API Group Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A global market-leading business services provider of safety and specialty services in over 500 locations worldwide.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

API Group Corporation (APG), a global provider of safety and specialty services, has a diverse portfolio operating through various segments:

  • Safety Services: This segment focuses on safety systems, which include inspection, testing, maintenance, repair, and installation services of fire protection systems, among others. It also includes fire protection equipment sales.
  • Specialty Services: This part of the business offers a variety of services such as: mechanical, industrial, electrical, and infrastructure, and also focuses on supporting these through design, installation, maintenance, and inspection work.
  • Corporate and Eliminations: Primarily for corporate overhead and other expenses.

A major part of the company’s business is providing fire safety solutions. They also focus on many other diversified industries.

API Group’s operations span across North America, Europe, Asia, and the Pacific, and the company has been focusing on expanding its global presence, with recent acquisitions aimed at strengthening its market position.

Competitive Landscape

API Group operates in industries characterized by:

  • Fragmented Competition: The business services industries are fragmented and generally contain lots of competition.
  • Technological Advancements: The industry faces increasing adoption of new technologies and software to help automate business processes and deliver higher value.
  • Regulatory Landscape: A variety of regulations that vary greatly by jurisdiction.
  • Customer Relationships: The client relationships are built based on expertise and reliability, and these form a moat for companies in the industry.
  • Economic Cycles: Demand for services is tied to overall economic conditions which creates cyclicality.

API Group competes with many smaller, local, competitors, often within regional areas that the company doesn’t have a big presence in. It also competes with other large multinational companies.

The industry is a bit of a mix of companies that operate in a lot of different fields. From tech to specialized services and traditional ones.

Financial Analysis

Analyzing APG’s financial health involves examining its financial statements, focusing on key metrics such as revenue, profitability, and cash flow, among others.

The latest data available for this report is from the 10K for 2023 and 10Q for Q1-2024.

  • Revenue: API Group’s revenues have shown strong growth, mostly driven by growth in the Safety Services segment. In the first quarter of 2024, Net revenues were $1,627 million, compared to 1,359 million in the same period of 2023.
    • Safety services had a revenue of $1,098.1 million in Q1 2024 compared to $820.5 in Q1 2023. A 34% increase year-over-year. This segment is doing really well.
    • Specialty services segment increased its revenue by $131 million year-over-year in Q1 2024.
    • Corporate and eliminations had a decrease in revenue of $25 million year-over-year in Q1 2024.
  • Profitability: Adjusted gross profits are growing year-over-year. In 2023 they were $3,563 million and $3,420 million in 2022, an increase of 4.2% year over year.
    • Adjusted EBITDA margins are decent, hovering around 10% and 13%, with growth in 2023.

A strong increase in revenue does not lead to profit in an equivalent manner as the costs also increase.

  • Cash Flow: API group’s cash flow has been variable, with cash provided by operating activities being generally positive but with fluctuations caused by acquisition activity and other factors.
    • In Q1 2024, net cash provided by operating activities is $438 million, compared to $288 million in Q1 2023. This increase is mainly due to improved net income.

A lot of cash flow is due to acquisitions, therefore organic cash growth seems to be weaker.

  • Capital Structure: API Group has been taking on long-term debt over the years. At the end of Q1 2024 they had long term debt of $3,738.5. They also have a huge amount of goodwill at $1,667.9 million. Their short-term debt is only $253.1 million.
    • They have a revolving credit facility which has a $2,200 million capacity, with a current outstanding at $982 million.
    • They have $738 million in finance leases that are considered debt, and other long-term liabilities of $1,375 million.

Debt level is very high, if they want to make more acquisitions, debt will be a problem

*  They have positive working capital as current assets is $3,108.6 and current liabilities is $1,694.8 million.
  • Recent Concerns
    • In Q1 2024 call, some of the revenue growth was attributed to a large acquisition, which shows the organic growth might be weaker. Also the company’s CFO has said the economic outlook is uncertain, and they face supply issues and inflation.
    • During Q1 earnings call, management discussed the company’s continued focus on improving its margins through project selection and cost control.

Management seems focused on growing revenues via acquisitions, but that can lead to some problems.

Moat Assessment

API Group has some attributes of a competitive advantage, but their moat is weak.

  • They have some switching costs in the Safety Services, where customers are likely to stick with providers for maintenance or inspection services.
  • They also have some geographic advantages from having a large distribution and operational presence in some of the regional markets they operate in, however there are enough competitors to reduce that strength significantly.
  • There are low barriers to entry which leads to lots of smaller competitors, the market is very fragmented. They are not able to achieve economies of scale in a specific area.
  • Their acquisitions are focused on growing revenues rather than creating structural advantages.
  • Intangible assets such as brands or patents are negligible in the business.

Because of this, API Group has a Narrow Moat, as their advantages are likely to be eroded over time by the competition.

Risks

Legitimate risks that could harm API Group’s moat and business resilience:

  • Intense Competition: Highly fragmented markets expose them to strong competition. Other companies could come in and lower their prices, and take market share away from API Group.
  • Macroeconomic Pressures: Industry activity is strongly tied to the macroeconomic environment. Economic downturns could lead to lower spending on inspection, construction, and maintenance, which may lower their profitability.
  • Regulatory Changes: Changes in regulations for certain products and services can reduce or eliminate some revenue streams, or they may increase costs of business operations.
  • Technological Disruption: As some of their businesses are based on traditional methods or systems, the disruption in the market with changing technologies may impact business operations.
  • Acquisition Integration: Acquired companies need to be fully integrated and become fully operational for the expected synergy gains to be achieved. Failing this will erode the value of the acquisitions.
  • Rising Debt Levels: The company has a lot of debt, that may prove to be risky for the company if the business goes through a downturn or if costs rise too high. Also, if the company continues to grow with acquisitions, their debt may increase even more.

Understandability Rating

Based on the company’s complex operations and high number of segments, the business is not the easiest to understand. However, with some research and by separating out the divisions, it is not very complicated either. Understandability: 3/5

Balance Sheet Health Rating

While the company’s cash flow has been inconsistent, current assets are far more than current liabilities which makes their short-term health really good. The company’s debt is high but manageable for a company of this size. Their leverage, however, is high and they could be vulnerable if things get bad. They do seem to have the capabilities to handle this debt, but it is still high nonetheless. Balance Sheet Health: 4/5