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Cove Street Capital on Compass Minerals $CMP US
Thesis: Compass Minerals' undervaluation due to mismanagement and weather challenges creates an opportunity for value realization under new leadership
Extract from their Q2 letter, link here
Analysis: We have reset our position in Compass Minerals (ticker: CMP) to 2.5% from 5%. The valuation being accorded to its two “irreplaceable” U.S. assets in salt and sulfate of potash are worth multiples of the current value of the stock, but weather headwinds have sucked the life out of the equity. Said another way, the company has been idiotically run and managed with a mindset that weather is NOT an issue in agriculture and de-icing salt and that has cost us dearly to date. A 72-year-old Board member has stepped in as CEO with a very obvious mission: reduce costs and sell the company. We again would note the Koch family paying $36 per share for a 17% share in the company, among other unhappy people.
L1 Capital on AerCap $AER US
Thesis: AerCap, the largest aircraft lessor, presents an attractive investment opportunity with strong growth potential and compounding returns
Extract from their Q2 letter, link here
Analysis: Every time you catch a flight, you probably don’t spend a huge amount of time thinking about whether the plane you are sitting in was bought or leased by the airline. Yet this is an important decision for the airline management team. Aircraft leasing is a well-established, but highly specialized niche of the secured asset lending industry. There are a wide range of aircraft leasing capital providers, but publicly traded aircraft lessors are limited, and the sector is not well known outside of the industry. While AerCap is by far and away the largest participant in the aircraft leasing industry, we believe it is flying below the radar of most investors. It is not often you can invest at an understated tangible book value and a single digit P/E ratio in a business:
With an industry leading position,
Supported by drivers that will reliably sustain growth for many years,
Led by the industry’s best management team,
Generating strong returns on equity invested in the business,
Holding an investment grade credit rating, and
Paying a dividend and returning excess capital to shareholders through buybacks. AerCap is a top 10 holding in the Fund and we believe it currently presents a very attractive opportunity to generate strong, compounding investment returns over time.
Black Bear VP on Builders FirstSource $BLDR US
Thesis: Builders FirstSource's strategic shift to value-add products and significant share buybacks position it to capitalize on the structural housing shortage, offering substantial long-term value
Extract from their Q2 letter, link here
BLDR is a manufacturer and supplier of building materials with a focus on residential construction. Historically, this business was cyclical with minimal pricing power as the primary products sold were lumber and other non-value-add housing materials. Since the GFC, BLDR has focused on growing their value-add business that is now 50%+ of the topline. The company has modest leverage and has been using their abundant free-cash-flow to buy in over 41% of the stock in the last ~3 years. While mortgage rates are higher, they are not unusual versus history. The low rates of the last 5-10 years are the outlier. We have a structural shortage of housing in the USA. With existing homeowners locked into low-rate mortgages, the aspiring homeowner may increasingly need to find a home from a homebuilder. Normalized free-cash-flow per share looks to be in the range of $13-$16 per year. Margins are structurally higher given their increased shift into value-add products. At quarter-end pricing of ~$138, that implies a free-cash-flow yield of 9-12%, which does not reflect the long-term housing needs or their pricing power.
Alphyn Capital on CarMax $KMX US
Thesis: CarMax, with its strong omnichannel strategy and long-tenured management, is poised to leverage market normalization and regain profitability despite recent challenges
Extract from their Q2 letter, link here
Analysis: CarMax, previously a winning investment for us, has disappointed us recently. Two key factors impacted CarMax: the rise of online competitors like Carvana and franchised dealerships entering the used car market and a post-pandemic environment with higher financing costs and less affordable cars. Their traditional brick-and-mortar, no-haggle model, while successful historically, faced challenges. In response, CarMax invested significantly in omnichannel offerings and technology to enable efficient car sourcing from consumers and dealers in a supply-constrained market. While this strengthens their long-term position, it has put temporary pressure on profits. Moreover, CarMax prioritizes consistent margins per car (~$2,500), which has impacted sales volume in recent quarters compared to competitors focused primarily on sales growth.
The used car market will eventually normalize, which should lead to positive operational leverage in CarMax from its recent investments. The company benefits from long-tenured management that has successfully navigated difficult macro conditions before. Management has shown adaptability with the omnichannel rollout and willingness to experiment with auto financing for lower-credit customers. I am carefully assessing the risk-reward against cash and other opportunities that I am looking into.
Brasada Capital on CCC Intelligent Solutions $CCCS US
Thesis: CCCS offers solid organic growth and attractive returns with minimal risk, presenting a strong investment case at current valuation
Extract from their Q2 letter, link here
Analysis: Big picture, the way to think about CCCS is that the steady state business can do 5-10% organic growth purely from established pricing and upselling. Along with that, there are some upside options, if they nail STP, if they nail the parts marketplace, if they nail something entirely different that we aren’t even talking about today that will help the ecosystem, the growth rate can be closer to 13%-15%. If we can buy this underwriting 9% growth, then these upside options will give us a nice margin of safety.
We believe the economics here are pretty locked in for the next few years, and at today’s valuation we expect to earn double digit returns with very little risk of permanent business value impairment.
Oakmark on Centene $CNC US
Thesis: Centene, a top U.S. health insurer, benefits from secular trends and market dominance, presenting a buying opportunity at an attractive multiple
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 Medicaid company and an improving Medicare business.
Oakmark on GE HealthCare $GEHC US
Thesis: GE HealthCare, newly independent and tech-savvy, promises higher margins and growth, offering an undervalued investment opportunity in the medical technology sector
Extract from their Q2 letter, link here
Analysis: GE HealthCare is a leading global medical technology company that was spun off from GE in January 2023. As a standalone company, we expect GE HealthCare to benefit from increased focus, better-aligned management and incentives, and an improved corporate culture. We believe this will help drive higher margins and sustainably higher organic growth over time. Additionally, we believe GE HealthCare is well-positioned to capitalize on technology trends in healthcare as an increasing portion of the value proposition comes from AI-enabled software, as well as a shift towards precision care. In our view, investors have a stale perception of GE HealthCare and haven't given the company credit for the significant self-help potential or the improving industry backdrop, which provided the opportunity to purchase shares at a discounted valuation to other quality medical technology companies.
SVN Capital on KKR $KKR US
Thesis: KKR aims to double its AUM by 2028, capitalizing on growth in Asia and strategic holdings, while its strong capital allocation and diverse strategies promise significant earnings growth
Extract from their Q2 letter, link here
Analysis: Asset Management: The alternative asset management industry is large; AUMs are currently at $15 trillion and are expected to hit $24 trillion by 2028. KKR currently has over 40 strategies through which it manages ~$553 billion in AUM (~3.7% of the market). It expects to more than double its AUM by 2028, which seems quite reasonable. Many of these strategies are relatively new, and so ~50% of its AUM still needs to scale up. As these strategies mature over the next five to 10 years, they are expected to start generating performance fees, in addition to the management fees they are currently generating. While the opportunities appeared to be immense in credit, real estate, and infrastructure, the team was excited about Asia—notably the opportunities in India and Japan. Over the next seven years, Asia is expected to generate more than 60% of total global growth. India is an economic powerhouse, enjoying the demographic dividend, which in turn commands capital from within and outside of India. Japan, on the other hand, has a rapidly aging population which is demanding yield-related products. KKR's Global Atlantic (GA), a fast-growing annuity provider, sees tremendous opportunities there. So, there are multiple ways of reaching more than $1.0 trillion in AUM by 2028.
Insurance: The other significant development leading up to the investor day is that KKR bought the remaining 37% interest in GA that it did not own. In 2020, KKR announced that it was acquiring ~63% of GA when its AUM was $72 billion; GA's AUM has grown to $171 billion as of 2023. Retirees generally look to supplement their retirement income through fixed annuities, which are a primary offering of GA. With more than 16% of the US population 65+ years old, and more than 30% of the Japanese population at a similar age, GA's runway to $340 billion in AUM in the next five years appears clear.
Strategic Holdings: In this segment, KKR is doing what I am doing at SVN Capital Fund, which is buying and holding a collection of high-quality businesses (currently 19 of them) that are highly cash generative, with low debt, and are run by high-quality management teams. Having owned them for a while, KKR expects to collect more than $300 million in dividends from these companies by 2026, more than $600 million by 2028, and more than $1.0 billion by 2030.
New Metric: The new reporting metric that captures the operating performance of the three segments is adjusted net income. It is the sum of the operating earnings (70% of which is recurring) from the three segments, combined with net investment earnings. In 2023, KKR generated $3.42/share in adjusted net income, which it expects to more than quadruple over the next 10 years! Ownership has always been spread widely within the firm, and today insiders control ~30% of the company. The management team's capital allocation decisions have been sound. KKR was one of the few companies actively deploying capital during COVID-19. One such acquisition was that of Global Atlantic. Another is share repurchase; since 2015, the company has repurchased 11% of outstanding shares at an average cost of $27.32/share.
While the stock price has doubled since 2021, it has been driven by earnings growth, and not multiple expansions. Currently, it is trading at ~22x 2024 earnings. There's more I can tell you, particularly about the people, the products, and the performance. But let me conclude this section here. My optimism for the company is based on the length of the runway for growth, sustainable competitive advantage in the industry, and organizational culture. I am already looking forward to the investor day in 2026.
Black Bear VP on LSB Industries $LXU US
Thesis: LSB Industries' strategic initiatives in low-carbon ammonia projects and strong capital allocation offer substantial growth potential, making it a high-reward investment at its current valuation
Extract from their Q2 letter, link here
Analysis: LSB Industries manufactures and sells nitrogen-based products for the agricultural, industrial, and mining markets. They are the 5th largest producer of ammonia and the leading merchant marketer of nitric acid in the U.S. The company has undergone a remarkable turnaround both operationally and financially after being chronically undermanaged by previous ownership. Looking forward, they are beneficiaries of the low-carbon movement as they are co-developing low-carbon ammonia projects and growing their existing capacity. LSB and other domestic producers use natural gas as their main raw material, giving them a competitive advantage due to the low cost of natural gas in the US versus foreign competition. Management has a very good grasp of quality capital allocation. The company is currently levered 2.5x but has been buying back their debt at a discount. While the stock is cheap (and they are buying back stock), having a safer balance sheet is a priority and free cash flow has been allocated between stock buybacks and debt paydown/buybacks. As capacity expansion comes online, the company should be able to generate $75-$110MM per year in free cash flow, equating to a 13-19% levered free cash flow and 9-13% on the enterprise value. Additionally, LSB has a blue ammonia development utilizing carbon capture/storage and a longer-term low-carbon ammonia export project. These two projects will generate $50-100MM in additional cash flow over the coming 2-4 years, effectively doubling the earnings power of the business. At today’s price, that translates to a 20-40% annual FCF yield.
Headwaters Capital on PDF Solutions $PDFS US
Thesis: PDF Solutions, with its critical role in semiconductor advancements and emerging technology, presents a scarce and transformational investment opportunity in a structurally growing industry
Extract from their Q2 letter, link here
Analysis: While PDF is clearly a complicated investment, the reality is this Company is one of the scarcest assets in the semiconductor industry, an industry that I believe has structural growth characteristics for decades to come. PDF sits at the nexus of multiple different trends that are seemingly coalescing around PDF’s technology. Furthermore, the Company’s solutions are critical to ongoing advancements in semiconductor production. As the manufacturing of semiconductors has grown in complexity at more advanced nodes, PDF’s Exensio software is becoming an industry platform that can help industry players throughout the ecosystem improve yields and efficiencies. More complicated manufacturing requires a platform approach to monitor data all through the manufacturing process. Jensen Huang, president and CEO of NVIDIA, echoed that perspective at SNUG. “Where the system starts and ends is just completely amorphous now,” said Huang. “We need to build the entire chip, which is this entire system, in silicon, in digital twins. And when we say, ‘Hit enter,’ we need to know that it’s perfect. It’s already lived inside the simulator, and it’s been living in that world for a couple of years. And so when I finally say launch, I know every single bill of material, how everything’s going to get put together, and all the software has already been brought up.” – Jensen Huang, CEO NVIDIA. PDF is differentiated in the industry given its position as an independent third party that can process and analyze vast amounts of data in real time to drive manufacturing efficiencies. PDF’s emerging eProbe tool, DFI, is also showing early signs of commercial success and represents a transformational opportunity for both the Company and the industry. While the thesis is not predicated on the success of this product, it is an exciting call option. The timing of the investment also seems reasonable right now. PDF has discussed most of these trends going back as far as the Company’s 2016 Analyst Day. However, major evolutions in equipment and software take years to play out because these node transitions take so long to develop. The industry is finally moving significant volumes to nodes that PDF can target. Supply chain resilience post-COVID and sovereign investments to support domestic fabs are additional tailwinds for the Company, both of which have inflected positively over the last three years. While I wish the business was easier to model and value, these positive investment attributes outweigh the opaqueness of the company's financials. Management ownership, its significant investment by a leading test company, net cash position and high ROIC provide further confidence around the investment opportunity. I have started the position at a smaller size than I most intend to add to as we learn more about the financials and limited visibility into orders. As I gain more confidence with the business, I hope to add to the position. Investment Thesis in One Sentence: "PDF Solutions, with its critical role in semiconductor advancements and emerging technology, presents a scarce and transformational investment opportunity in a structurally growing industry."
Longriver Partners Fund on Pinduoduo $PDD US
Thesis: Pinduoduo's unique business model and market position in China offer a compelling investment despite competitive pressures
Extract from their Q2 letter, link here
Analysis: When a company of Pinduoduo’s quality and potential trades at 11x this year’s earnings, Mr. Market is telling you he thinks something doesn’t smell right. Is it a real business? Are Pinduoduo’s earnings sustainable? I hope I’ve answered the former question. As for the latter, Pinduoduo has continued to profitably take share this year in China. I do acknowledge, however, that competition is increasing as Alibaba and J.D. get their houses back in order. They are cutting commissions and advertising fees to encourage merchants to cut prices. But they are constrained by their existing business models, product categories, user base and merchant structures. Pinduoduo aggregates demand and achieves low prices in a fundamentally different way. Overseas, Pinduoduo’s expansion has become a question of geopolitics. While consumers clearly enjoy Temu’s low prices, politicians don’t like its Chinese origins. There is some truth in the argument that state subsidies have pushed China Inc. into a state of overcapacity, which it is now trying to export. But that same Chinese overcapacity is keeping a tight lid on global inflation at this critical juncture post-COVID. Mr. Market appears certain Temu will fail, and maybe he’s right. But what if he’s wrong? Since this is an election year in America, it’s instructive to remember how forecasters were widely lambasted in 2016 when they gave Hilary Clinton an 85% chance of winning the Presidential election, only to see Donald Trump snatch victory from the jaws of defeat. The forecasters weren’t wrong, per se. Their audience simply forgot that their prediction implied Clinton also had a 15% chance of losing. Most stock pitches work the same way. They emphasize all the wonderful things that make a business great, cursorily tacking on at the end a few things that could go wrong (a.k.a. “risks”). Similarly, critics of a stock rarely acknowledge what could go right. This would be wonderful if investing worked like a beauty contest, where we could get rich by buying the best companies and selling the worst. However, markets work more like the pari-mutuel betting system at a horse track. As legendary handicapper Steve Crist explained, winners don’t bet on the horse, they bet on the odds. Great investments reward us for recognizing when prospects are mispriced. Pinduoduo isn’t without risk. Temu must run the political gauntlet. But what if it succeeds? What if the new innovations to its model bring it closer to that nirvana of low cost and good quality? What if its efforts to diversify away from America help it take root in new markets like Europe and Japan? What if it eventually reaches enough scale in certain markets to attract established brands, just as Pinduoduo does in China? Even if the odds are indeed low, the payoff should more than compensate.
Palm Valley CM on Resources Connection $RGP US
Thesis: With an appealing valuation and a strong track record of positive free cash flow, RGP is well-positioned to thrive post-recession, offering a compelling investment opportunity at its current low price
Extract from their Q2 letter, link here
Analysis: Resources Connection (RGP) is a global consulting firm focused on project execution. The company's 4,100 professionals specialize in facilitating initiatives associated with business transformation, strategic transactions, or regulatory change. Many employees have Big Four or legal backgrounds. In the mid-2000s, RGP was viewed as the best public company play on Sarbanes-Oxley compliance requirements, leading to a temporary profit boom. Besides consulting projects, the company also competes on the high end of professional staffing and works with over 2,000 clients, including 87% of the Fortune 100. Factoring in RGP’s extremely clean balance sheet, the business has never been priced this low since its IPO over 20 years ago. While results have been on a consistent downward slide for almost two years, the performance is consistent with other providers of consulting and temporary staffing. The stock's valuation multiples are appealing on both a trailing and normalized basis, although RGP's financials have not yet bottomed. RGP has generated positive free cash flow every year since going public. We believe it will survive the current industry recession.
Clearbridge on Shopify $SHOP US
Thesis: Shopify's vast market potential and recent investments position it for sustained long-term growth in profit and cash flow
Extract from their Q2 letter, link here
Analysis: We also took advantage of recent price weakness to add Shopify in the IT sector. Shopify is a leading global commerce enablement platform powering more than $250 billion in spend annually. With less than 2% penetration of the global ex-China retail market, the company still has significant runway as a share gainer addressing a very large and fragmented market. While the company recently increased spending on sales and marketing, we see potential for improved growth and margin leverage as it begins to see the fruits of these investments and believe Shopify can sustain strong operating profit and free cash flow growth over the long term.
Palm Valley CM on TrueBlue $TBI US
Thesis: Investing in TrueBlue at this cyclical low offers significant potential upside as the company's cost adjustments and strong liquidity position it for a rebound
Extract from their Q2 letter, link here
Analysis: TrueBlue, a staffer specializing in blue-collar roles, has rarely lost money over its history, but it produced operating losses over the past year and recently experienced its worst quarterly performance ever. Unlike Amdocs, it’s a highly cyclical business. The company has been slow in reducing operating expenses to match falling revenues, but the new management team is now adjusting the cost structure more actively due to the continuing industry pullback. We believe the company can remain near breakeven despite the ongoing demand drought for staffers. Over the last 10 years, the average annual operating profit generated by the firm was $75 million. TrueBlue’s current enterprise value is $280 million. TrueBlue has no debt and significant access to liquidity between its cash resources and credit facility. The company’s stock is also trading below tangible book value. Many investors today are chasing companies that are performing well when the stock price more than reflects it. With TrueBlue, we think we’re getting involved near a cycle low when the price more than reflects temporary challenges.
Night Watch IM on Valaris $VAL US
Thesis: Valaris is poised for multi-bagger returns as offshore drilling demand recovers, making it incredibly cheap on a free cash flow basis
Extract from their Q2 letter, link here
Analysis: Our largest and highest-conviction investment is Valaris (VAL). Valaris is the largest offshore drilling company in the world. As mentioned earlier, the developed world – predominantly Europe – has set out on a crusade to destroy its energy sector. Meanwhile, demand for oil keeps growing at roughly 0.4% global GDP growth, down from 0.8% a decade ago. This demand gets fulfilled by production growth in Offshore Brazil and Western Africa, with some growth coming out of the Middle East as well. Fortunately for VAL, these are all offshore regions which require their rigs to drill wells. Offshore oil projects are generally part of very long-term plans. They should all be economically viable as long as oil stays above $50 or $60 per barrel. And offshore even has the lowest carbon footprint of all oil & gas projects. Oil & gas have been in a downcycle since 2014. When the price of oil collapsed in 2014, many oil rigs were ‘stacked’ in the Canary Islands in hope of better times. No offshore rigs have been ordered since then. As demand for rigs has slowly recovered, all those rigs have returned to work. And while the number of idle rigs has dried up, the day rates those rigs charge their customers has risen steadily. Meanwhile, all the large rig operators except Transocean have filed for bankruptcy at least once. They emerged from bankruptcy with clean balance sheets. We have owned Valaris in funds we managed previously since its emergence from bankruptcy in 2021. At that time, day rates for deepwater rigs were around $200k / day (versus all-in costs of just below $200k / day) and the thesis was that the market would tighten and day rates would go up. 3 years later, the market has tightened and day rates have now breached $500k / day. At those day rates, VAL should generate around $1,650m in free cash flow compared to a market cap around $5b – roughly 3x FCF. VAL just needs a few more quarters to put its entire fleet to work at current day rates. We also believe day rates could rise further from today’s levels. That makes VAL cheap-to-supercheap on a FCF basis. By buying VAL at today’s price, you effectively buy a fleet of deepwater rigs and shallow water Jackups for an equivalent price of $250m per deep water rig. In June, competitor Noble Corp acquired Diamond Offshore for an equivalent price of $350m per rig. Those rigs cost around $750m to build 10 years ago. Given inflation and a higher cost of capital, it should cost anywhere between $1b to 1.5b to build an equivalent rig today. Importantly, no bank or shipyard today would be willing to finance the construction of a new rig given the uncertainty in the industry. After all, a rig is built for a lifetime in excess of 20-30 years. If day rates continue to rise in line with our expectations, we believe Valaris should trade closer in line with its replacement cost, which is 4x to 6x the current share price. Add a few years of FCF generation, and VAL is setting up to be a multi-bagger. Our conviction stems from the simplicity of this thesis. We only have to look at Tidewater’s recent performance to see what happens when FCF generation starts to really get going. In fact, we believe that most Tidewater investors will gladly change their position for the much cheaper Valaris. Nobody who follows the industry seems to dispute the FCF generation potential of VAL. However, the market seems to be waiting for the actual inflection in FCF to happen in early 2025. Given the upside we see in this stock, we are happy to be a few quarters early.
Clearbridge on Vertiv $VRT US
Thesis: Vertiv stands to benefit from the growing demand for data centers and AI GPUs, offering significant potential for margin expansion
Extract from their Q2 letter, link here
Analysis: The largest new addition of the three, Vertiv, has key offerings in power and thermal management designed to power, cool, deploy, secure and maintain electronics that process, store and transmit data. The company generates the majority of its revenue from the data center end market, which we believe should benefit from continued spending growth supported in part by the rise in power requirements of next-generation AI graphic processing units (GPUs). The company is nicely profitable today though we see room for further margin expansion ahead.
REQ on Lifco $LIFCO B SS
Thesis: Lifco’s decentralized business model and strong cash flow generation position it for continued growth and high returns on capital, making it a compelling long-term investment
Extract from their Q2 letter, link here
Analysis: In June, we joined the Business Breakdown podcast, where we presented one of our core holdings, Lifco. You can find the link to the podcast here and the transcript here. Lifco is a USD 11bn market cap Swedish high-performing conglomerate that invests in primarily private family-owned businesses in perpetuity. Revenues are USD 2.5bn with an EBITA margin of 23%. The company has demonstrated an extraordinary FCF per share CAGR of 25% and a total share return of 14x since the IPO in 2014. Carl Bennet, a Swedish industrialist, is the largest owner, holding 68.9% of the votes and 50.2% of the capital. Bennet has a successful track record of building Swedish industrial companies, and the former CEO Fredrik Karlsson played a crucial role in developing Lifco into its present form during his tenure from 1998 to 2019. During his tenure as CEO, Fredrik Karlsson compounded earnings by 100x. After a bonus disagreement in 2019 between Fredrik Karlsson and Carl Bennet, the current CEO, Per Waldemarson took the helm of Lifco. One of our team members was standing in the elevator on his way up to Fredrik Karlsson the day he left the company, and it was announced that Per would be the new CEO. Shares of Lifco fell 8% on that day, and while one of our team members was in Fredrik’s room, he called his broker and told him to buy Lifco shares, and he has not sold since. That tells a lot about the Lifco culture and the knowledge around the system's robustness when the CEO who left bought even more shares. Per has been employed since 2006, starting as the Managing Director for Brokk and later becoming head of Dental and ultimately CEO in 2019. Since Per Waldemarson took the helm of Lifco, the share price has performed 280%, outperforming the general market by almost 200%. Per has brought structure and scaled the organization, preparing Lifco for future growth opportunities without changing the overall strategy or culture of the company. Lifco is also one of the most decentralized businesses we have encountered, with three people at HQ and only a handful of people on finance functions, in addition to 15 group managers who drive the business forward. Lifco is so decentralized that the CEO has no secretary or assistant, and the last time we visited the company, the CEO made us coffee. Lifco’s business model is to acquire and develop market-leading companies with robust financial performance and strong cash flow generation. They do that by focusing on companies within small niches with high pricing power and, thus, high margins. The company emphasizes simplicity and minimal bureaucracy through a highly decentralized organizational structure where MD’s of all 235 subsidiaries have full P&L responsibility. The group thrives through its unique performance culture, where leaders are incentivized to grow profits yearly, but only if they generate an attractive return on capital. The group is divided into three business areas: Dental (25% of sales), Demolition & Tools (28%), and System Solutions (48%). Through the business area Dental, Lifco is Northern and Central Europe’s leading dental materials and equipment distributor and manufacturer. Demolition & Tools develops, produces, sells, and distributes remote-controlled demolition machines through its subsidiary Brokk and various tools and accessories for cranes and excavators through the company Kinshofer. Systems Solutions is a sector and industry-agnostic business area that comprises multiple highly niched and market-leading businesses that deliver B2B solutions. A fundamental part of their business is to drive organic profit growth. The incentive structures are built upon profit growth each year with an implicit return on capital metric. For example, one of the CFOs in one of the subsidiaries we talked to told us that all account receivables older than 30 days were written down to zero at reporting. In other words, you make sure, as a CFO, that clients pay their bills. Lifco has a strong cash flow generation with FCF/Net income of over 100%, contributing to the ability to grow through acquisitions. Lifco has since 2006 deployed SEK 21bn in acquisitions and generated an incremental return on capital of more than 20%. 60% of the market cap since the IPO has been paid out in dividends, further demonstrating the strong cash flow generation of the business. Lifco is unique because it knows how to run a distribution business, scale and grow sales globally, and run small niche businesses. Lifco leverages these strengths by sharing knowledge between divisions through its group managers and Boards in the subsidiaries, where directors can have Board responsibilities across divisions, making the group even more robust.
Protean Funds on Norva24 $NORVA SS
Thesis: Norva24 is misunderstood by the market, but its leading position in essential UIM services and strategic growth opportunities present a compelling case for investment
Extract from their Q2 letter, link here
Analysis: During June, we initiated a position in Norva24. As the leading Northern European provider of underground infrastructure maintenance (UIM) services to municipalities, real estate operators, construction companies, and industrial companies. That’s business English for ‘sh*t management’. The services Norva provides are typically necessary and can, at most, be postponed only temporarily. Demand is consistently growing on the back of ageing sewerage systems (in some markets, sewerage pipes are 40 years old on average, versus a normal expected lifetime of 20 years) with leakage increasing. This is further supported by regulation and climate change. Markets are growing like clockwork in the mid-single digit region, regardless of the economic environment, and is being consolidated from local family-run businesses to regional and decentralised densification-plays. So why do the chaps at Protean consider Norva a misunderstood case? Operating a service-specific fleet consisting of 1,100 vehicles, of which many are heavy and cost north of SEK 3m per vehicle requires you to have reasonably deep pockets and good customer relationships from the get-go to be profitable as a new entrant. Density is key in this business as somewhere around 55% of the cost is fixed in any given route (vehicle/depreciation, fuel, operator, overhead). Driving utilisation within a route is paramount for margins. Utilisation hinges on customer relationships. And as such you end up in a hen or the egg-issue. Deep-pocketed players lack customer relationships. Shallow-pocketed players (e.g. ex-Norva employees looking to set up a business of their own; yes, I am looking at you, Consultancies and Installers) lack the funds. This is not a business equated to providing pure installation services based on ad hoc demand or project-based orders, it requires capital and, most importantly, fingerspitzengefühl in route planning, relationship building, and capabilities. Habitual pushbacks we have encountered include that it is 1) it remains PE-owned; 2) it is Norway-domiciled, Swedish-listed and small/obscure enough for anyone to decide not to have a view; 3) the financial structure is complex with mostly leased vehicles (and we all know what that means under an obscure IFRS 16-regime). We argue there are similarities between our raison d’être and Norva’s financial sponsor (who surely will exit at some point, but such are markets), making it a comparatively good sponsor-owner. Moreover, the Norwegian domicile but Swedish listing stems from two simple facts: 1) Norway is the best Nordic market for UIM and is also the market where Norva started, and 2) there are not an abundance of peers in Norway whereas there are arguable comparable companies in Sweden.
Protean Funds on Truecaller $TRUE B SS
Thesis: Truecaller’s addition of insurance to its Premium package could be the transformative feature needed to drive subscription growth, offering significant upside potential
Extract from their Q2 letter, link here
Analysis: During June, we have upped our position in Truecaller. What elapsed during the final days of the months are very telling as to why we argue Truecaller is just habitually pushed back on by everyone and everybody. Since the company started monetising, it has been looking for a killer feature that will drive uptake of its consumer-facing subscription product Truecaller Premium. The features included in the package have so far been too narrow. And hopes of a diminished dependence of advertising revenues have not been high. We were thus surprised to see the lacklustre market reaction to the announcement of an insurance being included in the subscription at an unchanged price. This insures Truecaller Premium users in case of fraud in India. The average subscriber pays less than 1 USD/month for this service. Here’s the beauty of it; Truecaller includes this in the existing Premium package at no change in prices, pays the premium to the insurance company but bears no other responsibility towards either party. Unsurprisingly, Truecaller raised prices for its packages earlier this year – we think this was proactively to cover for the incurred insurance premium. Effectively this also means that the “only” risk Truecaller faces from this is if claims are higher than implied by the price paid for the insurance, in which case premiums will come up (which could be mitigated by more price hikes of Truecaller Premium). And suddenly, a potential killer feature is launched. Who would not want to insure themselves and their family members against fraud? Is it a sure bet that this will make subscription penetration take off from current close to 0.5% of the user base? No. But the risk is non-zero, in fact we think it is reasonably good, that this could be the feature we have been looking for. And the share barely budged. No analyst mentioned it, no sales desk sent an IB on it, no fellow investor we have spoken to recognised it. Radio silence. Mr Misunderstood on full display, again… We bought more on the day of the announcement.
Hvaler Invest on Crayon Group Holding $CRAYN NO
Thesis: Crayon Group Holding, driven by strong cash flow and margins, presents a compelling investment with significant growth potential
Extract from their Q2 letter, link here
Analysis: New target price 242 driven by Cash flow and margins Hvaler’s target price at about 100 NOK above consensus is driven by our strong growth expectations as well as margin development. We do not however model with growth exceeding what Crayon has delivered historically (we are below), and our margin expectations is based on continued strong margins in the licensing area, and that the consulting side will turn back to profitability (this is an area we know well). The recent performance in terms of cash flow is also very impressive and is in our view a clear indication that they will return to their historically good track record for cash collection. Cash flow was an important argument for the “short case” that some investors believed in (they are gradually giving up as we speak), which should be dead and buried soon.
Ennismore on abrdn European Logistics Income $AELI LN
Thesis: ASLI presents a unique opportunity with its strategic wind-down plan to eliminate NAV discount, promising a 30% upside by 2025 through asset sales and returning cash to shareholders
Extract from their Q2 letter, link here
Analysis: abrdn European Logistics Income Fund PLC (“ASLI”) is a GBP 250m market capitalised closed-end fund which owns 25 mid-box logistics sites across several European countries, with a concentration in Spain and the Netherlands. What attracted our attention to this investment opportunity was the fact that, after a 6-month strategic review, ASLI has decided to wind down. We are confident this will allow management to eliminate ASLI’s 22% discount to dividend-adjusted net asset value (“NAV”) by selling the properties and returning the cash to the shareholders. Now that the board’s proposal of an orderly wind-down was approved on 24th June and given ASLI’s modern locations with strong sustainability ratings and high-quality tenants such as Amazon, DHL and Dachser, we believe shareholders can achieve 30% upside to December 2025. ASLI floated in 2019 and typically was priced at NAV until interest rates began rising in 2022, leading to the fund trading below book value. Such discounts are currently exceedingly common across closed-end funds, but without a concrete strategy to close the gap, for example through a large buyback plan, the discount can persist indefinitely. We believe several reasons contribute to the discount in ASLI, including the fund’s illiquidity, lack of sell-side coverage, and a high cost base versus peers. Alongside this, the timing of property asset disposals is obviously hard to predict. However, these structural factors for mispricing are part of the reason our interest is piqued whenever a closed-end fund initiates a strategic review, a trend increasingly prevalent on the London Stock Exchange. Due to ASLI’s focus on an area of structural growth, with high demand for logistics sites, we are confident that they will be in a good position with regards to both price and speed of disposals. A wind-down, by selling properties and returning the cash to shareholders quarterly, allows the shareholders to realise the full value of the assets they own. We believe NAV is more than an achievable price for the wind-down. Firstly, we are encouraged by the eleven offers received by the board during the strategic review process. Although not all bids were for the entirety of the assets, we believe this demonstrates the attractiveness of ASLI’s sites, and we think a piecemeal wind-down will attract further bidders who are interested in specific assets. We believe ASLI’s adjusted net initial yield lies between 5.5% and 6%, and the fact that recent European transactions have occurred at around 5% gives us confidence in the property values. Our adjustments are based on vacancies and estimated year-to-date rental growth of 2%, as leases are index-linked, allowing ASLI to pass through price increases more easily. Moreover, we think that service charge, which is currently circa 20% of total sales, is high compared to a set of listed peers. We believe new owners could potentially lower service charge as a percentage of total sales by 10 percentage points, and correspondingly increase rental revenue. Finally, ASLI’s two sales over the last 14 months have come at, or above, NAV. While we believe the one-of-a-kind nature of property makes ASLI’s NAV difficult to gauge, we also think this is one of the reasons the opportunity exists, and we are convinced the large discount to NAV provides a strong margin of safety here. Furthermore, the strategic review process has allowed numerous parties to become familiar with ASLI’s holdings already, and therefore could lead to a flurry of deals over the next six to twelve months, shortening the timeframe in which ASLI can return cash to shareholders. Additionally, we are encouraged that the Chairman of the board seems aligned with shareholder interests, given he owns almost twice his yearly estimated post-tax director’s fee in ASLI stock - a great incentive for timely disposals. Finally, we are comfortable with ASLI’s loan to value of 38% in a context of a strong asset base, structural growth drivers stemming from the continuous expansion of ecommerce, and an active sales process. At the current share price of 60p, we believe the market is overlooking a compelling low-risk special situation. We see around 30% upside to December 2025. Furthermore, we expect management will sell down roughly three quarters of the properties and return the related cash over the next year, so our rate of return is more attractive than the nominal upside implies.
Ennismore on Admiral Group $ADM LN
Thesis: Admiral is poised for significant growth due to its superior management of the insurance cycle, robust financial metrics, and accelerated policy growth, making it a strong buy despite market undervaluation
Extract from their Q2 letter, link here
Analysis: We last wrote about Admiral in late 2022. However, we felt it worth explaining why, as of early July, we have made it our largest position. Refreshing that discussion briefly: our argument was that whilst a sharp, unexpected uptick in inflation is horrible for insurers (as the revenue they receive upfront may not cover their ballooning claims costs which arise in the future), it is a short-term negative for the industry that would end up proving to be a longer-term positive for the best operator. Admiral seemed likely to manage the cycle better than its peers. An extreme cycle like this one would be likely to prompt prices to overshoot to the upside as companies sought to rebuild their balance sheets, providing healthy margins in due course. And with its operating margins in the 20s vs. peers mostly in single digits, more capital-efficient balance sheet resulting in average ROE of around 50% compared to peers of 10-15% on a good day, and excellence in pricing and risk selection, Admiral would be uniquely well placed to grow volumes into the attractive environment that would result, with the recovery from the inflation shock likely to provide a couple of bonanza years. The process is not complete, but we have no reason to materially change our view thus far. The cycle has played out a little slower, but even more sharply, than we expected. Prices have risen by over 50% from the trough through Q1 2024, according to the comprehensive ABI Motor Insurance Tracker (and by significantly more than using other price indices such as Confused or the ONS). We anticipated volume growth and strong margins in 2023. In fact, Admiral continued to shed policies in H1 2023, and only began to grow, modestly, in H2 2023. We have strong evidence (we unfortunately cannot share the source) that this growth has continued and accelerated. Since December we believe Admiral has been growing extremely rapidly: we expect it to add well over 10% to its UK motor policy count in just the first half of 2024. This is much faster than anticipated by the sell side. Whilst the stock has done reasonably well since our September 2022 write-up (total return is +46% from then to the end of June), candidly we expected more. Taking a longer perspective: Admiral shares are 11% higher than at the end of 2019 (the total return is materially more of course). Yet we expect the total premiums written in 2024 to be almost double the 2019 level. And we see little to no erosion of its underlying margin structure. On our analysis, even if we ignore everything except the UK motor operations, the stock is not trading much above 10x earnings. The company is now approaching 20% market share of its core UK motor market and has grown total premiums at roughly 15% annualised over the 5 and 10 years to our estimates of 2024 numbers. It’s difficult to know what the ceiling for Admiral’s market share opportunity is. We note however that Direct Line once commanded around 35% of the market before its fall from grace. Progressive, the largest US motor insurer, has a very similar competitive position in the US and a similar five and ten year growth track record. It is a much lower return on equity business because it lacks Admiral’s reinsurance leverage. Progressive is valued at almost 20x run-rate earnings and its stock has almost tripled since the end of 2019. Aside from highlighting that we should have invested in Progressive over the last five years, rather than Admiral, this suggests to us that Admiral is currently severely undervalued. Since the end of June we have made Admiral our largest long position. It is unusual for us to believe we have a material and reliable edge on predicting a company’s volumes for an upcoming earnings report. The last time this happened also gives us pause: we wrote up Wise in our June 2022 letter. As we noted at the time, despite being contrarian and right on the top line owing to our proprietary data, the stock sold off 20% on its FY2022 results announcement in June following a cost warning. However, it then more than doubled in the next three months and contributed almost 5% to the Fund. Given our evidence that first half results should sharply exceed sell side expectations, we have added some call option exposure to our position to increase our leverage to a strong share price response to results in August. Don’t expect a doubling of the share price in Q3, however!
Platinium AM on London Stock Exchange $LSEG LN
Thesis: LSEG’s powerful virtuous cycle business model and growth vectors, including a promising Microsoft partnership, make it a compelling investment
Extract from their Q2 letter, link here
Analysis: Thanks to its unique mix of businesses – a combination of data and trading platforms – LSEG has created a virtuous cycle business model. Its customers rely on its data platforms – and increasingly on AI-driven quantitative analysis – to underpin their trading decisions in equity, foreign exchange and fixed income markets. They then trade those assets on LSEG trading platforms - creating ever more valuable data. Then pay for that data to drive their next sequence of trading decisions. It’s an incredibly powerful business model and it underpins our belief that LSEG can grow revenue consistently year on year. We were able to buy into LSEG at a discount when the company was swallowing the Refinitiv acquisition. Our view was that the deal would transform LSEG into a leading global financial data provider – however the rest of the market didn’t see this potential. Today, the company has many vectors for growth and is market-leader in many of its segments. We see the Microsoft partnership as a very exciting call option that could accelerate its growth, yet that potential isn’t yet built into the share price. LSEG is held in Platinum’s International and European Funds and in the Platinum Global (Long Only) Fund.
Vltava Fund on OSB Group $OSB LN
Thesis: OSB Group offers a compelling long-term investment with a 7% dividend yield and significant upside, trading at a discount due to being overlooked by passive investors
Extract from their Q2 letter, link here
Analysis: Shares of the British OSB Group constitute a new addition to Vltava Fund’s portfolio. This is a smaller and very specialised bank that provides mortgages to professional lessors of predominantly residential (buy-to-let) properties. It has a long tradition and a strong position in this market segment. Tax changes in the UK since 2016 have made it easier to own residential property through an LTD company, and especially if the owner holds multiple properties. Traditional large banks have more or less pulled back from lending to professional “buy-to-let” (or BTL) entrepreneurs, leaving the market opportunity to smaller and specialist institutions such as OSB. The opinions occasionally expressed suggesting that the BTL business is risky are, in our opinion, not grounded in reality. We think BTL is less risky than lending against properties that are occupied by their owners. OSB’s long-term results demonstrate this. Allowances for bad loans are typically in the lower tenths of 1 percent (ca 0.25%). This is a very low number and indicates low-risk lending. In addition, loans are pledged against properties with an average LTV (loan-to-value) ratio of 64%. OSB is a bank whose loans are fully funded by deposits on the liabilities side and is not dependent on the availability of bond financing or the interbank market. OSB is remarkably efficient, having a cost/income ratio of around 30% that almost any other bank would envy. Long-term ROTE (return on tangible equity) is above 15% and ROE (return on equity) is more or less the same. The bank regularly pays a large dividend and at the same time buys back its own shares. For such an established and quality business, we would not expect it to trade at a price below book value and with a P/E near 5. The dividend yield is 7%. This is perhaps due to the fact that last year’s profits dropped because of specific accounting rules requiring that earnings reflect negative expectations for client behaviour caused by the rapid rise in interest rates. This does not, however, change the long-term attractiveness of the business and so this year should mark a return to normal. How is it possible that such an appealing stock is trading in the market at such a discounted price? Because it is almost completely ignored by most investors. The investments of passive investors (i.e. most of the money in the markets) are placed elsewhere. OSB is a smaller bank, a so-called small cap. Passive money tends to avoid these. It also mostly avoids banking as a sector and, finally, it has shunned UK equities in recent years. British markets have been among the least sought after markets for some time. Taken together, this is almost a perfect storm. But for us, it’s absolutely ideal and we can’t help but reiterate that we hope the prevalence of passively invested money in the markets continues as long as possible. Banks are relatively straightforward to value, and a well-performing bank can also be a very good long-term investment. In fact, capital accumulation occurs relatively quickly in banks and compounding of interest can run similarly briskly there. In looking at a bank’s balance sheet, one sees that it consists almost entirely of financial items. A bank has no factories, no production lines, no large inventories, no big capital expenditures, no large research and development expenditures, and so on. A bank’s profits are almost purely credited to its equity. This, then, means they can grow rapidly at high ROEs. The long-term return to an investor in bank shares (when reinvesting dividends) is approximately equal to the bank’s long-term average ROE while holding constant the price-to-book (P/B) multiple. OSB’s long-term ROE can be expected to be around 17%, and as, as the bank is now trading at 0.8 times book value, the stock’s long-term return will most probably exceed the long-term ROE. With its ROE of 17%, we see a reasonable P/B value for the bank somewhere above 1.25 (given that it is a smaller bank). Book value growth per share should also be supported by share buybacks, which are now being made below that price level. OSB’s shares are very cheap, and the expected long-term return from holding them (inclusive of reinvested dividends) could be around 20% p.a. Much more that can be expected from the stock market and that is why the shares find themselves in our portfolio.
Ennismore on Ryanair $RYA LN
Thesis: Ryanair's aggressive cost management, fleet expansion, and market share gains position it for long-term growth, offering substantial upside despite current market mispricing
Extract from their Q2 letter, link here
Analysis: We’ve also written about Ryanair in the past. We argued that the airline has material cost advantages deriving from its low-priced aircraft purchases and more productive use of operational staff, but particularly from its higher fleet utilisation and its airport costs, which we argued were its most sustainable source of advantage. Given the scale and density of its network, its marketing power, and its low cost base, Ryanair is uniquely able to drive traffic to secondary airports and thus able to command lower fees with those partners. We believed that investors were overly focused on the potential erosion of the staff productivity advantage as Ryanair adopted collective bargaining with its flying staff, and that the historically low valuation failed to reflect the growth outlook. We met the company’s chief legal officer at the Ryanair headquarters in Dublin recently. As a 20 year veteran of the business, he made a compelling case that the paranoid, cost-focused culture of the business endures despite its very different scale and market position compared to when he joined. The management team is unusually stable. He noted a number of occasions where Ryanair employees have left to join other airlines and then returned having found it difficult to instil the Ryanair approach elsewhere. Somewhat similarly to Admiral, the core thesis on Ryanair today is that it is a much bigger business, and arguably a better positioned one, than it was before Covid, but the market is not reflecting that. The shares have risen a paltry 13% since the end of 2019, yet the fleet is 35% larger (than FY 2020 ending in March), average fares are 35% higher and ancillary revenues have increased by 17% per passenger. Group revenue is almost 60% higher than in FY2020. The industry capacity environment is tighter, and the future outlook for new plane deliveries much more constrained thanks to supply chain issues, than it was in the past. Ryanair has gained share in every one of its major markets since before Covid. Meanwhile Easyjet has stayed in its core of slot-constrained large city airports as well as diversifying into package holidays, and Wizz has pivoted to the middle east – both shying away from direct competition with their Irish peer. After communicating a positive outlook for the summer of 2024 earlier in the year, the company’s CEO Michael O’Leary noted in early May that fares were weaker than expected. This has disturbed investors. Management confirmed the trend at its FY results in May and the company repeated its commentary when we spoke to them at the end of June. It is unable to provide a specific explanation, but notes the weakness is widespread geographically. The most likely explanations are wider pressure on consumer discretionary budgets, and a waning of the wanderlust-at-any-price that airlines benefited from as consumers emerged from Covid restrictions. Other airlines have reported similar dynamics: Jet2 noted on 24 April “recently, pricing has been more competitive, particularly for April and May departures”, whilst on 4 July Norwegian Air Shuttle highlighted “softer traffic demand during the second quarter (of 2024), with a contraction in both load factor and yield compared to last year” as one of the drivers of its profit warning. Ryanair’s share price has declined by 25% from its peak in April to the end of June, which means the enterprise value has declined by around 30%. We didn’t forecast this summer’s apparent fare weakness. Neither can we provide a wholly satisfying or reassuring explanation of it. But we are happy to profit from the market’s reaction to it. Our belief is that either this is a minor wobble that will eventually prove to be noise, or, if it is the emerging sign of something more serious (such as a recession), Ryanair will be able to navigate this period better than its competitors, and emerge even stronger, as it has in previous crises. Ryanair’s profitability is highly variable: this reflects the cyclicality of demand (relative to supply) and the volatility of fuel prices, which are the company’s largest cost line. However, the long-term average net income per passenger is around EUR 10. This reflects a much higher margin than other European short-haul airlines as a result of the substantial cost advantage the Irish airline enjoys. Even excluding the heavily Covid-affected years, Ryanair’s average net income margin of 17% was c. 10% points higher than the other main European airlines. We believe the cost gap has widened since pre-Covid, thanks to Ryanair’s aggressive negotiations with Boeing and its airport partners, so if anything, we would expect the profit per passenger to trend upwards (the cost gap to peers is the key constraint on medium term profitability). And it will be difficult for peers to make much headway on closing this gap any time soon given the duration of order books on narrow body planes for the world’s two relevant aircraft manufacturers. Given its aircraft delivery schedule, Ryanair should reach 230m passengers in FY 2027. The range of outcomes around this projection is not very wide. Using the EUR 10 per passenger profit figure, the base case post-tax earnings outlook for Ryanair in three years’ time is EUR 2.3 billion. The stock currently trades with an enterprise value of just over EUR 17 billion. The EV could easily be twice that in three years’ time, and on a materially smaller share count (the first buyback since FY2020 was announced alongside FY results in May). In addition, we estimate the company is now valued below the replacement cost of its fleet. Ryanair may not offer the most comfortable journey, but our buying criteria is not focused on comfort. Like its passengers, we are focused on value, and looking through near term pricing wobbles, we think the stock is unambiguously cheap.
Gehlen Brautigam on Watches of Switzerland Group $WOSG LN
Thesis: Watches of Switzerland Group’s strategic relationships and high-margin business model present a significant upside, despite reliance on key supplier Rolex
Extract from their Q2 letter, link here
Analysis: Today, WOSG presents a compelling investment opportunity due to its strong market position, strategic brand relationships, and significant growth potential. The company’s business model, focused on high-margin products and exceptional customer experiences, is supported by substantial high-yielding capital investments aimed at long-term EPS growth. Despite potential macroeconomic sensitivities, the high-quality, and strong cash generation of WOSG’s business positions it for significant upside over the medium- to long-term. The primary concern affecting our investment case is the significant risk associated with its key supplier, Rolex. Therefore, it is imperative for management to uphold its exceptionally strong and uniquely personal relationship with Rolex’s management. Considering these factors, along with Rolex’s deeply conservative and trust-based culture, we find ourselves willing to accept this risk.
SVN Capital on Dr Lal PathLabs Limited $LALP IN
Thesis: Dr Lal PathLabs leverages India's growing healthcare sector, with impressive 15% revenue growth and 17% cash return on capital, making it a strong player in healthcare diagnostics
Extract from their Q2 letter, link here
Analysis: Dr Lal PathLabs Limited (NSEI ; ~$2.8 billion market cap), which operates more than 280 clinical labs for healthcare-related diagnostics in India. With increasing prosperity comes health-related issues. Healthcare services is a large and growing opportunity; India currently spends only 3% of its GDP on health versus 11% globally. Average revenue growth over the last 10 years has been ~15%, and the stock price has compounded at ~16% since the company went public in 2016. Founded more than 75 years ago, this is also an owner-operated company with net cash on its balance sheet, that has generated ~17% cash return on capital over the last 10 years.
SVN Capital on Triveni Turbine Limited $TRIV IN
Thesis: Triveni Turbine has maintained a top-two global position in the steam turbine market, consistently generating over 20% cash return on capital, and is poised for further growth with accelerating post-pandemic revenue
Extract from their Q2 letter, link here
Analysis: Triveni Turbine Limited (NSEI ; ~$2.3 billion market cap), based in Bengaluru, manufactures power-generating equipment in India, specifically the steam turbine market in the below-100-MW segment. Steam turbines are a relatively flat market, and Triveni maintains a top-two position on a global scale. More than 30% of demand comes from industrial and agricultural areas, which are growing at a rapid pace. Average revenue growth over the last 10 years has been ~14%, and the stock has compounded at ~20% over the period. Revenue growth has accelerated tremendously in the post-pandemic years. It is an owner-operated company with net cash on its balance sheet, and it has consistently generated more than 20% cash return on capital over the last 10 years.
Protean Funds on Metsä Board $METSB FH
Thesis: Metsä Board’s increased capacity and strategic decisions position it for a rebound in earnings, making it an attractive investment opportunity
Extract from their Q2 letter, link here
Analysis: Metsä Board is a Finnish producer of fibre-based packaging in a range of fields, including food and retail. The 51% ownership by the Metsäliitto Cooperative has always been a conundrum in this stock. Are the ultimate interests of Finnish forest owners the same as the external owners of Metsä Board? Would the cooperative enforce investment decisions where the ultimate objective is to increase the price of wood domestically in Finland? As such, the recent decision to not proceed with the potential >EUR1bn Koskinen project was a relief. Metsä has had its recent struggles (post-pandemic destocking & Finnish strikes & an explosion in their main pulp plant) which has overshadowed the completion of some other, more sensible investment projects. Since their earnings peak in 2022, Metsä has increased their capacity in paper board by 25% and their net long pulp position has increased to 1m tonnes. The normalized earnings capacity appears underestimated, and with momentum in prices this creates a good set-up.
Alphyn Capital on Terravest Industries $TVK CN
Thesis: Terravest Industries, a profitable acquirer in the storage tank and HVAC sectors, offers significant growth and returns potential driven by strategic acquisitions and efficient operations
Extract from their Q2 letter, link here
Terravest is a C$1.3bn market capitalization company based in Alberta, Canada, rolling up storage tank (propane, fuel, water) and boiler/furnace companies, run by a well-incentivized management team focused on good capital allocation. Terravest trades at a reasonable mid-teens free cash flow valuation, unlike many well-known serial acquirers.
The storage tank industry is surprisingly profitable, offering high returns on capital and proving to be a better business than one might have expected. Terravest operates four divisions:
• Compressed gas equipment (e.g., LPG and propane tanks), essential for rural home and commercial heating and agriculture (crop drying, etc.). 30% of sales and 24% of EBITDA at 16% margins.
• HVAC (industrial, commercial, and residential fuel tanks, wastewater tanks, furnaces, and boilers). 29% of sales, 30% of EBITDA at 20% margins.
• Processing equipment (wellhead processing equipment) near natural gas and biogas production facilities. 18% of sales and 13% of EBITDA at 14% margins.
• Service (water management) servicing and close to LNG producers. 24% of sales, 33% of EBITDA at 27% margins.
The company has a strong history of growth through acquisitions. It currently operates 25 businesses and has made 20 acquisitions since 2013. Terravest typically uses debt to fund acquisitions, primarily of mom-and-pop companies, bought at an average 5.5x FCF multiple, then uses the cash flows of the acquired businesses to pay down debt.
Following the acquisition, Terravest focuses on increasing profits by driving revenues through price increases and reducing costs, resulting in an effective post-acquisition multiple decrease from 5.5x to 4.1x. Terravest has generated a 21% average annual ROIC since 2013 and an EBITDA growth of 28% annually over the same period. Terravest operates a scalable, decentralized business model with centralized capital allocation and empowered operating company managers.
An example of improved unit economics is as follows. On a 60k gallon tank, Terravest improves gross margins from 20% to 34%. Terravest has a significant advantage with steel costs; it can buy in enough volume to directly source steel from mills, saving up to 15% on the price of steel, which constitutes 55% of the cost of goods sold. Terravest also has the working capital to buy steel in bulk and stock it in inventory, a financial capability smaller companies lack. As a result, Terravest can build customer orders in 10-14 weeks compared to 20-26 weeks for smaller companies, allowing it to charge a 5-10% premium. Finally, it saves 5-10% on labor costs.
There is some risk to cyclicality, given exposure to energy markets. Additionally, there is a perception that the propane markets are in terminal decline, being the target of environmental regulators. However, much of the propane is used for residential and commercial heating in rural areas with no good gas pipeline infrastructure. Therefore, Terravest’s delivery tanks are “critical infrastructure.” According to the EIA, propane consumption in the US has been stable for 20 years. With boilers in the HVAC business, Terravest mainly operates older style standard efficiency cast iron boilers, which are at risk of being regulated out of existence by continually updated environmental regulations. While true, this again is a slow decline. Demand for boilers is driven by new construction, where the patchwork of differing state and city regulations will likely take time to seriously dent revenues and replacement cycles, where the incremental cost to a homeowner to upgrade existing piping to accommodate a newer style boiler increases switching costs.
In the meantime, the company can continue deploying its cash flow at high rates into attractive adjacent end markets such as biogas, LNG hydrogen markets, and chemical tanks, many of which have a significant overlap in equipment as its petroleum markets. Terravest has a long runway for growth from a large pool of potential acquisitions and a strong operator/capital allocator team with a CIO with a strong track record and a CEO who is only in his early 40s. Finally, management is highly aligned, owns approximately 25% of the company, takes reasonable compensation, and is set to make themselves generational wealth if they continue to compound the business (as they have for the last decade).
Terravest is a smaller, less well-known company with a minimal investor relations presence. The price recently ran up as several value investors published well-thought-out writeups online. I initiated a starter position, intending to invest more in the future.
Here are some additional Q2 letters :
Everything you read here is for information purposes only and is not an investment recommendation.
This is really nice, thanks!