ToffCap's Monday Monitor #7

ToffCap’s Monday Monitor provides a snapshot of the largest changes in our watchlist. New (potentially) interesting investments and trades are regularly added to the list, with a special focus on companies that screen cheaply and catalyst trades. The list is dynamic; it will continue to grow and change going forward. 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.

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Housekeeping note. This will be the last TMM for a few weeks given the upcoming holiday season. We’ll be back soon!

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Overview

I. Company watchlist

II. Catalyst trades

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I. COMPANY WATCHLIST

Annotations for a selection of interesting companies with seemingly strong upside potential.

Additions this week:

• 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.

• IMCD (IMCD Netherlands – € 7.7bn). Extremely high-quality compounder, with decade+ growth potential. Asset light business model, with strong return and cash flow generation. High market fragmentation allows plenty of inorganic growth, which is easy to integrate given mostly acquired intangibles. Sell-side does not model m&a, hence results tend to beat consensus. Shares volatile due to fears of earnings normalization. Traing at 14x 2023e ev/ebitda for 15-20% ebitda growth over next 5+ years. More on the market here.

• Gravity (GRVY US (ADR) – $ 560m). Another great Clark Square Capital write-up. Korean developer, distributor and publisher of online games in Asia. Trading at ~2x 2024e ev/ebitda, with earnings expected to continue to increase given launch of Ragnarok Origin. Downside protection given very strong balance sheet (c. $50 / share net cash). No coverage + illiquid. Write-up here.

• Dentalcorp (DNTL Canada – CAD 1.4bn). Consolidator of dental practices. Strong, visible growth and free cash flow generation. Strategic alternatives review ended with no sale + high leveraged IPO in rising rate environment pressured the stock. Canada dental market still relatively fragmented (5-7% compared to >30% US), which leaves for plenty of room to grow inorganically. But focus is now on deleveraging. With high FCF generation and big portion of debt fixed, shares should rerate as leverage decreases and earnings continue to grow. >100% upside over ~12 months.

• Barco (BAR Belgium – € 2.2bn). High-quality compounder. Belgian technology company with main focus on visualization technologies. Three separate (i.c. no synergies) divisions with continued strong growth potential given secular tailwinds: Entertainment (high-end projectors for Cinema / events), Enterprise (ClickShare) and Healthcare (high-end screens + Nexxis operating room hub). Continued strong qoq improvements. Barco trades at ~11x 2023e ev/ebitda for >15% ebitda growth over foreseeable future. Shares flat YTD despite strong performance due to uncertainty surrounding the health of co-CEO (and major shareholder) Charles Beauduin, though shouldn’t impact the business (anymore).

• A-Mark Precious Metals (AMRK US – $ 920m). Cool, original company. Wholesaler and retailer of gold and silver bullion, as well as other precious metals products. Play on the (volatility of the) gold and silver market, as well as potential further (international) m&a. Cheap (mid single-digit p/e) + high returns on equity + probable continued strong earnings generation. h/t Roojoo for another great idea.

Previous additions (excl. companies no longer on the watchlist):

• DSM-Firminich (DSFIR Netherlands – € 26bn). Givaudan, IFF, Croda, Novozymes peer. Now one of the most integrated players, full product offering. Plenty of synergy potential over medium-term. Near-term market tailwinds from destocking, LT secular growth trends (healthy / organic foods and ingredients, sustainability, rising market complexity and regulation, etc.). 15-20% ebitda growth p.a. The merger with Firmenich creates a vastly more superior company compared to the legacy DSM business. DSFIR now has a foot in the door with all clients briefs and will be able to win many more tenders going forward. Recent profit warning (stock up on the day) highlights (expected) weakness in vitamin business; focus now on growth and integration. Premium company at very decent valuation.

• Knaus Tabbert (KTA Germany – € 630m). Recreational vehicles. At its recent investor day, Knaus (ao) introduced medium-term targets, aiming for a revenue CAGR of 16-18% for the years 2023-2027 and ~€ 2bn revenues by 2027, and >10% ebitda margin over the medium-term. Knaus plans to distribute around 50% of net income. Co. trading at ~7x 2023e ev/ebitda for >15% ebitda CAGR over the next few years.

• Solvay (SOLB Belgium – € 10.9bn). Will split in EssentialCo (commodity products) and SpecialtyCo (specialty chemicals). Split to be effective in December. Solvay recently announced both splitco’s targeted capital structure and provided more information on the upcoming split. The split dynamics (into a high(er) quality and low(er) chemical company) and uncertainty related to natural recourse damages to be paid will probably make the upcoming split a volatile one, potentially providing interesting trading dynamics.

• ICAD (ICAD US – $ 41m). Left for dead micro-cap. Net cash + many catalysts ahead. Ongoing sale process of ICAD's Therapy division. Likely announcement within 6 months; could fetch > current enterprise value. Growth of remaining Detection division looks to be inflecting. Finally, new management in place which will start communicating better to investors. Downside looks relatively protected given cash balance; very strong upside potential (5-10x) in case of sale Therapy division + growth inflection.

• Sylogist (SYZ Canada - CAD 160m). Turnaround. Left for dead stock due to poor strategy, mainly from old CEO. New management implemented strategic review; strategy shift. Renewed focus on growth and value creation. If strategy shift is successful, margins will expand and earnings grow. Peers trading at 2-3x valuation.

• 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.

• Allfunds (ALLFG Netherlands – € 4bn). The largest B2B fund platform in Europe. Offers a menu of third-party funds from banks and/or insurance companies. It is basically a distribution platform for funds. Allfunds has more distributors, fund managers and assets-under-administration on its platform than any of its competitors. Very young market (~10-15% market share for fund platforms), growing rapidly. Efficient, highly scalable model, >60% ebitda margin in a few years. Strong FCF generation. Screens cheap + benefits from rising ECB rates.

• eDreams Odigeo (EDR Spain – € 650m). One of Europe’s largest OTA. Currently transitioning from transactional to subscription business model with its PRIME loyalty program. Should lead to higher margins, visibility and resilience. Trough seems to have been reached, and key metrics should continue to improve. Stock cheap due to skepticism of model change + company using non-standard financials metrics. Could 3-5x in a few years if successful.

• Brunswick (BC US – $ 5.4bn). Cool boats (and parts). Outboard engines continue to gain market share, and Brunswick is profiting from this trend. Vertically integrated. Duopoly with Yamaha. 7-8x p/e despite industry headwinds, strong ROICs. Many thanks to Roojoo for this idea.

• Star Holdings (STHO US – $ 217m). Recent spin-off out of iStar / Safehold (SAFE US) merger. Sum-of-the-parts investment case, trading at a big discount to NAV: STHO holds SAFE shares (currently valued ~$ 360m), $ 50m cash, real estate (~$ 90m book value) and land development assets (~$ 250m book value); debt is ~$ 240m. Star is not an opco; plan is to monetise the assets over the medium-term (development and asset sales).

• PWSweb (PFSW US – $ 93m). Cheap, busted micro-cap. Trading at 3-4x 2023e ebitda. Stock buyback + strategic review ongoing.

• Unit Corporation (UNTC US – c. $ 300m after spec div.). Oil & Gas company. Set for strong FCF generation given good market fundamentals. Could be valued at ~2x ev/ebitda 2023e and 20-30% FCF yield. Insiders own >40%. Shareholder friendly capital return policy.

• Oddfjell Technology (OTL Norway – c. $ 200m). Offshore energy service provider. Relatively recent listing. Strong sector tailwinds providing plenty of runway. Cheap (relative) valuation. More info Alexander Eliasson (@alexeliasson).

• FitLife Brands (FTLF US – $ 77m). Good progress on ecommerce transition. Acquisition of Mimi’s Rock at attractive valuation. Potentially transformative. Management aligned. Trading at <7x FCF 2023e for >20% growth of ecommerce channel.

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II. CATALYST TRADES

Event-driven.

Additions this week:

• BorgWarner (BWA US). Record date set for Phinia (PHIN) spin 6/23. BWA shareholders to receive 1 PHIN share per 5 BWA shares. PHIN shares will be distributed on 7/3 and trade 7/5.
  UPDATE: Phinia now trading; share price roughly -30% since spin.

• 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.

• Inpost (INPST Netherlands). Email ‘leaked’ on Friday 07/14 re potential upcoming call to discuss ‘new business decisions’. Statement retracted. Could indicate imminent announcement of UK acquisition to solve network bottlenecks. Would be (highly) accretive if indeed the case.

• Logistec (LGT/B Canada). Compounder with strong track record of profitable growth. Not expensive + company announced strategic review ‘to maximize shareholder value’, pushed by major shareholder Sumanic Investments.

• Lionsgate (LFG US). Spin-off of the movie / TV studio business estimated in September.
  UPDATE. New filing for upcoming spin here.

• Enhabit (EHAB US). 2022 Encompass Health (EHC) spin-off. Performed very poorly since. Lots of m&a in industry. Activists pressuring company.

• Surgepays (SURG US). Short note published by Bird Dog Research. Research appears of relatively poor quality. SURG response mentioned $ 6m net income in Q2 23 (+30% qoq). Upcoming Q2 results (mgt comments) should be interesting.

• Sio Gene Therapies (SIOX US). Another busted biotech in the process of liquidation and returning cash. Potential 15-25% cash return (net of costs), i.c. >30% IRR.

• MDU Resources (MDU US). After the recent spin of Knife River (see below), MDU now also plans to spin its construction services business. Remaining company will be a pure-play energy delivery business.

• Oddity (ODD US). Imminent IPO. ODD is an ‘AI driven online platform’ for beauty products. Potential play on AI hype.

Previous additions:

• Lifecore Biomedical (LFCR US). Involved in potential buy-out. Demand for similar CDMO assets is high. Large shareholders pushing for sale. Potentially 75-100% upside.
  UPDATE: Dealreporter article stating LFCR has sent materials to a mix of strategic and financial potential bidders. Bids are expected to be collected by early July. LFCR being pitched using projected c. $ 70m ebitda. We estimate a potential sale price in the high-teens / low 20s.
  UPDATE: Great update on the thesis from Laughing Water Capital here.

• DOF ASA (DOF Norway). Subsea offshore services. Will soon emerge from bankruptcy; relisting requested.
  UPDATE: DOF confirms that it has received a letter of interest from Subsea 7 to acquire all the shares in the Company at a price of NOK 35 per share with consideration offered partly in consideration shares in Subsea 7 and partly in cash. Offer declined by BoD.

• Solvay (SOLB Belgium). Will split in EssentialCo (commodity products) and SpecialtyCo (specialty chemicals). Split to be effective in December.
  UPDATE: announcing capital structure and more information for the upcoming split.

• Cineworld (CINE UK). To emerge from bankruptcy in July. Imminent filing for administration (UK) and suspension of trading. Restructuring plan involves (ao) a fully backstopped rights offering to raise ~$ 800m.

• Covestro (1COV Germany). Rejected a $ 12bn offer from Abu Dhabi National Oil (ADNOC), but ‘open to discuss deal at higher price’. To keep in mind that Covestro is basically 100% free float. Potential fair price high 50s. To be continued.

• NSI (NSI Netherlands). NSI board member (top shareholder) resigns to prevent potential conflict of interest. Company trading at >50% discount to book value (NTA). High probability of a take-out. Esteban Albanil for more info (on anything RE related).

• Neoleukin Therapautics (NLTX US). (Potential) liquidation, with large upside to NAV in case of liquidation. See Dalius on Twitter for more info re NLTX.

• National CineMedia (NCMI US). Bankruptcy plan confirmed. Will emerge from bankruptcy in the next 2/3 months, trading under ticker NCMI, with (ao) financing for growth.

• Carriage Services (CSV US). Funeral home operator. Recently announced strategic review; received an all cash offer from Park Lawn Corp. Interesting dynamics.

• Top Ships (TOPS US). Intends to spin off subsidiary Rubico, holding one (!) Suezmax tanker, to shareholders. Given micro-cap size (<$ 12m) and relatively low liquidity, could be ground for interesting trading dynamics.

• Millicom (TIGO Latam). Takeout candidate with plenty of interest. Dalius SSI background here.

• SBB weighing sale of Samhallsbyggnadsbolaget i Norden (SBBB Sweden). Yes, that’s a real company name!

• MDU Resources (MDU US). Will spin Knife River into a stand-alone construction materials provider. Spin approved; distribution date set for 05/31.
  UPDATE: Knife River spin-off completed (KNF US). Classic period with no financials and no sell-side initiations.

• Metals Acquisition Corp (MTAL US). Registration statement finally approved. Vote on 06/05. New copper mine to trade in the public markets; great LT copper tailwinds.
  UPDATE: Merger approved. Glencore CSA copper mine to trade on June 16. De-SPAC volatility could provide interesting entry point for LT copper bulls.

• Kindred (KINDSDB Sweden - SEK 27.5bn). Online sports betting and casino. Exploring strategic alternatives, including full sale of company. Bloomberg reporting bids were due end of May.

• Talen Energy (TLNE US). Nuclear energy play. Recently emerged from bankruptcy on 17 May. Great tailwinds.
  UPDATE. Now trading OTC, ticker TLNE US.

• Hurricane Energy (HUR UK). Received buy-out offer (a.o.) from Prax for total consideration up to 12.5p/share. Current share price 7.8p, mainly due to complex pay-out.

• NFT Investments (NFT UK). The company has disclosed plans for a tender offer to be executed in ~12 months. Screens large discount to NAV.

• Aston Margin Lagonda (AML UK). Geely increased stake in AML, fueling speculation regarding a potential takeover.

• Abacus Property Group (ABP Australia). Will spin-off its self-storage assets. Listing probably in August.

• Imerys (NK France). Drilling results of Cornwall mine expected in the summer. Strong rerating potential on good results.

• NCR Corp (NCR US). Spin-off of ATM-related business in Oct. 2023. Potential large SOTP value unlock.

• Applus Services (APPS Spain). Three PE players as well as activists circling the company.

• PFSweb (PFSW US). Strategic review ongoing. To be completed in 2023.

• Merrimack Pharmaceuticals (MACK US). To receive $ 225m (vs. market cap. of ~$ 180m) from Ipsen after FDA approval for Onivyde (within 12 months). Cash to be returned to shareholders via special dividends.

• Cia Brasileira de Distribuicao (CBS US). Spin-off with remainco trading at negative value. Great write-up from Clark Square Capital.

• Crane (CR US). Spin-off.

• Liquida Technologies (LQDA US). Patent litigation. Write-up.

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