Inclusive Capital sees several upside opportunities with an active ESG focus at Verra

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Company: Verra Mobility (VRRM)

Business: Verra Mobility operates through two segments: (i) Commercial Services: the market-leading provider of automated toll and violation management, title and registration solutions for rental car companies, fleet management companies, municipalities, school districts and violation issuing authorities; and (ii) Government Solutions: works with local government agencies to make cities and streets safer through automated safety solutions, namely cameras that detect and process traffic violations for red lights, speed lanes, school bus and city bus lanes.

market value: $2.2 billion ($14.03 per share)

Activist: Inclusive Capital Partners

Percentage ownership: 6.66%

average cost: $14.11

Activist Comment: Inclusive Capital Partners is a San Francisco-based investment firm focused on increasing shareholder value and promoting sound environmental, social and governance practices. It was founded in 2020 by ValueAct founder Jeff Ubben to harness capitalism and governance in the pursuit of a healthy planet and the health of its inhabitants. As a pioneering active ESG investor (“AESG™”), Inclusive strives for long-term shareholder value through active partnerships with companies whose core businesses provide solutions to this pursuit. Inclusive is a return-oriented fund with a focus on ecological and social investments. The company’s primary focus is on creating environmental and social value, which in turn creates value for shareholders. Inclusive is so focused on environmental value that it has created a new metric to screen and rate companies: Corporate Value to Carbon Emissions Reduced.

What’s happening?

Sarah Farrell, a partner at Inclusive Capital, was appointed to Verra’s board of directors on December 30, 2021, just four months after Inclusive Capital filed a 13D reporting his position at the company.

Behind the scenes

Verra Mobility operates through two segments: (i) Commercial Services (“CS”) and (ii) Government Solutions (“GS”). The CS deal turned the big headache and high administrative costs for the rental car companies into an additional revenue stream with a 100% margin. The company receives a reduction in the daily service fee and part of the toll. The company has relationships with toll authorities across the country, handles 250 million transactions a year and is truly the only national provider of toll management across the country. The GS business generates revenue for local governments, helping them increase their road safety mandates and identify problem areas.

The CS segment comprises approximately 60% of the company’s revenue and has a 63% segment-level EBITDA margin, and the GS segment comprises approximately 40% of the company’s revenue with a 40% segment-level EBITDA margin. Both companies are #1 in terms of market share, with the CS business covering 95% of the toll roads in the US and the GS business holding 70% of the US market share. This results in a very high-margin business with maintenance investments of only 6% of sales and a return on invested capital of around 50%.

Despite all of this, the company is undervalued because investors don’t credit it with the recovery from Covid, even though the CS segment accounts for 98% of 2019 revenues and the GS segment has exceeded 2019 revenues. In addition, it has grown EBITDA by 19% per year from 2015 to 2019 and is expected to grow EBITDA by more than 25% per year in 2021 and 2022. This will result in $500 million in internally generated cash flow that can be used strategically or for other share buybacks, which account for about 20% of its current market cap.

Additionally, there could be future upside potential in three areas. First, the company could have a great opportunity to replicate what it currently has in the US in Europe. Europe has even more tolls. If the company could find a way to manage tolls for the European branches of US car rental agencies, there could be a $300-$350 million market opportunity compared to $230 million in revenue generated by CS in 2019 were achieved in the USA. Secondly, there are attractive opportunities for strategic M&A. The company’s management has shown discipline when it comes to acquisitions. The most recent acquisition, Redflex, is currently being fully integrated. Third, there are opportunities for capital allocation, as the company has already announced a $100 million share repurchase plan.

As is usual with integrative investing, this business also has a very strong ESG component. Within CS, the company enables more diversity in infrastructure financing. Most infrastructure costs are currently financed by gas taxes. However, as cars become more fuel-efficient and electric vehicles are on the rise, gasoline spending will fall in the long run, which is good for the environment. An increase in tolls collected will offset this decrease, benefiting the environment while increasing VRRM’s CS revenue.

In the GS segment, the ESG benefits are much clearer. Motor vehicle accidents are the third leading cause of death in the United States for people aged 1 to 44, after drug overdoses and suicides. In 2019, 36,000 people died in motor vehicle accidents in the US, and speeding and intersection accidents accounted for 55% of those deaths. The GS business is aimed squarely at this problem. The Insurance Institute for Highway Safety found that red light cameras reduced road fatalities in the US by 21% and speed cameras by up to 39%. As market penetration of the GS business increases, the business certainly becomes more profitable, but just as clearly, more lives are saved on US roads each year.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving portfolio companies’ ESG practices.

https://www.cnbc.com/2022/04/30/inclusive-capital-spots-multiple-opportunities-for-upside-with-an-active-esg-focus-at-verra.html Inclusive Capital sees several upside opportunities with an active ESG focus at Verra

Jane Marczewski

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