Actionable Investment Ideas #6
Includes GRVY, DNTL-TO, LCUT, ACIC, CARD-L, ASHM-L, RELL and WOR
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.
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This week's newsletter includes:
Gravity (GRVY, $473m)
dentalcorp Holdings (DNTL-TO, C$1.3bn)
Lifetime Brands (LCUT, $164m)
American Coastal Insurance Corporation (ACIC, $343m)
Card Factory (CARD-L, £363m)
Ashmore Group (ASHM-L, £1.5bn)
Richardson Electronics (RELL, $167m)
Worthington Industries (WOR, $3.6bn)
New Ideas From Value Investors Club
Here you will find summaries of the most captivating pitches from Value Investors Club that have just become publicly accessible. To access these VIC posts you will need to register for a free guest account.
Gravity (GRVY) is a Korean mobile game developer trading at an extremely asymmetric valuation of 2x EV/2024 EBITDA and a 35% FCF yield. This seems too low for a capital-light, high operating margin (22-23%) and highly cash-flow generative (75% FCF conversion) business that has been steadily growing its topline and earnings over the recent years. Valuing GRVY at 9x 2024 EBITDA - closer to its peers - would imply multi-bagger returns. A potential acquisition by a larger industry player is not out of the question given that there are few public mobile gaming companies left. Meanwhile, the downside is protected by GRVY’s large net cash position ($50/share or over 70% of the market cap). GRVY’s operational performance since 2016 has been steadily improving, with growing topline and EBITDA. More recently, the company’s financials accelerated driven by the successful release of GRVY’s key franchise Ragnarok in Taiwan/Hong Kong in Q4’22. The positive momentum is expected to continue with launches in other markets this year. The shares might be catalyzed by potential share buybacks as Gravity’s Japanese parent has a history of returning cash via repurchases. Full GRVY write-up on Value Investors Club (free guest account is required).
This is an interesting pitch on a company that I have been tracking for a while now. Dentalcorp Holdings (DNTL-TO) is the biggest dental services roll-up in Canada. It is an extremely stable, recession-resistant, consistently growing and cash-generative business trading at fairly cheap 11x 2023 FCF and 9.8x EBITDA. The company’s share price fell after the recent strategic review ended with no company sale, leading to a massive outflow of M&A focused investors from the stock. Despite being the largest player in the Canadian dental practice market with a large runway for further consolidation, the company trades at a significant discount to smaller operators and comparable industry transactions. DNTL’s closest competitor 123 Dental was acquired last year at a 16.5x multiple while other peers US Oral Surgery Management and Affordable Care were bought at 14-15x and 17x EBITDA respectively. The current valuation is also too low on an absolute basis given DNTL’s business profile with predictable and steadily growing recurring revenues, high EBITDA margins (18%+) and strong cash flow generation (60-65% FCF conversion). DNTL’s management seems to be very incentivized to sell the company due to the recently amended change of control provisions. Hence, despite the strategic review outcome (which happened to be run during unfavorable debt market situation), the company sale in the next few years is still very much possible. The shares should eventually re-rate closer to its 14x EV/EBITDA IPO multiple which would translate to an upside of 120-140%. Full DNTL-TO write-up on Value Investors Club (free guest account is required).
Lifetime Brands (LCUT), a designer and seller of branded kitchenware and non-electric household goods, is a stable and cash flow-generative business up for grabs at a low absolute and relative valuation. The opportunity exists as LCUT’s stock has been battered since early 2022 due to weakening consumer demand and retailer de-stocking initiatives driven by the post-COVID shift in consumer spending habits away from hardgoods. Nonetheless, the nature of the company's products is such that they have to be frequently replaced, so financials should eventually normalize. LCUT's low CAPEX model results in significant free cash flow with $17m reported in 2022 and $21m FCF expected in 2023 vs $164m market cap. On EBITDA basis, LCUT trades at c. 7x trough 2023E EBITDA vs peers at 7.8x-10.5x. Full LCUT write-up on Value Investors Club (free guest account is required).
New Ideas From Hedge Funds
Here you will find summaries of the most interesting situations I’ve come across while reviewing the latest hedge fund letters.
American Coastal Insurance Corporation (ACIC) is a cheap commercial P&C insurance carrier in Florida that was recently pitched by Sohra Peak Capital Partners. ACIC is a solid business that has dominated its niche (has captured 40% of its TAM) while delivering an average ROE of 23% with no unprofitable years since 2007. American Coastal’s market leading position is protected by a set of competitive advantages coming from its exclusive partnership with the largest CAT-focused managing general agent in the US - AmRisc. Despite strong fundamentals, the stock trades at an undemanding 4x FY24 P/E. The opportunity to buy at this valuation exists due to the recent “GoodCo-BadCo” deconsolidation of American Coastal from its parent United Insurance Holdings Company. The founder and CEO Dan Peed owns 48% of shares outstanding and has an impressive track record in the industry, including co-founding AmRisc. There is a path for American Coastal’s share price to reach $16-$22 over the next 2-3 years, implying a 100%+ upside. Full ACIC pitch from Sohra Peak Capital Partners.
New Ideas From Investment Blogs
In this section, I share concise summaries of the most attractive ideas I've uncovered sifting through various investment blogs.
Herman over at Smart Micro Caps recently shared his thoughts on Card Factory (CARD-L), the UK’s leading retailer of cards and gifts trading at a dirt-cheap valuation of 2.7x EBITDA and 3.3x FCF. CARD is a capital-light and cash-generative business that has consistently grown its revenues since the IPO back in 2014. The company is the only vertically integrated business in the UK’s greeting card market which makes it absolutely dominant by being able to react to demand and boast the widest quality selection at the lowest prices. CARD’s topline should continue to expand as the company keeps capturing incremental market share. There is also significant further growth runway in the adjacent and much larger UK’s celebration occasions market where the company will be able to combine its card offerings with other gifts. The management expects the CARD’s topline to grow by 40% until FY27. With base case assumptions, including a 14x PBT multiple, CARD might be worth 286p/share by FY27 which would imply a 170%+ upside. A potential catalyst might be reinstatement of dividends which is targeted at the end of FY24. Full CARD-L pitch on Smart Micro Caps blog.
Guy from Superfluous Value recently shared a pitch on Ashmore Group (ASHM-L), an oversold UK-based investment manager specializing in emerging markets credit. Before the onset of Covid, ASHM had gradually expanded its AUM (up 80% from FY16 to FY21) and revenues (+28%) while printing high EBITDA margins (60%+) and stable EPS. Ashmore’s funds have been highly skilled investors as indicated by 97% of the company’s AUM outperforming their relative benchmarks prior to 2020. However, the company’s shares have fallen over 60% from pre-Covid levels and now sit at ten-year lows. This has been driven by investor skepticism towards UK financial sector stocks as well as headwinds for out-of-favor EMs leading to softening ASHM’s fund performance since the pandemic. At current prices, the operating business appears cheap valued at only 5x average earnings recorded over the last ten years despite a generally solid track record of performance. There is a decent chance of operational performance picking up materially if at least some of the headwinds, such as cheap EM currencies, revert. Even if the headwinds do not subside, the downside seems protected by Ashmore’s cheap valuation and strong balance sheet, with half of the company’s market cap in liquid reserves. Full ASHM-L pitch on Superfluous Value blog.
Richardson Electronics (RELL) is an electrical components manufacturer that was recently highlighted in The Fond Investor blog. RELL’s share price has been decimated since late 2022 (over 50% decline) as the company’s largest PMT segment (63% of revenues) faced a material topline slowdown due to a cyclical downturn in semiconductor end-markets. While the company’s earnings will likely remain depressed for a couple more quarters, the market seems to have overreacted to short-term results as the headwinds should begin to dissipate in 2024. The cyclical semiconductor downturn will likely prove to be transitory as RELL’s semi-wafer customers expect a recovery in H1’24 due to increasing demand in automobile and AI end-markets. Moreover, the fast-growing GES business (18% of sales) has the potential to become the largest segment for the company driven primarily by the EV locomotives end-market where new large production orders are expected as soon as Q2’24. Investors buying in currently get an optionality of a quicker than anticipated recovery in the semiconductor market and potential significant unexpected announcement from GES. RELL currently trades at 17x depressed FY24 earnings. On conservative FY25 estimates, the company is valued at only 10x P/E. This seems undemanding for a business with a net cash position, expected double digit growth and potential for more cash generation once the GES business matures. Full RELL pitch on The Fond Investor blog.
Todd from Flyover Stocks recently shared his pitch on Worthington Industries (WOR), a diversified metals manufacturer that will spin-off of its steel processing business in early 2024. The situation offers a play on the remainCo as the transaction will separate the highly-cyclical, low-margin segment from the remaining stable, capital-light and high-margin (20%+ adjusted EBIT margins) building and consumer products businesses. Legacy Worthington has historically traded in line with cyclical steel companies, indicating that there is significant share price appreciation potential in the remainCo once the spin-off is completed. At current prices, valuing the steel processing segment near the low-end of WOR’s historical P/S multiple range (0.5x) would yield remainCo’s valuation at 10x adjusted net income. This seems undemanding for a stable business that is expected to grow topline at 7-10% (2-3% GDP growth + 2% transformation + 2% new products growth + 2% acquisitions) with a continued buyback pace of 3-4% per year. DCF model with conservative assumptions suggests that the remainCo equity might be worth $2.5bn or c. 12x adjusted net income. The remainCo will be led by the long-time CFO/CEO Andy Rose under whose tenure (since 2008) WOR has consistently paid dividends while retiring 40% of outstanding shares. Full WOR pitch on Flyover Stocks blog.