July Portfolio Review
With July in the books, I am sharing the monthly portfolio review. 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 the portfolio names still present attractive investment opportunities.
Without further ado, let’s dive right in.
Portfolio Review
Here’s the Idea Hive portfolio as of August 1:
Most portfolio names are currently trading close to the entry price levels. Nonetheless, several ideas have performed well since I incorporated them into the Idea Hive portfolio, including PPSI (+20% so far), 6736-T (+15% for hedged positions), and AMPY (+13%).
Portfolio Idea Updates
Below is a list of recent updates and thoughts on active Idea Hive portfolio positions.
Pioneer Power Solutions (PPSI)
PPSI's growth thesis has been working out well, as the company continues to secure significant new contracts. Recently, PPSI announced new purchase orders for e-Bloc, their key product line, totaling $7m (compared to total revenues of $41m in 2023). This follows several large orders totaling $12m for the e-Boost products disclosed in June. These announcements confirm that company's products are gaining market traction and counter my previous concern that e-Bloc and e-Boost are commoditized products. PPSI stock has surged by over 40% since early June, driven by these announcements. The stock trades at 15x 2024E EPS, up from 12x at the time of the initial post. However, I still think this is not a demanding multiple for a company expected to grow its topline by 30%+ in 2024. PPSI has also recently made progress on restating/filing its financials, as the company released the 2023 10-K last week. With PPSI likely to become current on its financials in the coming quarters, I’d expect a further stock re-rating. You can find a more detailed discussion of the recent developments in this post.
Sun Corporation (6736-T)
Several positive developments at Sun Corporation as management continues to face pressure from activists/equity holders. Last week, True Wind extended its tender offer to acquire up to 19% of Sun Corporation’s outstanding shares and raised the offer price from ¥4,400 to ¥4,750 per share. Then, this week, the PE firm increased the tender price yet again, this time to ¥5,500/share, and materially lowered the minimum participation condition to 5% vs. 15% previously. The tender will now expire on August 15. The offer still values Sun Corporation at a wide 42% discount to NAV as the premium over the initial offer is roughly in line with the CLBT share price jump since early June. Nonetheless, given the much lower minimum participation condition, the odds of the tender offer going through successfully have now significantly increased. True Wind’s potential entry into Sun’s shareholder register, alongside Oasis Management and Leopard Asset Management, would create further pressure for management to pursue some sort of value realization. Recall that Leopard has already publicly pressured management to distribute company’s stake in CLBT to equity holders. While True Wind’s playbook has not been made clear, it is possible that they might either push for a similar distribution or an outright sale of CLBT to a third party. Either of these scenarios would likely imply a 40%+ upside from the current levels. So, despite the recent share price run-up, I think there is still plenty of meat left on the bone. I currently do not intend to tender my shares barring any unexpected developments and/or sell-off in Sun Corp stock before tender expiration.
Amplify Energy (AMPY)
AMPY's share price is up 29% since mid-June, despite no announcements from the company. As discussed in my recent update post, I continue to believe that AMPY presents a compelling investment opportunity. The company remains inexpensive, trading at approximately 5x EBITDA, 10x FCF, and 0.5x EV/PD PV-10. While this is not cheap in the context of the broader O&G space, what makes AMPY stand out are the potential catalysts, including new well drilling at Beta and the potential divestiture of the Bairoil segment. If successful, Beta's development could create value multiples above the current share price. Meanwhile, a potential monetization of Bairoil, even at a steep discount to its PD PV-10 value (e.g., 50%), would allow the company to pay down most of its debt and/or initiate a large capital return. I will be waiting for Q2’24 results (scheduled for August 7) for updates on the Bairoil divestiture process, Beta’s development, and to refresh the valuation.
SunOpta (STKL)
In late June, STKL completed the expansion of its California plant, further indicating additional capacity entering the plant-based milk market. The expansion is anticipated to increase the annual production of oat milk by more than 60%. While demand for oat milk has been growing in recent years, the estimated size of the capacity expansion is likely to negatively impact plant-based milk pricing. With increasing supply and ongoing post-COVID demand normalization, I continue to expect a deterioration in STKL’s pricing and topline/margins in the coming quarters. For a more detailed overview of the investment thesis and industry, refer to my update posts discussing 1) the recent capacity expansion (here) and 2) the dynamics of the plant-based milk industry (here).
Summit Midstream Partners (SMLP)
As expected, SMLP’s unitholders have approved the pending C-Corp conversion. The reorganization will be completed on August 1, and the stock will commence trading under a new ticker, “SMC”. Despite the imminent catalyst, SMLP remains undervalued at only 6.5x 2024E EBITDA compared to 8x+ multiples at which peers are trading. I expect the reorganization to lead to a significant volume/valuation uplift given precedent C-Corp conversion cases. This should catalyze a stock re-rating closer to peer valuation multiples. Given SMLP’s significant debt burden, even a relatively minor half-a-turn re-rating on an EV/EBITDA basis would imply a 20%+ upside from the current stock price levels. Besides the imminent C-Corp conversion, there are several other catalysts that might help the stock re-rate. Management has recently refinanced SMLP’s senior secured notes 2026, putting the company one step closer to potential dividend reinstatement. There is also a chance the company might get sold at a premium to the current stock price levels. SMLP’s recent proxy indicates that the company has been in discussions with other parties regarding “a range of strategic alternatives,” including a transaction whereby “the potential counterparty would acquire control of the Partnership.” I have covered these updates on SMLP in more detail in articles published in mid-June (here) and late July (here).
Enav (ENAV-MI)
There have been no new material developments at ENAV over the last couple of months. The company remains undervalued, trading at c. 7x 2024E EBITDA when adjusted for cash owed to the company by airlines. This is too low considering that this is a high-margin, regulated monopoly business. I expect the stock to re-rate closer to peer multiples of 10x+ as ENAV is contractually reimbursed for the negative impacts of 1) traffic declines due to COVID and 2) higher-than-expected inflation in 2022-2023. ENAV is set to release H1’24 earnings on August 5.
Aecon Group (ARE-TO)
Highlighting several important developments at ARE. The company provided an update on the four legacy projects in late June (discussed here) and subsequently reported Q2’24 results (here). Key takeaways from the announcements include a settlement on the Coastal GasLink Pipeline project. While the company recorded a significant C$127m charge related to the settlement in Q2’24 (versus C$344m estimated TTM normalized EBITDA), I view this as a positive. One of the four key legacy projects is now behind the company, and no further write-downs related to it will be incurred. As for the three remaining projects, management recorded a C$110m impairment in Q2’24. During the earnings release, management noted that the company might incur up to C$125m in additional write-downs until the projects are completed by the end of next year. Potential additional write-offs would likely prolong the timeline of the investment thesis, with the company potentially not reporting clean financials until after 2025. Nonetheless, it is not yet clear if the incremental impairments will be incurred. Even if they are, the likelihood of further impairments appears low given the advanced status of the three legacy projects. Thus, I am inclined to view this as a neutral development, likely marking the beginning of the end of the write-down cycle. The market seems to hold the same view, with the share price jumping by nearly 20% since the earnings release, allowing the stock to almost fully recover from the post-June update-driven sell-off. Significant upside remains as the stock trades at 4x estimated TTM normalized EBITDA. This is significantly below the 10-20x multiples at which its peers are trading.
MGP Ingredients (MGPI)
There have been no updates from MGPI over the last couple of months, though it is worth noting that branded alcoholic beverage peer Diageo recently reported its first annual revenue decline post-COVID, driven partially by declining whiskey sales. MGPI will report earnings on August 1, so I will then assess company’s operational performance and any commentary from management on the broader American whiskey demand and supply dynamics. For now, I still consider MGPI an attractive short opportunity. You can find my research and thoughts on the company and the broader industry in this post published in mid-June.
List of Active Portfolio Ideas
Below you can find links to the initial pitches and latest update posts for each active portfolio idea.