It can be a lucrative strategy to follow a rollup acquisition strategy, or to become one of a particular industry’s consolidators in which a company operates in, as I noted in my previous article.
An example of this is Threat Protection Australia Limited (TPS:ASX), which is seeking to be one of the industry consolidators in the highly fragmented private security industry in Australia. The company estimates there are circa 6,500 businesses nationally generating approximately $6.3bln in annual revenues. So, it has a large addressable market in which to execute this consolidation strategy.
TPS offers all your standard security services for your home, alarms, remote monitoring, access control and responding to an alarm if your away etc. TPS also provides the aforementioned services to business customers along with your standard on site security personnel and some more high-end services such as private personal protection (read bodyguards), risk assessments and audits and counter surveillance.
TPS currently operates its head office out of East Perth in WA. Through two recent east coast acquisitions and with its east coast monitoring centre in Kingsgrove south Sydney, TPS has set itself up nicely for a full national offering of its services. TPS has furthermore recently announced that it has received the required permits and licenses to operate in VIC.
The company currently operates two main divisions
- Monitoring: Access control, CCTV, Alarm response, Motion Sensors etc
- Guarding: Onsite security personnel, events security, risk consultancy etc
Both divisions in FY17 contributed roughly equally to TPS’s revenue but the monitoring division contributed circa 90% of group EBITDA and expanded its divisional EBITDA margin from 30% in FY16 to 56% in FY17. The increasing scale and profitability of the monitoring division drove the overall company to report a healthy NBT of $1.2mil for FY17 up from a loss in previous year.
The monitoring division is the focus of the rollup strategy. TPS is seeking to leverage its largely fixed cost control rooms in Perth and Sydney through the acquisition of monitored security client bases. Acquisition of monitored security client bases come from its relationships with 480 resellers of its own monitoring service around Australia or from acquiring entire security businesses where the acquired business can provide other strategic benefits or capabilities to the overall group.
The current control room utilization/capacity indicated by the company sits at circa 30% thus providing plenty of head room for TPS to grow into. The company recently announced it had bought back some monitored security client bases from resellers for a cost of just over $600k. The conversion from a reseller account to a direct account delivers a roughly 3x uplift to revenue for very minimal additional costs to TPS given surplus capacity at its monitoring base according to the company’s announcement. TPS currently has 6000 lines/accounts it monitors directly out of total monitoring base of 37,000. Thus, the bulk it is monitoring services is conducted on behalf of its reseller base.
The company has a market cap of circa $20mil and it has traded around the same levels for the last 12 months despite improving business performance and execution of its strategy. This flat share price performance maybe due in part to its relatively debt high levels. The company has net debt of $6mil which is quiet high given its market cap. I am usually averse to debt in microcaps companies but as they say the devil is in the detail. The bulk of the debt is owed to Melbourne based wealth management company First Samuel rather than one of the big 4 banks or more standard commercial lenders. The debt is owed via a convertible note the total of which is $9.0mil with a little over 50% of the note facility drawn down to date. First Samuel is also TPS’s largest shareholder with 8.26% of the share register currently excluding the convertible note. Now this debt situation is not your normal run of the mill debt financing. Given the fact that the largest shareholder is providing the majority of the debt funding (NAB are also providing some funding) which is specifically linked to funding TPS’s acquisition strategy it makes the high debt levels more acceptable. The nature of TPS’s business means it is highly cash generative so TPS should be able to service their debt requirements through operational cashflows. TPS traded cashflow positive in FY17, another important milestone in its evolution.
FY18 looks set to be a pivotal year for TPS. It will firstly have the benefit in terms of revenues and EBITDA contributions from the full year impact of its recent Apollo Security acquisition which was a sizeable one in the context of TPS’s current business. Secondly, its recent licensing in Vic allows TPS to look at that market for acquisitions and/or expansion which will enhance its national presence and footprint. Having a national footprint opens the opportunity to tender for much larger corporate contracts which demand a national presence as these corporate clients themselves have a national footprint of sites or assets that need security. Overall TPS appears to be operating in an attractive space and to date at least appears to be executing its clearly defined strategy effectively. Overall to me it’s interesting.