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The following segment was excerpted from this fund letter.
APi Group (NYSE:APG)
The majority of APi’s business relates to fire safety, specifically the inspection, maintenance, and repair of fire safety systems. Such systems are a non-discretionary purchase, tying into the “forced buyers” theme of our last letter. If you are a landlord and want to have people in your building, having a functioning fire suppression system is a requirement.
Since APi Group’s focus is on the inspection and repair of existing fire suppression systems, not new installation, they are not beholden to new commercial construction. The company has a history of 7% organic growth in the fire suppression business and also has a specialty contracting business serving telecom and utility companies building large products for natural gas distribution, potable water distribution, and 5G rollout.
Currently, the overall company has a record-high $3.2B project backlog. While some of this would likely be burned off in a weaker economy, it is highly unlikely that revenue is falling off a cliff given the statutory nature of the majority of their revenue, history of organic growth, and this backlog.
On the margin front, APi Group made a substantial acquisition of Chubb’s (CB) fire and safety business from Carrier Group.
Chubb has a large European footprint, and APi management believes there is an opportunity to bring Chubb margins up to APi margins. This progression can be seen in the financials and the guidance given to date. The overall fire safety business should see margins and earnings rise as one-time issues related to supply chain roll off and new pricing absorbs the inflation on materials costs.
I believe that normalized EBITDA for the business is approaching $1B as supply chain issues roll off, inflation is passed through to end customers, and the Chubb acquisition is optimized. This figure is significant relative to their quarter-ending $3.1B market capitalization, $6.4B enterprise value, and minimal capital requirements. Similar private market companies have traded hands at 3X the multiples of APi Group.
While APG may never trade at 18X-20X EV/EBITDA of private market transactions, there is support for multiple expansion as the market recognizes the transition to a more asset light, lower capital intensity, and more stable inspection and repair business.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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