The global shift towards sustainability represents a US$40 billion environmental consulting and services market that will more than double over the next decade, making it a key area to explore for stocks with asymmetric upside driven by solid business fundamentals.
A stock that merits your fine-toothed comb is Vertex Resource Group (TSXV:VTX), market capitalization C$28.57 million, which has grown from a small trucking company in Saskatchewan in 1962 into an end-to-end environmental consulting, services and equipment provider with more than 1,000 employees currently active across Canada and in select U.S. locations.
Vertex’s increasingly profitable operations since 2021 and its management team’s proven prowess at building value through the founding, financing and scaling of resource businesses have gone unnoticed – generating approximately a 0 per cent return since January 2021 as of Aug. 21 – making the broader market’s obliviousness your opportunity at an outsized outcome.
Let’s begin to build our case for Vertex Group’s undervaluation with a look at what clients stand to gain from doing business with the Alberta-based company.
A service suite across the project life cycle
Vertex Group specializes in a complete set of environmental and industrial services from site selection to decommissioning for clients in high-polluting industries such as energy, mining and utilities, as well as private development, public infrastructure, construction, telecommunications, forestry, agriculture and government, granting investors diversified and ultra-leveraged exposure to industry’s burgeoning need for guidance towards greener operations.
The company’s Environmental Consulting Division focuses on everything from public engagement to subsurface engineering and wildlife services, while its Environmental and Industrial Services Division will take care of your accommodations, waste and cleaning and material transportation needs. Vertex’s offerings having grown steadily through the successful founding and acquiring of businesses over its 60-plus years of history.
Management has achieved this growth thanks to increasingly integrated solutions, tailwinds from the broader US$53 trillion universe of ESG assets, and an unwavering focus on profitable, cash-flowing growth that has been bearing fruit since Vertex emerged from the pandemic.
Operations proven out on the balance sheet
Vertex positioned itself to ride the reopening momentum post-pandemic, generating net income of C$1.66 million and revenue of C$159.44 million in 2021 – up from -C$5.7 million and C$136.13 million in 2020, respectively – thanks to industry diversification into utilities, telecommunications and government, as well as progress with cost containment, operating efficiencies, and geographic and sector diversification.
The company followed this up with record revenue of C$218.4 million, record adjusted EBITDA of C$32.2 million, and higher net income of C$2.04 million in 2022, supported by steady demand across multiple industries, synergies from previous acquisitions and a continued focus on profitable growth.
The evidence for the success of Vertex Group’s end-to-end business model continued in 2023, with net income increasing again to C$2.36 million, and the company setting new records for net revenue and adjusted EBITDA, which came in at C$247.3 million and C$37.9 million, respectively, as cost and efficiency initiatives over the preceding years gained further traction.
Vertex’s performance in 2024 to date has been no less impressive, maintaining a stable market presence in the face of higher interest rates and production delays because of persistent wildfires and tornadoes. Highlights include:
- C$58.5 million in revenue in Q1 2024, the highest for any first quarter in its history, thanks to a 19 per cent increase in environmental consulting revenue year-over-year, including adjusted EBITDA of C$6.9 million and free cash flow of C$2.9 million.
- A robust C$57.1 million in revenue in Q2 2024 marked by another environmental consulting revenue increase of 4.8 per cent year-over-year, adjusted EBITDA of C$10 million and free cash flow of C$1.7 million, with Vertex’s current backlog expected to keep demand steady into 2025.
The company is involved in numerous major capital projects planned for 2024-2026, which are expected to enhance demand and market share as management leans into cross-selling services across industries and project phases, and sustainability becomes table stakes for governments and industries in every sector in pursuit of 2050 net-zero goals.
Leadership with skin in the game
Vertex Group’s track record of profitable growth stems from a long-tenured management team that identified the tailwinds, pivoted the company from construction into environmental solutions in 2015, and hasn’t looked back since. This has put decades of experience in oil and gas, construction, executive leadership and investment management in the service of shareholders – of which management is a major one, coming in at 38.9 per cent insider ownership, according to Simply Wall Street. Let’s meet them now:
- Terry Stephenson, director, president and chief executive officer (CEO), founded and became president of Vertex in 2005. His previous experience at KPMG focused on audit, due diligence, valuations and taxation, including a large base of construction clients. He also served as director of finance at Flint Energy Services, where he oversaw mergers and acquisitions, public company compliance, tax planning and treasury management. Also in 2005, Stephenson founded Blackjack Investments, a privately held investment company focused on energy and natural resources.
- Sherry Bielopotocky, chief financial officer (CFO), has been with Vertex Group since 2005, previously holding the role of vice president of corporate services from 2015 to 2021. Her more than two decades in financial management and analysis span the consulting, logistics, manufacturing and construction industries, and include direct experience in mergers and acquisitions, risk management, contracts and public company reporting and compliance.
- Paul Blenkhorn, vice president of consulting services, began his career at Hood Packaging, a private paper and packing material manufacturer, where he gained expertise in process improvement, capital investment and product development. In 2006, he joined Pioneer Land Services as a project engineer and was quickly promoted to lead its environmental division.
- Brian Butlin, chairman, held the roles of chairman and CEO at Flint Energy Services until 2007 and 2005, respectively. Over his 25 years at Flint, he grew the company from a small Canadian oilfield services operation into a TSX-listed company with more than 7,500 employees, 49 North American locations and C$1 billion in annual revenue, presiding over 29 acquisitions during his tenure.
- Terry Freeman, director, is the head of investments for ATB Capital, a private equity firm buying minority stakes in Alberta-based companies. His past roles include managing director of Northern Plains Capital, a private equity firm with C$140 million in assets under management specializing in growth-oriented oil field services and energy industrial investments, and 20 years as CFO and board member at Flint Energy Services until its eventual sale. Freeman currently sits on the boards of numerous private construction, energy services, private equity and real estate ventures, as well as that of McCoy Global, a publicly traded oilfield services company.
- Stuart O’Connor, director, is the president of Timber Ridge Capital, a private holding and advisory company, and sits on numerous boards of private and public construction, software services, oilfield services and real estate ventures. His previously held the roles of:
- Director and chairman of Flint Energy Services.
- Director of IROC Energy Services.
- President and CEO of Merak Projects, a software company focused on the international oil and gas industry.
- Partner with Bennett Jones, where he practiced corporate and securities law.
- Stuart King, director, brings more than 23 years of accounting and finance experience to Vertex. He has served as CFO for CWC Energy Services since December 2017, after seven years as vice president, finance and controller at Canadian International Oil, a private oil and gas company. Prior to Canadian International Oil, King was the acting CFO and controller of Mahalo Energy, a public oil and gas company with operational assets in the United States.
Vertex’s leadership team, highly aligned with shareholders, has proven itself capable of delivering value-accretive results, firmly positioning the company to leverage its one-stop-shop offering and expand its presence in the blooming environmental consulting and services market, though the trajectory of Vertex stock tells a different story.
The asymmetric opportunity in Vertex Resource Group’s lack of market recognition
Having posted a 0 per cent return since 2021, despite more than three years of operational excellence, the environmental services stock has yet to reflect the ongoing momentum being generated by the underlying company, priming investors to be rewarded with a significant re-rating once the broader market realizes its inefficiency and corrects to the upside to better align with intrinsic value.
While this alignment may not occur immediately, given the unfavourable interest rate environment and its nudging of investors towards cash and yield instead of long-term capital appreciation, the reasons for conviction in the stock are numerous and strong:
- Vertex Group is a direct conduit to a greener world we have no choice but to pursue to keep the Earth habitable over the coming generations.
- Management has delivered on its pivot into environmental consulting and services with strong revenue growth without losing sight of profitability.
- The company’s exposure is diverse and includes high-pollution industries, offering it stability and long-term demand out of which to generate shareholder value.
Management is well ahead on putting our re-rating thesis into practice, demonstrating its conviction in the business with almost 40 per cent insider ownership, as well as stock repurchases of about C$1 million year to date and C$456,000 in Q4 2023 at an average of C$0.40 per share, sending a clear signal that the market is underestimating the earning power behind Vertex’s multi-pronged operations.
Building a position in the environmental stock today isn’t a bet on a faraway sustainable future, it’s an investment in that future’s ongoing construction, backed by every green flag a seasoned investor could want to sit tight and let compounding work its magic.
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This is sponsored content issued on behalf of Vertex Resource Group Ltd., please see full disclaimer here.
(Top photo of Vertex environmental consultants and hydrovac operators assisting with a critical water main break in Calgary in June 2024: Vertex Resource Group)
