October Portfolio Review
An overview of active Idea Hive portfolio positions
With October in the books, I am sharing the monthly portfolio review. This post provides an overview of the Idea Hive portfolio, including key information on each position, such as elevator pitches and performance to date. 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 continue to present attractive investment opportunities.
Let’s dive right in.
Portfolio Review
Here’s the Idea Hive portfolio as of November 12:
October and the beginning of November were pretty active for the Idea Hive portfolio. In mid-October, I introduced a new idea to the portfolio, HCC. As for the other active ideas, the majority of portfolio names reported Q3 results—I discussed these in four update posts. I would also highlight the important update on PPSI, which I covered in an article published in late October.
As for portfolio performance so far, four ideas have performed well since I incorporated them into the Idea Hive portfolio: ARE-TO (+68%), PPSI (+55%), MGPI short (+52%), and PESI (+51%).
Portfolio Idea Updates
Below is a list of recent updates and thoughts on active Idea Hive portfolio positions.
Aecon Group (ARE-TO)
ARE recently reported solid Q3’24 results. The business continues to chug along, with revenues and EBITDA growing at healthy rates. Margins remained broadly in line with recent quarters, providing further evidence that the significantly higher margins seen post-COVID are likely sustainable. But more importantly for the investment thesis, ARE is nearing completion of the legacy projects that have been a significant drag on the company’s profitability in recent years. During the conference call, management highlighted that two of the three remaining legacy projects are in the final stages, with completion expected in Q1 2025. As for the remaining Gordie Howe International Bridge project, the construction is proceeding as planned. While there is still a chance that ARE might record additional write-downs related to the Gordie Howe project, management reiterated that potential future impairments related to the legacy projects will not exceed the previously stated C$125m. ARE’s stock price has jumped by over 20% since the earnings release, reflecting the market’s growing awareness of the looming profitability inflection as the company moves past the legacy projects. Despite the share price jump, I continue to believe ARE remains significantly undervalued, trading at 6x TTM normalized EBITDA. To illustrate this point, the company’s peers—GVA, FLR, BDT-TO, and ACS-MC—all trade at TTM EBITDA multiples in the teens. So, I think there is significant further headroom for a stock price re-rating. I shared my more detailed thoughts on ARE’s Q3 results in this post.
Pioneer Power Solutions (PPSI)
PPSI dropped a bombshell of an update in late October with the announcement of the divestiture of the e-Bloc business for $50m (vs. $68m current market cap). I discussed the divestiture in late October. With one of its two business segments divested, the transaction will transform PPSI into a pure-play mobile e-Boost fast-charging unit manufacturer. I intend to reassess the situation after PPSI’s Q3 earnings and conference call (scheduled for November 14 and November 18, respectively), where I expect management to provide more details on capital allocation and the guidance for the RemainCo. For now, I continue to believe the setup remains attractive. Pro forma for the divestiture, the remaining e-Boost segment is currently valued at only $12m, or just 0.6x 2024E revenues, for what is a rapidly growing business with c. 80% sales growth anticipated for 2024. Given e-Boost’s large backlog and significant further growth runway, it’s not unreasonable to expect $30m+ in revenues and $4m+ in EBITDA by 2025. I think the market’s skepticism might stem from some uncertainty surrounding PPSI’s capital allocation, as management has hinted at plans to use part of the cash balance for an acquisition. While M&A is admittedly not something I typically rely on in an investment thesis, given management’s recent comments, track record, and the CEO’s large ownership stake, I believe the chances of a value-destructive transaction are minimal. Considering these aspects, I would also expect PPSI to allocate a sizable portion of the proceeds toward a large special dividend and/or stock buybacks.
MGP Ingredients (MGPI)
The MGPI ‘short’ thesis has finally started to play out as expected. In mid-October, the company released weak preliminary Q3 results, announcing significant downward revisions to revenue and profitability for Q3 and the rest of FY24, driven by softer-than-expected trends in company’s alcohol categories and elevated whiskey inventories across the industry. The Q3 results and revised full-year outlook confirm my earlier contention that the stable or improving operational performance seen in recent quarters has likely been sustained by previously signed customer contracts at more favorable terms than those currently being signed. But what’s most notable is the even dimmer outlook for FY25, as management expects to reduce whiskey put-away and scale down whiskey production in 2025 amid industry headwinds. Illustrating the extent of the negative industry inflection, the company expects revenues in its core Distilling Solutions segment to decline by a massive 35% next year. While MGPI’s stock price has halved since the preliminary results announcement, I believe there is substantial further downside, as MGPI is currently trading at multiples above its replacement cost. A potential re-rating from the current EV of $1.4bn to the tangible book value of $0.3bn—still above where MGPI traded before the industry upcycle—would imply a potential downside of 80%+. You can find my more detailed thoughts on MGPI in update posts published in mid-October and early November.
Perma-Fix Environmental Services (PESI)
A consortium, of which PESI is a part, was recently awarded a $3bn Hanford site-related West Valley contract. The revenues and margins for PESI from this contract are not clear, but the award might potentially provide another significant revenue stream on top of the two key contracts whereby PESI will treat nuclear waste and nuclear waste by-products from the Hanford site. While PESI share price has jumped by over 20% since the end of September, I continue to think the risk/reward remains compelling. With reasonable assumptions, PESI is likely to generate around $100m in annual EBITDA from the two Hanford-related contracts starting in 2026, compared to the current EV of c. $240m. Applying any sort of conservative multiple to this recurring, long-term earnings stream—say, 6x—would imply a multi-bagger upside. I would expect PESI’s stock to continue to re-rate as we approach the back half of 2025 when the company is likely to begin treating nuclear waste from the Hanford site. I will be waiting for PESI’s Q3 earnings, scheduled for November 13, for more details/updates from management on the the two key contracts and the expected revenue/margin profile of the recently announced West Valley award.
Warrior Met Coal (HCC)
Highlighting my recent article series on the met coal industry (parts one, two, three, and four), where I outlined the case for investing in met coal producers and explained why HCC presents the most attractive way to play the industry. Last week, HCC released Q3 results—I discussed these in an update post from early November. As expected, price realizations were weak in Q3 as met coal producers continue to navigate a downcycle environment amid soft customer demand and an influx of cheap Chinese steel exports into global markets. While HCC’s management sees some improvement in Q4, the company, along with peers, expects the pricing environment to remain weak in the near term. However, while the short-term might be rocky, I continue to expect a recovery in met coal prices over the medium term. At the current met coal prices, marginal producers—primarily those based in the U.S. (excluding HCC)—are operating at or near break-even levels. Met coal prices have historically bottomed at marginal producer cost levels during downcycles before recovering, largely driven by supply exiting the market. I wouldn’t expect this time to be different, as prolonged met coal pricing at current levels could lead to mine closures. HCC share price has jumped by c. 20% over the last week, driven largely by the election news in the U.S., and the company currently trades at 9x mid-cycle ‘EBITDA-Capex.’ While this might seem like a fair valuation, I would note that my ‘EBITDA-Capex’ estimate is pretty conservative, using a lower realized price than in recent quarters and excluding any contribution from the Blue Creek asset. Adding the FCF expected from the Blue Creek asset at mid-cycle met coal price levels would lower the multiple to around 5x. So, while HCC is not as cheap as it was when I first added it to the portfolio, I still believe the valuation remains attractive.
Enav (ENAV-MI)
No updates on ENAV over the past couple of months. The company remains cheap, trading at c. 7x 2024E EBITDA when adjusted for cash owed to the company by airlines. This is too low given that ENAV is a high-margin, regulated monopoly business. The current valuation is also significantly below the 10x+ multiples where European airport operators AENA-MC, ADP-PA, FRA-DE, and FHZN-SW are trading. I continue to expect the stock to re-rate closer to peer multiples 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 report Q3 results on November 14.
Summit Midstream Partners (SMC)
Nothing material to update on SMC, but the company reports Q3 results this week. I would expect to hear more from management on the ongoing ramp-up of SMC’s crown jewel asset, Double E, and the path forward after the Tall Oak acquisition announced last month. Until then, I continue to like the setup. SMC remains cheap, trading at 7x 2025E EBITDA on a pro forma basis compared to peer multiples of 8-10x. What makes SMC particularly interesting is a number of catalysts that could help close this valuation gap, including the potential dividend reinstatement and/or the continuing influx of institutional investors following the C-Corp conversion completed several months ago.
Amplify Energy (AMPY)
I covered AMPY’s recent Q3 results in this post. The key update from the earnings was that the Beta development program continues successfully, with new well drilling results once again exceeding management’s initial expectations. Impressive drilling results in two wells over the last two quarters, with payback periods of less than one year, highlight Beta’s large cash flow generation potential. With reasonable assumptions, Beta could generate nearly, if not all, of AMPY’s current EV in FCF over the next five years. With AMPY trading broadly in line with O&G peers, I continue to think investors are significantly undervaluing the Beta opportunity. I would expect the market to become increasingly aware of Beta’s potential as the drilling program continues and management provides further plans for new well drilling (an update is expected in Q1’25). During the Q3 earnings, AMPY’s management also announced that the company has decided to retain the Bairoil assets. This is somewhat disappointing, as a potential divestiture of Bairoil would have allowed AMPY to eliminate the majority of its debt and/or initiate a large capital return. However, given the weakness in the crude oil market, I would guess the company has not received appropriately priced bids, and so the decision to conclude the monetization process without a transaction seems like the right one.
WideOpenWest (WOW)
WOW recently reported Q3 earnings. The most important takeaway was that the takeover process remains ongoing, with the special committee continuing to evaluate the bid. Considering that WOW’s recent announcement of a new $200m loan might have raised some concerns for the buyout thesis, this update is clearly a positive, suggesting that the takeover by the major shareholder is still very much on the table. As for operational performance, there were no major updates that would impact buyers’ views of WOW’s value, though I would highlight the insignificant broadband subscriber decline, which again confirms that the significant churn seen in Q3’23 and Q4’23 has been contained. The prolonged six-month timeline since the non-binding offer is admittedly somewhat concerning, especially considering Crestview’s long history with the company. Nonetheless, given that WOW’s management reiterated that the sale process is ongoing, and considering Crestview and DigitalBridge’s solid reputations, I don’t believe this extended timeline indicates any significant negotiation difficulties. WOW remains cheap, trading at 5x 2024E and TTM EBITDA, aligning with the lower end of historical lower-quality copper/DSL asset acquisitions and below peer multiples of 6x+. Valuing WOW’s existing cash-generative assets at the current multiple and simply adding the capex spent on the fiber assets would yield a price target of c. $7/share, or a 25%+ upside. So, there’s plenty of headroom for the buyer consortium to raise the offer while still preserving ample value for themselves. I shared more detailed post-Q3 earnings thoughts in early November.
Montero Mining and Exploration (MON-V)
Indiana Resources, a junior miner that has already reached a settlement with Tanzania in a similar arbitration case as that of MON, recently received the second payment from Tanzania, in line with the previously outlined timeline. This is yet another indication of the Tanzanian government’s willingness and ability to fulfill its financial obligations, which is clearly a positive for the recoverability of the potential award/settlement for MON. MON’s tribunal hearing is scheduled for late November. Given the timelines observed in the IDA case, I would expect the tribunal award and/or potential settlement to be announced in early 2025. At current stock price levels, MON is trading at an 82% discount to the claim value, while the discount to my revised ‘realistic’ claim stands at 62%. Settlements of MON’s peers, IDA and WINS, came at 5% and 68% discounts to the original claims, respectively. However, I would note that IDA’s discount is likely a much more relevant reference point, as WINS’s large discount is explained by the push for an early settlement from its largest equity holder. Nonetheless, even assuming a settlement at a 38% discount to the ‘realistic’ claim value (i.e., the midpoint of peer discounts to claims), the net proceeds to MON would stand at c. C$21m, or 30% above the current stock price levels. So, given the favorable risk/reward, I continue to like the setup.
Sun Corporation (6736-T)
There have been no material updates on Sun Corp over the last month, though I would highlight that CLBT recently issued 3.5m shares to Sun Corp (vs. 96m CLBT shares held by Sun Corp before the issuance) as part of the 2021 SPAC transaction agreement, as CLBT 20-day VWAP has exceeded the $12.5/share threshold. Sun Corp is entitled to receive another c. 7m shares, as CLBT's stock price has met two other VWAP conditions. While Sun Corp share price has continued to rise recently, the gain has been more than offset by the upward drift in CLBT’s share price, leaving the discount to NAV wide at 38%. The investment thesis remains unchanged: I expect the three activists present on Sun Corp’s register to push management towards actions that could help unlock the discount to NAV. It remains to be seen if this will materialize, but I would highlight that Sun’s management has previously indicated openness to “considering various measures to enhance Sun shareholder value” and willingness to discuss such measures with the activists. As for the form value realization might take, the most likely options remain either a distribution of Sun’s stake in CLBT to equity holders or an outright sale of CLBT to a third party. Either scenario would likely imply a 30%+ upside from current stock price levels.
SunOpta (STKL)
STKL recently released Q3 results. Operational performance remained solid, consistent with the previous quarter, driven by strong volume growth in the foodservice channel. I would highlight that STKL’s peer OTLY has recently reported similarly strong performance in its North America segment. So, the ‘short’ thesis has clearly not been playing out as expected so far. Nonetheless, I continue to anticipate a shift from undersupply to oversupply in the plant-based milk industry, given increasing production capacity coupled with normalizing consumer demand, as evidenced by declining sales in the retail channel. The real detractor the investment thesis has been the foodservice channel, which has more than offset the weakness in retail. However, given STKL management’s commentary, I suspect the company might be overstating the importance of the foodservice channel. Another point worth noting is that the rapid growth in the foodservice channel appears to have been driven largely by market share gains and new product launches. Given STKL’s already dominant position in the plant-based milk market and broader consumer weakness, there are questions about the sustainability of the recent rapid volume growth in this channel. So, I am inclined to give STKL another quarter before reassessing my short position. I covered STKL’s Q3 results in more detail here.
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
MGP Ingredients (MGPI) — initial post here, last update here
Perma-Fix Environmental Services (PESI) — initial post here
Warrior Met Coal (HCC) — initial post here, last update here
Summit Midstream Partners (SMC) — initial post here, last update here
Montero Mining and Exploration (MON-V) — initial post here
Sun Corporation (6736-T) — initial post here, last update here
Great post, and impressive performance so far!