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An Under-the-Radar Gem Guy Gottfried Rational Investment Group - - PowerPoint PPT Presentation
An Under-the-Radar Gem Guy Gottfried Rational Investment Group - - PowerPoint PPT Presentation
An Under-the-Radar Gem Guy Gottfried Rational Investment Group Tel: (857) 453- 6623 Email: guygottfried@rationalig.com Investment Idea: TerraVest Capital Inc. (TSX: TVK) Snapshot Recent Price Shares (Diluted) $9.35 22.3 million
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Snapshot
*All financial figures pertaining to TerraVest are in Canadian dollars unless otherwise noted.
Shares (Diluted) 22.3 million Recent Price $9.35 Market Cap $208 million Dividend $0.40 (4.3% yield)
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Background
Canadian consolidator of manufacturing businesses in Canada and the US Focuses on small, fragmented industries with little competition for deals Typically buys from retiring or distressed owners
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Why is TerraVest Worth Your Attention?
Trades at a 12% normalized free cash flow (FCF) yield
Receive a double-digit, after-tax FCF coupon that will grow significantly over time
Consistent record of acquiring businesses at low-single-digit multiples of
pre-tax FCF
Long runway for additional transactions in the future
Within three years, even a below-market multiple should justify shareholder
returns far in excess of 100%
Exceptional management with substantial ownership and insider buying
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Why is It So Cheap?
Underfollowed: no analyst coverage and no quarterly conference calls
Management focused squarely on creating shareholder value; spends virtually no time on investor relations
Recently closed acquisitions have yet to contribute to consolidated results Component of business serving energy sector is at cyclical trough and
therefore under-earning
Underappreciated growth potential; TerraVest still in early stages of
consolidation strategy
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Acquisition Case Studies
A critical component of our thesis rests on TerraVest’s ability to make
attractive acquisitions over time
Actions speak louder than words
It is not enough to have a well-articulated strategy – we need concrete evidence that this strategy can actually be executed
With that in mind, let’s examine every deal done by present management in
recent years
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Propar Group
Bought 90% of Propar in August 2013, remainder in September 2015 for
cumulative price of $14mm
FCF has grown ~2.5 times since purchase of initial 90% Paid approximately 2.5x current pre-tax FCF and FCF continues to climb
*The initial 90% was acquired by Gestion Jerico shortly before Jerico was purchased by TerraVest (see later slide). Jerico was run at the time by TerraVest’s current Executive Chairman, making Propar relevant to this analysis.
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NWP Industries
Bought in August 2014 for $12mm FCF has actually stayed flat since the acquisition despite NWP’s industry
crashing (produces oil and gas processing equipment)
Paid ~4x current pre-tax FCF, achieved during industry trough, and likely 2-
3x normalized pre-tax FCF
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Signature Truck Systems
Bought in April 2015 for US$14mm (net of excess cash) FCF has declined post-acquisition due to warm weather in each of the past
two winters
Warm winters reduced wear-and-tear of, and consequently replacement demand for, Signature’s propane trucks
Paid ~6.5x current pre-tax FCF; difficult to estimate multiple relative to FCF
under normal winter conditions but it should be considerably lower
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Gestion Jerico
Bought in February 2014 for $54mm FCF has since doubled and is poised for further growth going forward Paid ~3x pre-tax FCF in its largest and most important deal to date
*The aforementioned Signature deal was done within Gestion Jerico. The multiple referenced above excludes FCF attributable to Signature in order to avoid double-counting.
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Recent Transactions
Three smaller deals from Dec. 4, 2015 to Jan. 1, 2017; paid combined $11mm Motivated sellers: all three companies were capital-constrained (including
- ne in bankruptcy)
While these are relatively recent acquisitions, we estimate that TerraVest will
end up having paid less than 2x normalized pre-tax FCF for these businesses Bottom line: TerraVest has repeatedly proven its ability to execute extraordinary deals for shareholders; just as importantly, there is a long runway for additional acquisitions over time
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Capital Allocation Case Study: Self-Tender
In 2012, TerraVest launched a tender offer for its shares at $2.75 per share Bought back an impressive 36% of the company at a more than 70% discount
to the current price and an even greater discount to intrinsic value Management’s capital allocation acumen extends beyond acquisitions to the repurchase of its undervalued stock
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Insider Alignment
Largest shareholder: Clarke Inc. – Canadian investment company with noted
record of value creation
Owns 28% of fully diluted shares
TerraVest is Clarke’s biggest position, accounts for approx. one-third of its EV
Executive Chairman Charles Pellerin: second-largest shareholder, owns 15% CEO Dustin Haw: former VP Investments at Clarke; was spending all of his
time helping to run TerraVest before officially joining it as CEO
Forfeited his in-the-money options at Clarke in order to join TerraVest
TerraVest shares and options account for vast majority of his net worth
Importantly, Haw and Pellerin are only 33 and 41 years old, respectively; shareholders can benefit from their intelligent capital allocation for decades to come (provided they don’t sell the company first)
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Insider Buying
Purchases by Clarke and Pellerin in 2016 1.5mm Diluted shares outstanding 22.3mm Purchases: percent of total 6.7% TerraVest’s two largest shareholders bought 7% of the company last year
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Valuation: Normalized
EBITDA $40.0 Maintenance capex (5.0) Interest (0.7) Taxes (9.9) Normalized FCF $24.3 Per share $1.09 FCF multiple 8.6 FCF yield 11.7% Investors receive a double-digit after-tax “coupon” that is highly likely to grow materially over time
*Dollar amounts in millions except per-share amounts. Estimate assumes a full year of normalized results from recent acquisitions and that TerraVest’s energy-focused operations experience a partial recovery from present depressed levels.
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Illustrative Valuation in Three Years
Current normalized FCF $24.3 Incremental EBITDA from acquisitions 25.0 Incremental interest, capex, taxes (9.7) FCF $39.6 Per share $1.78 FCF multiple 5.3 FCF yield 19.0% FCF per share will grow meaningfully as TerraVest continues executing bargain-priced acquisitions; significant upside even at a modest multiple of 12 (“compounder”-type companies routinely trade at 20x or more) Assumed trailing FCF multiple 12 Implied share price $21.31 Upside (incl. cumulative dividends) 141%
*Dollar amounts in millions except per-share amounts. Scenario assumes $100mm of debt-funded acquisitions at 4x EBITDA after synergies.
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Catalysts
Additional deals – timing unknown but virtually certain to happen over time
As demonstrated earlier, TerraVest’s acquisitions tend to be highly accretive
Contribution of recent acquisitions
E.g. one important deal just closed in January and required meaningful integration, so it has yet to make an impact on consolidated results
A profitable “double-dip” for investors: the above factors – particularly the first
- ne – will result in both FCF per share soaring and the stock receiving a more
favorable multiple
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Conclusion
A company that can deploy substantial amounts of capital at outstanding returns long into the future, yet trades at a bargain price Management is heavily incentivized, has proven itself repeatedly, and is young, with years (if not decades) still ahead of it Stock will likely experience both material FCF growth and multiple expansion as investors begin to recognize TerraVest as a long-term compounder
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Rational’s Edge with TerraVest
TerraVest is an unusual business whose historical financials don’t tell the full
story, and whose management makes little effort to promote it
Rational’s long-term, research-intensive approach has enabled us to build
deep relationships within the company and conduct extensive due diligence
We have thus developed an intimate understanding of TerraVest’s history,