ToffCap's Monday Monitor #12

Interesting companies and event-driven trades

Oct 16, 2023

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ToffCap’s Monday Monitor provides a snapshot of interesting potential investments and event-driven trades we find while turning over many rocks, with a special focus on companies that screen cheaply and catalyst trades. The list is dynamic; it continues to grow and change. If you have interesting additions to the list, feel free to contact us at contact@toffcap.com or on Twitter.

Enjoy!

Disclaimer. ToffCap’s Monday Monitor is provided for informative purposes only. No due diligence has (yet) been performed on the names on this list. The list might change strongly on a regular basis. This overview does not constitute advice; always do your own due diligence.

Overview

I. Company watchlist

II. Catalyst trades

I. COMPANY WATCHLIST

A selection of interesting companies with seemingly strong upside potential.

Additions this week:

ArcBest (ARCB US – $ 2.4bn). ArcBest is one of the largest (#6) less-than-truckload (LTL) carriers. The industry is currently in a cyclical downturn, which will turn at some point. As with all cyclicals, it could get worse before it gets better, though volumes have already been declining for some time, while truck load pricing is about 50% off the 2021-2022 peak. Besides an eventual turn of the market, another interesting catalyst is the recent bankruptcy of the large competitor Yellow (YELLQ US). Given the unionized structure of the company, ArcBest is an a strong position to take drivers over from Yellow. The shares are trading at ~10x p/e on the street’s 24e, which is much cheaper than peers (e.g. TFI International, Saia, Old Dominion Freight line). Should volumes turn, and ArcBest be able to take over some drivers from Yellow, both earnings and multiple have the potential to strongly rerate (>100% over next few years).
Ardagh Metal Packaging (AMBP US – $ 1.6bn). Levered aluminum can producer, listed in 2021 via a SPAC. The share price has been under pressure recently, providing a potentially interesting entry point. Ardagh operates in a very consolidated industry (roughly 3 companies control most of the market). The company is close to completing its large capex plan, and is projecting positive free cash flow as of next year. This alone will allow to increase focus on deleveraging (though probably initially via increasing ebitda / cash given well-termed out debt up to 2027). Operating leverage in pretty high in this business, so if volumes start heading back in the right direction, free cash flow could expand significantly. The company is already trading at ~15% dividend yield, with all the intentions to continue to pay out its dividend. Very compelling asymmetrical risk / reward investment.
Cab Payments (CABP UK – GBP 550m). Cab Payments provides, through its subsidiaries, B2B cross-border payments and foreign exchange solutions across emerging markets (mainly Africa). Cab listed in July, but the shares are down c. -35% since (classic broken-IPO in a bad market), providing a potentially interesting entry point. The payment and FX solutions providing assets are ‘hidden’ within a dusty old UK bank, masking the true growth potential of the assets. Besides a potential recovery of the (overall very cheap small- micro cap UK) market, Cab appears to be well positioned to benefit from the secular growth in emerging markets correspondent banking flows. Just the creation of the FX trading platform allowed Cab to grow revenues >60% p.a. over the past years, and growth is expected to continue strongly. Cab is trading at ~7x p/e on 2024e earnings, with plenty of potential to grow earnings >30% p.a. for quite some time.
Maui Land & Pineapple (MLP US – $ 275m). MLP is a very interesting recent pitch on VIC, which reminded us of St. Joe (JOE US). We’re big fans of JOE (which is down -20% since reaching a top in July after very strong earnings momentum), so we’re clearly biased to MLP. The pitch is simple. MLP owns a lot of land in Maui (roughly 22k acres), much of which is beautiful land with plenty of development potential. MLP has so far been relatively quiet to the market, but that is anticipated to change over the short term. And as MLP moves into its developing phase and starts to realize this potential, the ‘true’ value of its assets will be realized. Just like JOE, MLP has the potential to 5-10x over the next years. The VIC pitch is still ‘locked’ for some weeks, but there’ll be plenty of time left here to do the work. Also, the low-flow (c.61% of shares are owned by one shareholder), no coverage and at first sight no growth screening might create explosive movements as value asset is unlocked.
Vivendi (VIV France – € 8.8bn). We recently tweeted about Vivendi, the perennial SOTP vs. NAV unlock story. The Vivendi story is well-known; Vivendi is a French conglomerate with many media and entertainment related assets. The amalgamation of assets is relatively inefficient, with core assets centered around Canal+, Havas and Lagardère, but also including a vast array of non-core assets (including ao Gameloft, GVA, Dailymotion) and several minority stakes in listed companies, such as a 10% stake in UMG $UMG and ~24% in Telecom Italia (TIT Italy). To note that these two stakes alone represent ~67% of Vivendi’s current market cap. The extreme discount to NAV has been present for quite some time, and speculation about possible actions to reduce this discount has been coming and going for a long time. To note that Bollore (BOL France) owns ~31% of Vivendi and it is well assumed that it will be taking full control at some point. We never really believed that the upside to NAV could be realized as long as Vivendi continued to gather assets (randomly). Why could it be different this time? Recent press articles mentioned that the company is targeting a divestment of its ticketing and festivals activities. These assets are consolidated within Vivendi Village. It is VERY rare to see divestments of consolidated assets at Vivendi. Is this the early start of a significant change in strategy? We’re not sure, but it may be worth to keep an eye on this one.

Additions in previous TMM:

Not edited since initial inclusion.

Basket of FCF generators with leveraged b/s. We recently tweeted that we’re currently focusing on companies with relatively high leverage and good FCF generation, where operating earnings are stable / growing but eps is declining due to higher interest rates. We notice that the share price of such companies might be experiencing pressure in the current rate environment while they easily could (and probably will) reduce leverage given their high cash flow generation. This means that 2023 / 2024 eps might be under pressure, but could return to strong growth as of 2024 / 2025. Twitter was once again kind, with many providing interesting ideas. We’ve not vetted all suggestions, but this list includes some very interesting names: DNTL, AZE, IMCD, INPST, ALE (Poland), NOA, JBI, FTT, BERY, DLHC, DND, Lotte Chilsung, ABG, GEO, WBD, APPS, ADEA, HBI, SSNC, IIIV, HCA, AT1.
FitLife Brands (FTLF US – $ 81m). Supplier of (mainly) nutritional supplements. Management with a strong track record of value creation, aligned. Good progress on ecommerce transition, not yet reflected in shared price. Acquisition of Mimi’s Rock at attractive valuation. Potentially transformative. Trading at <7x FCF 2023e for >20% growth of ecommerce channel. Recently acquired assets of bankrupt MusclePharm for $18.5m; MS has been generating $ 1.2-1.5m revenue / month, at 25-30% gross margins. Management keeps acquiring interesting assets to leverage at very decent prices. Should start trading on Nasdaq soon.
eDreams Odigeo (EDR Spain – € 830m). We highlight Andrew Walker’s excellent podcast on eDreams. eDreams is one of Europe’s largest OTA, currently transitioning from a transactional to a subscription business model with its PRIME loyalty program. This should lead to higher margins, visibility and resilience. Key metrics continue to improve. The shares are cheap due to skepticism of the model change + the company using non-standard financials metrics. Could 2-4x in a few years if the transition is successful and market valuation shifts (more) towards recurring revenue comps.
Civitanavi (CNS Italy – € 113m). Civitanavi designs and develops technology solutions of inertial navigation, geo reference and stabilization systems for both industrial and defense use. CNS IPOed in 2022, but got wrecked after reducing its 2023 guidance. The sell-off could provide an interesting entry point into a profitable company with a strong balance sheet (~26% of EV in net cash), good market and product positioning and what looks like solid growth ahead. @BerkelKip has a recent tweet on CNS.
Aplisens (APN Poland – PLN 252m). Aplisens manufactures process instrumentation (differential pressure transmitters, hydrostatic level probes, level transmitters, valves, digital indicators, gauges, etc.). Aplisens’ growth appears to have been inflecting positively over the past few years. The company recently published H1 23 results, showing ~22% revenue growth yoy and ~PLN 17m income; assuming H2 = H1 for simplicity, Aplisens is trading at roughly 7.5x 2023e p/e for >50% yoy growth in H1. Good cash flow generation and roughly 3.5% dividend, if you’re into this. No sell-side coverage.
ADF Group and Daktronics. We have a recent update on two of our favorite companies, who remain stubbornly cheap despite strong earnings growth (ahead).
Daktronics (DAKT US – $ 358m). Daktronics is a manufacturer of electronic scoreboards and large screen displays for sporting, commercial and transportation applications. The company has a strong market positioning and is a well-respected player. In some ways it reminds us of Barco, which also has a large screen division (though operates in other markets). Daktronics suffered during covid, but supply chain challenges have now eased and the pricing environment has improved. Fundamentals are improving, with growth returning, margins improving and NWC normalizing. DAKT is positioned for further growth, which the company expects to realize over the next quarters. Q4 (ending April 2023) was very good, which bodes well for the seasonally strong H1. Daktronics is trading at <4x ev/ebitda on our 2023 estimates of earnings and cash flow generation; continued progress should at least double this multiple, on higher earnings. Surprisingly, there’s no coverage on this company (yet). H/t AltaFoxCapital for this idea.
ADF Group (DRX Canada - CAD 115m). A ToffCap favorite. We reiterate our stance, as recently tweeted. ADF’s Q1 results were extremely strong, but have not (yet) shown the full extent of the company’s recent efficiency improvements. Going forward, ADF will double the amount of steel passing through the automation platform. This, combined with relatively more higher value-add projects on its record order backlog and a good amount of operating leverage, could lead to $40-50m ebitda in FY24 (current year). Stock could 2-3x over next ~18 months. Write-up here.
Hudson Global (HSON US – $ 61m). Hudson is a Recruitment Processing Outsourcer. Left for dead after several headwinds. Revenues are generally highly recurring in this business, creating visibility. Margins could be at the trough now that Coit acquisition mess appears to be under control. Ebitda could grow >30% pa over next few years (off low base). Trading at ~3x 2023e ev/ebitda, with $ 20m net cash on balance sheet and > $ 300m NOLs available. FCF conversion ~100% given asset light business and NOL usage.

II. CATALYST TRADES

Event-driven trades and ideas.

New additions and updates

A bunch of companies on the watchlist completed their spin-offs, some of them trading very poorly (for various reasons). Might be interesting to keep an eye out.
Aramark (Vestis VSTS -25% since spin); Kellogg/Kellanova (KLG -40% since spin, K -25% since July); Danaher (Veralto VLTO -8% since spin); Lithium Americas (Lithium Argentina LAAC); Novartis (Sandoz SDZ SW); NCR (Alteos NATL -10% since spin).
Teck Resources (TECK US). CEO indicated a decision on the future of the company's coal operations to be reached by the end of this year. CEO reportedly told the FT Mining Summit in London that the company is engaging with several groups that have expressed interest in buying all or part of the coal business.
Euroapi (EAPI France). BIG share price reaction, dropping ~60% (!), on bad results and suspension of its medium-term target. Might be interesting to keep an eye on this one, given relatively high quality assets. Management will be performing a strategic review; we'll now more at FY results.
Profrac (ACDC US). Evaluating strategic options for its Proppant Production segment, which operates through its Alpine Silica subsidiary. Options under strategic review include an IPO, sale or merger of Alpine Silica.
Allfunds (ALLFG Netherlands). To explore strategic options, incl. sale, according to Vozpopuli. Hired Goldmand and Citi, looking for 5bn. Makes no sense for this company to remain public, in our opinion.
Biote (BTMD US). Asset light, cash generative company. Founder and wife currently in divorce. Wife (25% owner) selling shares as (we understand) intention is to sell out. Share overhang might provide good entry point.
Topcon (7732 Japan). Attractively valued company with new management and US activist (ValueAct Capital) with decent track record in Japan increasing pressure.
Howard Hughes (HHH US). Ackman (Pershing Square) continues to buy HHH, now trading below $70. Company recently announced it would spin off its Seaport and other related assets. ~90% upside to NAV (according to HHH).
Astra Space (ASTR US). According to Bloomberg, Astra is ‘considering selling a 51% stake in its in-space propulsion business, among other strategic sale options’. The unit is to be valued at >$100m - compared to a current market cap of ~$13m. Might be an interesting option-like trade.
WP Carey (WPC US). WPC will spin-off 59 office properties (Net Lease Office Properties NLOP). NLOP to begin trading on 2 November; 1 NLOP shares for every 15 WPC shares. WPC down c. -20% over the past few weeks.
Delta Apparel (DLA US). Activewear maker received an unsolicited offer for its Salt Life segment and initiated a strategic review.
Clark Square Capital's Ultimate Value
for a recent write-up.
LL Flooring (LL US). Live Ventures (LIVE) offered $5.85 per share; LL shares are still trading <$4. LL previously rejected an offer of $5.76 ps. Our friend @ClarkSquareCap has some ideas of the offer.
United Natural Foods (UNFI US). UNFI has a 'transformation program' in place. Insiders (CEO and CFO) have recently purchased shares. Shares are down ~60% YTD. Might be interesting to keep an eye on.
Mallinckrodt (MNKTQ US). Planning to emerge from bankruptcy by end of year.
Genetron (GTH US). Genetron to go private for $126m. Holders will receive $1.36 in cash per ADS. Closing Q1 2024. Genetron ADRs trading at $1.18.
TSR Consulting (TSRI US). Reviewing strategic alternatives. Options include a sale of the company. Profitable nano-cap with net cash balance sheet. H/t @evfcfaddict for the idea.
Summit Midstream Partners (SMLP US). Reviewing strategic alternatives. Alternatives include sale of assets, refinancing parts or entire capital structure, sale of the Partnership.
Impel Pharmaceuticals (IMPL US). Reviewing strategic alternatives as company is running out of cash. Alternatives include sale of assets or all of the company. Goal of closing a transaction no later than early 2024.
Rite Aid (RAD US). Reviewing strategic alternatives as highly levered. Reviewing alternatives to recapitalize, refinance or otherwise optimize its capital structure.
Clean Air Metals (AIR Canada). Exploring strategic alternatives including strategic funding, strategic partnerships or joint ventures, full company sale.
Ebix (EBIX US). Levered, cash flow generating software company, exploring strategic alternatives. Includes sale of assets.
Aerwins Technology (AWIN US). Exploring non-core asset sales to finance production of XTurismo hoverbike.
Nuvation (NUVB US). Busted biotech SPAC with >$600m net cash on balance sheet, trading at negative EV. Currently pursuing last trials. If success, stock is cheap; if failure, NUVB becomes a cash-distribution play. To play out over next ~12 months.
UPDATE: BIG insider buying recently, while share price under pressure.
Vista Outdoor (VSTA US). Will spin its outdoor segment. Recently filed a Form-10, intention to spin in Q4. Could be interesting given underlying free cash flow generation + ‘anti’-ESG character of part of the assets.
UPDATE: Outdoor Products segment to be called Revelyst, ticker GEAR.
BlackBerry (BB US). Probable strategic review by November. Also lots of attention from Veritas Capital.
UPDATE: To separate IoT and Cybersecurity business units.