TVK.TO - Terravest Industries

[spartan]

There's been some discussion about TerraVest in the past, so I figured it might be beneficial to create a new thread and see what everyone thinks about this.

Guy Gottfried has made several presentations about this company. See here for his most recent talk, given at Ivey on Feb 28, 2019: https://www.youtube.com/watch?v=jjPC6mRiSDM&t=1s

Interesting to note that the prof immediately started asking about the float, insider holdings, etc. as soon as Guy started speaking about it. It's the first presentation I've ever seen where the prof has interjected so early, with such a clear and strong interest..

Diving a little deeper into the company, it seems as though Guy's analysis is very solid. TerraVest is gobbling up a bunch of smaller players and holds an industry leading position in the LPG space. It's a consolidation play. In my opinion, the market is not assigning a large enough multiple. There are so many strong points:

1. Small market cap ($220 Million Canadian) with no analyst coverage.
2. Obscure industry. Favorable to TerraVest's current consolidation strategy.
3. Very large insider holdings (roughly 70%). Skin in the game. Shareholder-friendly management.
4. Proven track record of earnings with potential for upside.
5. Management has proven their skill in capital allocation by virtue of their acquisitions, which are averaging 3.4x EV/pre-tax FCF.
6. Relatively cheap price. Heads I win a lot, tails I lose a little.
7. Strong balance sheet should serve as a cushion.

It seems to be mispriced with a sizable margin of safety. Given Guy's calculations, which seem very reasonable and knowledgeable given his intimate understanding of the company, it is probably undervalued by roughly 60%.

If this isn't bought out soon by a PE firm, I think it has the potential to significantly appreciate within the next year or two as the market realizes how much value is being left on the table. Would love to hear people's thoughts.

[Philbert77]

Thanks for posting Spartan. I like this stock - so much so that I picked up some today.

There is a lot to like here. They have management with skin in the game. They have prudent decision making. They are making sound shareholder friendly moves (paying a dividend, buying back shares, acquisitions).

I would also add that Clarke Inc provides some interesting perspectives in the Investor Reports: http://www.clarkeinc.com/investor.aspx?un=2

From their most recent letter:

"We also believe Terravest is materially undervalued, trading at approximately 7x 2018 EBITDA. We believe Terravest can continue to grow organically and through smart acquisitions; assuming only modest EBITDA growth over last year, Terravest likely trades at or less than 6x EBITDA."

[Philbert77]

Terravest is still killing it and no one cares:

"Sales for the quarter ended March 31, 2019 were $76,159 versus $62,568 for the prior comparable quarter, an increase of 22%. This increase is purely a result of organic growth across the Company’s portfolio of businesses. Sales for the six months ended March 31, 2019 were $155,190 versus $125,171 for the prior comparable period, representing an increase of 24%. This increase was the result of growth through acquisition as MaXfield Group Inc. (“MaXfield”) was acquired on January 1, 2018 and only partially contributed to the prior period, as well as organic growth of 13.5%. Organic growth is calculated as the percentage change in sales for the current period compared to the prior period. In calculating organic growth for acquired companies, management estimates the sales achieved for periods prior to the acquisition by TerraVest. The organic growth in both the quarter and six months is primarily a result of recently added and expanded LPG tank manufacturing lines, as well as an increase in the demand for compressed gas storage and distribution equipment in both Canada and the USA, which is being driven by a strong winter heating season and increased capital investment in NGL infrastructure in Western Canada.

Net Income for the second quarter and six months ended March 31, 2019 was $5,505 and $11,644 versus $1,872 and $7,019 for the prior comparable periods. This represents increases of 194% and 66% respectively. For the quarter, these increases are a result of increased sales activity, as described above, as well as a change in the fair value of derivative instruments and ongoing cost control initiatives. For the six-months, acquisition costs in the prior period related to the Maxfield acquisition also contributed to the increase.

Cash flow from operating activities for the second quarter and six months ended March 31, 2019 were $3,277 and $12,243 versus $227 and $7,693 for the prior comparable periods. This represents increases of 1,344% and 59% respectively. These increases are primarily a result of the reasons explained above.

Year-to-date, the Company has experienced improved results over the prior comparable period. Management expects this trend to continue for the remainder of the fiscal year. The Fuel Containment segment has benefited from a strong winter heating season and continues to see increased demand for its LPG storage and distribution equipment and heating equipment product lines. The situation for the Processing Equipment segment remains mixed as strong demand for NGL storage and distribution equipment is expected to persist throughout the remainder of the fiscal year. However, demand for this segment’s oil and gas processing equipment continues to be stable but faces pricing pressure. The outlook for the Service segment remains challenging as pricing pressure continues to persist despite moderately improving commodity prices."

https://terravestindustries.com/terravest-announces-second-quarter-results-for-fiscal-2019/

[no_free_lunch]

I had to look at this when I saw Gottfried was in.  I like the growth and the stock buybacks.  I like the roll up a fragmented industry story.   I have serious concerns though about the debt.  They have gone from zero debt to $100m or so.  Is that not a concern?

[Philbert77]

What is the concern though? Are you concerned they are over extending themselves? Are you concerned about the interest rate they are paying?

It seems they are using it for decent purposes:

"Financing costs for the second quarter and six months ended March 31, 2019 increased 12% and 24% respectively versus the prior comparable periods. This is a result of increased levels of debt as a result of several growth capital projects and recent substantial issuer bids. "

[no_free_lunch]

I don't know the rate but the interest expense is reasonable given EBITDA or even relative to net earnings.

The issue I have is that it complicates the story.  They have grown but how much of that is a result of gearing up.  How much debt will they take on.  I have to start thinking about these things.

They have bought back shares several times but it seems they have also issued shares.  Their share count was around 20m in 2012, they did a huge buyback down to 13m in 2013, now they are at 18m (20m fully diluted).   So net net shares are basically level.

Earnings have grown but they are chaotic.  I haven't done the work to make all of the adjustments to see how much of that is one time adjustments.  Maybe it evens out.  They have grown earnings  3-4 fold over the last 7 years.  It is just a question of where they were at the cycle in each of those 2 periods. 

I am not saying it is a bad idea.  Gottfried needs to be listened to.  It's just a lot of work, I am still just diving in.

[Stuart D]

Guy Gottfried has made several presentations about this company. See here for his most recent talk, given at Ivey on Feb 28, 2019: https://www.youtube.com/watch?v=jjPC6mRiSDM&t=1s

^Great video, thanks for posting.

[fishwithwings]

I took a quick look at the company.  Here are my $.02
-It seems like the value of the company is dependent on management's execution and acquisitions.  If the market no longer has confidence in their ability, the stock price will likely take a big hit.
-Clarkie Inc. holds 5.39m shares of Terravest and is trading below book value.  This could be an interesting way to play Terravest.
-My impression is that Terravest (to a large extent) is exposed to the O&G industry, therefore a downturn in the industry could spell trouble.
-No catalyst