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 investment 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:
Codere Online (CDRO, $135m) - Undervalued B2C online gambling operator.
PFSweb (PFSW, $112m) - Potential sale of e-commerce order fulfillment services provider.
Capital City Bank Group (CCBG, $511m) - Cheap regional bank immune to industry-wide issues.
i3 Verticals (IIIV, $750m) - Misunderstood software and payment fintech.
Permian Basin Royalty Trust (PBT, $999m) - O&G royalty owner with temporarily suppressed distributions.
LNA Sante (LNA:PA, €309m) - Oversold French care home operator.
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.
Codere Online Luxembourg (CDRO) is a cheap and fast-growing B2C online gambling operator in Spain and Latin America. The company is likely to get sold within the next 2 years given the solvency issues faced by its distressed parent/controlling shareholder Codere Retail (owns 67%). Codere Retail has recently noted that CDRO could be for sale with proceeds used to reduce leverage at the parent company. There is likely to be no shortage of potential bidders given CDRO’s excellent brand recognition and the regulatory/operational complexities of running online gaming businesses in Latin America and Spain. A potential sale would unlock substantial value as the company currently trades at only 0.25x EV/2024 sales. This contrasts with 3.75-4x revenue multiples for comparable industry transactions, including Blackstone’s acquisition of GanaBet.mx and Entain’s purchase of BetCity. At a 2.5-3.5x revenue multiple, CDRO would be valued at $14-$18 per share, implying a multi-bagger upside. Even if the company sale fails to materialize, CDRO would likely commence a dividend distribution in 2024 as the business is on the brink of turning cash flow positive. CDRO’s recent operational performance has been strong, with net gaming revenues accelerating in both the cash cow Spanish business and the growth-driving Mexican segment. Full CDRO write-up on Value Investors Club (free guest account is required).
The ongoing strategic review at the e-commerce order fulfillment services provider PFSweb (PFSW) is likely to culminate in a company sale as the management seems clearly focused on this outcome. A potential takeover would likely come at a significant premium to current share price levels as PFSW trades at only 5x 2023E EBITDA - substantially below 13x for a similar growth, margin and leverage profile competitor GXO. Another peer Radial was sold in 2017 at a 12x multiple. At a reasonable 8-12x EBITDA, PFSW might fetch $8-$13/share, implying a 60%+ upside. While the strategic review has already been ongoing for over two years, the company sale might finally materialize as PFSW has only recently completed its corporate restructuring. The management seems highly incentivized to complete the potential transaction by year-end as the existing incentives related to the change of control provisions expire in December. Even if the sale does not occur, the downside is protected by large net cash position (40% of the market cap) and historically low valuation (historical EBITDA multiple of c. 8x). Meanwhile, PFSW currently appears to be a higher-quality business as its largest vertical is now the large, fast-growing and still underpenetrated health and beauty segment. In a no-sale scenario, the management might opt to employ the company’s large net cash balance toward share buybacks. Full PFSW write-up on Value Investors Club (free guest account is required).
Capital City Bank Group (CCBG) is a stable regional bank with a locally dominant deposit franchise trading at only <10x NTM P/E and 1.7x TBV while expected to generate a 20% ROTCE over the next 12 months. CCBG’s larger but lower-ROTCE peer SBCF has historically traded at >2x TBV while another competitor FFIN trades at >3x TBV and 19-20x P/E. Valuing CCBG at 15x 2024E EPS would yield a 60%+ upside. The opportunity exists as CCBG shares are down c. 20% from Mar’23 highs amid the US regional bank turmoil despite the fact that the bank is largely immune to the industry’s problems of deposit outflows to higher-yielding vehicles. CCBG’s deposits are much less sensitive to higher interest rates as the bank has sticky relationships with its customers, including municipal agencies and local businesses, due to few locally available full-service commercial financing alternatives as well as social community-related reasons. Resulting low deposit beta allows CCBG to boast low funding costs as indicated by the average deposit rate at 0.5% in Q1’23, with 42% of total deposits in non-interest checking accounts. While the share of deposits in non interest-bearing accounts will likely decline, they are likely to move to CCBG’s accounts with still low 1.25% rates. On the asset side, the bank has a highly interest rate-sensitive loan book with yields of newly issued loans at >7% (vs 5.4% for the entire loan book in Q1’23). Benefitting from these dynamics, CCBG’s net interest margin is expected to continue increasing from 3.1% in FY22 and 4% in Q1’23 to over 4.5% over the next 12 months which is expected to lead to a double-digit earnings growth. CCBG has a strong track record of displaying solid NIMs (>5% for 22 out of last 30 years), indicating that higher earnings are likely to be sustainable. Full CCBG 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.
i3 Verticals (IIIV), a fintech company providing software and payments solutions, was highlighted in Voss Capital’s Q2’23 letter. The market seems to have missed IIIV’s successful transition from a payments business (95% of revenues in FY17) to a higher-quality software company (65% of revenues in FY23) over the recent years. This is indicated by the company being valued at 12x EV/EBITDA - in line with pure-play payments competitors. In contrast, software companies with similar financial profiles are currently trading at 15-20x multiples. The most direct public comp Tyler Technologies is valued at a much higher 32x EV/EBITDA. IIIV has displayed higher gross/EBITDA margins compared to TYL while recording similar organic growth rates. IIIV is unlikely to fetch such a valuation given that, unlike TYL, it is not an exclusively public-sector focused player. However, even valuing i3 Verticals at 16x EV/EBITDA - a massive discount to the peer’s valuation - would imply a c. 50% upside from current levels. One of the potential catalysts here might be IIIV’s management continuing to pursue and integrate software acquisitions. There is a chance of the leadership agreeing to sell the company to a strategic acquirer down the road if the valuation gap does not close. Full Q2’23 letter from Voss Capital.
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.
Permian Basin Royalty Trust (PBT) was recently covered on the Special Situation Investing blog. PBT owns royalty interests in two oil and gas fields in Texas, entitling the trust to receive a fixed percentage of the asset operators’ net profits. Distributions received by PBT have been temporarily suppressed since 2020 as the asset operator of PBT’s largest property has pursued significant capital expenditures ($124m in 2022 and $122m in 2023 vs $54m in PBT’s royalty income in 2022) to extend the remaining life of the asset, yield greater production and reduce production costs. However, outsized capital expenditures should conclude by 2024 given that the asset operator has not mentioned intentions to pursue additional projects. This is expected to drive a dramatic increase in PBT’s royalty income. Assuming the same production levels next year as in 2022 and leaving a healthy $20m in property-related capex (vs $2m-$3m in total capex annually in 2016-2019) would raise the royalty income for 2024 from $54m to $129m. Given that PB is required to payout nearly all of its royalty income to unit holders, this would raise the dividend yield from 4% to c. 13%. Other similar royalty trusts SBR and SJT are currently trading at 5.6% and 3.8% dividend yields, suggesting that there would be ample room for a share price re-rate. Full PBT pitch on Special Situation Investing blog.
French care home operator LNA Sante (LNA:PA) was recently highlighted on the Buried Treasure blog. LNA is a stable and predictable business with high returns on capital (25-45% ROIC in FY16-FY22) trading at a cheap 9.3x EBITDA and a 14% FCF yield. The current EV/EBITDA valuation is significantly below the historical 11.1-18.4x range in FY15-FY22. The opportunity exists as LNA stock has cratered over 40% since early 2022 amid a broader sell-off in the industry due to allegations that the two largest industry players ORPEA Group and Korian have mistreated elderly residents. The market seems to have overreacted as LNA has no history/reports of abusing residents and was in fact cited positively in the investigative journalism book on ORPEA. Given LNA’s position as the third largest care home provider in France, the company might benefit from residents deciding to relocate from homes operated by ORPEA and Korian to its facilities. Considering LNA’s low debt burden relative to peers (1.9x leverage ratio), the fallout might also provide for M&A opportunities in the highly fragmented industry. LNA is also set to benefit from a combination of broader tailwinds in the French care home space, including rising average population age and an inadequate supply of beds (partly due to limited grants of new licenses for operators). A conservative DCF valuation based on projected sales per operational bed suggests a share price target of €44/share, implying a 45% upside. Full LNA:PA pitch on the Buried Treasure blog.
Thanks for sharing some great new ideas such as i3 Verticals and LNA Sante🙏👍
Great list of ideas. Thank you for including my LNA write-up 🫡