net debt/ebitda 0.1x 0.9x 0.0x 0.0x first look toronto ... · for u.s. persons only: this research...

ACUMEN CAPITAL FINANCE PARTNERS LIMITED | SUITE 800, 500 4th AVENUE SW | CALGARY, AB | T2P 2V6 MAIN PHONE: 403.571.0300 | TOLL FREE: 1.888.422.8636

October 6, 2017

Summary. We toured KBL’s new Toronto facility in Brampton, Ontario, Wednesday afternoon, and walked away very impressed. Our reference point was KBL’s Calgary facility. The Toronto facility is a real step change in terms of technology and process. We believe the investment has positioned KBL to be the processor of choice for both health care and high-end hospitality in Toronto and the surrounding areas of the Golden Horseshoe. Details are below.

Significant improvement in operating efficiencies. Management estimates the new facility will provide a 25% improvement in operating efficiencies, a 50% reduction in water usage (~3% of operating costs), and a 10% decrease in electrical consumption. KBL estimates the new facility will end up having less than 1% rewash requirement which will help with throughput and margins.

Facility now gaining utilization. KBL started processing laundry in February/March 2017 and is currently operating at about 60% capacity (split 50/50 between Healthcare and Hospitality) with a single shift (8:00 am – 6:30 pm Monday – Sunday). The new foot print is 90,000 square feet compared to 38,000 square feet for their old Toronto facility (Etobicoke). Current employment is about 250 full and part-time equivalents, about the same as their old Etobicoke facility.

Total investment came in as expected. Total investment was $37.0M, with $35.0M spent by Q2/17. The remaining $2.0M was expensed in Q3/17. $15 – $20M was spent on equipment from Jensen (https://www.jensen-group.com/) and almost an equal amount spent to plumb, wire, and build out the facility to install the equipment. KBL is now Jensen’s #1 client in the world.

Big step change for the Company. Comparing facilities, the big differences in Toronto includes laundry handling (fewer human touch points), more automated equipment, including new Cockpit function to monitor employee performance (anticipate 10% improvement in productivity), lower water (both equipment usage and large recycling component), lower natural gas usage, and increased number of loading docks (22 new vs. 6 old).

K-BRO LINEN INC. (KBL: TSX) SPECIAL SITUATIONS RESEARCH

COMPANY DESCRIPTION: K-Bro Linen Inc. (“K-Bro”, “KBL” or “the Company”) owns and operates seven laundry and linen processing

facilities in Canada. The Company is a full cycle operator serving healthcare, hospitality and other commercial businesses with processing, management and distribution services. Plants are located in Calgary, Edmonton, Regina, Toronto, Vancouver, Victoria, Montreal, and Quebec City.

ACUMEN CAPITAL | RESEARCH ENERGY. GROWTH. VALUE.

Brian D. Pow, MBA | Vice President Research and Equity Analyst | (403) 571-0303 | [email protected] Nick Corcoran | Associate Analyst | (403) 410-6840 | [email protected]

Recommendation: BUY 12-Month Target: $43.50

Implied Total Return: 14.9%

S/O (bas.): 9.6m Last Price: $38.90

S/O (dil.): 9.7m Implied Total Return: 14.9%

Market Cap: $372.8m Monthly Dividend: $0.10

Current EV: $367.5m Current Yield: 3.1%

Year End: Dec. 31

F15 F16 F17e F18e

Revenue $144.5m $159.1m $167.6m $179.7m

y/y growth % 5.9% 10.1% 5.3% 7.3%

EBITDA $27.1m $28.2m $28.3m $31.0m

y/y growth % 3.4% 4.0% 0.3% 9.6%

Net Earnings $12.1m $11.5m $11.8m $13.1m

EPS (dil.) $1.52 $1.44 $1.30 $1.37

F15 F16 F17e F18e

P/S 2.6x 2.3x 2.2x 2.1x

P/EBITDA 13.7x 13.2x 13.2x 12.0x

P/E 30.9x 32.3x 31.7x 28.4x

EV/EBITDA 13.5x 13.0x 13.0x 11.8x

F15 F16 F17e F18e

Working Capital $8.7m $13.8m $47.0m $10.1mD/E 0.0x 0.2x 0.2x 0.0xNet debt/EBITDA 0.1x 0.9x 0.0x 0.0x

ROAE 10.8% 10.0% 8.1% 7.5%

BV/Share $14.28 $14.62 $19.18 $18.48

Payout Ratio 46.0% 44.1% 49.6% 46.7%

Key Personnel

Linda McCurdy President & Chief Executive Officer

Kristie Plaquin, CA Chief Financial Officer

Source: Acumen Capital Partners, Sedar

Figures subject to rounding

First Look – Toronto Facility Tour

https://www.jensen-group.com/

mailto:[email protected]


October 6, 2017 ACUMEN CAPITAL | RESEARCH IDEAS. GROWTH. OPPORTUNITY.

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Acumen Capital Finance Partners Limited Suite 800, 500 4th Avenue SW | Calgary, AB | T2P 2V6 | Main Phone: 403-571-0300

Most issues in transitioning are now behind KBL. Most of the issues in transitioning to the new facility are now behind KBL; they are currently focusing in on operating efficiencies which are already 90% achieved. Start-up issues and challenges earlier in the year included;

• Losing 50% of the staff as they transitioned to the new facility. Travel times on transit were a major issue for a largeportion of the previous employees given the new location in Brampton.

• The driver labour dispute (the drivers recently requested reinstatement with no collective agreement and 5/13 nowback).

• Taking on $7.0M of new healthcare business.

Toronto facility is now KBL’s biggest. They are currently processing about 12,000 pounds an hour. This is now the largest facility for KBL, processing the most volume of all nine plants. (Vancouver will jump ahead once they are in the new facility and have 100% of the volumes).

On-site distribution a potential opportunity. KBL currently employs about 200 workers that work at hospitals in Alberta and British Columbia to manage the laundry inventory in the hospitals. KBL plans to step up selling the benefits of on-site laundry distribution to its healthcare clients in Toronto. This is a value-add for customers as KBL can perform the same task in 10 – 50% fewer hours and provide savings up to 20% per year by outsourcing the business to KBL (~$150,000 a year). KBL’s automated processing system can also provide feedback on usage levels to help identify potential over use in areas of the hospital.

Q3/17 should show further improvement. KBL reported Q2/17 results that were in line with our expectations. We sense that KBL made good progress during Q3/17, particularly adding the new healthcare volumes that were awarded TY to its Toronto facility. We were reminded that hospitality volumes during the summer months are typically double the rest of the year and KBL apparently processed the additional workload with very few issues. For Q3/17, our estimates include revenue of $43.8M and EBITDA of $7.7M roughly (in line with consensus). For Q3/16, KBL reported revenues of $41.6M and EBITDA of $7.5M.

Recommendation. We believe KBL was very successful in achieving its goals (increase efficiencies and the cost per pound to process, improve output quality, reduced enviromental footprint, improve infection protection as well as improve employee ergonomics and safety) with the new Toronto facility. Having been strapped for capacity in Toronto for a number of years at its old Etokicoke facility, KBL is now set to increase its business development efforts to gain market share at the expense of other market players with less sophisticated facilities. We maintain our BUY Rating and $43.50 Target Price based on our peer EV/EBITDA and DCF valuation.



October 6, 2017 ACUMEN CAPITAL | RESEARCH

IDEAS. GROWTH. OPPORTUNITY.

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FIGURE 1 | K-BRO LINEN INC. | TORONTO FACILITY

Pictures are of Hospitality laundry arrival, Healthcare laundry arrival, Hospitality sorting, and Healthcare laundry pressing.

Source: Acumen Capital Partners





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ISSUER: K-BRO LINEN INC. (KBL: TSX)

Disclosure Requirements

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Yes No

Does Acumen Capital Partners or the Analyst/Associate have any actual material conflicts of interest with the issuer? Explanation:

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Does the Analyst/Associate or Household member serve as a Director, Officer, or Advisory Board Member of the issuer?

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Has the Analyst/Associate received any direct compensation from the subject company in the past 12 months?*

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For U.S. persons only: This research report is a product of Acumen Capital Finance Partners Limited (“Acumen”), which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.

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Acumen Recommendation Structure: Buy, Speculative Buy, Hold, Reduce, Under Review, Tender Full Recommendation Structure explanation can be found at the Acumen Capital Partners website: www.acumencapital.com

The information transmitted is privileged, confidential, may be subject to copyright and is intended solely for the use of the individual or entity to which the transmission is addressed. This transmission is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such would be prohibited, nor in any jurisdiction where Acumen is not registered to do so. The views expressed are those of the sender and not necessarily those of Acumen Capital Finance Partners Limited or its subsidiaries. Any unauthorized use, distribution, review or disclosure is prohibited. If you received this in error, please notify the sender and delete or destroy this message and any copies. Acumen does or seeks to do business with companies covered in our research comments and reports. As a result, investors should be aware that the firm may be in a conflict of interest. Investors should consider this report as only a single factor in making their investment decision©.





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ACUMEN CAPITAL | STAFF LISTRESEARCH

Brian D. Pow, MBA Vice President Research, Equity Analyst (403) 571-0303 [email protected]

Trevor Reynolds Oil and Gas Research Analyst (403) 410-6842 [email protected]

Nick Corcoran Associate Analyst (403) 410-6840 [email protected]

Ted Bobier Associate Analyst (403) 571-0530 [email protected]

INSTITUTIONAL SALES

Brian Parker President & CEO, Institutional Sales (403) 571-2514 [email protected]

Robert Cooper, CFA Institutional Sales (403) 571-0324 [email protected]

Jason Sawatzky Institutional Sales (403) 571-0685 [email protected]

TRADING

David Waite Institutional Trading (403) 410-6730 [email protected]

Jesse Ahlan Institutional Trading (403) 571-0148 [email protected]

David Lovsin Institutional Trading (403) 571-0318 [email protected]

Crystal Bellefountaine Associate (403) 571-0314 [email protected]

INVESTMENT BANKING

Kelly Hughes Head of Investment Banking (403) 571-5036 [email protected]

Ian Thomson Vice President, Investment Banking (403) 571-0301 [email protected]

Shawn Ostrow, MBA Vice President, Investment Banking (403) 571-0319 [email protected]

RETAIL SALES

Robert Laidlaw Vice President (403) 571-2522 [email protected]

Imran Mulji Investment Advisor (403) 571-0112 [email protected]

Loredana Alaia Associate Investment Advisor (403) 441-0536 [email protected]

Sheldon LeLievre Vice President, Sr. Investment Advisor (403) 571-0315 [email protected]

Craig Madill Sr. Investment Advisor (403) 410-6018 [email protected]

Erin Williams Investment Advisor Assistant (403) 571-2416 [email protected]

Donny Woo Vice President, Sr. Investment Advisor (403) 571-2510 [email protected]

Darren Fong Investment Advisor (403) 441-2754 [email protected]

Leanne Bectold Associate (403) 441-5672 [email protected]

Alan Tolg Investment Advisor (403) 410-2042 [email protected]

Ron Cairns Investment Advisor (403) 410-2040 [email protected]

Scott Barnett Investment Advisor (403) 571-0532 [email protected]

Curtis Schirrmacher Investment Advisor (403) 571-0113 [email protected]

Preston Smith Investment Advisor (403) 571-2195 [email protected]

Alec Balfour Investment Advisor (403) 571-2505 [email protected]

Grant Gowland Associate (403) 441-0537 [email protected]

Bob Zarchekoff Vice President, Sr. Investment Advisor (403) 571-2500 [email protected]

Rod Zarchekoff Investment Advisor (403) 571-2501 [email protected]

Jane McKenna Investment Advisor Assistant (403) 571-2502 [email protected]

TREASURY AND OPERATIONS

Cindy Marthaller Operations Manager (403) 571-8045 [email protected]

Myja Miller CFO, COO (403) 571-0308 [email protected]

Govind Achyuthan Chief Compliance Officer (403) 571-0689 [email protected]

Shanda Biggs Client Services (403) 571-0300 [email protected]

ACUMEN CAPITAL | PARTNERS

Acumen Capital Finance Partners Limited | Main Phone: 403-571-0300 | Trading Toll Free: 1-866-410-9039

www.acumencapital.com

| Suite 800, 500 4th Avenue SW Calgary, AB T2P 2V6 |



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