDA is expected to rise more sharply than its peers in the next year, which should typically result in a higher EV/EBITDA multiple. The company’s EV/EBITDA multiple (9.4x) is lower than its peers’ average of 11.8x. So, I think the stock is undervalued versus its peers at this level. BV’s average EV/EBITDA multiple for the past five years was 10.3x. If the trades at that multiple, the stock price can rise by 6% from the current level. If it trades at the peers’ average (11.8x), the stock price can increase by 27%. Since my last publication on February 7, where I suggested a “Buy,” the stock has increased by approximately 51%. As I discussed earlier in the article, I expect 20%- 25% adjusted EBITDA growth in the next four quarters. Feeding these values in the EV calculation and applying the current sell-side EV/EBITDA multiple of 9.4x, I think the stock should trade between $15.5 and $16.4, implying a ~23% upside. What’s The Take On BV? Seeking Alpha Continuing with its policy of investing in businesses where it can grow profitably, BV’s new structure under One BrightView helped remove silos and eliminate inefficiencies. It now plans to unwind its noncore aggregator business known as BES. Although the unwinding process can lower revenues, its EBITDA will not be affected much. The key economic indicators like GDP and the US residential markets have either remained stable or picked up pace in recent times. This should augur well with BV’s short-term outlook. So, the stock strongly outperformed the SPDR S&P 500 Trust ETF (SPY) in the past year. Cash flows improved substantially in 1H 2024, creating space for deleveraging. With relatively cheap valuation multiples, I suggest investors keep “buying” it for strong medium-term returns.

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