UniFirst’s New ERP, And M&A Improved Dividend Growth Expectations (NYSE:UNF)

UniFirst Corporation (NYSE:UNF) recently received significant attention from investors as a result of recent implementation of new ERP and CRM systems. In my view, analysts increased their quarterly EPS expectations because they expect net income growth coming from new efficiency from automatization of certain processes. A 5 year dividend growth rate of close to 24%-25% and recent stock repurchase of shares could bring demand for the stock very soon. Besides, I think that UniFirst appears significantly undervalued.

UniFirst

UniFirst is a company that offers large-scale masterwork services for businesses, industries, and office buildings. The company’s activity extends to different types of cleaning services that include uniforms that were exposed to radiation work among others.

UniFirst has its own manufacturing and design capabilities for anti-flammable protective clothing or clothing for use in laboratories, including a wide line of products for pants, T-shirts, jackets, and overalls among others.

The company also sells and rents cleaning supplies for industries along with cleaning bathrooms and food areas. The company also provides training in safety practices for industries, distributors, and businesses linked to the service.

In other words, this company offers an integrated suite of cleaning services, including the manufacture, design, and distribution of safety clothing, and its main activity consists of providing its clients with clothing and accessories on a weekly basis, collecting the items used for later cleaning and reuse.

During the year 2023, approximately 60% of the garments distributed were manufactured by the company in its three production facilities located in San Luis Potosí in Mexico, in addition to the plant in Managua, Nicaragua, as well as other subcontracted manufacturers that serve the general cost reduction strategy that the company maintains.

The advantage of having its own manufacturing capabilities is that it can offer its clients customized products, establishing long-term contracts in the supply of safety clothing and related cleaning services.

In the last quarterly report, UniFirst reported significant growth in several areas compared to the same period last year. We found close to 8.9% increase in revenue and 34% increase in operating income. I also appreciate quite a bit that CFO increased to $106.7 million in the first half of 2024, which represents close to 66.3% more than what UniFirst reported in the same period in 2023.

Even though UniFirst did not deliver better than expected EPS, with better than expected quarterly revenue, I think that recent increase in CFO and net sales expectations are quite beneficial.

For the year 2024, the company expects to report revenue close to $2.415 billion and $2.425 billion. Besides, four analysts out there increased their EPS expectations for the next quarter, and the consensus estimates for 2024 and Q1 2025 include EPS increases.

Review Of Business Segments, And 300k Active Clients

The company’s activity is grouped into six business segments, three of which correspond to the type of service it provides, these being also present in Canada, and a sixth dedicated to corporate activity.

The activities corresponding to services related to the supply of safety clothing as well as their cleaning and reuse are intended mainly for industrial clients. None of these represented more than 10% concentration in the company’s revenue in recent years, and by the end of 2023, there were more than 300 thousand active clients, which UniFirst serves with 270 service locations under its operation. This type of service is by far the one that represents the greatest amount of income for the company.

On the other hand, there is the garment manufacturing segment, organized from the aforementioned facilities as well as the subcontracted manufacturers, whose production is used entirely within the previous segment, since it is the clothing that it provides to its clients. In this sense, it is worth saying that during the last year, 60% of the garments distributed by the company came from its own manufacturing capacities, including subcontracted industries, which also shows that currently the demand for these services exceeds the productive capacity of the company.

The first aid segment, which represents the least profit for the company, provides services to its clients, with the supply of all the products and devices necessary for emergency care within its industries.

Balance Sheet

As of February 24, 2024, UniFirst reported $90 million in cash, with rental merchandise in service close to $241 million and accounts receivable of $291 million. The current ratio stands at close to 3x, so I believe that the company reports a substantial amount of liquidity. The asset/liability ratio is close to 4x. In sum, the balance sheet appears quite stable.

UniFirst does not seem to report debt. Providers seem to offer financing. With short term accrued liabilities of $158 million and long term accrued liabilities of $123 million, total liabilities are close to $571 million.

Assumption 1: UniFirst Enjoys A Market That Grows At Close to 4.6% CAGR, Which May Push The Company’s Net Sales Up

According to market experts, the workwear and uniforms market could grow at close to 4.6% CAGR from 2022 to 2030. With this in mind, I believe that UniFirst could report net sales growth of at least close to 4.6%. Under my best case scenario and my worst case scenario, UniFirst includes net sales growth of around these figures.

Data Bridge Market Research analyses that the workwear and uniforms market which was $24.26 billion in 2022, would rocket up to $34.76 million by 2030, and is expected to undergo a CAGR of 4.6% during the forecast period. Source: Databridge Market Research

Assumption 2: The New ERP And CRM Projects Could Accelerate Efficiency

UniFirst recently reported a significant amount of expenses related to CRM and ERP projects, which I believe could bring significant efficiency benefits in the coming years. As a result, I believe that UniFirst could deliver increases in the net margin from 2024 to 2033. I included these assumptions in my dividend models.

In fiscal 2022, we initiated a multiyear ERP project that we currently anticipate will continue through 2027, with early phases focused on master data management and finance capabilities followed by subsequent phases with a strong focus on supply chain and procurement automation and technology. Source: 10-Q

We refer to our CRM and ERP projects together as our. For the thirteen weeks ended February 24, 2024, we expensed $3.2 million of non-recurring costs related to our Key Initiatives, primarily relating to our ERP project. Source: 10-Q

Assumption 3: Inorganic Growth Will Most Likely Bring Economies Of Scale And Increase In Margins

The company’s strategy is hybrid, and includes the organic growth of its services and acquisitions related to its expansion, whether through storage or cleaning centers or expansion of its productive capacities. With this in mind and taking into account the balance sheet, I think that new acquisitions could bring additional net sales growth, economies of scale, and net sales growth.

In 2023, for instance, the company reported the acquisition of assets from Clean Holdco. In the last quarterly report, the company provided information about the assets acquired. The total amount of goodwill registered appears significant, which I believe implies that there is a significant amount of cost synergies included in the deal.

During the third quarter of fiscal 2023, the Company completed the acquisition of the business and certain real estate assets of Clean Uniform from Clean Holdco, Inc. and certain of its affiliates for an aggregate purchase price of $299.1 million, net of cash acquired. Source: 10-Q

Assumption 4: Repurchase Of Stock May Lower The WACC, And Enhance The Stock Valuation

UniFirst also declared a significant amount of stock repurchases, which I believe could accelerate the demand for the stock. According to the last quarterly report, UniFirst could acquire $91.9 million of stock in the near future.

On October 24, 2023, our Board of Directors authorized a new share repurchase program to repurchase up to $100.0 million of our outstanding shares of Common Stock, inclusive of the amount which remained available under the existing share repurchase program approved on October 18, 2021. Source: Quarterly Press Release

The Company repurchased 45,250 shares of Common Stock for $7.9 million in the second quarter of fiscal 2024. As of February 24, 2024, the Company had $91.9 million remaining under its existing share repurchase authorization. Source: Quarterly Press Release

In my view, the stock repurchases, dividend yield of close to 0.8%, and dividend growth of close to 23% in the last five years may bring new investors. As a result, we may see a decrease in the WACC in the coming years. I included a WACC close to 6.9% and 7.05%.

Under My Best Case Scenario, My Dividend Model Would Imply A Valuation Of $287 Per Share

Under my best case scenario, I assumed that my previous assumptions were correct. As a result, we may see net sales growth, moderate increases in the operating margin, and profit margin. It is worth noting that I included financial figures that were in line with my previous income statements. I believe that my figures are conservative.

My expectations include 2033 revenue of $4276 million, with revenue growth between 5% and 8%. I also assumed 2033 cost of revenues of about $2755 million, with 2033 selling and administrative expenses close to $918 million and depreciation and amortization worth $169 million. T

Total operating expenses would stand at about $3844 million, with operating income close to $431 million. Also including 2033 interest income close to $26 million, 2033 net income would stand at about $456 million.

If we assume a dividend payout of close to 18%, which is in line with previous figures, the 2033 dividend would be $84 million. Now, with a weighted average number of shares outstanding close to 18.4 million, a WACC of 6.9%, and a PE ratio of 22x, my dividend model implied a valuation of $287 per share.

My Worst Case Expectations Including Failed Assumptions

Under this scenario, I assumed 2033 revenues close to $3535 million, with revenue growth ranging from 7% to 2%. Cost of revenues would be close to $2413 million, with selling and administrative expenses worth $803 million and depreciation and amortization of about $145 million. 2033 total operating expenses would stand at about $3363 million, with 2033 operating income worth $172 million.

My results also include income before income taxes worth $194 million, provision for income taxes close to $1 million, and 2033 net income of about $193 million.

Taking into account a dividend payout of 18%, 2033 dividend would be close to $35 million. If we also include weighted average number of shares outstanding of 18.4 million, an exit PE of 20x, and a WACC of 7.05%, the implied price would stand at $111.7 per share.

Competitors

The uniform rental and rental market is highly competitive. Although it is dominated by a few large companies with national reach, it also has the participation of more than 600 small businesses with regional reach in different internal markets. Major competitors of UniFirst are Cintas Corporation (CTAS), Alsco, and Vestis Corporation (VSTS). Competition is expected to increase in the short term due to the participation of new manufacturers and the increase in industries dedicated to this type of production.

Risks

Of course, any situation of decrease in industrial activity in Canada and the United States could translate into a drop in demand for the company’s products and services, mainly in the energy industry, where the most concentrated clients come from. Along with this, I would consider possible increases or variations in transportation prices and other factors that imply an increase in costs in distribution and supply chains, which would undermine the company’s objectives of maintaining a low-cost structure. In addition, the loss or inability to retain its customers as well as dependence on subcontracted manufacturers can be risk factors for the company.

Conclusion

UniFirst is making significant efforts to implement new ERP and CRM systems, which will most likely bring profit margin increases in the coming years. Moreover, with a solid balance sheet, I think that the company is in a good position to acquire more targets, which may also complement the growth of the workwear and uniforms market. Also taking into account the 5 year dividend growth rate of close to 24%-25% and the stock repurchase program, the WACC may lower in the coming years. There are obviously some risks out there from changes in labor law, variations in transportation prices, or lower demand than expected. However, I believe that UniFirst appears significantly undervalued.