Company In-Depth North America: Canada

Industrials- Industrial services

Initiating Coverage

Buy

April 15, 2008 Price (April 15, 2008; USD) 79.6

Price target- 12 month (USD) 90.7

Ritchie Brothers Auctioneers Inc. 52 week range (USD) 85.9/55.9

Reuters: RBA.N Bloomberg: RBA:US TSX: RBA NYSE: RBA
NYSE Composite Index 8978.2

Price (1 year trend)

Recession Proof!
Samarth Modi
Research Analyst
Samarth.modi08@rotman.utoronto.ca

Initiate coverage with a buy: 12 month target price of USD 90.7

I initiate coverage of Ritchie Brothers Auctioneers Inc. (RBA) with a buy
rating and 14% potential upside from the current price. Its non-recessionary Performance (%) 1m 3m 12m
business model in such uncertain times, attractive growth prospects, unique
Global Markets

auction process, expansion strategy to add complementary asset categories Absolute 5.6 9.3 31.3
and sound risk management practices support the buy call.
NYSE Composite 4.0 -2.1 -5.7

Non recessionary business model

RBA’s business model has proved to be remarkably unaffected by macro
Stock Data
influences. Its gross auction sales have declined (marginally) only in two of
the last 35 years. During downturns buyers shift their preference to buy Market Cap (USDbn) 2.8
second hand quality equipments, while during economic upturns there is
Shares outstanding (m) 34.8
increased demand for both used and new equipments. Such demand pattern
benefits used equipment auctioneers including RBA. Avg. daily value traded (USDm) 14.2

Existing business: Attractive growth prospects Key

Every year $100 billion of used equipments change hands; RBA has a Indicators RBA NYSE
market share of 3%. The distinct competitive advantage of its unique auction
PE 36.8 19.0
process for buyers and sellers presents attractive opportunity to increase
market share further. RBA’s strategy to add new markets and P/BV 6.6 3.6
complementary asset categories such as industrial marine equipments,
Div. Yield (%) 1.1 2.1
forestry and petroleum equipments would enhance long term prospects.

Valuation: Continue to trade at a premium to market Projected Financials

Since its public listing in 1998, RBA has been trading at a premium to its
competitors and the broad market. The premium is attributed to its ability to 2007A 2008E 2009E 2010E
maintain growth and strong market position. Based on long term Auction rev. 315.2 358.5 407.8 463.9
assumptions about free cash flow, DCF has been applied. Further, historical
EBITDA (m) 130.8 155.1 175.9 199.5
PE and price/cash flow support premium valuation. I have assigned equal
weight to these three valuation techniques and arrived at a value of $90.7 per EPS (Basic) 2.2 2.6 3.0 3.4
share, it represents a 14% upside from the current price.
Cash flow(‘share) 2.8 3.2 3.7 4.2

Price target impediments

Key impediments to price target are risk to incur losses in guarantee and
outright purchase contracts, inability to deliver lien free assets and difficulty in
managing growth.

All prices are closing prices for April 15, 2008. Data is sourced from New York stock exchange (NYSE) and subject
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company.
Investors should consider this report as only a single factor in making their investment decision.

For Disclosure and Analyst certifications refer to Appendix I

 Company Overview
Founded in 1958, Ritchie Bros. Auctioneers Inc. (RBA) is the world’s largest auctioneer of used industrial
today operates in 27 equipments. The company creates a marketplace for industrial equipments by bringing together
countries. equipment owners and purchasers at unreserved auction. “Unreserved” implies that there are no
minimum bids or reserve price and each item goes to the highest bidder on auction day,
regardless of price. To protect artificial manipulation, equipment owners are barred from bidding
for own equipments. The auction process is conducted either on site at an auction location or
through company’s website (www.rbauction.com). In 2007, RBA facilitated $3.19 billion in gross
auction proceeds and generated $315 million in auction revenues.

RBA was founded in 1958 and its headquarters are located in Richmond, British Columbia,
Canada. As of today it operates from 110 locations including 38 auction sites, in 27 countries.

Investment Rationale
Non recessionary business model
Gross auction sales
RBA’s business model has proved to be remarkably unaffected by macro influences. Its gross
declined only in two auction sales have declined (marginally) only in two of the last 35 years. During recessions,
of the last 35 years equipment owners are more likely to sell idle assets, thereby increasing the supply of used
equipment available in the market. At the same time, purchasers look for second hand quality
equipments rather than more expensive new equipments, this increases the demand for second
hand equipment auction. RBA is currently benefiting from this trend. During market upturn, there is
increased demand for both used and new equipments; it benefits used equipment auctioneers
including RBA.

Consignment volumes are impacted by regular fleet upgrades and reconfigurations, financial
pressure, retirements, inventory reductions and timing of the completion of major construction
projects. The diversity of demand pattern further makes business model of RBA non-recessionary.

Existing business: Secular growth prospects

Exhibit 1
RBA estimates that globally there is $1 trillion
RBA is larger than worth of industrial equipments. About $100 Trend: Gross auction sales ($bn) in the last 25 years
its next 40 auction
competitors
billion of these equipments change ownership
combined every year. The market is largely fragmented
and RBA’s market share is 3%. Over 90% of
equipment transactions occur via traditional
methods of trade-publications and brokers.
These traditional methods have drawbacks
such as lack of transparency, longer execution
time and limited reach to buyers. These
limitations present ample growth opportunities
for RBA to convert traditional transactions of
equipments into RBA’s unique auction process.
The company has been following this growth
strategy over the past 50 years. It has been
Gross auction
revenues grown at a
able to increase its gross auction revenues at a
CAGR of 13.6% over CAGR of 13.6% in the last 25 years. In my
the past 25 years view, company’s strong business model and
ability to reinvent the processes would enable it
to maintain constant growth in the long run.

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 Unique auction process Exhibit 2
View of one of the RBA’s auction sites
Permanent auction RBA operates through 38 auction sites in 27
sites average over countries. Permanent auction sites are
65 acres owned by RBA and average over 65 acres.
Typically auction sites are located in close
proximity to a major city and the average
expenditure on a permanent site in recent
years has been $15 million-$20 million.
Auction sites include environmentally
certified refurbishing and painting facility,
equipment display yard, ramp auction
theaters and administrative facilities. Since
auction site development cost is high, it is a
major entry barrier for new players. Gaining
break even auction volume is the key to
manage profitable operations. Over the
years, RBA has developed a proprietary
database of 4,50,000 customers in 175
countries.

Over 80% of the customers are end-users, thereby providing the benefit of competitive pricing for
RBA’s 80% buyers by eliminating brokers and agents. Additionally, RBA has developed extensive expertise to
customers are end- market the equipment before any auction. For every industrial auction, the company mails an
users thereby
company eliminates average of 50,000 full color auction brochures to a strategic selection of customers from its
brokers in auction proprietary database. In my opinion, unreserved auction method, geographical reach through large
process number of auction sites and marketing expertise are distinct competitive advantages for RBA.

Unreserved auction implies that there are no minimum bids and no reserve prices. Every item sells
to the highest bidder on auction day, regardless of the price. RBA bars sellers to bid for their own
equipment to protect from any manipulation in bidding. RBA’s earns revenues from 3 sources:
1. Straight commission: A pre-negotiated commission rate of gross auction value. The
commission ranges from 9% to 10%. This source accounts for 75% of the auction revenues.

Exhibit 3 2. Guarantee contracts: In some situations, RBA

RBA uses ramp method for auctions guarantees a minimum sale proceeds to the
Guarantee and
consignor and earns a commission based on
outright purchase
contracts expose selling price. The commission typically includes a
RBA to risk of pre-negotiated percentage of sale proceeds in
losses excess of the guaranteed amount. The consigned
equipment is sold on an unreserved basis in the
same manner as other assignments. If the actual
auction proceeds are less than the guaranteed
amount, RBA’s commission is reduced, and if
proceeds are significantly lower, RBA can even
incur a loss on the sale. RBA factors a higher rate
of commission on such sales to compensate for
the increased risk. This source accounts for 15%
of the auction revenues.

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 3. Sale of inventory: In certain cases, RBA first acquires ownership of the equipment and later
sells them at auction. During the period of retaining ownership, the cost of the equipment is
recorded as inventory in company’s balance sheet. The net gain or loss in auction is recorded
as auction revenues. This source comprises of approximately 10% of the auction revenues for
RBA.

Leveraging technology
Online application RBA also allows participation in auctions through its online bidding application, rbauctionbid-Live
to complement on- on its website (www.rbauction.com). The facility allows customers to participate in auction process
site auction live and in real time, even if they couldn’t make it to the auction site on auction day. Since
launching its online services in 2002, it has sold over $1.7 billion of equipments. In 2007, online
bidders were buyers or runner up on 27% of all lots offered online and their total online purchases
exceeded $600 million. The online presence has enhanced the reach and is complementing the
on-site auction participation efforts of RBA.

In 2004, RBA launched mission 2007 or M07 to develop efficient, consistent and scalable business
processes. It made significant improvements in internal systems and customer services. Now M07
has evolved into a mindset of continued improvement and in my opinion would enable RBA to
achieve the growth with efficiency and consistency. The company also started developing its
custom built Ritchie Bros. Operating System (rbOS); it will handle proprietary aspects of the
business and auction site management for RBA. Implementation of electronic clerking system in
2008 is expected to result in significant efficiencies in auction process and improved customer
services.

Expansion strategy: New markets and complementary asset categories

Exhibit 4
A key factor in RBA’s growth strategy is its ability to Geographical break-down of revenues (2007)
Long term growth identify and develop new markets and market
from emerging segments. For the next five years, most of the
economies
growth is expected to come from expanding
company’s business and increasing its presence in
the markets, where RBA is already present, such as Canada;
US, Canada and Western Europe. However, over 23%
the long run, emerging economies are expected to US; 56%

significantly contribute in maintaining growth. RBA is

in the process of evaluating markets such as Japan,
Latin America, India, China, Eastern Europe and
Russia. In some of these countries it has already Europe,
established sales offices to take advantage of future Asia,
Australia;
growth opportunities. 21%

Expansion in RBA aims to increase its market share in its core markets of construction, transportation and
complementary agriculture equipment. In 2007, RBA acquired Saskatchewan based agriculture equipment
asset categories to manufacturer Clarke Auctioneers Ltd. Company’s strong balance sheet and operating cash flow
enhance long term would support any potential acquisitions in core markets. The company expects to increase its
growth prospects
presence in asset categories that are complementary to its core markets. The focus on newer
asset categories such as, industrial marine equipment, over the road trucks, real estate, mining,
forestry and petroleum equipment would enhance long term growth prospects.

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 Risk Management
75% of the business About 75% of RBA’s business is
Exhibit 5
is relatively risk free relatively risk free, since it is conducted Relatively stable commission rates for 75% of the business
on straight commission basis. Net
proceeds from guarantee and sale of
inventory constitute 25% of the auction
revenues. In these situations company
underwrites customized contracts by
either providing guarantee of minimum
sale proceeds or buying the assets
Risk mitigation by outright. RBA mitigates such risks by
building risk building a risk premium into its
premium in commission rate and by following a
commission and
rigorous appraisal rigorous appraisal process. The
appraisal process draws on its extensive
field experience and its proprietary
database of equipment sales prices. It
also uses its knowledge of major
equipment deals around the world to
form a view of the equipment supply to market and anticipate any potential demand/supply
imbalances. Over the years, it is the largest participant in the global used trucks and equipment
markets; therefore it has the expertise to assess the trend in these markets. Further, its limited
exposure to changes in equipment values mitigates the risk of its guarantee business. The time
from signing a contract to the date of auction is typically 30-45 days, and truck and equipment
prices tend to be stable over such short periods of time.

Valuation
Target price of $90.7 is based on DCF, historical PE and historical P/CF. Since its public listing in
Weighted average 1998; RBA has traded at a premium to its competitors and broad market. The premium valuation is
of historical PE,
P/CF, DCF supports Exhibit 6 attributed to attractive growth opportunities,
a valuation of $90.7 Assumptions Underlying the DCF model non-recessionary business model and market
per share Growth Rate during 2012-2016E (%) 7
leadership. Based on long term assumptions
Growth Rate post 2016E (%) 4
about revenues and free cash flow, the DCF
has been applied. I arrived at a discounted
Market Risk Premium (%) 6 enterprise value of $3188.5 million and a
Beta 0.49 discounted equity value of $2993.4 million. It
WACC (%) 7.04 translates in a per share value of $86.0

RBA has traded at an average high PE of 33.4 times since Exhibit 7

2003 (Exhibit 11) The estimated EPS of 2.96 for 2009 on Final target price
this historical average gives a value of $98.7 per share.
Valuation technique Price
PE $98.7
RBA has traded at an average high of 23.9 times cash flow P/CF $87.5
DCF $86.0
per share since 2003 (Exhibit 12). Based on estimated cash Equal weight (target price) $90.7
flow per share 3.67 for 2009 on this historical average, I
arrived at a value of $87.5 per share.

Finally, I assigned equal weights to valuation techniques and arrived at a value of $90.7 per share,
the price represents 14% potential upside from the current market price of $79.6 (April 15, 2008).

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 Price target impediment
Inability to deliver • RBA occasionally offers its services as a consignor of used equipment and provides the seller a
lien free minimum sale price guarantee. In the event of selling price less than purchase price, the
equipments and company’s profit margins may reduce. Or if the auction proceeds are significantly lower than the
difficulty in purchase price, RBA would incur a loss.
managing growth
may hamper
competitive • RBA guarantees that the equipments sold at its auctions will have a clear title and be free of any
position lien. If RBA fails to properly identify a lien on a piece of equipment that has been sold, it could
incur additional cost and expenses related to that sale.

• The company is dependent on the supply and demand for used industrial equipment. Should the
company be unable to attract sellers or buyers to its auctions, its financial results would be
adversely affected.

• Integral to RBA’s geographical strategy is the identification, purchase and construction of auction
site. External factors limiting availability of land, delay in municipal permitting process or
environmental compliance may adversely impact expansion.

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Exhibit 9
Details: Unreserved auction method

Advantage Buyer Bidding Process Advantage Seller

Transparent and Attracting equipment sellers, Global market to sell

Open process, appraising and valuing the their equipments &
No manipulation equipment a worldwide
by seller auction network

Lien free Drafting the auction contract

equipment Direct access to
end users

Refurbishing the equipment for final

sale
Comprehensive International
selection marketing
Attracting bidders expertise

The ability to Research for lien free guarantee to

inspect, test and buyers Refurbishing
compare different expertise
equipments
Setting up auction yard

Flexibility and
No buyers’ Conducting the auction customization in
premium Arranging intermediary services auction contracts
including finance company
representatives, custom brokers,
transportation companies
Easy registration rbauction.com
and internet bidding exposure

Post auction formalities: Collecting

proceeds, regulatory formalities,
.. settlement statements to .
consignors, disbursing proceeds

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Exhibit 10
Financial Summary

US$m, Year ending December 2006A 2007A 2008E 2009E 2010E

Statement of Income
Gross Auction Sales 2,721.0 3,186.5 3,568.9 4,068.5 4,638.1
Auction Revenues 261.0 315.2 358.5 407.8 463.9
Direct Expenses 37.0 42.4 46.4 52.9 60.3
Gross Profit 224.0 272.8 312.1 354.9 403.6
Depreciation & Amortization 15.0 19.4 21.4 24.4 27.8
General & Administrative 118.2 142.0 157.0 179.0 204.1
Operating Income 90.8 111.4 133.7 151.5 171.7
Interest expenses 1.2 1.2 1.2 1.4 1.4
Other Income 0.9 1.7 - - -
Pre-tax Income 90.5 111.9 132.5 150.1 170.3
Taxes 34.1 35.9 42.4 48.0 54.5
Net Income 56.4 76.0 90.1 102.1 115.8
Dividend (26.9) (31.3) (33.4) (33.4) (33.4)
Retained Earnings 29.5 44.7 56.7 68.7 82.4
EPS 1.6 2.2 2.6 3.0 3.4

Statement of Cash flow

Net Income 57.2 76.0 90.1 102.1 115.8
Depreciation & amortization 15.0 19.4 21.4 24.4 27.8
Stock compensation expenses 2.0 2.0 2.0 2.0 2.0
Others (0.2) 1.9 - - -
Net change in working capital (8.4) 2.0 (25.7) (16.6) (11.7)
Net cash from operations 65.6 101.3 87.8 111.9 133.9
Capital expenditure (51.2) (113.2) (84.1) (99.9) (108.2)
Acquisitions (2.3) (0.6) - - -
Others 7.0 8.1 - - -
Net cash from investing (46.5) (105.7) (84.1) (99.9) (108.2)
Short term liabilities 0.1 (0.2) - - -
Others 5.3 10.5 - - -
Issuance of share capital 5.2 3.6 - - -
Dividends (26.9) (31.3) (33.4) (33.4) (33.4)
Net cash from financing (16.3) (17.4) (33.4) (33.4) (33.4)
Net change in cash 2.8 (21.8) (29.7) (21.5) (7.7)
Cash at the beginning of the year 169.3 172.1 150.3 120.6 99.2
Cash at the end of the year 172.1 150.3 120.6 99.2 91.4

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Balance Sheet (US$m)
As at: Dec-31-2006A Dec-31-2007A Dec-31-2008E Dec-31-2009E Dec-31-2010E
Assets
Cash and cash equivalents 172.1 150.3 120.6 99.2 91.4
Receivables 36.7 67.7 78.9 77.9 69.8
Inventories 5.6 6.0 7.5 9.0 10.5
Other Current Assets 13.7 13.2 15.6 18.0 20.4
Total Current Assets 228.1 237.2 222.6 204.1 192.1
Fixed Assets 285.1 390.0 474.1 574.1 682.3
Goodwill & Intangibles 39.5 42.6 42.6 42.6 42.6
Other assets 1.5 3.0 3.0 3.0 3.0
Total Assets 554.2 672.8 742.3 823.7 920.0

Liabilities & Stockholders' equity

Auction proceeds payable 65.1 80.7 90.7 101.7 111.2
Account payables 67.5 98.0 100.8 102.5 106.8
Short term debt 0.2 0.2 0.2 0.2 0.2
Current portion of long term debt 0.9 - - - -
Current Liabilities 133.7 178.9 191.7 204.4 218.3
Long term debt 43.1 44.8 44.8 44.8 44.8
Others 8.8 14.0 14.0 14.0 14.0
Total Liabilities 185.6 237.7 250.5 263.2 277.1
Total Stockholders' equity 368.6 435.1 491.8 560.5 642.9
Total Liabilities &
Stockholders' equity 554.2 672.8 742.3 823.7 920.0

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Exhibit 11
Valuation: PE Multiples

Historical PE Multiples
Calendar Year High Low EPS (diluted) PE (High) PE (Low)
1998 $14.9 $10.0 $0.77 19.3 13.0
1999 $19.7 $13.2 $0.66 29.9 20.0
2000 $15.7 $8.3 $0.51 30.7 16.3
2001 $14.5 $10.2 $0.60 24.2 17.1
2002 $16.5 $12.3 $0.84 19.6 14.7
2003 $26.5 $14.7 $1.07 24.8 13.7
2004 $33.2 $25.0 $1.01 32.9 24.8
2005 $45.4 $30.0 $1.43 31.7 21.0
2006 $60.5 $42.1 $1.61 37.6 26.1
2007 $85.8 $52.7 $2.16 39.7 24.4

Average since 1998 29.1 19.1

Average since 2003 33.4 22.0
Current 30.6

EPS (2009) PE multiple Target price based on PE multiple

2.96 33.4 $98.7

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Exhibit 12
Valuation: P/CF Multiple

Historical P/CF Multiples

Calendar Year P/CF (High) P/CF (Low)
1999 9.9 30.1
2000 29.8 5.2
2001 26.0 4.8
2002 11.0 6.8
2003 23.2 7.4
2004 14.8 12.1
2005 22.9 14.9
2006 28.3 19.8
2007 30.1 19.1
Average since 1999 21.8 13.4
Average since 2003 23.9 14.7
Current 23.6

Cash flow per P/CF multiple Target price based on

share (2009) P/CF multiple
3.67 23.9 $87.5

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Exhibit 13
DCF Valuation

Assumptions

Tax Rate 32%

LTD 44.8
Shareholders’ equity 435.1
LTD/ Equity 0.09
Market Risk Premium 6.00%
Beta 0.49
Risk Free rate of return 4.38%
Cost of Debt 6.50%
Cost of Equity 7.32%
WACC 7.04%
NPV ($mm) 3188.5
Cash ($mm) 150.3
Value of Equity ($mm) 2993.4
No. of Common Shares (mm) 34.8
Price per share ($) 86.0

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Exhibit 14
Valuation matrix

Valuation technique Target Price

PE $98.7
P/CF $87.5
DCF $86.0
Equal weight (Final target) $90.7

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APPENDIX I
Disclosure Section

Analyst Certification
The following analyst hereby certifies that his views about the company discussed in this report are accurately
expressed to the best of his knowledge. In addition, the undersigned analyst has not and will not receive any
compensation for providing a specific recommendation or view in this report. Samarth Modi

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