Presentation: TerraVest Industries (TVK.TO)
I was selected to present at the Fairfax Financial shareholder dinner in April
We published a 35 page Special Report on TerraVest in January and I was selected to present at the Fairfax Financial shareholder dinner in April. You can view the Special Report here and presentation with updated thoughts below.
TerraVest is an acquirer and operator of steel-based storage tank and equipment businesses that has delivered shareholder returns of ~30% p.a. for the last decade. The company generates a 25% post-tax incremental return on tangible capital and has an excellent and aligned management team who own 35% of the business. We published our Special Report when the stock was around C$40, the stock trades at C$70 today, and we think management will continue to compound capital at strong returns for many years to come.
The company follows a strategy of acquiring, restructuring, and operating businesses that are generally mom & pops across storage tanks and pressure vessels (~65% of revenues), oil & gas equipment (~20%), and boilers and furnaces (~15%). We believe that TerraVest creates value by acquiring businesses for an average of 10x FCF then restructuring to cut that to 6x, with restructuring the more important and where management spends most of its time.
TerraVest is able to increase profits primarily in three ways: (i) By shifting the mindset of mom & pops to focus on FCF over revenues, (ii) by using its scale to procure steel and other materials at a lower cost, and (iii) by sharing resources across businesses such as by consolidating facilities or cross-selling products.
The company’s five key members of management all earn relatively low base salaries and have the vast majority of their net worth in the stock. All are highly experienced and most are fairly young – CEO Dustin Haw is the key and is 40 – giving them a strong incentive and long runway to continue compounding. The CEO has never sold a share to supplement his relatively modest income, which suggests to us he thinks TerraVest will continue to be successful. We think there remain many businesses and adjacent industries for TerraVest to deploy capital into.
The stock has appreciated significantly over the last twelve months but remains reasonably valued at 15x FCF for a business likely to compound earnings at double digit rates. TerraVest does not speak to sell-side analysts, hold earnings calls, or give investor presentations and so the stock is largely undiscovered among institutional investors. We believe the company’s intrinsic value will increasingly be reflected as management executes, more investors take notice, and stock liquidity increases.