Guy Gottfried : TerraVest Capital – An Under-The-Radar Gem

Guy Gottfried’s presentation from the Value Investing Seminar in Italy on TerraVest Capital.

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Background

  • Canadian consolidator of manufacturing businesses in Canada and the US
  • Focuses on small, fragmented industries with little competition for deals
  • Typically buys from retiring or distressed owners

Why is TerraVest Worth Your Attention?

  • Trades at a 12% normalized free cash flow (FCF) yield
    • Receive a double-digit, after-tax FCF coupon that will grow significantly over time
  • Consistent  record  of  acquiring  businesses  at  low-single-digit multiples of pre-tax FCF
    • Long runway for additional transactions in the future
  • Within three years, even a below-market multiple should  justify shareholder returns far in excess of 100%
  • Exceptional management with substantial ownership and insider buying

Why is It So Cheap?

  • Underfollowed: no analyst coverage and no quarterly conference calls
  • Management focused squarely on creating shareholder value; spends virtually no time on investor relations
  • Recently closed acquisitions have yet to contribute to consolidated results
  • Component of business serving energy sector is at cyclical trough and therefore under-earning
  • Underappreciated growth potential; TerraVest still in early stages of consolidation strategy

Acquisition Case Studies

  • A critical component of our thesis rests on TerraVest's ability to make attractive acquisitions over time
  • Actions speak louder than words
  • It is not  enough to have  a well-articulated  strategy –  we need concrete evidence that this strategy can actually be executed
  • With that in mind, let’s examine every deal done by present   management in recent years

Propar Group

  • Bought 90% of Propar in August 2013, remainder in September 2015 for cumulative price of $14mm
  • FCF has grown ~2.5 times since purchase of initial 90%
  • Paid approximately 2.5x current pre-tax FCF and FCF continues to climb

NWP Industries

  • Bought in August 2014 for $12mm
  • FCF has actually stayed flat since the acquisition despite NWP’s industry crashing (produces oil and gas processing equipment)
  • Paid ~4x current pre-tax FCF, achieved during industry trough, and likely 2-3x normalized pre-tax FCF

Signature Truck Systems

  • Bought in April 2015 for US$14mm (net of excess cash)
  • FCF has declined post-acquisition due to warm weather in each of the past two winters
    • Warm winters reduced wear-and-tear of, and consequently replacement demand for, Signature’s propane trucks
  • Paid ~6.5x current pre-tax FCF; difficult to estimate multiple relative  to FCF under normal winter conditions but it should be considerably lower

Gestion Jerico

  • Bought in February 2014 for $54mm
  • FCF has since doubled and is poised for further growth going forward
  • Paid ~3x pre-tax FCF in its largest and most important deal to date

Recent Transactions

  • Three smaller deals from Dec. 4, 2015 to Jan. 1, 2017; paid combined $11mm
  • Motivated sellers: all three companies were capital-constrained (including one in bankruptcy)
  • While these are relatively recent acquisitions, we estimate that TerraVest will end up having paid less than 2x normalized pre-tax FCF for these businesses

See the full presentation below.