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TerraVest (TVK.TO)
Special Report, Podcast, Presentation
TerraVest reported a more modest fiscal Q4 on December 13th, after several strong quarters.
Sales were C$230.7mm, +33% y/y and -1% on an organic basis.
The prior comparable period did not include the acquisitions of LV Energy (Oct '23), Highland Tank (acquired Nov '23), and Advance Engineered Products (Apr '24).
Organic growth for the year was +4%, in line with the low single digit trend rate of growth for the company.
Quarterly organic growth tends to be volatile so we would not read much into the -1%, especially after the strong Q3. For the four quarters of the fiscal year organic growth was: +7%, -4%, +14%, -1%.
Organic growth and declines followed normal trends in the quarter, with growth driven by service, compressed gas equipment, residential and commercial petroleum tanks. Declines were driven by furnaces and boilers, and oil & gas processing equipment.
We would not read too much into TerraVest’s segments as management likes to disguise true segment growth from competitors. Highland Tanks, for example, is consolidated into the HVAC segment despite also manufacturing storage tanks. Nevertheless, organic growth by segment was:
HVAC: -13% in FQ4 after being +9% in FQ3. -5% for the full year.
Compressed gas: +21% in FQ4. +11% for the full year.
Processing equipment: -23% in FQ4. -14% for the full year.
Service: +3% in FQ4. +19% for the full year.
Underlying earnings power and FCFF by our calculations was C$23mm for the quarter and C$125mm for the year, putting the stock on 19x EV/FCF.
Net debt declined to C$161mm, putting ND/EBITDA at 0.8x vs a historic average of 2.4x. Cash generation is likely to be around C$315mm over the next three years (3 x C$125mm in FCFF - C$20 in interest expense).
That means today’s net debt of C$161mm is on track to become net cash of C$154mm over three years. Using TerraVest historic ND/EBITDA average of 2.4x implies the company has C$610mm of buying power (C$190mm in current EBITDA x 2.4 + C$154mm cash = C$610mm).
At the company’s normal acquisition multiples of 11x FCF and 7x post-restructuring, that would imply acquired FCF of C$55mm and C$87mm respectively, and total company FCF of C$180mm and C$212mm.
That puts TerraVest on 15x FCF and 13x FCF in three years, suggesting the stock is still reasonably priced despite the run-up.
We think that point is worth reiterating. Markets tend to underappreciate management that deploy capital at strong incremental returns, and typically do not price in value creating acquisitions until after they happen.
TerraVest’s underlying FCF of C$125mm for 2024 was estimated by adjusting for a few important factors: