Ritchie Bros Auctioneers Inc ((NYSE: RBA)
Last Price: USD 60.02 | Fair Value: USD 40.50
Business Strategy & Outlook
Ritchie Bros. provides auction and marketplace services for used heavy equipment. The company’s strong auction liquidity attracts both buyers and sellers to its network. The Ritchie Bros. will continue to be one of the top players in the asset disposition market. The network effects present in its business have consistently delivered higher average selling prices for consignors (or sellers) and provided buyers a wide range of equipment to choose from. For both parties, Ritchie Bros. drives significant amount of value, which has allowed it to monetize its network effects and develop a strong competitive positioning.
Ritchie Bros.’ strategy going forward is to move its business from being primarily transaction based to more solutions based. It has developed digital solutions that range from inventory management solutions for buyers to market intelligence tools for sellers. The company is also pushing to provide more services to customers, such as equipment inspections, storage, and advertising, in addition to asset valuation services. While these services have the potential to drive higher profitability, the it will be challenging to drive adoption rates higher in the near term. Customers will need to be convinced of the value that add-on services can bring to their buying or selling experience. The company has exposure to attractive tailwinds in the near term. Construction equipment makes up more than half of the equipment sold through Ritchie Bros., with the balance in transportation and agriculture equipment. The near term looks bright for each of these markets, meaning Ritchie Bros. will likely see increased activity on its marketplace. In economic upturns, equipment owners often opt to sell their older equipment to buy newer ones. Ritchie Bros. also benefits when markets are pressured, and equipment owners look to increase their liquidity levels through asset disposals (such as bankruptcies). The used equipment supply will continue to loosen in the near term and lead to greater auction liquidity for Ritchie Bros.
Financial Strengths
Ritchie Bros.’ total debt at the end of 2021 stood at $1.7 billion, which equates to a net debt/adjusted EBITDA ratio of 4. The company issued new debt (over $900 million) in 2021 to fund its acquisition of Euro Auctions, however, the company intends to issue redemption notices on the new debt, given its decision to discontinue the deal. Historically, the company’s total debt has ranged between $100 million-$250 million. In 2016, Ritchie Bros.’ total debt rose to $619 million (up from $110 million in 2015) after it issued notes with a principal of $500 million (due in 2025) to partially fund its acquisition of Iron Planet. The company can generate $400 million in free cash flow in the midcycle year, supporting its ability to bring debt levels down.
Ritchie Bros. also provides financial services to its customers by matching them with lenders (it receives a fee for acting as broker). Management has expressed interest in expanding its financial services to get access to assets that will likely be sold through bankruptcies. The Ritchie Bros. will work to leverage its partnership with Gordon Brothers, an investment firm focused on working with businesses dealing with insolvency issues. By using its excess capital, Ritchie Bros. can potentially bring additional assets to its marketplace to be sold off, but this is more of a long-term opportunity rather than an immediate value driver. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of 2021 stood at $326 million on its balance sheet. One can also find comfort in its ability to tap into available lines of credit to meet any short-term needs. The company has access to $525 million in credit facilities. It maintains a strong financial position with a clean balance sheet.
Bulls Say
Company Description
Ritchie Bros. operates the world’s leading marketplace for heavy equipment. The company started as a live auctioneer of industrial equipment, since then it has greatly expanded its operations to include the sale of construction, agricultural, oilfield, and transportation equipment. Ritchie Bros. operates over 40 live auction sites in more than 12 countries, along with online marketplaces, including iron Planet, Marketplace-E, and GovPlanet. Its agricultural auctions are frequently much smaller venues and can include liquidations of single farms. The company holds over 300 auctions yearly and sells over $5 billion worth of equipment.
(Source: Morningstar)
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