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:
British American Tobacco (BTI) - Cheap tobacco industry giant.
Short Idea: XPEL (XPEL) - Overearning automotive protective film maker.
Hawaiian Electric Industries (HE) - Asymmetric litigation play.
Humble Group (HUMBLE:ST) - Cheap producer of healthy snacks.
Altus Group (AIF:TO) - Misvalued Bloomberg for commercial real estate.
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British American Tobacco (BTI, $70bn)
BTI is the world’s second-largest tobacco company, selling cigarettes, nicotine pouches, vaping, and heat-not-burn products. British American Tobacco presents an opportunity to invest in a solid FMCG business with attractive 9% dividend and 15% FCF yields. The company is currently valued at only 6x EV/2024 EBIT - at multi-decade lows and below the valuation seen during the Dot-com bubble, GFC, and COVID. The current multiple also appears low on a relative basis as BTI’s inferior peer with a history of worse capital allocation Altria is valued at 8x EV/EBIT. The opportunity exists as British American Tobacco shares have gradually declined since 2022 driven by weak performance in the US due to market share losses in the cigarettes business and an ongoing consumer shift from cigarettes to nicotine pouches. The company currently does not have a material presence in the booming US nicotine pouch business (industry growth of 30-40% annually). However, BTI is seeking FDA permission to bring Scandinavian oral nicotine pouch products into the US which is expected to boost company’s operational performance in the country. Other potential catalysts include resumed share buybacks in H2’24, the non-combustibles segment turning profitable and a potential monetization of the stake in the Indian subsidiary ITC currently worth 15% of BTI’s EV. Even if none of these catalysts materialize, BTI is an attractive stock purely from a yield perspective offering a 9% annual return. Full BTI write-up on Value Investors Club (free guest account is required).
Short Idea: XPEL (XPEL, $1.7bn)
XPEL is a manufacturer and installer of automotive protective films. Despite XPEL’s exposure to cyclical automotive sales, the market is incorrectly viewing the company as a secular growth story. XPEL is currently trading at 27x NTM P/E, which implies a 15%+ annual organic revenue growth rate through 2030. This growth projection is excessive, as sales of the core PPF segment (60% of revenues) are expected to normalize after more than doubling since pre-Covid levels. Topline and earnings normalization seems likely as a number of recent tailwinds will prove temporary. These include Tesla owners purchasing PPF to compensate for paint production challenges on earlier models and dealerships generously offering PPF to new cars due to higher dealer markups. Subsiding tailwinds, coupled with increased competition, should drive PPF’s topline growth down to a materially lower 8% CAGR through 2030. Given the contribution from higher-growth segments, such as window film and installation labor, the company might reasonably display an 11% blended topline growth going forward. Assuming EBIT margins in line with historical level and applying a generous 20x P/E multiple, XPEL would be valued at $41/share (35% upside). There might be further downside in a potential recession ($21/share or a 60%+ upside) as XPEL’s multiple would likely compress significantly. Full XPEL write-up on Value Investors Club (free guest account is required).
Hawaiian Electric Industries (HE, $1.3bn)
Hawaiian Electric Industries is a holding company with two major subsidiaries - Hawaiian Electric, the main utility in Hawaii, and American Savings Bank, one of the largest banks in Hawaii. HE presents a speculative and timely play on equity recovery in the upcoming litigation case related to the company’s utility subsidiary. HE shares have plummeted from $38/share to $12/share recently as Hawaii Electric was sued for billions in damages due to allegedly causing the recent wildfires on the Hawaiian Maui island. The fires were reportedly sparked by HE's power lines that were disrupted during high wind conditions. The potential damages have been estimated at well over HE’s current EV of $4bn. Given HE’s unaffected stock price, the market is currently pricing a 75% chance of HE going bankrupt. This seems to be overly pessimistic there are several potential outcomes that could prevent a complete equity wipeout:
The litigation will depend on plaintiffs' ability to prove that the fire was caused by HE's negligence. While HE did not turn off the power during the storms, the company might argue that shutting down the electricity would impact the Maui water systems required to respond to fires. Meanwhile, the argument that HE did not adequately prepare for extreme weather conditions could be rebutted by the large maintenance spending and historical investments regularly made by the company.
Even if HE is eventually found liable for damages, there is a chance that the liabilities are ring-fenced within Hawaii Electric’s Maui subsidiary.
Another possibility is that HE will be able to shield its banking subsidiary, worth approximately $5-$10/share, from potential liabilities. This would provide a decent downside protection.
If either of these outcomes materialize, HE would likely re-rate substantially, proving the market’s recent reaction overdone. There is also a possibility of HE settling with victims. If the company can reach a potential $3bn settlement (funded by equity and a rate base increase), the stock would likely be a homerun from the current share price levels. Full HE write-up on Value Investors Club (free guest account is required).
Humble Group (HUMBLE:ST, SEK 3.9bn)
Humble Group is a Sweden-based producer and distributor of healthy snacks and drinks, including protein bars, fitness drinks, and healthy candy. Humble is currently trading at 7x NTM EBITDA and a 15% FCFE yield. This valuation seems to be too low for a consumer staples company with a dominant market share (approximately 80%) in the fast-growing healthy confectionery market in Sweden. Slower-growing consumer staple peers, such as HAIN and BRBR, are currently trading at EBITDA multiples ranging from 10x to 20x, with an average valuation of 13x. The opportunity exists as Humble shares have declined by over 70% from their peak levels in 2021. This decline has been primarily driven by the market's concerns about Humble’s over-leveraged balance sheet as well as margin pressure from raw material inflation and SEK depreciation. However, at this point, the concerns appear to be overdone. Balance sheet was recapitalized in June 2023, with net debt-to-EBITDA decreasing to 2.5x from the previous 4x. Meanwhile, EBITDA margins have likely troughed in FY23 and are expected to rebound in the upcoming years as shipping contracts reset and pricing increases are realized. Assuming that Humble’s EBITDA margins recover to 12% by FY25 (vs 13% in FY21) and applying a 12x EBITDA multiple would imply a significant upside potential of over 200% over the next two years. Full HUMBLE:ST pitch from Alta Fox Capital.
Altus Group (AIF:TO, C$2.2bn)
Altus Group provides analytics, property tax, and consulting services/software to participants in the commercial real estate industry. The company is currently trading at a 30%+ discount to its SOTP value. It seems that the market is only ascribing value to Altus Group’s crown-jewel Altus Analytics segment (47% of revenues) which houses the market-dominant ARGUS valuation software (i.e. the Bloomberg of the CRE sector). The ongoing transition from on-premises to higher-margin cloud licenses has temporarily impacted the analytics segment's profitability, creating a need to run several different platforms. EBITDA margins declined from 27% in 2017 to 17% in 2021. However, with the transition nearing completion, margins have already rebounded to 21% and are expected to reach 31% in 2023. An incremental margin boost might come from a recently launched new offering which will allow the company to generate high-margin recurring revenues from its existing asset-level dataset. Excluding the value of all other segments, Altus Analytics is currently valued at 19x 2024E adjusted EBITDA ($130m) - below its peers that are trading at over 22x multiples. Meanwhile, the remaining property tax and consulting/advisory segments are expected to generate $88m in 2024 adjusted EBITDA. Valuing the analytics business and the remaining segments (after deducting corporate overheads) at 22x and 11x multiples respectively would suggest a price target of C$75/share (50%+ upside). Full AIF:TO write-up on Value Investors Club (free guest account is required).