Compound Annual Growth Rate since 2020

A mature business that has decreasing shareholder equity shows weakness within the business. The use of debt has not significantly increased revenue growth, although the boost in net income contributed by the acquisition of ITRenew has put a massively positive skew on it and therefore EPS. The overall consensus is that whilst the company is growing through acquisitions, total liabilities are increasing and shareholder equity and operating income are being punished as a result of this. To show strength, liabilities and equity should be travelling in the opposite direction.

Stericycle

Stericycle is another large competitor of RediShred’s which provides regulated waste and secure information destruction services. Whilst a large part of the business does not compete with RediShred, their information destruction services do. This is referred to as Shred-it.

Stericycle provides services in 16 different countries46. Specifically, the Shred-it business provides services in the following 13 countries:

Overall Shred-it generated $906,500,000 in 2022 from document and hard drive destruction which is around 15x larger than the revenue generated by RediShred48 .

46Stericycle 2022 Annual Report; https://s25.q4cdn.com/446039012/files/doc_financials/2022/ar/Stericycle_Annual-Report-2022.pdf ;page 10; access date: 08/07/2023.

47 https://www.shredit.co.uk/en-gb; access date: 08/07/2023.

48 Using the 2022 annual report for both companies this work out to be 14.84 x larger; Stericycle 2022 Annual Report; https://s25.q4cdn.com/446039012/files/doc_financials/2022/ar/Stericycle_Annual-Report-

It would seem that the acquisition model of growing their business much like RediShred and Iron Mountain has required a significant amount of debt creation. Shred-it itself was acquired by Stericycle back in 201549

Furthermore, Stericycle’s 2022 10-K offers some good insights into the paper shredding industry:

Volatility:

Baled shredded paper is known as SOP and is then sold to be used to create new pulp paper products. SOP average sales price was $235 in 2022 which was a 67.8% increase over 2021 prices. As with many commodities baled shredded paper is no exception to massive price swings.

Route density is king:

The 10-k outright acknowledges the fact that revenue per stop is low so there is a need to leverage routing efficiencies and density to ensure profitability. Also points out their competitive advantage lies with their transportation network over other competitors – although the strength of this advantage is difficult to determine.

As can be seen in the below screenshot, paper tonnage is down which is, in part, due to the industry decline, but also accelerated by the increase in work from home staff. This results in less paper being collected from office locations. This backs up what was highlighted by both RediShred and Iron Mountain in their annual reports – everyone is seeing a decline in paper tonnage. More recently CEO of Stericycle Cindy Miller points out that whilst people are returning to the office other companies are announcing pretty big layoffs. From this, secure destruction does not look as attractive as it was

2022.pdf ;page 11; access date: 08/07/2023; and RediShred Capital Corp, Consolidated Financial Statements, Q4 2022; https://www.proshred.com/RediShred/wp-content/uploads/sites/4/2023/04/RediShred-CapitalCorp-FS-Q4-2022-Final.pdf; page 10; access date: 05/07/2023.

49 Stericycle 2022 Annual Report; https://s25.q4cdn.com/446039012/files/doc_financials/2022/ar/Stericycle_Annual-Report-2022.pdf ;page 8; access date 08/07/2023 & https://www.stericycle.com/en-us/about-us/our-stories/stericycle-completesacquisition-of-shred-it-sup-; access date: 08/07/2023. pre-covid in 201952. In addition, the 2022 10-K points out that inflation has resulted in cost increases in their underlying expenses53 .

50 Stericycle 2022 Annual Report; https://s25.q4cdn.com/446039012/files/doc_financials/2022/ar/Stericycle_Annual-Report-2022.pdf ;page 15; access date: 08/07/2023.

51 Stericycle 2022 Annual Report; https://s25.q4cdn.com/446039012/files/doc_financials/2022/ar/Stericycle_Annual-Report-2022.pdf ;page 24; access date: 08/07/2023.

Growth by Shred-it within the information destruction segment has grown significantly, with North America contributing all of the growth as international markets actually represent a decline in 2022. This is illustrated in the below screen shot:

The shareholder letter at the start of the 2022 10-k points out debt reduction indicating that it is an ongoing concern for investors. But it must be noted that debt within this industry is relatively high: Iron Mountain as of year-end 2022 had over $10 billion.

However, even though debt has been decreased, the sheer impact of how fast interest rates went up has resulted in an increase of interest expense vs 2021: 2.8% of revenue went on interest expense in 2022 and 2.7% of revenue went on interest expense in 2021.55

Furthermore, they plan to use more debt to pay down old debt. This does not bode well with me when viewing the financial health of the company56 .

Financials

52 Stericycle Inc Q1 2023 Earnings call; https://investors.stericycle.com/events/event-details/; time 41.18; access date: 15/07/2023.

53 Stericycle 2022 Annual Report; https://s25.q4cdn.com/446039012/files/doc_financials/2022/ar/Stericycle_Annual-Report-2022.pdf ;page 20; access date: 08/07/2023.

54 Stericycle 2022 Annual Report; https://s25.q4cdn.com/446039012/files/doc_financials/2022/ar/Stericycle_Annual-Report-2022.pdf ;page 37; access date: 08/07/2023.

55 Stericycle 2022 Annual Report; https://s25.q4cdn.com/446039012/files/doc_financials/2022/ar/Stericycle_Annual-Report-2022.pdf ;page 44; access date: 08/07/2023.

56 Ibid.

Overall, financials for Stericycle are lacklustre. Revenue has compounded at 1% annually which means a negative real return with inflation persistently higher than 1% since the start of 2020. Both EPS and Net income have a compounded at 40% and 42% respectively which is meaningless as we are starting from negative figures, and shareholders’ equity is negative at -0.2%. It is worrying to see net cash from operating activity with a compound growth rate of -39% demonstrating massive income generation issues. However, some positivity can be found with their debt compounding at4% indicating a reduction of debt since the start of 2020.

Compound Annual Growth Rate since 2020

Additional Notes:

Whilst Shred-it is a large company it makes specific mention of its target market including small and medium sized business which is RediShred’s target market. This means that whilst competition is not as present for RediShed, it certainly means they will come into contact with Shred It® in the US as they expand:

The same can be said when viewing the shredding solutions page on Iron Mountain which references small companies next to its other directly competing Asset Recycling & Disposition Service:

What can be learned from the competition?

Whilst barriers to entry are high, revenue generation is particularly tough with route density being key to profitability. As this industry is resource heavy, debt seems to run very high on the abovementioned company balance sheets. This is where RediShred stands out with much healthier financials. It is also clear that this resource heavy industry and the need to build out physical networks results in liabilities increasing linearly with revenue. Whilst competition, thus far, has been evaded, it may be closer to home than RediShred’s Jeff Harsham is letting on.

Debt to Equity

57 https://www.shredit.co.uk/en-gb; access date: 15/07/2023.

58 https://www.ironmountain.com/uk/services/secure-shredding; access date: 15/07/2023.

Before drawing a conclusion, I want to point out the dangers of high debt levels in a high interest rate environment. Insolvency is much more likely. A rule of thumb is that debt to equity should be 2 or lower for debt levels not to be an issue59; anything higher dramatically increases the risk of insolvency. This is a particular concern of mine when it comes to asset heavy companies:

RediShred:

Viewing the Q4 2022 Financial Statements which form Part of their Annual Report Data we can see that RediShred has a Debt-to-Equity ratio of 1.07

Iron Mountain

Dividing total liabilities by total equity, here we get a Debt-to-Equity ratio of 24.34

Stericycle

Here we get a Debt-to-Equity ratio of 1.20.

Comparing all three, it would seem Redishred is the least leveraged amongst its competition which is extremely good to see; however, Stericycle’s balance sheet is also healthy from a debt perspective which makes the debt reduction discussion in their 10-k less worrying. Iron Mountain on the other hand demonstrates extreme balance sheet weakness and reflects exactly what investors should stay away from. There is a very high probability that Iron Mountain could go bankrupt.

59 What Is a Good Debt-to-Equity Ratio and Why It Matters; https://www.investopedia.com/ask/answers/040915/what-considered-good-net-debttoequity-ratio.asp; access date: 19/07/2023.

60 Consolidated Financial Statements December 31, 2022 and 2021; https://www.proshred.com/RediShred/wpcontent/uploads/sites/4/2023/04/RediShred-Capital-Corp-FS-Q4-2022-Final.pdf ; page 25; access date: 15/06/2023.

61 Iron Mountain Incorporated Annual Report; https://s23.q4cdn.com/202968100/files/doc_financials/2022/q4/IRM-2022-10K-as-filed.pdf; page 74; access date: 05/07/2023.

62 Stericycle 2022 Annual Report; https://s25.q4cdn.com/446039012/files/doc_financials/2022/ar/Stericycle_Annual-Report-2022.pdf ;page 55; access date: 08/07/2023.

Conclusion:

Overall RediShred is an extremely well-run company which operates amongst giants in a declining industry. There is uncertainty over how much business will be retained as they transition towards digital storage, and with more revenue being derived from digital solutions much more business will become less predictable. Whilst I am mainly positive about the performance of management in the running of RediShred, the future possibility of equity raises is concerning given they have done so already in the past. There is a much higher probability that equity raises will occur in the future with the current high interest rates63. Equity raises do not incur interest and would mean shareholders take the loss via equity dilution. Furthermore, the continued success of RediShred will result in more business competing with the larger competitors as it too expands and tries to acquire larger customers. This is not something I would usually be concerned about, but when an industry is in decline there is increased difficulty in maintaining profitability. In an industry based on a commodity this will be fought on by price which will drive down margins. This is further exacerbated with the industry having high operational costs to begin with. Overall, the attractiveness of RediShred as an investment when extrapolating these factors is severely decreased.

That being said, I am extremely optimistic that RediShred will perform well over the medium term. Growth and profitability will likely continue before the bigger players compress margins. My favourite feature of RediShred is management’s persistence in making acquisitions that increase route density and their overall network; furthermore, their recent acquisitions of recycled paper reprocessing facilities bring more value capture to the company. If a competitive advantage is to be found within this industry it all comes down to network effects - and RediShred is doing a good job in building out its network. In so doing, there is a high change of their brand forming a moat although this is much less predictable and should be viewed through a more speculative lens. It also seems that scaling the network runs linear with expenses: for instance, cost savings have not occurred with the expansion of their network. Expenses have increased in line with cash flow generation and not at a slower pace which would suggest cost savings have not yet been established from their network.

If I had to highlight the most important point from my review above it is the declining paper shredding industry that you would be buying into. I personally choose to buy into growing industries as profits in a declining one make investment decisions far more hazy. The more unclear the path, the more likely unforeseen risks spring out of the woodwork. Stock picking is hard enough at the best of times and as Warren Buffet has famously stated ‘I don’t try to jump over 7-foot hurdles: I look around for 1-foot hurdles I can step over’.

Please note, I do not have a position in RediShred Capital Corp.

Thank you for reading.