Cleaning service consolidator business bears putting on watch list

Investors sometimes score large gains by following and investing in consolidating companies and industry.

Three of the best-known recent industry consolidators are Alimentation Couche-Tarde in the convenience store business, Saputo in the global cheese business, and Park Lawn Corporation in the funeral business. Consolidators grow large by acquisition of locations in an industry, becoming low cost operators.

Often, they grow by acquiring mom and pop family operations that are difficult to sell as Park Lawn has done with funeral homes.

A relatively new entrant on the consolidator business model is Quebec-based GDI Integrated Facilities Inc.

Started in 1926 as a cleaning business, GDI became interested in growth by buyouts in the 1980s with a public listing in 2007.

The company offers contracted services on fixed-price or cost-plus terms for cleaning, records management, heating ventilation and air conditioning and complementary services. Clients come from a range of sectors: hotels, office and apartment buildings, national retailers, shopping centres, health care and government/military buildings

Expansion into the U.S. has one-fifth of business from south of the border. Seventy per cent of all revenues come from cleaning with 27 per cent from technical services.

Since 2014 assets have grown from $4 million to an astounding $616 million with plenty of operations left to acquire for improvement on efficiency. Employees number 20,000 with 13 U.S. locations, and 21 in Canada, including Regina. Operations in this sector are hard to sell for a decent value. GDI can offer a good price with a combination of cash and GDI shares.

Profit for next year is expected to grow by 25 per cent, meaning investors have put a nice premium on shares trading at 26 times next year’s estimated earnings. Management is critical in consolidating of companies. About 80 per cent of corporate acquisitions don’t work out well, so management becomes key.

New management since 2015 has done extremely well at consolidating all the new partners. With all the acquisitions total debt has been kept at a reasonable 31 per cent of assets.

Given that controlling shareholders have multiple voting shares and own 42 per cent of the subordinate shares there is little opportunity investors will see the company sold out under them, unless by the controlling shareholders.

At a recent $28.27 shares are up almost 15 per cent since June. Low price for the year is $16.30 bringing investors almost 100 per cent gain so far this year. Investors may want to wait for a drop-in price before nibbling on GDI, but be forewarned: hot stocks often don’t fall back in price. This stock is for investors with strong stomachs for risk. CAUTION: Remember when investing, consult your adviser and do your homework before buying any security. Bizworld does not recommend investments.

Ron Walter can be reached at ronjoy@ sasktel.net