“It’s not unreasonable to expect QRHC to report $8M in EBITDA in 2021. At $6 this infers a 15x forward EBITDA multiple, in-line with the industry, so not especially expensive for a growing company with ample room for additional long term-growth. They’ve at long last, five years into the CEO’s tenure and in his second year with a functional Board, started doing the ordinary of running a business well. I think there’s an opportunity with a little serendipity, to do something truly extraordinary. (As a deep dive for newbies on what the business does, this comprehensive two-part writeup I recently found via reddit is quite good.)
From a high-level view, in their role as a waste broker (just don’t call them that to their faces) QRHC sits in the middle of an evolving two-sided marketplace. Historically however, they’ve only faced in one direction, towards the customer. This is the traditional business model, where the customer benefits from brokers bidding out waste pickup to the lowest cost independent regional hauler (ie the vendor). Within this traditional paradigm, there is ample room for QRHC to grow because it remains a highly fragmented market ripe for consolidation, which they are finally doing.
But the market is concurrently changing and this creates what I think could be an incredible opportunity, provided management and the Board can see it, understand it and pursue it.
Among the changes, customers are willing to trade low price for conscientious waste management. Furthermore, the complexity of pickups is growing since vendors are required to split waste streams (organics vs recycling vs landfill) or more vendors are required for each customer. In the background of it all, the vertically integrated players (RSG, WM, et al) are expanding their municipal franchise agreements, which now cover ~20% of QRHC’s addressable geography. These agreements create pockets where QRHC’s margins are capped below target levels. These larger players threaten both the independent regional haulers and QRHC.
In this dynamic marketplace, it looks like there should be an opportunity to go against the traditional model and nurture tighter relationships with vendors in order to solve a number of problems including fending off competition from the vertically integrated players and easing the complexity of invoice management all while continuing to offer the customer more value-added services and metrics around conscientious waste management.
Let’s start by inverting the business model. QRHC isn’t just solving the “one throat to choke” problem for multi-location customers, they are solving the problem of bulk breaking national multi-location customers for regional vendors. To be clear, these could be customers QRHC stole from the regional haulers through higher level sales negotiations, then sold back to them. This is why QRHC and its vendors are generally viewed as frenemies but it’s also evidence of growing leverage.
And as QRHC grows, in theory it should have more control over the national sales space and taken another step, more control over allocating routes to regional vendors. In the traditional model, it would use that leverage to bid for the most aggressive prices.
But what if it used that leverage to make the vendor relationship less transactional? It could create (or buy) a unified billing and invoice system and push the regional haulers onto that system. This would alleviate QRHC’s single biggest issue of the complexity of managing invoices, since this is an industry where paper invoices remain the norm. It could even potentially create (or buy) a sophisticated logistics platform to help the haulers manage their routes better, which could be important to the end customer who might want to track its carbon footprint.
In short, QRHC could leverage its growing position in the middle of a two-sided marketplace to become the center of niche tech enabled ecosystem. This would solve some of the competitive issue for themselves and their regional haulers, provide those regional vendors with technology they couldn’t otherwise get themselves and offer the customer more sophisticated and conscientious solutions.
It seems inevitable as this market unfolds that something like this will take shape over the next five to ten years. If QRHC can recognize this opportunity and fulfill that role as an asset lite center of a deconsolidated network of regional haulers serving national customers – an independent alternative to the vertically integrated players – I think it would add and create more value than it does as a onesided customer facing solution. This idea is small part of my investment thesis, but it represents optionality on something truly bigger and more extraordinary than where they are today. “