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