Hedge funds' best ideas #11

35 pitches found in hedge fund reports this week

Sep 25, 2024

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Conestoga on Agilysys $AGYS US

Thesis: Agilysys is set to accelerate growth with its robust software offerings for the hospitality industry, underpinned by a strong subscription model and key client wins.

Extract from their Q2 letter, link here

Analysis: Based in Alpharetta, GA, Agilysys is a leading provider of software to the hospitality industry. The company offers approximately 30 products, including point-of-sale, property management, and inventory management, to the hotel, casino, resort, and gaming industries. Key clients include Hilton, Marriott, and Caesars Entertainment. Its recent win with Marriott with its property management product should provide accelerated revenue growth and increased profitability starting in mid-2025. The company’s business model has solid visibility, with subscription revenues accounting for 55% of total recurring revenue. We expect the company to grow its revenues and earnings at levels consistent with our buy criteria.

Check here for the latest results, quarterly call and analysts' estimates.

Greenhaven Road on Alta Equipment Group $ALTG US

Thesis: Alta Equipment’s hidden growth potential in infrastructure and manufacturing spending, combined with strong cash generation, offers significant upside.

Extract from their Q2 letter, [link here]

Analysis:
Alta Equipment Group (ALTG) is another example of a company where my view appears to be quite different from the market’s view. I wrote about the company more extensively in the Q1 2024 letter saying that:
"An investment thesis should fit into a paragraph, or in this case a sentence… This business is (1) less cyclical than it appears, (2) generates more cash than it appears, with (3) less debt than it appears, with (4) a significant hidden growing annuity type asset, and (5) run by an owner operator who can grow organically and through acquisition for the next decade-plus, at an (6) attractive valuation."

Note that the paragraph above did not mention interest rates once. In fact, it speculated that ALTG was not particularly cyclical. Yet, just this month, at the first whiff of a possible interest rate cut, ALTG’s stock ripped 10% on the first day and then another 25%+ over the following few days.

Mr. Market appears to be tying ALTG’s prospects to interest rates. While lower rates will lower interest expense and may be beneficial to residential construction, Alta Equipment Group’s new equipment sales are primarily tied to infrastructure and manufacturing spending, not residential construction. Infrastructure spending should be supported by the Infrastructure Investment and Jobs Act (IIJA), which allocates $1.2 trillion for transportation and infrastructure spending, and the Inflation Reduction Act (IRA), which allocates $369 billion for fighting climate change and providing energy security. Mr. Market can focus on interest rates, but I see infrastructure spending as the more relevant driver of future earnings and that has already been passed by Congress.

To further bolster the case that Alta Equipment Group may be less cyclical than some believe, here is another piece of data that is not in the “historic” numbers. Alta Equipment Group went public in 2020. Thus, most historical financial datasets for the ALTG begin in 2020 even though the company has been operating for 40 years. In 2009, when Alta Equipment Group was primarily focused on forklifts and their strongest geography was Michigan, their two largest customers were auto manufacturers who entered bankruptcy as auto volumes plunged. During this period, the worst in 50+ years for their two largest customers wading through bankruptcy, Alta’s Parts and Service business was down only 10%.

ALTG’s cash-generating power is another place where few people seem to see what I see. The financials are complicated because five distinct business lines are forced to be reported in a single cash flow statement under GAAP accounting rules. There are Parts businesses and Services businesses. These are very attractive higher margin “razor blade” businesses. They are also two lower margin (but higher transaction value) businesses selling new and previously rented equipment. These are the low margin “razor” of the traditional razor/razor blade business model. Finally, there is an equipment rental business. The rental business is opportunistic and profitable, but basically exists to eventually sell equipment for future Parts and Service business. Five symbiotic business lines, one set of financial statements, the rules are the rules.

Last year, ALTG’s rental business distorted its cash flow statement. Of its 40+ lines, two of them are explicitly related to the rental business — (1) proceeds from sale of rental equipment generated $128.9M, and (2) the expenditures for rental equipment used $62M. Looking at the cash flow statement, it appears that the rental business provided almost $67M of cash.

However, Alta Equipment Group typically takes rental equipment from inventory, so there is a supplemental schedule outside of the traditional cash flow statement. Quantitative investors are unlikely to adjust their numbers based on the schedule and passive investors don’t even know it exists. The schedule is labeled “Net transfer of assets from inventory to rental fleet within property and equipment” and the impact was $180M. When this number is factored in, the rental business consumed roughly $123M of cash last year. I believe, and management has indicated that 2023’s rental inventory investment included a ~$40M, one-time catch-up in inventory for the rental business, an anomalous holdover from inventory shortages during COVID.

The ALTG share price ended the quarter at $8, down 35% for the year. It is highly unlikely that the quants have connected the dots, and we know for certain that the passive investors don’t even look. I see well more than 100% upside from the quarter-ending share price, as we should all see the cash pile up in the coming quarters.

The fireside chat with CEO Ryan Greenawalt should provide insights into the stability of the business and how they can navigate economic weakness in their end markets. As one of the newest holdings, the video is meant to provide additional context.

Check here for the latest results, quarterly call and analysts' estimates.

VGI Partners on Amazon $AMZN US

Thesis: Amazon’s dual focus on AWS’s AI-driven growth and retail margin expansion positions it for significant upside as its core businesses accelerate.

Extract from their Q2 letter, [link here]

Analysis:
We continue to see upside to Amazon’s two core businesses – Amazon Web Services (AWS) and retail/ecommerce. Whilst Microsoft and ChatGPT have captured the imagination of investors looking for AI exposure, the AI business at AWS is extremely well positioned to increase sales through its combination of software infrastructure products, proprietary training and inference chips (an alternative to NVIDIA). AWS is also developing large language models which are only beginning to be appreciated by the investment community.

In addition, we see significant room for Amazon’s retail business to surprise to the upside through margin expansion. After a period of massive capacity expansion and transport infrastructure investment, Amazon has rationalised its North American retail footprint and we believe it will reap the margin benefit of this over the coming years.

Check here for the latest results, quarterly call and analysts' estimates.

Regal Partners on Baidu $BIDU US

Thesis: Baidu’s leading AI advancements and undervalued core search business offer a rare opportunity for explosive growth in China’s tech landscape.

Extract from their Q2 letter, [link here]

Analysis:
When we initiated our long position in Baidu Inc late last year its stock price was trading below the value of just its non-core business components, (if we reverse engineered Goldman Sachs assumptions at the time). In other words, Baidu Inc’s core “Search” business, which is China’s leading internet search engine, was effectively being valued on a negative price-to-earnings. While the stock price has since risen, such that it is now implying a 4.9x price-to-earnings for the core search business, we have also become increasingly positive on Baidu Inc’s earnings outlook as a leading player in China’s artificial intelligence (AI) development. The company not only has the most advanced Large Language Model (LLM) in China, on a number of important measures via its ChatGPT equivalent ErnieBot, but also has advanced proprietary semiconductor chip technology and has the leading deep learning framework. Baidu’s AI advancements are likely to accelerate the growth rates of its core search business, via new innovations such as AI generated gift recommendations, AI travel planning, AI fashion apparel pairing, AI home décor matching and numerous other applications. Moreover, Baidu Inc can enhance its leading business-to-business AI cloud service ecosystem with a customer base of over 200,000 enterprises currently utilizing its deep learning framework. Again, while the assumptions below could be considered as optimistic in the near-term there is clearly significant potential value to be unlocked.

Check here for the latest results, quarterly call and analysts' estimates.

River Oaks Capital on Boston Omaha $BOMN US

Thesis: Boston Omaha’s deep asset portfolio and significant free cash flow generation offer investors high downside protection with attractive growth potential.

Extract from their Q2 letter, [link here]

Analysis:
If you simply add the conservative value of Boston Omaha's billboard company — $300m — plus the value of their Sky Harbour ownership — $135m, you already get well more than Boston Omaha's current market cap of $410m.

This means that investors are essentially ascribing zero value to:

$175+m of invested capital in their rural broadband internet businesses
$35m Insurance Business
15.6% ownership of CB&T Bank — $25-30+m value
$20+m in real estate and other investments
$25+m of cash on the balance sheet

Using conservative estimates, this gets you to a $720m market cap — which is 70+% above the current market cap.

From a free cash flow standpoint, Boston Omaha is generating a ~11-14% free cash flow to equity yield (7-9 P/E ratio), which doesn’t include the $20+m of free cash flow potential from their fiber businesses in the future.

Not only does Boston Omaha provide us with unusually high downside protection for a company with so many valuable assets that have growth potential, but the downside protection is now further backed by the announced $20m share buyback program.

Check here for the latest results, quarterly call and analysts' estimates.

Saltlight Capital on Brookfield $BN US

Thesis: Brookfield is positioning itself as a key player in the critical global energy expansion needed for AI and net-zero goals, presenting a powerful long-term investment opportunity.

Extract from their Q2 letter, [link here]

Analysis:
Last quarter, we discussed AI's high energy intensity. Brookfield believes (and we concur) that an unprecedented electricity build-out is required over the next two decades. They provided some numbers in a recent letter to shareholders.

"...the global installed capacity for electricity is approximately 8,000 gigawatts. To meet expected demand, this installed capacity will need to expand to more than 20,000 gigawatts in the next 20 years. In addition, nearly half of what exists today will need to be retired, as it is very carbon-intensive. Said differently, we need to more than double the current capacity (which was largely built over the past 50 years) while also replacing approximately 50% of what we have.

Nothing like this has ever been attempted, but it is essential in order to reach the world’s net-zero goals and drive the AI revolution."

Energy and human progress go hand in hand. With AI reaching the point where it will augment human intelligence, having sufficient power to run AI will likely become a strategic imperative. Gigawatt-size data centers will likely be on the horizon in the next few years.

Brookfield is a significant player relative to its size but insignificant on an absolute basis. It controls around 250 gigawatts through renewables platforms (~3% of global installed capacity and equivalent to seven Eskom's).

During the quarter, Brookfield announced a $10bn, 10.5-gigawatt power contract with Microsoft—the largest of its kind. However, this additional capacity is a drop in the ocean, considering the 20,000 gigawatts needed over the next 20 years.

Here is the problem: who will fund it, and who can build it? Governments are in a perilous fiscal debt situation. The scale of capital required to build the global electric generation and transmission capacity is hundreds of trillions. Therefore, the private sector will likely have to fund a large portion of the build-out.

Brookfield has been building up its energy platform to tackle the funding and operational elements of the demand problem. Recently, it has acquired ten renewable operating and development platforms.

Was this a good capital allocation decision? Reverting to our Power framework, let's consider Brookfield's core competencies: deploying capital, operating 'real assets', and raising substantial funds. Notably, it has raised $100 billion over the past year and services 80% of the largest alternative allocator institutions in the world.

It should be noted that powers are valuable when operating against one's competitors within the industry. A handful of other alternative firms might indeed be able to muster significant capital, but here's where Brookfield distinguishes itself: the combination of 'real asset' investment and operating capabilities with the ability to mobilize that mega-capital. This multi-functional prowess is not commonly found among its competitors.

In this vertical, Brookfield's Second Act involves acquiring energy-specific competencies on the asset side and then buying up stakes in smaller asset managers to maximize value across the capital structure (e.g., private credit now has $300 bn of assets under management).

What's in it for us? Brookfield participates in the backbone of the world economy – infrastructure, power, data centers, and real estate. If one had to invest in these assets directly, they would yield low returns over long durations. This kind of returns profile would not align with our preference to compound our fund’s returns. However, the broader opportunity set is in the hundreds of trillions, especially as AI and energy demand converge. It is unquestionably mouthwatering.

Instead of direct project involvement, a more attractive strategy for us is to invest in an asset manager specialized in these sectors, benefiting from their scale and powers. We participate in capital-light management fees and investment returns over the investment’s lifespan. Essentially, we’re investing in Brookfield’s power, but we also participate in the vast ‘global backbone’ opportunity set.

Check here for the latest results, quarterly call and analysts' estimates.

The London Company on Bruker $BRKR US

Thesis: Bruker’s innovative instruments and strong capital allocation create a compelling growth story driven by life sciences and proteomics research.

Extract from their Q2 letter, [link here]

Analysis:
Bruker designs and manufactures advanced scientific instruments as well as analytical and diagnostic solutions for a number of differentiated end markets in the life sciences arena. Its solutions enable its customers to explore life and materials at microscopic, molecular, and cellular levels. With a global presence and a focus on life sciences, it benefits from long-term drivers like proteomics research. BRKR derives its competitive moat from its highly innovative instruments that push the cutting edge of science, enabling strong pricing power and market leadership. BRKR’s management team has an excellent track record of capital allocation and delivering on their promises that help create shareholder value. Over time, BRKR has reduced its reliance on government/academic customers, diversified away from Europe, increased growth, and expanded margins meaningfully. BRKR also possesses many characteristics we look for in a company, including a strong balance sheet, high ROIC (>20%), improving margin (close to 20%), and high insider ownership. BRKR is also owned in our Mid Cap portfolio.

Check here for the latest results, quarterly call and analysts' estimates.

Harris Associates on Centene $CNC US

Thesis: Centene’s leadership in government healthcare programs and its successful Medicare turnaround offer strong growth potential, with shares trading at a highly attractive valuation.

Extract from their Q2 letter, [link here]

Analysis:
Centene is one of the largest health insurers in the U.S. The company specializes in three major government-sponsored programs: Medicaid, Marketplace, and Medicare Advantage, each of which benefits from long-term secular tailwinds. In Medicaid, states are steadily outsourcing their programs to companies like Centene to reduce costs and improve care quality. Managed Medicaid penetration has increased throughout the past decade and we expect further gains over time. In Marketplace, growth is driven by the trend toward more individuals buying health insurance. Centene holds the #1 market share in both of these programs and is well positioned to capitalize on their continued growth. Finally, we believe management is successfully turning around Centene’s Medicare business and expect the division to generate positive earnings over time. After adjusting for losses stemming from Centene’s Medicare business, we were able to purchase shares at a single-digit P/E multiple, which we think is too cheap for a leading, secularly growing health insurance company and an improving Medicare business.

Check here for the latest results, quarterly call and analysts' estimates.

Smithson on Choice Hotels $CHH US

Thesis: Choice Hotels' robust margins, coupled with strategic share buybacks, present a solid investment with a 5% free cash flow yield.

Extract from their Q2 letter, [link here]

Analysis:
Choice Hotels is a US-based hotel franchisor known for its Quality Inn and Radisson brands, among several others. It is another high-quality company with a strong track record of steady growth and profitability, achieving over 30% operating margins in recent years. Over the past 12 months, however, the shares have been held back as management pursued a hostile bid for Wyndham Hotels and Resorts, a lower quality US hotel business of a similar size to Choice Hotels. This bid was ultimately abandoned by management in March, who at the same time communicated to shareholders that the funds earmarked for the deal would instead be spent on share buybacks, an approach we support given the currently attractive valuation of 5% free cash flow yield. We took the opportunity to acquire the position soon after this announcement was made.

Check here for the latest results, quarterly call and analysts' estimates.

River Oaks Capital on Citizens Bank $CFG US

Thesis: Citizens Bank’s exceptional management and strategic positioning, backed by significant cash reserves, make it a compelling growth opportunity with a high upside potential.

Extract from their Q2 letter, [link here]

Analysis:
Citizens Bank is a community bank located in Atlanta, Georgia. It is the largest position in our fund and now has an $80m market cap.

In May, I went to the Citizens Bank shareholder meeting and was able to catch back up with CEO Cynthia Day, CFO Sam Cox, Chairman of the Board Ray Robinson, and the rest of the Citizens team.

What Cynthia and her team have accomplished over the past few years since receiving $122m of ECIP funding (the ECIP Program was described in the past few letters) and other favorable financing has been incredible to watch.

Over the past 18 months, they have bought back over 10% of their shares (and are trying to opportunistically buy back more), paid $3+m in dividends, lowered their efficiency ratio to below 50% and started releasing a quarterly press release that informs potential investors of the outstanding performance and over-capitalization of the bank.

Not only have Cynthia and her team built an excellent bank but they have been extremely receptive to suggestions made by us shareholders. It has just all around been a pleasure to be an owner of Citizens Bank.

Now, the next stage of the Citizens Bank story starts.

Check here for the latest results, quarterly call and analysts' estimates.

VGI Partners on CME $CME US

Thesis: With a near-monopoly on U.S. interest rate derivatives trading, CME’s growth potential is tied to rising Treasury markets and increased volatility, making it a critical player in market infrastructure.

Extract from their Q2 letter, [link here]

Analysis:
CME operates futures and derivatives exchanges, including the Chicago Mercantile Exchange, the New York Mercantile Exchange, the Chicago Board of Trade, and the Dow Jones Index Services. On top of this, CME also owns other key assets related to foreign exchange trading & infrastructure and a strategic shareholding in Standard & Poor’s (S&P) Index business.

The key driver of trading activity for CME is in its interest rate derivatives products, where it has an effective monopoly in the exchange trading of interest rate derivatives in the United States, through its benchmark products across the entirety of the interest rate curve. Demand for interest rate derivatives is driven by volatility in interest rate markets, whose effect is compounded by the number of bonds held by those looking to manage interest rate risk and, by extension, market liquidity.

Check here for the latest results, quarterly call and analysts' estimates.

Harris Associates on First Citizens BancShares $FCNCA US

Thesis: First Citizens BancShares’ strategic acquisitions, including the value-accretive Silicon Valley Bank purchase, position it for substantial growth, with shares trading at an attractive discount.

Extract from their Q2 letter, [link here]

Analysis:
First Citizens BancShares is a leading regional bank with an attractive geographic footprint in the Southeast and West Coast U.S. markets. We like that First Citizens has a low-cost deposit franchise, prudent lending practices, and a history of solid financial results through the economic cycle. Under current CEO Frank Holding’s leadership, the company has generated meaningful growth in tangible book value per share driven by strong operating results and accretive acquisitions.

A recent example is First Citizens’ March 2023 purchase of Silicon Valley Bank out of FDIC receivership, which we believe drove a significant increase in the company’s intrinsic value and will continue to be value accretive through cost and funding synergies, and new avenues for growth.

Check here for the latest results, quarterly call and analysts' estimates.

VGI Partners on GE Healthcare $GEHC US

Thesis: GEHC’s independence and focus on optimizing costs, combined with margin expansion potential, offer a promising opportunity for high-teens earnings growth.

Extract from their Q2 letter, [link here]

Analysis:
Our GEHC investment thesis is based on an under-appreciated margin opportunity as a newly independent company. We often see this with spin-off situations:

A hidden asset with a renewed focus on capturing market share;
A bloated cost structure that can be better optimised; and
A newly independent and aligned management team.

The margin opportunity stands out when comparing GEHC to its closest peer Siemens Healthineers, whose Imaging business generates operating margins in the low 20s percentage compared to GEHC in the mid-teens. We believe GEHC will close the margin gap over time by addressing the low-hanging fruit in the cost base while also launching new, higher-margin products.

Check here for the latest results, quarterly call and analysts' estimates.

Azagala Capital on IAC $IAC US

Thesis: IAC’s diverse investments, including high-growth companies like Dotdash Meredith and Turo, are undervalued at current prices, presenting a strong upside potential with multiple catalysts on the horizon.

Extract from their Q2 letter, [link here]

Analysis:
IAC's valuation at $4.5B, corresponding to $52 per share, includes:

$2.4B of MGM's market value.
$1.1B of ANGI's market value.
$1B cash in the holding company.

The valuation assigned by the market to current prices does NOT take into account:

Dotdash Meredith (DDM) has had 2 consecutive quarters of double-digit growth in the digital part of the business, with incremental profit margins above 40%. The growth in revenue from the digital part (+12% compared to the previous year) is the only asset to follow to measure the future evolution of the company since, despite generating only 50% of the revenue, it is the division that contributes 90% of the profits.
A good sign of DDM's good health is the increase in its profit forecast for 2024 to $300M, on the way to the $450M it will generate in the coming years.
If we value Dotdash Meredith with a multiple equivalent to other companies in the sector with a similar level of profits, we have a reasonable valuation of $2-3B, in line with the acquisition cost of $2.7B in 2021.
IAC owns 32% of the private company Turo, a company that this year will reach $1B in revenue and, despite having a structure focused on business growth, is profitable. Turo has been preparing to go public since 2022, but neither market conditions in recent years nor the pre-listing valuation have made the transaction possible.
If investment bankers fail to push through the IPO in the coming quarters because the valuation is not at a reasonable value, and since Turo also does not need additional capital since it has a comfortable cash position, we may see some corporate transaction that crystallizes the value of the company through an acquisition by Uber, as it may make more economic sense for Uber to buy Turo than to compete against them.
If we value Turo with the multiple of listed companies with similar business models, we get a minimum value of $5B. IAC's 32% stake in Turo could fetch $1.6B.
Both MGM and ANGI are currently executing share buyback programs. In the case of MGM, the repurchases of its own shares have withdrawn 40% of the total since IAC's initial investment, and with respect to ANGI, the new repurchase program, approved on August 2, for a total of 25 million shares, would mean withdrawing 5% of the total shares and 35% of the total shares that IAC does not yet own from ANGI.
The latter is no small detail, and in addition to adding buying pressure to the share price, leaves the door open to a potential delisting that could lead to a subsequent sale. All this in an environment of profit increases for ANGI, as demonstrated by the rise in the outlook for 2024 to $140M.
IAC has presented results well above market forecasts during 2024, has raised its profit forecast for the rest of the year, and cash generation in the first half has reached $117M (compared to $20M in H1 2023).
Given the current situation of revenue and profit growth across all of IAC's investments and with the share price so depressed as to reflect no value in any of the unlisted assets, I cannot imagine being in better hands than those of IAC's management team to reduce the discount at which the company is trading to its true market value.
The company's CEO also has a good part of his incentive package in stock and would only collect it if the stock progressively reaches between $110 and $225, compared to the $52 it is currently trading at.
In the last presentation of quarterly results, IAC has clearly indicated that it is studying potential acquisitions since the valuations are beginning to be reasonable and in line with its internal profitability levels.
One possibility to enhance the company's current cash level ($1.7B) could be to access the purchase of BetMGM (MGM and Entain JV). There is always the possibility of selling its stake in MGM to finance a high-value acquisition.

Although IAC will always be a complex company for the market with multiple moving parts, the sum of the current share price level, the catalysts I have described, and the experience of its management team make me have complete confidence in this company.

Check here for the latest results, quarterly call and analysts' estimates.

Greenhaven Road on KKR $KKR US

Thesis: KKR’s growing AUM, fueled by increasing demand from high-net-worth and mass affluent investors for alternative investments, positions it for sustained long-term growth.

Extract from their Q2 letter, [link here]

Analysis:
The core of my KKR investment thesis is simple: AUM is going up, up, up, up. In previous letters, I’ve discussed in more depth why I believe growth is inevitable at KKR. They have the people, products, and business model with a track record of success operating in a market that continues to demand larger allocations of capital.

Interestingly, in the last quarter, two high-net-worth individuals I know mentioned they had been steered towards alternative investments offered through their wealth advisors. This should be a more frequent occurrence as KKR and other alternative managers increase their focus on “High Net Worth” and “Mass Affluent.” This past quarter, KKR announced a deal with Capital Group, which manages over $2.6 trillion. As Capital Group said in their press release:

"While alternatives have been available to high-net-worth individuals and accredited investors for some time, mass affluent investors, which represent more than 40% of the wealth market globally, have not historically had access to the asset class. This combination of Capital Group and KKR opens the door for more financial professionals and their clients to access alternative investments as part of their portfolios."

High Net Worth and Mass Affluent typically have a private equity / private credit allocation of near zero. It is an easy sell for a wealth advisor, and the fees/commissions can be materially higher than an index fund. The conditions are ripe for more and more of your funds to be sold “alternatives.” I am not saying that investing in KKR’s retail-focused funds will be great investments, but we own KKR, which manages those funds. AUM is going up, which means fees are going up, and with the operating leverage inherent in the model, earnings are also going up.

Check here for the latest results, quarterly call and analysts' estimates.

River Oaks Capital on Medical Facilities $DR US

Thesis: Medical Facilities offers strong upside with aggressive share buybacks, cost reductions, and high cash returns to shareholders, all while nearing debt-free status.

Extract from their Q2 letter, [link here]

Analysis:
Medical Facilities is our second largest position. The company now has a market cap of $225m and has majority ownership in four surgical hospitals in South Dakota, Oklahoma, and Arkansas, as well as one surgical center in California.

I recently caught up with Michael Rapps, who is one of the leaders of Converium Capital, and he re-iterated how his team alongside CEO Jason remain committed to their step-by-step plan laid out when they went activist in 2022: no more acquisitions, sell non-core assets, pay down debt, cut costs at the corporate level and return all excess cash to shareholders.

By the end of this year, management is on pace to buy back another $15+m of shares — a total of 35+% of the outstanding shares since 2022 — alongside paying a $6+m yearly dividend and becoming corporate debt free.

When I wrote a full summary on Medical Facilities in the last letter, they had bought back an impressive 25+% of shares from 2022 to the end of 2022, but the board continued to limit Jason and his team on the price they could buy back shares at — even though the share price has never traded near my estimated fair value of $18+ CAD per share.

I know one of the agenda items at this year’s annual meeting was to allow Jason and his team more autonomy over the share buyback price. It appears that has been approved as Medical Facilities has recently bought back shares up to $13.50 CAD per share — the cap was around $10 CAD per share last year.

Management has now achieved all of their goals since the activist takeover in 2022 with non-core assets divested, corporate costs down to ~$8m, free cash flow at $25+m, and a net cash position at the corporate level.

With revenue growth of ~5% year over year alongside margins returning to pre-covid historical norms (as employees and other inflated costs start to come down), it seems that the highest probable next step — of the four scenarios laid out in the last letter — is for the Medical Facilities team to sell their ownership in the Arkansas and Oklahoma facilities in the near term (12-18 months).

Their ownership in these two hospitals should be worth $70+m each — a very conservative estimate for the Arkansas hospital.

Jason and his team would then most likely use the $70+m of proceeds to execute a tender offer to buy back another ~30% of their shares.

They would then be left with their two hospitals in South Dakota which are their cash cows. They each have 20-30% operating margins and 40+% return on invest capital — most notably Sioux Falls.

They are best in class surgical hospitals — receiving top tier national ratings — that will demand a significant premium once they are eventually sold over the next few years.

Another scenario outlined in the previous letter is Jason and his team sell all four hospitals at once for $300+m.

Regardless, the more shares management can buy below fair value between now and the eventual sale of their four hospitals means the greater the return will be for River Oaks.

Medical Facilities currently generates $25+m of free cash flow to equity per year — a ~11% free cash flow to equity yield (9 P/E ratio) — which should continue to grow at or above inflation.

Although the market cap has increased ~40% to $225m since we bought ownership last year, it still provides us with significant downside protection as management continues to aggressively buy back shares at well below fair value — $300+m.

Meanwhile, the four surgical hospitals are in total worth well over $300m to a strategic acquirer regardless of if they are sold individually or together.

In a hypothetical situation where the acquirer bought all four hospitals, the acquirer — such as Surgery Partners — could immediately eliminate $8m of redundant corporate overhead costs which would free up the four hospitals to generate ~$33+m of free cash flow — not including other potential synergies.

Check here for the latest results, quarterly call and analysts' estimates.

Greenhaven Road on PAR $PAR US

Thesis: PAR’s rapid transformation, new customer wins, and strategic acquisitions position it for exponential growth in the fast-evolving point-of-sale market.

Extract from their Q2 letter, [link here]

Analysis:
PAR had a transformative first half of the year, with accomplishments that include:

Buying two companies: Stuzo closed at the end of March and TASK closed in July
Selling their legacy, non-core defense business
Starting to roll out their POS software to Burger King (less than 5% rolled out through June)
Announcing Wendy’s as a customer win (loyalty), though no software has been rolled out
Beginning the rollout of their online ordering product (Menu), which was a financial headwind last year with all costs and zero revenue.
Likely won but not announced two additional Tier One customers.

As you will hear in the video, the acquisitions have created opportunities that simply did not exist at the beginning of the year, including:

A new payments product for convenience stores to roll out this year.
Adopting Stuzo pricing on loyalty for existing customers, effectively raising prices.
Developing a POS offering for convenience stores to be introduced at the end of the year.

It was a busy first six months of the year with a lot of fantastic progress.

Returning to the quality of consensus estimates and the idea of not using them to make investment decisions for my family’s (and your) savings, as of quarter-end, four of the analyst estimates being used to form PAR’s “consensus numbers” last updated their models in November 2023 according to FactSet. In this case, I think we know the answer to “do you see what I see?” An analyst model from November predates all of the positive developments outlined above. Will the reported numbers end up being different enough to matter?

According to FactSet, the consensus estimates are for continued EBITDA losses in Q3 of this year and only $18M of EBITDA next year. However, in both the video linked above and in the last earnings calls, the company has said they will be EBITDA positive in Q3 of this year. As for the 2024 EBITDA number, I don’t think $40M is a stretch and $60M+ is possible depending on the investments being made, customer wins, and rollout cadences. So, based almost entirely on things that have already happened, such as winning Burger King and acquiring Stuzo, EBITDA profitability is coming sooner and 2024 EBITDA is likely 2-3X “consensus.” This is why we do our own research.

With the sale of the defense business, PAR is much closer to a pure-play software business. As a result, they will likely change how they report results, better highlighting the attractiveness of its software business to the market. In addition, with the sale of defense and progress in the core software business gross margins will go up, growth will go up, and profits should inflect higher. This year, I believe that PAR should be able to grow its software business at 25%+ and should be a Rule of 40 software company next year. While that is not what the sell-side-analyst estimates from November 2023 say, I hope we are on the same page when their November 2024 versions come out. PAR ended the quarter at approximately $47. Our Q1 letter laid out a path to $80 in a year, which is not quite a double, but if my view and the market view do converge, there is significant upside.

Check here for the latest results, quarterly call and analysts' estimates.

The London Company on Qualys $QLYS US

Thesis: Qualys' leading position in cybersecurity, combined with strong margins and cash flow, offers compelling growth in a recession-resistant industry.

Extract from their Q2 letter, [link here]

Analysis:
Qualys provides cybersecurity and compliance solutions, which enable its clients to identify, prioritize, and remediate risks to information technology infrastructures. QLYS also offers solutions through a software-as-a-service model, primarily with renewable annual subscriptions. QLYS should continue to benefit from the long-term secular tailwinds that drive sustainable growth in cybersecurity. QLYS’s products are critical but also low-cost relative to a company’s overall security budget, helping ensure high retention rates and recession resistance. We believe QLYS is among the best managed in the industry. Many past decisions have positioned QLYS ahead of peers in terms of product quality, structurally higher margins, and competitive moat. QLYS generates high operating margins with growing cash flow generation and has a very strong balance sheet. QLYS is also owned in our Small Cap portfolio.

Check here for the latest results, quarterly call and analysts' estimates.

The London Company on TE Connectivity $TEL US

Thesis: TE Connectivity’s leading market position, cost-efficient supply chain, and exposure to electrification trends make it a solid, undervalued compounder.

Extract from their Q2 letter, [link here]

Analysis:
TE Connectivity designs and manufactures connectors and sensors, supplying solutions to the transportation, industrial, and communications industries. The critical components that TEL sells have long life cycles and they make up a small percent of the overall cost of materials for complex electronic systems (i.e., low cost but high-cost failure products), creating high switching costs and barriers to entry.

TEL has a leading share in the global connector market (including 30-35% share in automotive) with leverage to secular growth from the ‘electrification’ of multiple end markets. TEL’s management team has enacted successful cost-realignment strategies, driving significant margin improvement and leading to mid-teens returns on invested capital.

TEL fits our process well. It has a low level of net debt, generates healthy cash flows, returns a significant amount of capital back to shareholders through its dividend and buyback program, and it currently trades at a discount to our estimate of intrinsic value and a discount to its peers. Given its strong competitive position, capital allocation philosophy, and favorable industry tailwinds, we believe TEL presents an opportunity to own a high-quality compounder.

Check here for the latest results, quarterly call and analysts' estimates.

Saga Partners on Trupanion $TRUP US

Thesis: Trupanion has disrupted the pet insurance market with a superior value-driven model, scaling rapidly while maintaining industry-low costs and high customer satisfaction.

Extract from their Q2 letter, [link here]

Analysis:
Trupanion, one of the largest and fastest-growing pet insurance providers in North America, has fundamentally altered the market. Its unique cost-plus insurance model, which calculates premiums based on actual claims experience, allows the company to keep its administrative costs low, resulting in competitive pricing. Trupanion’s data-driven approach and strong relationships with veterinarians across the U.S. help provide real-time vet bill payments, a valuable customer benefit.

The company has experienced rapid growth, scaling its subscription-based business with a focus on high lifetime value per pet. As Trupanion expands its veterinary relationships and continues to invest in its proprietary software platform, it has the opportunity to further differentiate itself from competitors. The company has been rapidly gaining market share, driven by its superior customer service and efficient claims processing system.

Despite Trupanion’s recent underperformance in the stock market, we see the long-term opportunity for the company as it captures more of the fragmented and underpenetrated pet insurance market. Given its disruptive business model, low-cost structure, and strong customer retention, Trupanion is well positioned to maintain and even expand its market leadership.

Check here for the latest results, quarterly call and analysts' estimates.

River Oaks Capital on Truxton Bank $TRUX US

Thesis: Truxton’s undervalued wealth management business, with rapid AUM growth and high returns on equity, offers significant upside potential hidden within a community bank.

Extract from their Q2 letter, [link here]

Analysis:
Of Truxton’s $19-$20m per year in free cash flow to equity, 50% comes from the wealth management side of the business and 50% comes from the bank.

The banking side of the business has a book value of ~$90m and generates $9-10m of free cash flow to equity — a respectable 10% return on equity.

However, you can see why investors ignore Truxton when they view it as a bank with a $90m book value trading at $180m market cap — 2x book value appears to be very high for a community bank.

Even if you look at Truxton’s market cap of $180m, $19-$20m of free cash flow to equity — a 10-11% free cash flow yield (9-10 P/E ratio) — doesn’t look overly exciting until you dig a bit further.

Once you meet Tom and his team, you realize that not only is there a wonderful business hidden within a bank but it is quite undervalued as well!

First off, if you look at Truxton’s return on equity, it has grown from ~10% a decade ago to ~20% today. This is largely due to the growth in their wealth management business — from well under $500m AUM to $2 billion AUM — which generates 30+% returns on equity.

After getting to know management, the upside of Truxton becomes very apparent as they are laser-focused on growing their high-return-on-investment wealth management business.

Check here for the latest results, quarterly call and analysts' estimates.

Artisan Partners on Vita Coco $COCO US

Thesis: Vita Coco’s supply chain advantage and growing global demand for healthier beverages position it for continued category leadership and margin expansion.

Extract from their Q2 letter, [link here]

Analysis:
Vita Coco is the leading coconut water brand in the world. While this niche category has relatively low household penetration today, it is slowly growing as the product benefits from increased awareness, availability, and acceptance as an alternative to sugary sports beverages.

The company’s supply chain is an important competitive differentiator. It has secured long-term supply agreements with a network of factories across six countries that process coconut flesh into food and other products, allowing Vita Coco to obtain their coconut water that typically would be disposed of as a wasted byproduct.

We believe the company should be able to drive total category growth for coconut water, and its supply advantage should allow it to maintain a high market share, offer attractive pricing, and expand margins.

Check here for the latest results, quarterly call and analysts' estimates.

Smithson on Inficon $IFCN SW

Thesis: Inficon’s strong position in semiconductor and renewable energy markets, paired with geopolitical advantages, makes it a top contender for sustained growth.

Extract from their Q2 letter, [link here]

Analysis:
Inficon is a Swiss producer of instruments for gas analysis, measurement, and control, which are used for leak detection and vacuum control in precise manufacturing processes, including semiconductors, flat panel displays, solar cells, and industrial coatings. With all the fervor around the number of specialist GPUs being ordered to power generative AI applications, such as those produced by Nvidia, many will be surprised to hear that there has actually been a downcycle in the production of ordinary semiconductor chips since 2021.

This is due to the fact that a shortage of chips in 2020, resulting from supply disruptions, led to an overproduction in 2021 to catch up. In turn, this led to inventories building up just as demand for consumer items such as cars and TVs softened. Inficon’s semiconductor division, accounting for up to half of group revenue, has suffered somewhat over the last two years but is now receiving increasing orders, which, based on company data, are accelerating every month.

Longer term, the company is well-placed to take advantage of growing markets, not just in semiconductors, but also in renewable energy, automotive, and water purity, as it is positioned as the number one or two player in every market it serves. The management also believes that being a European company selling semiconductor-related equipment into China will continue to give them an advantage over US-based competitors if geopolitical tensions escalate.

Check here for the latest results, quarterly call and analysts' estimates.

Arauca Capital on Moberg Pharma $MOB SS

Thesis: Moberg Pharma’s MOB-015 shows strong market leadership and growth potential in Europe, with promising prospects for wider commercialization in the coming years.

Extract from their Q2 letter, [link here]

Analysis:
Moberg Pharma’s MOB-015, an antifungal nail treatment, has shown promising results in clinical trials, positioning it as a market leader in Europe. The treatment is more effective and faster-acting than existing options, giving it a significant competitive edge. Moberg Pharma is focused on scaling the commercialization of MOB-015 across Europe, and initial sales data have been encouraging. With regulatory approvals already secured in several countries and more to follow, the company is well-positioned to capture a large share of the market. In addition to MOB-015, Moberg Pharma is exploring opportunities to expand its product portfolio, potentially entering new therapeutic areas. The company's strong balance sheet and ongoing efforts to optimize its distribution network are expected to support its growth strategy in the coming years.

Check here for the latest results, quarterly call and analysts' estimates.

Azagala Capital on Nekkar $NKR NO

Thesis: Nekkar’s significant growth, cash-rich position, and strategic acquisitions like Globetech offer an opportunity for 15% annual returns with major upside potential.

Extract from their Q2 letter, [link here]

Analysis:
Nekkar is currently trading at NOK 10.5 and, despite what it may seem, if we only look at the share price appreciation, Nekkar still shows a huge disconnect from its actual value.

Over these 5 years, Nekkar has grown its sales by 17% compound annual growth (NOK 267M in 2019 vs NOK 575M), which has caused its profits to increase threefold.

This increase in profits explains the movement of the stock in this period, but not the current valuation of the company.

If we discount the cash (227M NOK) which represents 21% of Nekkar's current market capitalization, we find a company that is trading at a multiple of 7 times this year's earnings. In other words, even if the stock never moves from these levels, its sales and earnings never grow again (unlike what has happened during these years), we would still be seeing a 15% annual return.

This 15% per year does not take into account the share buyback programs that Nekkar is running (2.9M shares as of June 30, 2024, for a total of NOK 27M).

This 15% annual increase also does not take into account the acquisitions that Nekkar is making, such as the purchase of Globetech announced on August 15.

Globetech is a company that will add around NOK 70-80M in revenue in 2024 (+50% in recurring revenue through long-term contracts) with profit margins above 20%, and whose acquisition has been financed partly with shares and partly with cash (NOK 66M).

Check here for the latest results, quarterly call and analysts' estimates.

VGI Partners on DSM-Firmenich $DSFIR NA

Thesis: DSM-Firmenich’s transformation into a high value-add Flavours & Fragrances leader, with significant margin improvement, offers strong upside potential as the market recognizes its true value.

Extract from their Q2 letter, [link here]

Analysis:
DSM-Firmenich is also a recent addition to the portfolio, having grown from a smaller position earlier in the year. DSM-Firmenich is the combination of publicly traded DSM and the privately held Firmenich. The resulting company makes up one of the four major players in the concentrated Flavours & Fragrances industry, and the transaction marks the completion of a major portfolio transformation at DSM over the last few decades.

DSM has repositioned itself from a commodity chemicals supplier to a high value-add Flavours & Fragrances solutions provider. We believe the stock has been overlooked by the investment community given the historical business profile but expect material upside to be realized over the coming years as the earnings quality of the merged business, improving margin profile, and resulting high ROIC are better appreciated.

Check here for the latest results, quarterly call and analysts' estimates.

Emeth Value Capital on Barratt Developments Plc $BDEV LN

Thesis: Barratt Developments’ substantial land portfolio and strong cash position provide significant downside protection, with potential for a 35% cash margin on home sales if land operations are halted.

Extract from their Q2 letter, [link here]

Analysis:
As a traditional homebuilder with a substantial owned land portfolio and a significant net cash balance, Barratt Developments has ample downside protection. While we have previously highlighted the countercyclical nature of maintenance land expenditure, it's worth noting that this excess cash flow dynamic is most extreme when land purchases are halted altogether. In other words, when the business is being liquidated.

For instance, on a typical home sale with an ASP of £350,000, Barratt Development would expect to make approximately £67,000 in pretax profit. However, land is a cost of goods sold that averages roughly sixteen percent of ASP, or £56,000 per plot. Therefore, if Barratt opted to cease its land-buying operations and not replace each plot sold, it would pocket more than £120,000 in cash flow per home, resulting in a thirty-five percent cash margin.

Let’s carry the analysis further to estimate what shareholders of Barratt Redrow Plc might expect if the company were to liquidate. The combined group currently owns 82,595 immediate land plots, which equates to three to four years of build volumes. The large majority of these plots are in established communities and have been selling for years.

Check here for the latest results, quarterly call and analysts' estimates.

Greenhaven Road on Burford $BUR LN

Thesis: Burford’s $6.2B judgment against Argentina, with interest accruing daily, presents a highly attractive risk/reward opportunity as the company works through its backlog of cases.

Extract from their Q2 letter, [link here]

Analysis:
In my last letter, I included the ancient Greek saying, “The wheels of justice turn slowly, but grind exceedingly fine.” Burford continues to work through a backlog of cases that were slowed by COVID court closures. We expect that the fruits of their labors will begin to be more evident over the coming quarters as they close out longer-duration cases and recognize what are likely large gains on their original capital deployments.

As a reminder, their largest "holding" is a $6.2B (~$28 per share) judgment against Argentina related to the YPF case. Each passing day sees nearly $1M of interest accrued to the judgment, which equates to ~$1.40 per share annually for Burford. While there is likely to be a negotiated settlement with the Argentinian government for an amount less than what is owed, Burford’s share price indicates that they will recover nothing from YPF and nothing from their investments in substantial meat-related antitrust cases, while assigning minimal value to their asset management business.

We have no way of knowing for certain what the precise recoveries will be from these cases, but the risk/reward skew is very attractive from an investment standpoint.

Check here for the latest results, quarterly call and analysts' estimates.

VGI Partners on London Stock Exchange Group $LSEG LN

Thesis: LSEG’s transformation into a data and analytics powerhouse, backed by Refinitiv and partnerships like Microsoft, offers significant long-term growth potential.

Extract from their Q2 letter, [link here]

Analysis:
The London Stock Exchange Group (LSEG) has transformed from a traditional exchange into a Data and Analytics group. Today it only generates 3% of revenue from its legacy cash equities exchange. In doing so, it has transitioned into a business with an attractive recurring revenue profile and an opportunity to cross-sell data and analytics services on the back of its large acquisition of Refinitiv in 2021. Since then, LSEG has invested behind Refinitiv, which has led to revenue growth acceleration.

We think LSEG is now at an inflection point, not only to continue improving revenue growth but also to benefit from margin improvement after a heavy investment period. This period has seen LSEG incur additional spending from the integration of the Refinitiv assets, as well as form a large partnership with Microsoft. We expect LSEG to elaborate further on this strategy at its investor day later in 2023 and to introduce new medium-term financial targets.

We find the valuation highly compelling for this quality of asset. LSEG is trading at a discount to nearly all of its Data & Analytics peers, despite a more attractive growth profile over the next three years. Additionally, the original Refinitiv vendors have been selling down their large stake, steadily reducing the valuation overhang. As this continues, we believe it will close the valuation gap with peers.

Check here for the latest results, quarterly call and analysts' estimates.

Regal Partners on Ferrotec Holdings $6890 JP

Thesis: Ferrotec’s strong position in the semiconductor supply chain, paired with upcoming IPOs of Chinese subsidiaries, presents a compelling growth story.

Extract from their Q2 letter, [link here]

Analysis:
We continue to hold Ferrotec, which is a Japan-listed global supplier of critical parts to the semiconductor and electric vehicle industries. Our primary reason for maintaining a holding is the company’s China business, which we believe has been deeply underappreciated by the market. Ferrotec’s key Chinese subsidiaries, responsible for most of its growth, are expected to undertake IPOs on Chinese stock exchanges in the near future. The upcoming IPO of Ferrotec’s major Chinese subsidiary is likely to act as a catalyst, unlocking value and crystallizing the worth of the company’s assets in China, which have been neglected by international investors. Additionally, Ferrotec is in a strong position to benefit from ongoing global semiconductor demand growth, driven by secular tailwinds like electrification and 5G deployment.

Check here for the latest results, quarterly call and analysts' estimates.

Smithson on Reply $REY IM

Thesis: With deep expertise in AI integration and long-standing corporate relationships, Reply’s recurring revenue model offers a unique blend of stability and growth.

Extract from their Q2 letter, [link here]

Analysis:
Reply is an IT consulting company based in Italy that helps corporates with technology adoption, not only with advice and 3rd-party software integration but also developing and coding custom software. They are increasingly engaged to help integrate AI technology into corporate IT systems, giving them direct exposure to the long-term growth in AI adoption. It strikes us that, whoever the winners in AI may be, those helping companies to implement the resulting technology will not lack demand.

The company is structured as a group of small ‘pods’ of specialist teams focusing on very specific IT niches. This allows the company to grow both organically and through acquiring new pods, enabling it to remain at the cutting edge of IT integration. Part of its advantage is the strong relationships it has built with large multinational companies, over decades in some cases, which now provide recurring revenue.

Its second advantage is that the majority of its contracts are fixed price, unlike the larger consulting firms that typically charge by the hour. This removes the risk of projects overrunning and causing cost overruns for clients, which is a common issue with traditional consulting work. The downside of this approach is that some contracts can turn out to be less profitable than expected for Reply, but given its reputation for delivering high-quality work, this has not been a major issue in recent years.

Check here for the latest results, quarterly call and analysts' estimates.

VGI Partners on Deutsche Börse AG $DB1 GR

Thesis: Deutsche Börse’s diversified portfolio and cyclical tailwinds, along with its strategic acquisitions, position it for long-term growth at an attractive valuation.

Extract from their Q2 letter, [link here]

Analysis:
Deutsche Börse (DB1) is a well-diversified exchange group whose activities touch on most aspects of European capital markets, offering a blend of transactional and non-transactional revenue exposure. It provides trading, clearing, pre/post-trading, and data & analytics services in four key operating segments: Trading & Clearing, Fund Services, Security Services, and Data & Analytics.

We consider DB1 an underappreciated portfolio of dominant businesses, with management deploying the benefits of current cyclical strength into long-term structural growth opportunities. Since 2021, net interest income (NII) has been the key cyclical tailwind for this business, generating high drop-through earnings from collateral balances. However, the market ascribes a low multiple to these earnings due to their sensitivity to interest rate movements.

DB1 has committed to driving structural growth using the cash generated from cyclical tailwinds over the past several years. This strategy recently manifested through the acquisition of SimCorp, a Danish listed company providing mission-critical software solutions to asset managers, with over 60% recurring revenues.

DB1's 1H23 results have shown ongoing progress toward its recognition as a diversified financial technology provider, with revenue growth of 18% translating to EPS growth of 20%. Highlights included 16% revenue growth in fund services and 7% growth in data and analytics.

Check here for the latest results, quarterly call and analysts' estimates.

Montaka on LVMH $MC FP

Thesis: LVMH’s portfolio of monopoly-like brands, high-end clientele, and structural growth in luxury markets offer strong long-term upside, especially with current conservative market valuations.

Extract from their Q2 letter, [link here]

Analysis:
We outline the five pillars of our LVMH investment thesis:

Monopoly-like assets: LVMH owns 75 branded houses or "maisons," some of which date back centuries. These brands have long histories and heritage, combined with decades of careful brand investment by LVMH. This makes them monopoly-like assets that competitors cannot recreate, regardless of time or money spent. These brands represent significant barriers to entry for competitors.
High net worth customer base: LVMH's customer base is disproportionately exposed to high-end customers who are relatively immune to economic cycles. Most of the group's revenues, especially in leather goods, come from a small group of ultra-high-net-worth individuals, contrasting with brands exposed to "aspirational" customers who are more affected by economic pressures.
High-end luxury markets grow structurally: The global luxury market is expected to grow from €1.5 trillion to between €2-2.5 trillion by 2030. Additionally, the number of ultra-high-net-worth individuals (with assets of at least $30 million) is growing by about 4% annually. Their wealth is also compounding, suggesting potential for faster growth in the high-end luxury market than current forecasts predict.
Revenue growth driven by price and mix: LVMH's revenue growth, particularly in the crucial leather goods segment, is primarily driven by price increases and product mix rather than volume or new store openings. For example, in Louis Vuitton, about 80% of revenue growth from 2020 to 2023 came from price and mix, leading to higher incremental profit margins.
Valuation and market expectations: Both analyst consensus and market-implied expectations are too conservative regarding LVMH's future growth and profitability. LVMH's profit margins could trend upwards over time, approaching levels seen in luxury companies like Hermès. The market may also be applying too low a valuation multiple to LVMH.

Check here for the latest results, quarterly call and analysts' estimates.

Azagala Capital on Westaim Corp $WED CN

Thesis: With strong cash reserves and undervalued assets like Arena, Westaim offers a low-risk investment with significant upside potential over the next two years.

Extract from their Q2 letter, [link here]

Analysis:
Our investment thesis on Westaim continues to develop as expected.

The company is valued at $370M, has accumulated cash of $289M as of June 2024 ($135M in December 2023), and continues to monetize its investment in Skyward, of which approximately $75M remains to be sold as of the date of this letter. At the annual investors meeting on May 16, they effectively confirmed for the first time that in the next 12-18 months, the $153M managed by its subsidiary Arena will be converted into cash, as we have always defended.

Looking ahead to the next 2 years, Westaim will have accumulated a minimum cash flow of $500M after deducting all expenses and without including any additional profitability from its divisions or interest from that cash flow (currently 5.25%).

Simply put, an investor in Westaim today at $2.9 per share will own $4 per share in cash in 2 years, plus the rest of the company’s assets (Arena).

A company with this level of cash should be immune to any general declines that may occur in the stock market.

Let us not forget that Westaim also owns 51% of Arena, which, although valued on the holding company’s balance sheet at practically 0, contributed $3.7M in profits during the first half of 2024 ($1.8M during the same period in 2023).

Check here for the latest results, quarterly call and analysts' estimates.

Arauca Capital on Shelly Group $SLYG BU

Thesis: Shelly’s strategic acquisition of LOQED and its entry into the smart lock market provide an exciting new growth vertical at minimal cost, offering significant upside potential.

Extract from their Q2 letter, [link here]

Analysis:
Shelly recently disclosed the acquisition of LOQED, a company that designs and distributes smart locks. Their products are extraordinary, but the company went into bankruptcy as management overestimated the market potential. Shelly bought the company out of bankruptcy for 150,000 EUR, an insignificant amount that seems lower than the value of the inventory.

By securing this acquisition, Shelly owns the IP, distribution channels, and relationships with manufacturers, and will integrate the LOQED products into the Shelly ecosystem. With a minimal investment, Shelly entered a new vertical that opens the door (no pun intended) into security, integrating all aspects of home and building automation. This demonstrates the capital allocation skills of the management team, deploying a few thousand euros and gaining a new vertical.

Shelly's shares at the time of writing trade at 36.00 EUR, representing 21 times my estimate of 2025 earnings and 15 times 2026 earnings. This estimate only includes the existing products and markets. If Shelly X, the new vertical into smart locks, and geographical expansion succeed, this estimate will be very conservative. Shelly is an illustration of a company constantly providing new and free optionality.

Check here for the latest results, quarterly call and analysts' estimates.

Smithson on Melexis $MELE BB

Thesis: Melexis’ low-cost, high-functionality sensors are poised to ride the wave of growing automotive and smart technology demand.

Extract from their Q2 letter, [link here]

Analysis:
We also started a position in Melexis, a Belgian company that designs and sells advanced sensors, integrated circuits, and systems, principally for the automotive industry but also for smart buildings, energy management, and robotics. We are attracted to the fact that it produces very low-cost ($0.50 on average) but highly functional chips and sensors, which are growing in terms of number used per car by around 10% a year.

The low cost but high functionality not only enables continued penetration into cheaper cars and novel uses but also protects the company against copycats, as it is difficult to design and produce them at a much lower cost. This is assuming a competitor could guarantee the same functionality and reliability, which is critical for car manufacturers.

As manufacturers have been running down their inventory over the last year or so, revenue growth has slowed and the share price has underperformed. This has created an attractive entry point now that, as suggested by management at its last quarterly earnings report, customer inventories were approaching normal levels and the company’s free cash flow is growing once more.

Check here for the latest results, quarterly call and analysts' estimates.