Capital-light, fast-growing UK microcap at 8.7x earnings
Plus, strong management with a history of accretive acquisitions.
This post will be a little light on detail, and will probably be the last for a couple of months, as my finals are 6 weeks from now. Still, I think this seems like a pretty interesting opportunity, so decided I’d get a quick write-up out before I disappear. I hope you enjoy it.
Intro
Peter Lynch wrote in One Up on Wall Street that his favourite stocks are of businesses that do something dull, disagreeable, or depressing.
React Specialist Cleaning probably fits all three. Their principal business is specialist and often emergency clean-ups, with a particularly important category for them being train accidents. When somebody throws themselves in front of a train, it’s React SC that are there within 2 hours, picking bits of brain off the platform. It doesn’t get much more depressing than that.
Lynch liked such businesses because he found Wall Street had a tendency to overlook them. But carrying out such morbid work probably isn’t necessary to be ignored, in this case — React Group, today’s company, is a £17m AIM-listed nanocap with a long history of share dilution and negligible GAAP profitability. It’s too small for Wall Street to care (I couldn’t find a single sell-side report on this company), screens too poorly for most retail investors to find it, and has an investor relations page so horrible that most who do probably give up before finding the annual report.1
And yet, under the massive amortisation charges and poor IR, what I see here is a group of growing, profitable, and surprisingly high-quality companies, led by strong management who like a bargain almost as much as I do.
History
The relevant history for this company begins in 2018. At this point, the company is a complete dud. FY18 (ending in September) had seen a £600k operating loss on £3.3m of revenue, and shareholders equity had fallen to just £1m. Having been at 800p 4 years prior, the stock was just 8 pence by year-end - valuing the business at about £650k.
It’s with this backdrop that React brings in Mark Braund as a “strategic adviser” (in other words, a turnaround pilot). He identifies one issue pretty immediately - >70% of their revenue is non-recurring ad hoc jobs, and existing management have allowed customers to bully them into accepting unprofitable prices on these.
In March 2019, Mark Braund persuades the then-executive chairman to take a step back from operations, and bring in Shaun Doak as CEO. The financials start improving pretty quickly, as they cut unprofitable services and angle for recurring-revenue contracts — revenue drops slightly in FY19, but the gross margin jumps by 7.5% and their operating loss reduces to £180k.
The turnaround only accelerates in 2020 - revenue jumps 40% (with only about a third of this being covid-related contracts) and the company records its first profit in years, £190k. At the end of the year, the old chairman steps down, and Mark Braund is elected in her place.
With the wind at their backs going into 2021, and a share price climbing higher and higher, they begin exploring acquisition opportunities in the facilities management (FM) services space. In March 2021, management set their sights on Fidelis. It’s a boring company - they just provide standard and specialist contract cleaning service - but it’s profitable and capital-light, with 5-year recurring revenue contracts — and they can buy it for just 4.75x EBITDA. There’s another benefit too — it puts them in a prime spot to cross-sell their React SC emergency cleaning to the entire Fidelis customer list. They go for it, paying £1.75m upfront, with up to £3m in contingent consideration available over the next 2 years, at that 4.75x EBITDA multiple. About £200k is funded via shares, at 105p.
FY21 sees organic revenue growth of 20%, with the acquisition bringing the headline figure up to 77%. EBIT doubles to £430k.
In FY22, they make a significantly larger acquisition — a bit of a “bet the farm” acquisition, actually. The candidate this time is LaddersFree - which runs a network of 300+ window cleaners across the UK. That sounds like a painfully simple, and hence low-margin business, but their results suggest otherwise - they generated £1.2m of EBITDA in 2021, on just £3.0m of revenue. The business is essentially capital free, so three quarters of that converts to after-tax cash flow. And it’s not like they’re ripping people off, either - in fact their Trustpilot is one of the best I’ve ever seen. Consensus seems to be that they do an excellent job, typically well below competitors’ rates. And two third of revenue is recurring, typically on 1-3 year contracts. For this, React paid only £7.1m — 6x EBITDA and 8x earnings. Now, admittedly the dilution was pretty severe for this acquisition - the share count roughly doubled - but I still think it was a good deal. React’s own EBITDA pre-acquisition was ~£800k, so it was immediately EPS-accretive, and I think the earnings they bought were of a higher quality than those they were ‘selling’.
In FY23, the foot came off the gas (sensibly, I think) and no acquisitions were made — organic growth of 21% (following 17% in FY22) brought EBITDA up to £2.3m.
FY24 was much the same — with the UK economy slowing down, topline growth slowed to 11% on an “underlying” basis (and only 6% if you include the expiration of a significant covid-era contract).
Then in October 2024 (post year-end ‘24 — recall that their FY ends in September), they announce a third major acquisition. This one is for a specialist drainage and plumbing company called 24hr Aquaflow. Their work has a similar profile to the cleaning businesses - a high proportion of recurring revenue, some of it coming from scheduled maintenance and some of it from “contracted reactive” (being on call 24/7 in case something goes wrong). A relatively unexciting and moatless business, to be sure, but what is attractive is the valuation they paid for it - just £5m for £1.2m of EBITDA. With capex being ~£150k, and assuming 25% tax, that’s barely over 6x FCF. Plus, Aquaflow had grown revenue 29% YoY in 2024, and React would get the opportunity to cross-sell cleaning services to yet another list of customers. The acquisition was funded with £3.5m of debt (at BoE base rate + 3% — surprisingly low) as well as £1.5m of equity.
Financial Snapshot
That brings us to where React Group stands today - a group of four loosely-related FM services businesses, with 87% of revenue recurring on 1-5 year contracts.
What’s the underlying earning power?
Prorated for Aquaflow, React generated about £3.6m of adjusted EBITDA in 2024, with capex of ~£300k.
Acquisition/restructuring costs were £250k, due to (a) contingent consideration on past acquisitions, (b) the delayed integration of LaddersFree, and (c) preliminary costs of Aquaflow acquisition. Though this all seems quite reasonable and nonrecurring, I’ll keep £100k of this in the earnings calculation for the sake of conservatism.
Interest was £131k in FY24. Including the extra £3.5m at BR + 3% (so currently 7.5%), we’re looking at ~£390k going forward.
SBC was £90k in 2024.
I’ll assume a 25% tax rate - this is higher than they’ve historically paid, but amortisation has helped them in the past
This implies owner earnings of £2.05 million.
Post-Aquaflow, the basic share count is 23.50 million. There are also 2.04 million in outstanding options, all of which are in the money, so the true share count is 25.54 million. As I write this, the price is 69.52p, implying a market cap of £17.75m, or 8.7x trailing owner earnings. With some organic growth in FY25, forward multiple could be meaningfully lower.
Management
If it was just the business as is stands today — a group of small, medium-quality UK businesses (with pretty strong organic growth, granted) at 9x earnings, I probably wouldn’t be so interested. What really interests me is the possibility of further acquisitions at similar valuations to the past ones. If they can continue buying capital-light companies capable of double-digit organic growth, at mid-single digit EBITDA multiples, this could become a serious compounder. But this rests on management being of sufficient quality.
Chairman - Mark Braund
Mark was clearly instrumental in getting the turnaround going. Looking at his LinkedIn, though — which reveals he’s also the chair of two other UK companies (and has in total chaired at least 5 others while at React) — one would probably assume he’s taken more of a hands-off advisory role since then.
However, listening to earnings calls, this isn’t the impression I get. Mark seems to be just as familiar with the intricacies of the business as the CEO, which is great to see (though I fear for his work-life balance…).
Mark has a strong record at prior companies. From 2011-2015, he was CEO of InterQuest, a specialist staffing provider. EPS grew from -£0.50 to £8.50 over his tenure. He then left that £150m revenue company to become CEO of the much smaller RestoneConnect (now SmartSpace), a struggling provider of workplace management technology and services. The turnaround was successful there too - Redstone was restored to profitability, then sold for £22m - far more than it had been worth a few years prior.
Today, Mark holds 4% of React including his options (~£700k worth altogether, versus £170k total comp in ‘24), so has meaningful skin in the game. Encouragingly, he bought £5k more just last month. If there is any concern, it’s that his record suggests he tends to get bored and leave once things start going well — though hopefully that’s changed now he’s a chair, not a CEO.
CEO - Shaun Doak
Shaun Doak also comes across as competent on earnings calls. His record prior to React is harder to assess, as he hadn’t previously headed a company, but React has obviously done well so far, and it’s probably telling that Mark chose him for the role.
Shaun owns options representing 3% of the share count, worth several times his £184k total comp in 2024.
What I like most about this management team is their refusal to overpay for acquisitions. In the most recent results Q&A, a shareholder asked if their standards for M&A have dropped. The response was emphatic - they had not, and they never will. A lot of investors probably see the share count dilution and pretty quickly move on, but in each acquisition, I think they received a good bit more in value than they gave away — and there’s nothing wrong with paying with shares in such a case.
Conclusion
I think there’s quite an interesting opportunity here — to get on board with a strong management team, who are determined to continue consolidating the FM services industry with this buy-cheap-and-cross-sell model — at only a high single digits multiple. If they continue executing, the upside could be pretty large.
That’s where I’ll leave it. This analysis is obviously far from complete — a bit of scuttlebutt would probably go a long way here — but I hope it’s still useful to you as a jumping-off point.
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Best,
Matt
Good write up Matt
excellent writeup