Terravest Industries: Rollup Done the Right Way, Aligned Management

Mike Kruger of MPK Partners presented his in-depth investment thesis on Terravest Industries (Canada: TVK) at Best Ideas 2020.

Thesis summary:

Terravest Industries (C$332 million enterprise value) is a rollup done the right way, with a focus on dirt-cheap M&A, synergies, and building competitive moats. The company makes wellhead equipment for natural gas in Canada, as well as all manner of fuel storage containers for residential and commercial use, from heating oil at a furnace to propane on a truck.

Since 2014, management has committed ~C$150 million (all-in) to acquisitions, which are generating unlevered pretax FCF of ~C$33 million (4.6x). Excluding changes in working capital and growth capex, FCF per share has grown at a 45+% CAGR despite miserable conditions for E&Ps in Canada, which provide nearly half of earnings.

Terravest was once a failing and unfocused income trust, but was led to redemption by Clarke Inc., a highly successful value-based investor in Canadian small-caps. The top two managers own shares worth ~6x and ~8x their cash compensation, respectively. The chairman owns over 260x his cash compensation. Pro forma for the integration of the two latest acquisitions, Terravest shares trade at ~6.4x FCF.

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About the instructor:

Mike Kruger’s first investment experience was watching his shares of Berkshire Hathaway get cut in half during the tech-mania of the late 1990’s. But he didn’t panic, and today manages a global focused value portfolio of equities and distressed debt in New York City. He previously worked as a former equity and credit analyst at Promethean Asset Management LLC in NYC, and prior to that as a high-yield credit analyst at Liberty Mutual in Boston. He holds a Bachelor’s degree from the College of Arts and Sciences at Cornell University.