Business

RediShred operates PROSHRED Security, a secure document and hard drive destruction service, Secure e-Cycle, an electronics recycling and refurbishment service, and PROSCAN, a document scanning and digitizing service.

Business History

RediShred was initially a Capital Pool Company (“CPC''), similar to a SPAC, which raised $5 million in a private placement. Common shares in the capital company began trading on the TSX Venture Exchange under the ticker “KUT” on August 29th, 2007. The Capital Pool Company acquired Professional Shredding Corporation for a total consideration of $5.3 million in 2008. No longer being a Capital Pool Company, shares began trading under the name “RediShred Capital Corp.”

Initial performance from RediShred was poor. The company was consistently unprofitable and cash flow negative, at one point reporting -200% operating margins. Shares peaked shortly after IPO on the 10th of September 2007, when they closed at $3.61 per share before going on to decline to $0.10 per share on January 7th, 2013, a 97.2% drawdown over 5 years. Despite the poor financial results, things were improving. Revenue was growing, margins were inflecting upwards, and RediShred was executing on its acquisition goals.

In 2011, then CEO Robert Crozier was replaced in his role by CFO Jeffrey Hasham. Hasham remains CEO today. RediShred achieved its first EBITDA and cashflow positive year in 2013, two years after Hasham took over as CEO and since then has grown revenue at a 26.76% CAGR.

RediShred offers three services, a document and hard drive destruction service though PROSHRED, a document digitizing service through PROSCAN, and an electronic recycling service through Secure e-Cycle.

RediShred’s scanning and electronics recycling businesses are two nascent components of the business. They do not have a long operating history, represent only a small proportion of RediShred’s revenue and value, have seen significant swings in revenue, and RediShred’s management makes limited disclosures about them. I do not have the insight or analytic ability to properly value these segments. At worst, they provide some optionality to RediShred shareholders. Either the segments are worthless and will be small drag on financial performance before being shut down or will create significant value for RediShred over time. I ascribe zero value to them in my valuation of RediShred, with the bulk of this thesis focusing on its document destruction service. One small note is that the digital scanning service is a natural cross-selling opportunity for RediShred. Businesses may wish to have digital copies of their files before being destroyed and outfitting PROSHRED trucks with digital scanning equipment can be done easily.

PROSHRED’s customers are commercial enterprises. Their revenue is broken down into three categories.

Scheduled

A business may not have the facilities to conduct on site document destruction or may not wish to. PROSHRED installs secure bins in customer offices. Once per month, a specialized PROSHRED truck arrives on site, collects the paper from the bin, and securly shreds it in one of their specially outfitted trucks.

Unscheduled

Alternatively, a customer may request an unscheduled pick up. This operates in a similar way to a scheduled pick up but is done on short notice. The mix between scheduled and unscheduled revenue has remained largely the same over the past five years.

Recycling

Once paper has been collected and destroyed from a business, RediShred keeps the shredded paper and then resells it at a high margin as Sorted Office Paper (“SOP”).

RediShred has a number of attractive qualities that make it a valuable asset. First, PROSHRED’s document destruction business is highly recession resistant. Document destruction is a necessary part of business operations and represents only a small part of a businesses operating expenses. A RediShred customer can cut expenses in many areas before needing to cut their document destruction expenditure. Even in a recessionary environment, I expect RediShred’s scheduled pickup revenue to remain to remain largely unaffected and their unscheduled pickup to suffer only a slight decline.

Second, a large proportion of RediShred’s revenue is highly recurring in nature. Close to half of RediShred’s revenue comes from scheduled pickups that are collected on a monthly basis. Adding to the degree of confidence in these collections, RediShred has extremely low customer churn, I have seen it estimated that RediShred has a 2% annual churn rate in customers. Such a low churn rate indicates that customers leave RediShred not because of competition within the industry, but because they have gone out of business. Scheduled collections occur regularly and with a high degree of certainty. In addition, RediShred has recently implemented price increases and found no material impact on this churn figure, indicating there may be some untapped pricing power for RediShred.

Insiders currently own approximately 20% of the company, including options, warrants and indirect holdings. There is a significant outside owner, Moray Tawse. Tawse is the co-founder of First National Bank, and is certainly a sophisticated investor and one capable of keeping directors and executive officers in line.

Potential investors may have concerns that RediShred is currently overearning due to historically elevated SOP prices (this is discussed further in the risks section). While RediShred is currently benefitting from higher than usual paper prices, this is partially offset by higher fuel prices, truck part shortages, and increases in maintenance times. As the macroeconomic environment normalises, I would expect paper prices to decline as well as the above disruptions to alleviate.

Industry

The document destruction industry remains highly fragmented. There is no clear market leader in the small and medium enterprise space. This means there is no incumbent with a clear cost advantage for RediShred to compete against. In addition, this means that RediShred can reinvest their cash flows into acquiring locations for a long period of time. 

RediShred has been acquiring other locations in ‘tuck-in’ acquisitions. There is no significant operational or financial cost associated with acquiring and integrating another document destruction company. In addition, once a location has been acquired, overhead can be stripped out and the post-acquisition multiple paid drops.

Potential investors may have concerns about the future of the document destruction industry. Businesses are continually adopting technological solutions over paper solutions. As an example, consider how much paper that would have been used in sending letters fifty years ago has been replaced by email. These are fair concerns but have not materialised. RediShred has actually seen modest organic growth in this regard. RediShred reports ‘Same location system sales’ as a KPI, which accounts for acquisitions that take place in the course of business. This KPI has grown double digits this financial year (partially helped by a decline in the previous year) and RediShred has previously cited 8% growth in same location system sales as a long-term target. Over the short to medium term, fears of a ‘paperless office’ should not overly concern RediShred shareholders.

Competitive Advantages

RediShred benefits from three identifiable competitive advantages. Economies of scale, network effects, and brand.

First, RediShred benefits from economies of scale though route density. As more businesses sign up for RediShred’s destruction, scanning, or electronic recycling services, the route density of their trucks increases. The cost increase associated with adding another customer to a RediShred truck’s route is negligible while capturing the full value of an additional customer. This allows RediShred to spread its fixed costs over a greater number of customers. This gives RediShred a cost advantage over smaller competitors.

Similar to economies of scale discussed above, as more businesses opt for RediShred’s destruction services, the average cost per destruction for RediShred goes down. RediShred can then offer lower prices, drawing in more customers in a virtuous cycle. There is a limit to this, however. At some point, trucks become constrained in how much they can destroy in a day. Regardless, there is a network effect present, as RediShred competitive position becomes more entrenched as more businesses opt for their destruction services.

Brand is another competitive advantage RediShred benefits from, albeit a weak one. As RediShred adds more trucks to their network, the service becomes more reliable. Many of RediShred’s competitors are mom-and-pop businesses limited to one or two trucks. If one of these trucks has issues running, it can have a material adverse impact on the ability of the company to destroy documents on time. RediShred’s size advantage over these companies means they can develop a reputation for reliability over time.

Valuation

I estimate a 26.3% IRR if shares are purchased at their current price and held for five years using conservative assumptions. These assumptions are expanded upon below.

A link to the DCF and DCF notes in excel form can be found by clicking this link

While RediShred is a quality company, with double digit revenue growth, recurring revenue, low customer churn, a competitivly advantaged position, and an ability to reinvest at high rates of return, I am doubtful it will ever trade at a premium multiple. There is significant investor aversion to roll-up stories and especially roll-ups that use debt to fund acquisitions. I have estimated a NOPAT multiple of 15, which would correspond to an equity yield of 6.67% in an all equity financed firm.

I assume a decline in revenue in 2023 assuming paper prices revert to historical levels. I then assume revenue grows at a 19.32% CAGR from the end of 2023 to 2027. RediShred’s revenue CAGR from 2011 to 2021 has been 26.76%, so this is below RediShred’s historical rate.

RediShred’s EBITDA margins have hovered around 25% in recent years, with improvements as the company continues to capitalise on its economies of scale. I do not use EBITDA as a valuation metric, but it is useful in projecting out future financial performance. I assume operating margins will continue to improve as RediShred leverages it’s economies of scale.

Risks

RediShred’s financial performance is highly sensitive to recycled paper prices. Once RediShred destroys office paper, it is then resold to intermediaries as Sorted Office Paper (SOP). This resold paper is a high-margin, low overhead revenue stream. Paper prices are highly volatile and something RediShred has little control over. Recent paper prices have been high and RediShred has been benefiting from this. RediShred’s underlying business performance, excluding paper reselling, has been satisfactory. Should paper prices experience a decline, RediShred shareholders will be adversely affected. Over time, however, the improved underlying performance of the non-paper business should compensate for this.

There have been concerns that as businesses become more digitized, the volume of paper being processed will decline and RediShred will face secular headwinds. While there is some merit to this argument, it is not enough to break an investment thesis in the company. RediShred’s Total System Sales (Sales including revenue from franchised locations that RediShred cannot book as revenue) has experienced healthy growth since the company went public, even accounting for acquisitions. In addition, since the COVID-19 pandemic, there has been a significant demand pull forward in document digitizing services. Despite work from home measures, an increased focus on remote work, and only businesses designated ‘essential’ remaining open, RediShred still posted double digit revenue growth for 2020FY.

I believe that RediShred is now in a stronger position than ever for organic growth going forward.

RediShred has taken on debt to finance their acquisitions and Capex requirements. This debt has grown from $8.2 million total debt and $7.2 million in net debt in 2015 to $27.4 million in total debt and $16.3 in net debt today. Despite the increase in debt increase, RediShred’s financial performance has improved and the company can still comfortably manage it’s debt load. RediShred is not close to being in breach of its debt covenants. RediShred’s Net Debt/EBITDA is 1.5, on the higher side, but not enough to pose an existential risk to the company.