Vestis Spin-off Deep Dive
October 11, 2023
Vestis (VSTS) spun off from Aramark (ARMK) last week.
Vestis is the #2 competitor in the workplace supplies and uniform business industry. It provides an essential service to industrial companies. This is evidenced by: 1) 92% recurring revenue and 2) competitors saw sales decline by only mid-single-digits during the GFC.
A new CEO was hired by Vestis two years ago, and she appears to be guiding the company in the right direction (case studies covered during the investor day were compelling).
Revenue is growing at a mid-single-digit clip and margins are expanding.
If the company executes on its long-term guidance (5-7% top line growth and 500bps of EBITDA margin expansion), the stock will be a home run.
The stock is trading at 9.2x my 2024 EBITDA estimate below peers (UNF-9.6x, CTAS-20.9).
My fair value estimate is $21 based on an EV/EBITDA multiple of 11x. My only concern is that half of Vestis’ workforce is unionized which is a concern in the current labor environment with labor strikes.
I’m not in a rush to buy the stock given that only 22% of shares have traded since the spin-off ( I typically like to see 40% to 50% trade before buying).
Nonetheless, the stock looks quite interesting.
Capitalization and Valuation
On October 2, 2023, Aramark (ARMK) spun off its Uniform Services Business, Vestis (VSTS) in a tax free transaction. Aramark shareholders received 1 share of VSTS for every 2 shares of ARMK.
Rationale for the Spin-off
Aramark included all the boilerplate reasons for pursuing a spin-off:
But I think the main reason for the separation has to do with valuation. Aramark is hopeful that the spin-off will trade at a premium to ARMK.
In terms of a potential range of valuation outcomes, the uniform services business has two comps, Cintas (CTAS) and UniFirst (UFS)
CTAS trades at 20.9x NTM EBITDA while UNF trades at 9.6x NTM EBITDA. Whether this transaction unlocks value will depend on whether VSTS trades closer to CTAS or UNF.
Vestis serves an estimated $48BN market. It competes primarily with UniFirst and Cintas.
Vestis offers full-service uniform solutions including the ability to design, source, manufacture, customize, personalize, deliver, launder, sanitize, mend and replace uniforms on a regular and recurring basis.
Its uniform offerings include shirts, pants, outerwear, gowns, scrubs, high visibility garments and flame-resistant garments, along with shoes and accessories.
In addition to uniforms, Ventis also provides workplace supplies including managed restroom supply services, first-aid supplies and safety products, floor mats, towels, linens and other workplace supplies.
Vestis’ value proposition is that it’s more efficient for companies to outsource the services that Vestis provides rather than doing it inhouse.
This intuitively makes sense to me.
Vestis serves many different industries:
And has low customer concentration:
Vestis estimates recurring revenue of 92% FY 22.
Vestis operates in a large, fragmented market. It is the number 2 player in the industry, behind Cintas (CTAS) and ahead of Unfirst (UNF).