August Portfolio Review
August Portfolio Review
An overview of active Idea Hive portfolio positions
With summer behind us, I am sharing the monthly portfolio review for August. This post provides an overview of the Idea Hive portfolio, with key information on each position, including elevator pitches and performance so far. The article also covers recent updates on each portfolio name and their impact on the underlying investment theses. The aim of this post is to quickly recap the latest developments for each idea and highlight why these portfolio names still present attractive investment opportunities.
Let’s dive right in.
Portfolio Review
Here’s the Idea Hive portfolio as of September 2:
August was a pretty active month for the Idea Hive portfolio. In late August, I introduced two new ideas to the portfolio, MON and WOW. As for the other active ideas, the majority of companies reported quarterly results during the month — I discussed these in four update posts. Despite some stock price volatility in August, most portfolio names are currently trading close to the entry price levels.
Portfolio Idea Updates
Below is a list of recent updates and thoughts on active Idea Hive portfolio positions.
Aecon Group (ARE-TO)
ARE share price has been on a steady upward trajectory recently, despite no news or material announcements from the company, and the stock is now up by 30% since late July. It seems that the market is becoming increasingly aware of the looming profitability inflection when the company moves past the remaining legacy projects. Despite the recent share price run-up, ARE remains cheap, trading at only 4.4x normalized TTM EBITDA. This is substantially below the 10x-20x multiples at which company’s peers are currently trading, and 8-9x EBITDA where ARE fully/partially divested its road-building and utilities businesses. With the legacy project-related write-down cycle coming to an end, I’d expect the stock to re-rate closer to the peer and divestiture multiples. Besides the improving profitability, another potential catalyst might be share buybacks, as the TSX has recently approved the company’s buyback authorization for 5% of outstanding shares. If/when launched, these buybacks will create some incremental upward pressure on the stock.
Pioneer Power Solutions (PPSI)
PPSI continues to secure new contract wins. In mid-August, the company announced a collaboration agreement with EV charging delivery services provider SparkCharge. As part of the agreement, PPSI will deliver 12 e-Boost rental units to the customer starting in Q4’24. While other terms of the agreement have not been disclosed, this is likely a sizable contract win for PPSI — for reference, several months ago, the company announced a $5m order for 4 fast-charging e-Boost units. The latest contract win reinforces the growth thesis, highlighting the demand for PPSI’s second-largest product line and the potential for PPSI to use the rental model to generate more stable/recurring usage/rental fees going forward. Despite further evidence that company’s products are gaining market traction, PPSI continues to trade at 13x 2024E P/E, an undemanding multiple for a company with 30%+ projected growth this year and significant further growth runway. The market’s skepticism likely stems from PPSI’s ongoing issues and delays with financial statement reporting, with the company yet to file Q1 and Q2 financials. Nonetheless, given the progress thus far (2023 10-K was filed in July), I’d expect the company to become current on its financials in the coming months. PPSI investment setup has been nicely outlined in this recent write-up from everyonehatespoetry.
Amplify Energy (AMPY)
AMPY reported Q2 results in early August (discussed in this post). The key takeaway from the earnings release was positive Beta drilling results. The drilling of a new well was completed “on time and under budget,” and production rates significantly exceeded previous guidance, with the company now projecting a payback period of only four months. This is highly encouraging as it shows that the incremental FCF generation potential of new wells is substantial. Assuming that further well drilling yields similar results, we might see c. $32m in annual incremental FCF from Beta well drilling — roughly in line with AMPY’s TTM FCF. The incremental cash flow generation might potentially be significantly higher, as the company’s infrastructure allows for expanding the development program from 4 to 12 wells per year. While AMPY’s share price has surged since the earnings release, I think the market is still ascribing limited/minimal value to Beta’s new well drilling optionality. Another potential catalyst, the Bairoil asset divestiture, is still in play, as in the earnings release management highlighted that the process is ongoing, with multiple bids received.
Montero Mining and Exploration (MON-V)
Highlighting my write-up on MON published a couple of weeks ago. Despite the slight share price jump since the write-up was published, MON still presents a highly asymmetric bet. The company continues to trade at a wide 83% discount to its arbitration claim against Tanzania. In contrast, settlements in two nearly identical precedent cases, IDA-AX and WINS-V, were reached at 83% and 32% of the award/claim value. A potential settlement at the midpoint of these two cases (as a percentage of claim/award value) would imply pre-tax net proceeds to MON of C$0.72/share, or 100%+ above the current stock price levels. I consider the downside to be protected, as conservatively assuming a settlement in line with WINS, the pre-tax proceeds would stand at C$0.37/share.
Summit Midstream Partners (SMC)
Over the last month, SMC completed the C-Corp conversion and reported Q2 earnings. While the C-Corp conversion has so far not catalyzed a stock re-rating, it will likely take some time for the substantial influx of new institutional and index investors to fully materialize. So, I still expect the C-Corp conversion to create upward pressure on the stock price over the coming months. As for the Q2 results, the company’s performance was broadly in line with management’s expectations and previous trends. The key takeaway was that SMC continues to quickly ramp up its crown jewel asset, Double E. Given the already contracted Double E capacity, I’d expect asset’s EBITDA generation to continue growing rapidly in the coming quarters. As a reminder, management has previously stated that at full current capacity, company’s share of Double E’s EBITDA would be $45m, implying a near doubling of the SMC’s current EBITDA. SMC remains cheap on both relative and absolute valuation basis, trading at 6x 2024E EBITDA (vs 8x+ for comps) and at a 50% discount to my SOTP value estimate. I shared my more detailed thoughts on the latest developments at SMC in mid-August.
Enav (ENAV-MI)
Several things to highlight on ENAV: Q2 results and recent rumors that the Italian government might be looking to divest part of its stake in the company. I discussed ENAV’s Q2 results in early August. The company continues to perform well, thanks to ongoing growth in air traffic over, to, and from Italy, as well as payments accrued during 2020-2023. Total COVID-related cash inflows in H1’24 were broadly in line with management’s implied guidance. The company remains undervalued, trading at 6.7x 2024E EBITDA pro forma for the cash owed by airlines. This is substantially below other European airport operators, which are trading at 10x-11x multiples. I think the stock is poised for a re-rating closer to peer valuations as the company continues to receive COVID- and inflation-related accruals. Moving on to another noteworthy update, recent media reports suggest that the Italian government is looking to divest a 20% stake in ENAV (compared to a 53% total stake). While these are currently just rumors from an Italian newspaper, a stake sale would make sense given Italy’s previously outlined broader privatization plan for 2024-2026. Although a potential stake sale could act as an overhang on ENAV stock in the short term, it would also substantially boost free float and liquidity, potentially attracting more institutional investors. I will continue to monitor media/ENAV for any further updates on this front.
SunOpta (STKL)
Last month, STKL reported Q2 earnings. The operational performance was generally solid, driven by continuing strong demand in the foodservice (i.e., coffee shop) channel. The stock is up by roughly 10% since the earnings release. Despite the market’s optimism, I continue to think that we might be nearing an industry inflection, as indicated by STKL’s pricing remaining firmly in negative territory. Meanwhile, additional capacity is slated to enter the industry in the near term, including the ramp-up of STKL’s Midlothian third manufacturing line. This suggests that the industry will likely shortly tip into oversupply, and thus pricing pressures will only intensify. So, I continue to expect a deterioration in STKL’s pricing and topline/margins in the coming quarters. You can find my more detailed thoughts on STKL’s earnings in this post.
WideOpenWest (WOW)
In case you missed it, I shared a pitch on WOW last week. I believe WOW presents one of the more intriguing special situation plays currently available in the market. The non-binding takeover proposal from Crestview Partners at $4.80/share is evidently low-balled and opportunistic, leaving plenty of room for a price increase. Given that the special committee has been reviewing the offer for four months now, I think the situation is quite timely, and we may see a price bump announced soon, likely in the coming weeks or months.
Sun Corporation (6736-T)
As expected, True Wind’s tender offer at improved terms, ¥5,500/share, went through successfully, and the PE firm has acquired a 19% stake. With yet another activist on the shareholder register, Sun Corp’s management will face increasing pressure to pursue actions that could help close/narrow the company’s discount to NAV. Recall that the company’s leadership has previously stated it would be open to “considering various measures to enhance Sun shareholder value” and would be willing to discuss such measures with the activists. So I think we are likely to see some value-realizing actions, such as a distribution of Sun’s stake in CLBT to equity holders, in the coming months. While Sun’s share price has more than doubled since the write-up was published, the gain has been more than offset by the rally in CLBT stock price over recent months, and thus the discount to NAV remains wide at over 40%.
MGP Ingredients (MGPI)
I discussed MGPI’s Q2 earnings in a post published in early August. To summarize, I’d regard the results as slightly negative/neutral for short positions. During the quarter, the company displayed significant volume growth in the key Distilling Solutions business, potentially reflecting strong demand from American whiskey producers. Nonetheless, despite decent quarterly results, I continue to believe the industry is poised for a negative inflection over the short to medium term. The latest data confirms that the American whiskey industry remains vastly oversupplied, with whiskey inventory and production at unprecedented highs. Meanwhile, MGPI peer Brown-Forman’s commentary indicates that consumer demand continues to normalize after the jump during the COVID years. With the investment thesis intact, I continue to think that MGPI is an attractive short opportunity.
List of Active Portfolio Ideas
Below you can find links to the initial pitches and latest update posts for each active portfolio idea.
Pioneer Power Solutions (PPSI) — initial post here, last update here
Montero Mining and Exploration (MON-V) — initial post here
Summit Midstream Partners (SMC) — initial post here, last update here
WideOpenWest (WOW) — initial post here
Sun Corporation (6736-T) — initial post here, last update here
MGP Ingredients (MGPI) — initial post here, last update here
I really enjoyed this format. Good article. Thank you! :)