“During the quarter we re-entered into a position in APi Group Corporation (NYSE:APG), a leading fire safety service and inspection business focused on commercial end markets. We previously owned APi shortly after its SPAC IPO when I thought shares were severely mispriced given the strength of the business and future earnings power. We sold the position following a strong increase in price within a short period of time, and now find ourselves owners again. Since our initial ownership, earnings power has increased considerably as the company completed the acquisition of Chubb’s fire and security business from Carrier Global, while continuing to execute tremendously well. Yet we had the opportunity to acquire shares at nearly the same price we were granted the first time around.

APG provides an incredibly necessary and recession resilient services where they have been able to gain a clear advantage through organic growth as well as M&A where decades of management experience allows them to acquire and improve complementary businesses. I believe APG has massive advantages from a scale, culture, pricing and work quality standpoints, to the point where they have very little national competition. As the business grows, they will continue to separate themselves as the premier provider of fire safety services, and should be able to flex some pricing power in exchange for quality. Importantly, APG has diversified the business away from new construction activity, so they are more insulated from industry downturns than in the past.

Organic growth and slight margin expansion is all that’s needed to do very well owning this business, as I estimate APG can generate EBITDA in excess of $1.0 billion within the next few years on an enterprise value of less than $7.0 billion. Management is targeting a free cash flow conversion rate of 80% which I believe is achievable using conservative estimates, and would provide firepower for strong capital allocation, an area in which management excels. If APG turns on the M&A and share repurchase engines, the potential return math becomes even more attractive. My commentary from 2020 on the quality of the business and investment thesis remains applicable, and I believe the path to strong returns is more than likely from here. I look forward to sharing more about APG in future letters.”