PFB: Canadian Micro-Cap Insulating Products Maker with Strong FCF

James Zimmerman of Lowell Capital Management presented his in-depth investment thesis on PFB Corporation (Canada: PFB) at Best Ideas 2020.

Thesis summary:

PFB Corporation is a manufacturer of insulating building products made from Expanded Polystyrene Material for the residential, industrial, and commercial construction markets in North America. PFB is an industry leader and the only vertically integrated Expanded Polystyrene Material company in North America. 

PFB has a market cap of ~$80 million and a “Ft. Knox” balance sheet with net cash of ~$15 million, implying an enterprise value of ~$65 million. LTM cash from operations is $17 million and FCF is almost $12 million. PFB is trading at about 4.5x adjusted EBITDA and a 15+% unlevered FCF yield. 

Absent a severe recession, PFB’s strong FCF can be sustained due to its highly cash-generative business model, which has limited working capital and capex needs, and PFB’s unique competitive position in localized markets. Maintenance capex is ~$2.5 million per year as compared to almost $16 million in LTM adjusted EBITDA. PFB is a fairly stable and sticky business with entrenched competitive positions in attractive local markets in North America. 

Jim sees the shares as undervalued at a recent price near $12 per share, trading at ~4.5x adjusted EBITDA and a 15% unlevered FCF yield, which seems attractive for a custom manufacturing business that growing in the mid-single digits organically, with modest capital investment needs and strong free cash flow. Based on 8x Jim’s estimate of adjusted EBITDA of $18 million by fiscal 2021, plus $25 million in estimated net cash, PFB would have a market cap of about $170 million or ~$24 per share, as compared to a recent price of $12 per share.

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About the instructor:

Jim Zimmerman is founder and portfolio manager of Lowell Capital Value Partners, LP, successor fund to Lowell Capital Fund, L.P. Mr. Zimmerman managed Lowell Capital Fund L.P. from 2003 to 2015 employing a proprietary strategy laser-focused on smaller and/or misunderstood companies with large, sustainable free cash flow yields and “Ft. Knox” balance sheets. He generated a compound annual return significantly exceeding the HFRI Equity Hedge Index and the S&P 500 Total Return Index over this period, despite holding a significant net cash position (~30%) for most of this period. He has over 25 years of investment banking and investment management experience in a variety of industries and has been involved with several billion dollars of investments. He has been a member of the invitation-only Value Investors Club for over 10 years, contributing detailed investment write-ups on 35 companies to date which have produced an average return exceeding 50% per investment. He has built an extensive network of relationships with value-oriented investment groups and activists. Mr. Zimmerman graduated with a BA with high honors in economics from Princeton University in 1980 and an MBA from Stanford Business School in 1984. He worked at Drexel Burnham Lambert, Inc., 1984 to 1990, serving in the Corporate Finance Department and multiple other investment banks from 1990 to 2003. He is a close follower of Warren Buffett and his investment approach.