In this newsletter, I share the most intriguing investment ideas I've come across in the past week from a variety of sources, including Value Investors Club, various investing blogs, hedge fund letters, and more. I aim to present you with concise and easily digestible investment idea summaries that quickly capture the essence of the thesis.
This week's newsletter includes:
Spirit Airlines (SAVE) - Mispriced merger arbitrage.
Short Idea: B&G Foods (BGS) - Packaged food producer facing solvency issues.
Short Idea: Knife River Corporation (KNF) - Overvalued construction materials company.
Innovative Food Holdings (IVFH) - Inflecting specialty food distributor.
CAB Payments Holdings (CABP:L) - Oversold B2B payments platform.
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Spirit Airlines (SAVE, $1.8bn)
The ongoing combination between JetBlue and Spirit Airlines offers a compelling merger arbitrage play with a potential 88% return in less than a year. This opportunity exists due to antitrust concerns as the DOJ has filed a lawsuit to stop the merger and the trial is set for October 16. The market appears to be mispricing the odds of a favorable litigation outcome as antitrust arguments seem overblown. The combined SAVE and JBLU would remain only the fifth largest airline in the US, with the four legacy carriers controlling 80% of the market. Any pushback on overlap grounds appears unlikely as JBLU has put forth a proposal to divest most of the overlapping routes. Another favorable aspect is that the judge was appointed by Reagan and is a proponent of the free market politics. The risk of JetBlue backing out of the deal is low as the buyer recently terminated its partnership with American Airlines (due to antitrust concerns) to focus solely on the Spirit merger. This is a positive as earlier reports suggested JBLU might prioritize the NEA partnership over the SAVE merger. Even if the transaction falls through, the potential downside is limited. The stock price of SAVE might drop to $15/share (vs the current $16.85/share) given the substantial reverse break-up fee of c. $2/share (net of the already prepaid amount). At this level, SAVE would be valued at only <4x 2025 pre-tax earnings if margins were to recover closer to pre-Covid levels. There is also a chance that other companies, including the previous bidder Frontier Airlines, could emerge as potential suitors for SAVE if the current transaction does not go through. Full SAVE write-up on Value Investors Club (free guest account is required).
Short Idea: B&G Foods (BGS, $589m)
BGS produces and distributes shelf-stable and frozen foods as well as household goods in North America. BGS is expected to face solvency issues over the next several years, with significant debt maturities of $0.6bn coming up each year during 2025-2028. This compares to $45m in gross cash and $300m-$320m in 2022-2023 EBITDA. Given high net leverage ratio of 8x, full refinancing of the debt is likely out of the cards, indicating that the company will need to raise equity and/or to fire sale its assets in a difficult M&A environment. Meanwhile, cash generation from the operating business is unlikely to materially reduce debt burden as recent price increases intended to offset inflationary/supply chain pressures have led to declining volumes, negatively impacting revenue growth. BGS shares have already declined significantly since the write-up was published in August driven partially by a $550m 2028 senior note offering (used to partially refinance debt maturing in 2025), however, there seems to be further upside remaining for short-sellers here. A potential near-term catalyst that could spark a further sell-off might be another dividend cut (60% decrease already announced in Nov’22). There is a risk of the company getting taken out by a private equity firm, however, the probability of this outcome seems low given the current valuation of 9x EBITDA with minimal growth runway. Full BGS write-up on Value Investors Club (free guest account is required).
Short Idea: Knife River Corporation (KNF, $2.9bn)
KNF is a recently spun-off construction materials company that is currently overvalued by the market. Despite being primarily a producer of lower-quality asphalt, concrete and cement products, the company trades in line with higher-quality aggregates-focused peers. KNF is currently trading at 10x EBITDA which is in line with its competitor SUM that generates 44% of its EBITDA from aggregates vs 19% for KNF. CRH, a competitor with a similar aggregates exposure as KNF, is currently valued at a significantly lower 7x multiple. KNF displayed lower topline growth in 2016-2022 than the comps (5% CAGR vs 6% for SUM and 8% for CRH) while also recording lower average FCF conversion (15% vs 23% and 49% respectively). The opportunity exists due to investors' limited familiarity with KNF as the company was recently spun-off from its parent MDU Resources operating in an unrelated business. With increasing sell-side coverage, investors should stop lumping KNF together with higher-quality aggregates companies. At a more reasonable 8x EBITDA, KNF would be valued at $37/share, implying a 27% downside. If the market starts valuing the company on FCF basis, a 6.5% yield would imply a price target of $19/share or a 60%+ downside. Full KNF write-up on Value Investors Club (free guest account is required).
Innovative Food Holdings (IVFH, $35m)
IVFH is a micro-cap company running gourmet and specialty food distribution for U.S. Foods. IVFH has historically had a poor track-record of shareholder value creation, with substantial cash burn, bad investments into non-core e-commerce segment, excessive compensation and significant equity dilution. However, with the replacement of the CEO earlier this year following pressure from several activist funds, the core food distribution business now appears to be on the brink of profitability inflection. Driven by improved pricing, reduced overheads and slashed marketing costs, IVFH has already managed to turn profitable on EBITDA level in Q2’23 for the first time since 2019 despite Q2 being a seasonally weak quarter. There is substantial runway for EBITDA margin improvement from 2% in Q2’23 to 10% on a normalized basis. This target seems achievable given that IVFH’s margins were at 6% for most of its history with significantly lower scale and excessive overheads. Using a conservative 8% normalized margin estimate, the company is currently valued at only 7x 2024E EBITDA. This is substantially below 12x EBITDA where acquisitions in the food distribution industry have been completed. Valuing IVFH at a 10x EBITDA multiple would suggest a 50% upside from the current share price levels, implying a 30% potential IRR through 2024. Potential catalysts might include operational improvements or disposals of cash-burning e-commerce businesses and potential food distribution business sale to U.S. Foods. Full IVFH write-up on Value Investors Club (free guest account is required).
CAB Payments (CABP:L, £590m)
CABP is a B2B payments platform providing FX conversion services on official aid (think of UN agencies) and corporate payments from developed into emerging markets. CAB Payments currently trades at 7x 2024E EPS. This seems to be an undemanding valuation for a fast-growing (65% CAGR over the last four years), high-margin (50% EBITDA margins) and cash flow-generative (80% EBITDA-to-FCF conversion) business that benefits from strong secular tailwinds. CABP has plenty of growth runway (35-40% topline growth guided for the medium-term) as the company will continue to take market share from developed market banks currently providing much more expensive legacy correspondent banking services (80-85% of payments currently). The opportunity exists as CABP shares have been under heavy selling pressure since the recent IPO in Jul’23. This has been driven by low investor appetite for out-of-favor London-listed fintech/payment IPOs due to the their poor performance over the recent years as well as a weak broader macroeconomic backdrop. CABP’s IPO appears to have been poorly placed, with over-allocation to underwriters that subsequently sold their shares after the initial 30-day stabilization period. The sell-off dynamic was exacerbated by sell-side research blackout period and lower summer trading volumes. However, with the initiation of sell-side research and the recent inclusion into FTSE 250, the shares are expected to re-rate. Applying a 15x 2024 P/E multiple would imply a price target of £4.50/share or an 100%+ upside from the current share price levels. Full CABP:L write-up on Value Investors Club (free guest account is required).
CAB Payments looks cheap and tempting, but not certain whether they have a moat