Inclusive Capital spots multiple opportunities for upside with an active ESG focus at Verra
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Verra Mobility (VRRM), Company
Business: Verra MobilityIt operates in two parts: (i). Commercial Services: The market leader for automated toll and violation management, title and registration solutions for rental cars companies, fleet managers companies, municipalities and school districts, as well as to provide title and registration solutions for violations issuing authorities. (ii). Government Solutions: Works with local governments to make roads safer by providing automated safety solutions such cameras to detect, process, and report traffic violations, including speed, red light, school bus and bus lanes.
Stock Market Value$14.23 per share
Activist: Inclusive capital partners
Ownership percentage: 6.66%
Average cost: $14.11
Commentary of an activist:Inclusive capital Partners, an investment company based in San Francisco, is focused on increasing shareholder wealth and encouraging sound environmental and social governance. Jeff Ubben founder ValueAct formed it to harness capitalism and governance towards a healthy planet for all its inhabitants. The pioneering active ESG, (“AESG™”Inclusive, a (investor), seeks long-term shareholder benefit through active partnerships that are formed with companies whose core operations contribute to the pursuit of this goal. Inlusive, a return-driven fund that focuses on social and environmental investing, is an example of a returns-driven fund. This fund’s principal focus is on creating social and environmental value. Shareholders also benefit from this firm. Inclusive’s primary goal is to create environmental value. It has developed a new method to evaluate and value companies, the enterprise value to reduce carbon emissions.
What’s Happening?
Sarah Farrell was a partner in Inclusive Capital. appointed to Verra’s boardOn December 30, 2021, Inclusive Kapital filed a thirteenD to report its position within the company. This was just four months ago.
Behind the scenes
Verra Mobility has two business segments. (i) Commercial Services (“CS”), and (ii] Government Solutions (“GS”) are the main ones. The CS division transformed what had been a huge headache for rental car companies and a large administrative expense into an ancillary revenue stream with a 100% margin. The company receives a percentage of the daily fee and the toll. The company is the sole national provider of toll administration in this country. It maintains relationships with over 250 million tolling authorities throughout the country. The GS business generates revenue for local governments, and it helps to increase road safety mandates.
The company’s CS segment accounts for approximately 60% of its revenue. At the segment level, it has 63% EBITDA margins. Meanwhile, the GS segment makes up approximately 40% of company revenue. There are 40% EBITDA margins at each segment. The CS and GS businesses rank No. The CS business covers 95% of U.S. Toll Roads, while the GS company has 70%. It is a high-margin business that has a maintenance cost of only 6% and a return of approximately 50% on capital invested.
Despite this all, investors don’t give Covid recovery credit to the company. The CS segment accounts for 98% of the 2019 revenue, while the GS segment exceeds 2019. In addition, it has grown EBITDA annually by 19% from 2015 to 2019. It is forecast that EBITDA will increase more than 25% in 2020 and 2022. Internally generated cash flow will amount to $500 million. It can then be used for strategic purposes or stock buybacks.
Three areas could offer future opportunities. First, there could be a tremendous opportunity for the company to duplicate what they do in the U.S.A in Europe. Europe also has tolls. There could be a $350-$300 million market for the U.S. rentals car agencies in Europe if the company can find a way of managing the tolls. That’s compared to the $230m in US CS revenue in 2019. Second, there are attractive opportunities for strategic M&A. They have shown that the company’s leadership is capable of managing acquisitions with discipline. They are: most recent acquisitionRedflex, a company that provides redflex services, is currently in process of integration. There are also capital allocation opportunities, as the company announced this already. $100 million stock repurchase plan.
This business has a strong ESG component, as is the case with Inclusive investments. The company offers more options for infrastructure financing. Gas taxes are the main source of funding for most infrastructure expenses. Gas taxes are in decline due to cars being more efficient and electric cars rising, so it is good news for the environment. This decline will be compensated by an increase in tolls, which will benefit the environment and boost VRRM’s CS revenues.
The ESG benefits in the GS sector are more obvious. In the United States, motor vehicle accidents rank third among all causes of death for individuals aged 1-44 after suicide and drug overdoses. Motor vehicle deaths accounted to 36,000 in America as of 2019. Speeding and intersection-related crashes accounted 55%. This is the problem that GS addresses directly. Red-light cameras were found to decrease traffic fatalities in America by 21%, while speed cameras reduced fatalities by up to 39%. The more GS businesses are able to penetrate the market, the better the business will be, and just as important, it is more likely that more people are saved each year on U.S. roadways.
Ken Squire, the president and founder of 13D Monitor is an institution research service that focuses on shareholder activism. He is also the portfolio manager for the 13D Activist Fund which invests in a portfolio 13D activist investments. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving ESG practices of portfolio companies.
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