Description

This is a company run by value investors, for value investors.  It’s the good kind of rollup - seeking out smallish niche manufacturing businesses with low capital intensity.  The results have been and continue to be tremendous, yet this company continues to fly under the radar, with a modestly-levered P/FCF of 5.8-7.6x (using maint capex vs total capex) on my estimates for the FY which ended in September.

All amounts in Canadian Dollars.  â…” of Terravest’s sales are in Canada, the rest are in the U.S.

Terravest is a consolidator of the following niche industries:

• Home heating oil products (mostly storage tanks).  They’re #1 in North America

• Propane, anhydrous ammonia, and NGL transport vehicles & storage vesselss.  They’re #1 in Canada and in the top 3 in the U.S.

• Oil & Gas wellhead processing equipment, in which they’re #1 in Canada.

… and if that’s not exciting, I don’t know what is.

VIC member “crow” posted this name in April of 2018 to the sound of crickets, judging from the lack of any messages.  (He deserved better!) But that’s unsurprising for this company. There’s no sellside coverage. There’s barely any chatter on the Interweb:  https://stockhouse.com/companies/bullboard?symbol=t.tvk   

Maybe mgmt likes it that way: the company doesn’t hold conference calls, and I don’t believe mgmt has ever appeared at an investor conference.  There is no annual report with color photos - the required SEDAR filings are all you get (but they’re all you really need).

Mgmt is just focused on making money.  And it’s not surprising given that insiders own 28% of the shares.  The Chairman, CEO, and Chief Investment Officer all have shareholdings worth many, many times what Terravest pays them in a year.  Additionally, Clarke Inc. owns 31%, and that makes up about 40% of Clarke’s value today. If you’ve ever scrounged for small-cap bargains in Canada, you’re probably familiar with George Armoyan and Clarke Inc.

In fact, Armoyan was instrumental in turning this company around about 8 years ago, and the CEO was a Clarke employee before taking his current job.  I’ll let this slide from Clarke’s investor presentation tell the story:

Since FY2010, revenue has grown at a 24% CAGR, while EPS has grown at a ~60% CAGR.  Back in FY2010, ROE was a pathetic 0.5%, vs 27.9% in the LTM.

Mgmt’s MO is to buy manufacturing businesses with low capital intensity.  They seek out small, fragmented industries with little competition for deals.  The typical seller is a retiring founder or an owner in distress. As such, they’ve been able to consistently buy businesses for low single-digit multiples of pretax income - historically around 1.5-6.0x.  And that’s unlevered. Mgmt typically looks to lever up these deals by around 2x EBITDA, making the levered pretax multiples just silly cheap.

(Terravest also has an oil-field services business that was purchased way back in October 2005, but it’s barely breaking even these days, so it’s not having any impact on those valuation multiples I mentioned.  This is not an area where they’re looking to grow.)

Speaking of capital allocation, these guys are active buyers of their own shares, having spent ~$19M on buybacks from the Dec 2017 quarter through June of this year.  They’ve also spent ~$4.7M repurchasing a convertible bond which is now deep in-the-money (strike is $8.25. With only 11m of principal outstanding, this will likely wind up turning into 1.3M new shares before the 2020 maturity.

Forecast:

Despite rising 29% (plus paying dividends at the rate of $0.40/year) since Crow’s writeup, shares are trading at an even lower multiples today:

LTM revenues as of Crow’s writing were $206.8M vs LTM as of June 30th of 305.2M.  Meanwhile, net income was 10.4M vs 24.5M. A couple acquisitions (Maxfield and Fischer Tanks probably account for ~7.5M of this net income boost, but the rest is all organic.

Catalyst

Company is firing on all cyclinders, so even without multiple expansion you should make money on just FCF/share growth.

Buybacks

Maybe someday mgmt will get out and tell the story.  Maybe some analyst picks up coverage.