ToffCap's Monday Monitor #9

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.

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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:

• Brockhaus Technologies (BKHT Germany – € 224m). Brockhaus Technologies focusses on acquiring high-margin and high-growth German technology companies (basically a listed PE fund). Brockhaus is led by an experienced management team with a good track record; insiders still own a decent part of the company. The company is projecting strong growth for 2025, targeting >€ 300m revenues and roughly 40% ebitda EBITDA margins, which would bring the current valuation at 3.5-4.0x ev/ebitda on 2025e (excl. cash generation) for what should be continued strong, profitable growth.

• 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.

• Twin Vee PowerCats (VEEE US – $ 17m) and Forza X1 (FRZA US – $ 14m). We’re keeping an eye again on these two power boat manufacturers for the first time since the spin. Both micro-caps back net cash balance sheets (closed to zero EV), and Twin Vee still holding ~44% of Forza. Both companies now seem to have some interesting catalysts ahead that could bring the valuations back to a more sensible level: Twin’s acquisition of AquaSport, now back to production, and Forza’s ramp up in deliveries. Check the comment section of this old VIC write-up for some info and CarlosM’s more recent work.

• eDreams Odigeo (EDR Spain – € 860m). Reiterating EDR. We recently tweeted about eDreams’ excellent results, confirming the thesis. 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.

• Azelis (AZE Belgium – € 5.0bn). Very high-quality compounder, with decade+ growth potential. Inherently asset light business model, with strong return and cash flow generation. Extreme market fragmentation allows plenty of inorganic growth. Shares -20% YTD given (cyclical) normalisation of earnings after a few very strong years on the back of covid. Given sell-side laziness to model m&a, results tend to beat consensus. Trading at ~12x 2023e ev/ebitda for we believe >50% ebitda growth potential over next two years. Potential 100% return over next 2/3 years given earnings growth + valuation normalisation. More on the market here.

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

• 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.

• 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.

• 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).

• 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.

• 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.

• 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.

• Knaus Tabbert (KTA Germany – € 550m). 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.

• 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.

• 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.

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II. CATALYST TRADES

Event-driven.

Additions this week:

• LICT (LICT US). Changed distribution date for its MachTen (MACT US) spin-off to August 31 (from August 14). Shareholders to receive 150 shares of MachTen for every 1 share of LICT. Could have some interesting dynamics given small spinco size.

• Telekom Austria (TKA Austria). Telekom Austria (controlled by America Movil) to spin-off the cell tower, renamed EuroTeleSites AG, in ‘autumn 2023’. For every four Telekom Austria shares, the shareholders will receive one EuroTeleSites share. To be listed on the Vienna Stock Exchange.

• Danaher (DHR US). Danaher will spin its Environmental & Applied Solutions unit (Veralto) on 30 September (record date 13 September). 1 Veralto share for 3 Danaher shares.

• Western Digital (WDC US). Western Digital to ‘ …fully evaluate a comprehensive range of alternatives, including options for separating its market-leading Flash and HDD franchises’. In talks to spin and merge with Kioxia, double listing in US and Japan. Timing Q3 / Q4 2023.

• NetDragon Websoft (777 Hong Kong). Will separate its offshore education business and merge it with Gravitas Education (GEHI US). Approval for split and merger on September 11.

• Premier Investments (PMV Australia). PMV will review a few of its brands, potentially spinning these off, with the intention to focus more on the more rapidly growing part of the business; ‘the Review will consider a range of options… including dividend policies and a separation of the Group into two or more distinct entities by way of demerge’.

• Howard Hughes (HHH US). Pershing (Ackman) continuing to buy shares on the open market. Now at c. 33% stake. To note that Howard Hughes has planned an investor day on September 6.

• Future Plc (FUTR UK). Sky News reported the company was exploring the sale of all or most of its business-to-business operations. The company is working with advisers at JEGI Clarity to gauge interest from buyers for assets including SmartBrief. Could unlock lots of value; we recently tweeted about Future.

• Chegg (CHGG US). Increased buyback authorization by $ 200m (to ~$ 290m) - on a c. $ 1.2bn market cap.

• Seadrill (SDRL US). Out of bankruptcy in 2022. Recently announced a $ 250m buyback (on ~$ 4bn market cap; clean balance sheet). To note, Elliott owns ~9%; Greenlight Capital recent buyer.

• MEI Pharma (MEIP US). Clinical stage biotech, attempting to merge with Infinity Pharmaceuticals (INFI US). Interesting dynamics given activists pressuring the company + potential liquidation in case of failure to merge.

• Forward Air (FWRD US). Massive insider buying after ~40% drop on announcement of merger with Omni Logistics.

• Fortrea (FTRE US). Recent spin-off from Laboratory Corp (LH US); roughly -10% since spin. Classic pre-coverage phase. Insiders have recently been adding.

• Lee Enterprises (LEE US). Decent insider buying in this sold-off name. Interesting company given paper-to-digital newspaper transition.

• Abacus Property Group (ABP Australia). Will spin-off its self-storage assets. Listing probably in August.
  UPDATE. Spin completed. Abacus Storage King now trading (ASK Australia). Shares roughly -15% since listing.

• BriaCell Therapeutics (BCTX US). Will spin some pre-clinical assets.
  UPDATE. Spin-off fully approved, and on track for August 31. New CriaCell common shares to be trading around September 5.

• Solvay (SOLB Belgium). Will split in EssentialCo (commodity products) and SpecialtyCo (specialty chemicals). Split to be effective in December. New capital structure and more information for the upcoming split.
  UPDATE. Solvay presented (for the first time) half year figures for the new SpecialtyCo and EssentialCo.

• Cia Brasileira de Distribuicao (CBD US). Spin-off with remainco trading at negative value. Great write-up from Clark Square Capital.
  UPDATE. Spin completed. Exito and CBD stub still screening cheaply. CSC update here.

• Novartis (NOVN Switserland). To spin-off Sandoz (generics unit).
  UPDATE. Planned distribution on or around October 5.

• 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.
  UPDATE. Top (still) anticipates the spin-off to be completer in September.

Previously reported event-driven trades, currently on the watchlist:

• 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.

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

• 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.

• 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 announcements, indicating strong revenue potential.

• 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.

• 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.

• 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).

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

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

• 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.

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

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

• Merrimack Pharmaceuticals (MACK US). To receive $ 225m (vs. market cap. of ~$ 175m) from Ipsen after FDA approval for Onivyde (within 12 months). Cash to be returned to shareholders via special dividends.

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

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