Montrose Environmental Group Seeks $160 Million U.S. IPO (Pending:MEG)

Quick Take

Montrose Environmental Group (MEG) has filed to raise $160 million in an IPO of its common stock, according to an S-1/A registration statement.

The firm provides a range of environmental remediation and management services to industry.

MEG has a reasonable IPO valuation, potential for continued growth through acquisition and new organic opportunities as well as resilience to viral pandemic conditions, so the IPO is worth considering.

Company & Technology

Irvine, California-based Montrose was founded to provide environmental services through three business segments:

Management is headed by president and Chief Executive Officer Mr. Vijay Manthripragada, who has been with the firm since September 2015 and was previously CEO of PetCareRx and prior to that was a Senior Vice President at Goldman Sachs.

Below is a brief overview video of a Montrose PT Mobile Lab:

Source: Austin Heitman

The firm targets customers in the following markets:

  • Power Generation

  • Chemical Manufacturing

  • Manufacturing

  • Oil & Gas

  • Natural Gas

  • Real Estate Development

  • Ethanol Production

Montrose has received at least $168 million from investors including Oaktree Capital Management, CTEH Holdings, and Yukon Environmental.

Customer Acquisition

The company obtains customers through a direct sales force team and the firm has more than 4,500 clients producing revenue growth of an average of 17% per year since 2016, inclusive of its recent acquisition of consulting firm CTEH.

Management says its long-standing relationships with a number of Fortune 1000 companies and government entities, and many of its services were deemed ‘essential’ during the recent COVID-19 shelter in place guidelines.

Notably, the firm has acquired over 50 businesses in the last eight years, as management views the industry as still highly fragmented and it intends to continue ‘selectively acquiring companies’ in the industry.

Selling, G&A expenses as a percentage of total revenue have been rising as revenues have increased, as the figures below indicate:

Selling, G&A

Expenses vs. Revenue

Period

Percentage

Three Mos. Ended March 31, 2020

34.3%

2019

21.7%

2018

20.5%

Source: Company registration statement

The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, dropped to 0.5x in the most recent reporting period, as shown in the table below:

Selling, G&A

Efficiency Rate

Period

Multiple

Three Mos. Ended March 31, 2020

0.5

2019

0.9

Source: Company registration statement

Market & Competition

According to a 2019 market research report by Environmental Business International, the global market for environmental services is estimated to have a value of $1.25 trillion. The firm’s addressable market is believed to be approximately $395 billion and is expected to grow at a rate of 3.4% per year from 2018 to 2024.

A high growth rate is expected to occur in the Remediation and Industrial Services and Consulting & Engineering Services sub markets, and a lower growth rate in the Wastewater Treatment Services and Analytical Services markets, as shown in the chart below:

Also, with the advent of the recent COVID-19 pandemic, there will be an increased focus on air quality and management expects ‘the WHO’s guidelines coupled with increasing pollution to catalyze local air quality regulations and therefore, demand for environmental services, particularly air quality services.’

Major competitive or other industry participants include:

Management says its primary competitors are divisions of large companies and that few of its competitors provide the full range of solutions that it offers.

Financial Performance

Montrose’s recent financial results can be summarized as follows:

  • Growing topline revenue

  • Increasing gross profit, but variable gross margin

  • Growing operating losses and negative margin

  • Uneven cash flow from or use in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Three Mos. Ended March 31, 2020

$ 61,031,000

19.8%

2019

$ 233,854,000

23.9%

2018

$ 188,805,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Three Mos. Ended March 31, 2020

$ 16,633,000

20.0%

2019

$ 69,871,000

29.2%

2018

$ 54,071,000

Gross Margin

Period

Gross Margin

Three Mos. Ended March 31, 2020

27.25%

2019

29.88%

2018

28.64%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Three Mos. Ended March 31, 2020

$ (11,977,000)

-19.6%

2019

$ (8,945,000)

-3.8%

2018

$ (10,639,000)

-5.6%

Net Income (Loss)

Period

Net Income (Loss)

Three Mos. Ended March 31, 2020

$ (41,248,000)

2019

$ (23,557,000)

2018

$ (16,491,000)

Cash Flow From Operations

Period

Cash Flow From Operations

Three Mos. Ended March 31, 2020

$ (8,978,000)

2019

$ 17,042,000

2018

$ (2,845,000)

(Glossary Of Terms)

Source: Company registration statement

As of March 30, 2020, Montrose had $1.5 million in cash and $257.5 million in total liabilities.

Free cash flow during the twelve months ended March 30, 2020 was $2.0 million.

IPO Details

Montrose intends to raise $160 million in gross proceeds from an IPO of ten million shares of its common stock at a midpoint price of $16.00 per share.

After IPO, the firm’s enterprise value will approximate $622.9 million and its share float will be around 49%.

Management says it will use the net proceeds from the IPO as follows:

We intend to use $139.3 million of the net proceeds from this offering in connection with the redemption of all outstanding shares of our Series A-1 preferred stock and the remainder for general corporate purposes, including future investments in innovation and acquisitions in our highly fragmented industry.

Management’s presentation of the company roadshow is available here.

Listed bookrunners of the IPO are BofA Securities, William Blair, BNP Paribas, Capital One Securities, Stifel, and Needham & Company.

Commentary

Montrose is seeking public market capital for its ongoing operations as well as to likely fund additional acquisitions, as the firm has been very acquisitive due to industry fragmentation.

The firm’s financials indicate a slight softening in revenue growth and increasing operating losses.

However, Montrose says it is engaging with over 70 clients on their COVID-19 response activities, so it appears the firm has the potential for resiliency through the pandemic and even the potential for new business opportunities as a result of the pandemic as customers increase their focus on air quality.

Selling, G&A expenses have increased as a percentage of revenues; its Selling, G&A efficiency rate has dropped as revenues have increased.

The market opportunity for environmental services is large and expected to grow at a low-to-moderate rate of growth in the years ahead, although the aforementioned increasing focus on air quality as a result of the COVID-19 pandemic may produce new market growth opportunities for nimble firms such as Montrose.

As to valuation, according to an NYU Stern School basket of publicly held Environmental & Waste firms, their average EV/Sales multiple in January 2020 was 3.08x.

MEG’s proposed EV / Revenue multiple of 2.55x indicates to me that the IPO appears reasonably valued, especially given the firm’s likely higher revenue growth rate of nearly 20%.

Given the reasonable IPO valuation, potential for continued growth through acquisition and new organic opportunities as well as resilience to viral pandemic conditions, the IPO is worth considering.

Expected IPO Pricing Date: To be announced.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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