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2019-11-13 17:13:20

Spruce Point is pleased to issue a unique investment research opinion on Cintas Corp. ( CTAS or the Company ), a uniform rental, safety, and fire inspection service company. The report outlines why we believe shares face 60% - 75% downside risk to approximately $69 to $107 per share.

The full contents are available on our website. Follow us on Twitter for exclusive updates @sprucepointcap. Please read our disclaimer below.

I. Core Business Appears To Be Facing Pressures

Cintas bid up the value to acquire G&K in 2016, and paid a large premium

Based on our pro forma analysis, with data provided by Cintas, and some modest assumptions, we estimate no underlying margin growth at Cintas

The pro forma company, is now showing rising bad debt expense, higher working capital to sales, and DSOs higher than each company was on a standalone basis.

In addition, receivables have been rising at 2x sales in the combined company. This has often been cited as a potential sign of problems by experts.

Cintas also started to disclose discounts and rebates which could explain part of the challenges

We observe that Cintas is becoming more reliant on short-term financing through commercial paper issuance, and that leverage is now creeping higher

II. Fast Growing Fire Protection Business Faces Growing Risks

New disclosures show Fire Protection Services is Cintas' fastest growing business

Because new information is being provided about this business, we don't believe sell-side analysts have fully evaluated its risks and rewards. Based on our research, we see new challenges facing this segment including a lack of qualified/certified/licensed labor, new private/public money entering the sector, shorter contract lengths, and signs of pricing pressure

Based on a Freedom of Information request with Aurora, Illinois, we find evidence that Cintas workers falsified inspection records. 8 of 12 Cintas workers at this location were not licensed. It is unclear if this is a systemic problem or isolated incident.

Cintas credit agreement requires it carry all valid permits / licenses etc to conduct its business. If the problem is wide ranging and material, it could be out of compliance with its credit agreement.

Industry professionals we spoke to said that Cintas is completing core fire extinguisher inspections at $1.50 per unit, much lower then recent historical pricing

A wave of private equity money is entering fire inspection services. It's an attractive business for private equity since its legally mandated and recurring. Sources we spoke to believe new entrants are aware of Cintas' operating challenges.

APi Group was just acquired by a UK SPAC and will be listed on the NYSE. We believe it is a big competitor to Cintas, and as a new public company, will have broader access to capital.

III. Valuation And Downside Potential

Cintas analysts ascribe an average price target of $255/share. The stock has regularly traded above fair value.

Comparable acquisitions in uniform rentals suggests 1.8x and 9.5x sales and EBITDA valuation

A recent comparable company Company in fire and security, Convergint, was just acquired for 1.7x and 15x projected EBITDA

Cintas trades at a valuation premium to other commercial service and public safety companies such as ARMK, SERV, MSA, EME, UNF, ABM, and HCSG

A few sell-side analyst reports we reviewed fail to discuss the fire protection business, or highlight any of the risks we identified.

We conduct a sum-of the-parts valuation for each of Cintas business lines, using transaction multiples, and public peers identified above. We estimate a fair value of $69 - $107 per share or 60-75% downside risk potential.


This research note and our presentation expresses our research opinions. You should assume that as of the publication date of any presentation, report or letter, Spruce Point Capital Management LLC (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our subscribers and clients has a short position in all stocks (and are long/short combinations of puts and calls on the stock) covered herein, including without limitation Cintas Corp. (“CTAS”), and therefore stand to realize significant gains in the event that the price of its stock declines. Following publication of any presentation, report or letter, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. All expressions of opinion are subject to change without notice, and Spruce Point Capital Management does not undertake to update this report or any information contained herein. Spruce Point Capital Management, subscribers and/or consultants shall have no obligation to inform any investor or viewer of this report about their historical, current, and future trading activities.

This research note and our presentation expresses our research opinions, which we have based upon interpretation of certain facts and observations, all of which are based upon publicly available information, and all of which are set out in this research presentation. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward looking statements, expectations, pro forma analyses, estimates, and projections. You should assume these types of statements, expectations, pro forma analyses, estimates, and projections may turn out to be incorrect for reasons beyond Spruce Point Capital Management LLC’s control. This is not investment or accounting advice nor should it be construed as such. Use of Spruce Point Capital Management LLC’s research is at your own risk. You should do your own research and due diligence, with assistance from professional financial, legal and tax experts, before making any investment decision with respect to securities covered herein. All figures assumed to be in US Dollars, unless specified otherwise.

To the best of our ability and belief, as of the date hereof, all information contained herein is accurate and reliable and does not omit to state material facts necessary to make the statements herein not misleading, and all information has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer, or to any other person or entity that was breached by the transmission of information to Spruce Point Capital Management LLC. However, Spruce Point Capital Management LLC recognizes that there may be non-public information in the possession of CTAS or other insiders of CTAS that has not been publicly disclosed by CTAS. Therefore, such information contained herein is presented “as is,” without warranty of any kind –whether express or implied. Spruce Point Capital Management LLC makes no other representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. You should assume all statements made are our opinions, unless sourced as facts where practical.

This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor. This is not an offer to sell or a solicitation of an offer to Buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. Spruce Point Capital Management LLC is not registered as an investment advisor, broker/dealer, or accounting firm.

Disclosure: I am/we are short CTAS.

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