ToffCap's Monday Monitor #8

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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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:

• Barco (BAR Belgium – € 1.8bn). We highlight the recent write-up. High-quality compounder. Belgian technology company with main focus on visualization technologies. Three separate divisions (i.c. no synergies) with continued strong growth potential given secular tailwinds). Continued strong qoq improvements. Barco trades at ~10x 2023e ev/ebitda for >15% ebitda growth over foreseeable future. Shares down YTD despite strong performance due to uncertainty surrounding the health of co-CEO (and major shareholder) Charles Beauduin, though shouldn’t impact the business.

• 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 normalising. DAKT is positioned for further growth, which the company expects to realise 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.

• Shelly Group (SLYG Bulgaria – € 380m). Shelly designs and distributes IoT products for smart-home and industrial buildings automation. Its main product offering is focused on smart relays, though the product pipeline is full. We are reminded the ‘old’ IoT module companies (Gemalto, Telit, UBlox, Sierra, etc.), which many disregarded for too long given the risk of commoditisation. Indeed, the market did, but there was some strong growth for a few years early on. Shelly seems to be focused on creating an ecosystem, which should make its products stickier. After years of product development, the company is now ready to deploy, and the outlook is good. At 27x 2023 earnings (SLYGe), Shelly might not scream value, but growth should be very strong for several years. Bulgarian based, but dual listed in Germany, with most of sales outside of Bulgaria (Bulgarian Lev pegged to Euro). Write-up from @Nicholasp66.

• Crocs (CROX US – $ 5.7bn). That’s right, Crocs. Brand more sticky than what we’ve historically assumed. Current weakness seems mostly related to Hey Dude brand; we’re currently doing the works to better understand the dynamics, but impact seems more benign than what market implies. Crocs has a history of buybacks (authorisation of $ 1bn). Also insiders have recently stepped up purchases. IF management guidance is met, the share price could rerate significantly (>3x potential).

• Oil tanker basket (think TNP, STNG, EURN, TORM, HAFNIA, FRO). We’ve brought back some crude and product tanker stocks on our watchlist . Rates have been holding unusually well in what is normally a weak quarter. This bodes well for the high season. Fair warning, careful with tanker stocks; a short overview of the potential explosivity of tankers (both up and down).

• ICAD (ICAD US – $ 58m). 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.

  UPDATE: ICAD signed a multi-year strategic agreement with Radiology Partners, the US’ largest radiology practice. Price shot up to >$ 3.50. ICAD filed a mixed-securities shelf; price dropped. ICAD signed an agreement with Google Health. Despite the price action since addition to the watchlist, ICAD currently seems cheaper based on the revenue potential from both agreements.

• BorgWarner (BWA US – $ 1.2bn). 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. Classic pre sell-side initiation period. Should be relatively stable, mature company. Cheap (rightfully so) + strong FCF generation ($4.50-$5.00 / share, back-of-the-envelope). Should PHIN return to growth, might warrant higher multiple.

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

• 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.

• 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.

• 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.

• 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.

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

• 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:

• Breedon Group (BREE UK). Cement & aggregates. Steady, profitable company. Screens cheaply in itself. Added catalyst of recent uplisting and several FTSE indices inclusions in September.

• Spirit Airlines (SAVE US). Merger arbitrage. Spirit / JetBlue merger uncertainty; airlines disagree with DOJ attempt to block the merger. The trial date has been set for October 16. Spirit shareholders to receive ~$ 33 / share if deal consummated (vs current share price ~$ 17). Companies confident in deal closing potential.

• Aramark (ARMK US). Will spin its uniform business (Aramark Uniform Services). The remaining company will focus on Food & Facilities Services. Form-10 recently filed. Spin-off planned before year-end.

• Sprott Physical Uranium Trust (U-U Canada). The price of Uranium has continued to climb lately, (once again) fueling speculation of a potential Uranium short squeeze. Uranium looks to be back as a Fintwit favorite.

• Vista Outdoor (VSTO US). Vista intends to spin-off its outdoor segment. Parent company new name The Kinetic Group (ticker HUNT). New Outdoor Product company name tbd. Spin-off planned before year-end.

• Novartis (NOVN Switserland). To spin-off Sandoz (generics unit). Planned October 10.

• LL Flooring (LL US). Announces Exploration of Strategic Alternatives.

• BriaCell Therapeutics (BCTX US). Will spin some pre-clinical assets. Spin-off approved for August 31.

• 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.

  UPDATE: Out of bankruptcy. Looks like roughly 15-20% FCF yield for decent business and clean balance sheet.

• Oddity (ODD US). Imminent IPO. ODD is an ‘AI driven online platform’ for beauty products. Potential play on AI hype.
  UPDATE: IPOed, currently trading at ~$45.

• ICAD (ICAD US – $ 58m). 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.
  UPDATE: A few very significant announcement, indicating strong revenue potential.

Previously reported event-driven trades currently on the watchlist:

• 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.

• 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.

• 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.

• 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 soon emerge from bankruptcy. 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).

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

• 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!

• 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.

• 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.

• Crane (CR US). Spin-off.

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

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