A few updates across the board

ADF, DNO, Mongolia Growth Group, Técnicas Reunidas and OCI

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A short housekeeing note: we won't be publishing a Toffcap Monday Monitor this week. We're going to take some time off to focus on a few large ongoing projects. But do not worry - it'll be just for a few weeks.

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It's been some time since I provided you with an update on some of the names that we're still following.

ADF Group

I revisited ADF a few months ago and so far the story has not changed.

Next week the company will report Q1 25 results and I’m eager to check on the company’s progress. While Q4 and Q1 are generally seasonally weaker quarters, ADF came out with a banger Q4 24 (FY ending Jan): >24% gross margins and $15.5m ebitda, the latter +200% yoy.

These are very strong results, and while earnings growth was great I was mostly pleased about the revenue progression: $88m revenues in Q4, +72% yoy and the best quarter revenue-wise in FY24. In other words, ADF has been able to generate very strong revenues during the generally seasonally weakest part of the year. This is a very good signal and bodes well for what lies ahead.

The company closed the year off with a record order book and just a few days ago ADF announced another batch of contracts worth $90m.

The total backlog is now at a massive $600m. In combination with the new automation platform running at full speed, this provides for very good visibility for the next few years.

However, the story has changed compared to be past few years but I’m still excited. FY23 and FY24 were the years of automation. ADF needed to execute on its promise of increased efficiencies. And they delivered, with gross margins moving from high single digits into the mid-20s.

FY25 will be different. It’s now time to reap the benefits of this new automation. While I still expect some marginal efficiency improvements, most gains have already been achieved and I don’t expect to see a continued strong gross margin expansion.

It’s now time for top-line growth and cash flow generation. As a reminder, I'm looking for $70m ebitda this year (+25% yoy). This is not a stretch - just annualising H2 23 gets us almost there.

But the backlog has grown strongly and sits now at a record $600m. In combination with the new automation platform running at full speed, this provides for a very good base for further revenue growth.

What is possible? Well, ADF already hit $500m revenues once in the past and that was before the new automation platform. This compares to $331m last year. In other words, it could go much higher.

As a last note, I want to highlight something in the recent press release regarding the new orders. The CEO stated a.o. that ADF has the means and “ample capacity” to deliver the projects in the backlog.

IF ADF indeed has more capacity, that means there’s also much more growth potential. Needles to say, I remain excited about how this company will continue to execute.

DNO

It's still early but it's good to see DNO moving in line with the thesis. DNO was out with a very good set of results, showing continued progress. The shares are up >20% since our write-up, but I think much more is to come.

While the potential (and probable imo) reopening of the Iraq-Turkey pipeline provides attractive optionality, which would effectively double revenues, that is not the (whole) thesis.

DNO decided in 2019 to accelerate its pivot away from Kurdistan towards the North Sea. The company has been successful so far and I believe that this pivot is still underestimated and very much undervalued. An eventual reopening opening of the pipeline is just gravy.

The recent results once again underlined this thesis. Uncertainty remains regarding a potential oil-export pipeline resumption, but DNO continues to improve its operations. Q1 24 production was at the highest level since the March 2023 pipeline shutdown and Tawke is now nearly fully restored.

What’s more, DNO has been able to realise higher prices from its local sales (around $40, up from the low $30s). This helped the company to a strong beat on Q1 ebitda and bodes well for continued progress this year. And this is all on the back of a continued progress in the North Sea - again, an underestimated pivot.

So while a potential rerating on the back of a reopening of the pipeline is very interesting and welcome, it’s not necessary for DNO to be a successful investment. Over time, I expect the market to apply a higher valuation as the company’s asset exposure to this region continues to grow.

Mongolia Growth Group

MGG is nice odd little company that I wrote up in September of last year. While the stock hasn’t moved a lot (c. +16% since), the underlying thesis is playing out in line with expectations.

I won’t rehash everything, but as a reminder the story is that MGG either has to buy an operating company or liquidate the portfolio. It would be cool and very interesting to see Harris Kupperman acquire something, though I still expect the company will liquidate.

MGG has made strong progress on that front by liquidating most of its Mongolian real estate assets. As a result, MGG’s book is now very liquid. As of Q1 24, BV was roughly $1.95 per share compared to a current share price of $1.66.

The upside is not massive, but I consider it easy money tied to a fun, little diversifier. I also like the indirect Uranium, Valaris and St. Joe exposure. And hey, who knows, maybe Harris will surprise us and acquire something interesting and exotic.

Técnicas Reunidas

I haven’t written about Técnicas Reunidas for a while mainly because of how I’m playing this one. I expected this one to play out very slowly (i.c. the recovery of end-markets, turning into a super cycle) with uncertain timing. This, combined with the availability of long-dated OOM options makes it an intriguing set up.

Since the write up Técnicas has been executing well. FY23 was a year with solid margin progression (3.8% ebit margin, up strongly yoy) and FY24 is guided for a return to high-single digit revenue growth and continued operating leverage.

While this is good, recently the company impressed the markets with some very bullish FY26 and FY 28 guidance, confirming the multi-bagger potential left:

• Técnicas is projecting >5% ebit margin and €160m net profit in FY26. The last time that Técnicas generated this kind of income was... well, never. Furthermore, shareholders can expect a return to remuneration as of FY26.

• Even more, the company is even seeing ~8% ebit margin by FY28 - an insane level.

During the last cycle (2006-2014) Técnicas achieved max €150m net income. And during the peak years, the company was trading at roughly 15x p/e on average. At 15x on the FY26 guidance Técnicas would be a double from today.

Even more, the FY28 guidance of 8% ebit implies >30% income growth p.a. over the few years after FY26. 15x on let's say €300m would be almost 4x today's share price (incl. dilution). And this excludes what will be a much stronger balance sheet.

But why couldn't the multiple be higher in a few years?

This all assuming earnings will stabilise thereafter. If we're indeed in a super cycle, we could see massive growth and cash generation for a decade.

But there's good reasons why the stock is still far off these levels. It remains a tough sector to operate in. A single bad project could kill you:

• there's not much love given poor management decisions in the past

• investors are still shell shocked from the recent horrible downcycle

• EPC firms (like Técnicas) constantly face cost overruns, delays, disputes with clients, as well as geopolitical and regulatory risks

• add to that the highly competitive landscape, with numerous global and regional players vying for contracts

But this is why I love these industries. Sooner or later the cycle turns and nobody is watching. Currently it remains a much hated sector with very few eyes looking at it. But this creates the opportunity.

It won't happen overnight. It's an execution story. There's plenty of time to average up. But I believe we are at the early stages of this new (energy) cycle. There will be a ton of volatility ahead, but so far so good.

OCI

I never wrote this one up, but this remains a very compelling opportunity in my view with significant near-term opportunities.

OCI has always been a relatively complex company, reason for a significant SOTP potential. To unlock this potential, the company initiated a strategic review. Following this review, OCI announced (a.o.) the divestment of its Iowa Fertilizer company (IFCo) and its 50% stake in Fertiglobe for a total of >$6bn.

After these divestments, OCI will have a strong net cash position. They also guided that the remaining assets should generate $500m ebitda and $650m (mid-range) after its expansion investments.

So OCI has been trading at low single-digit ev/ebitda multiples on a pro-forma basis (pre- and post-expansion) with peers trading at 5-7x (on what I would argue are low multiples).

The company announced it will distribute ‘at least 3bn’ to shareholders. The first special divided of €4.5 p/s was announced (c. 18% yield) and roughly €9 more is to come.

Add to that improving operations and continued ongoing strategic review. OCI now mentions significant inbound interest in the continuing operations.

We now also have a timeline: OCI will be providing an update on the strategic review at Q2 results.

Bottom line, there remains a strong discrepancy in (commodity) chemical assets between private and public markets, and this is drawing a lot of interest.

I wouldn't be surprised to see further asset sales at OCI, or perhaps a full take out.