Ryan O’Connor of Crossroads Capital Partners presented his investment thesis on Countryside Partnerships (UK: CSP) at Wide-Moat Investing Summit 2022.

Thesis summary:

Countryside is a UK-based homebuilder pivoting to an economically resilient, asset-light, high-ROIC “partnerships” business – thus far obscured by gradual liquidation of the lower-return, capital-intensive traditional homebuilding segment. The traditional homebuilding segment deteriorated due to COVID, leading to a value-destructive equity raise at pandemic lows. The company’s troubles culminated in late 2020, when Browning West initiated an activist campaign to replace Countryside’s leadership while encouraging a sale of the homebuilding division to unlock shareholder value. Recent stock price weakness has been driven by (1) an abrupt firing of CEO Iain MacPherson, (2) “sandbagged” numbers related to the CEO changeover, (3) elimination of the dividend,  (4) interest rate/inflation fears, and (5) Russia’s war against Ukraine.

Countryside is a catalyst-driven high-quality compounder with a widening moat and stable, predictable cash flows, yet the shares trade as if the opposite were true. The company is transitioning from a mixed asset-light/asset-intensive business model to a completely asset-light model. It enters into joint ventures in which local housing authorities contribute permitted land, while Countryside contributes construction and community development know-how. About 60-70% of JV homes are presold, dramatically reducing revenue volatility/cyclicality and limiting capital outlays. Related cash-on-cash returns are 2-3x those of traditional homebuilding. The removal of the homebuilding business via a two-year liquidation should demonstrate the earnings power of the partnerships business. At recent prices, CSP trades below 5x medium-term earnings power, compared to an average of ~30x for UK-listed peers.

According to Ryan, investors today are paying an “absurd” no-growth multiple for a defensive, dominant market leader with long, highly visible growth runway. The shares deserve a rerating to reflect the business model transformation. Medium-term guidance calls for 40% ROCE on capital employed of £750 million, implying EBIT of £300 million, or a sub-5x EPS multiple on FY24E earnings. Ryan estimates that EPS will exceed £1 per share in three to four years, implying that CSP trades below 2.5x normalized earnings — an exceedingly low valuation for an asset-light, high-return-on-capital, wide-moat growth business with net cash. Ryan believes an appropriate multiple would be 15-25x at the low end, implying a share price that could more than triple over near- to medium-term. Inclusive Capital’s £295 pence-per-share takeunder bid, future buyback activity, and a deep discount to normalized earnings likely limit the downside regardless of market- and economy-related factors.

Ryan originally presented his thesis on the company (then called Countryside Properties) at Wide-Moat Investing Summit 2021.

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About the instructor:

Ryan O’Connor is the President and Portfolio Manager of Crossroads Capital, LLC. Before founding Crossroads, Ryan was an analyst at several value-centric investment partnerships.

Ryan’s primary responsibilities include asymmetric idea generation, with a specific focus on undiscovered emerging franchises and catalyst-driven special situations, as well as investment strategy and portfolio construction. Before life as a securities analyst, Ryan attended Indiana University (Bloomington), worked as a financial advisor for AG Edwards & Sons (now Wells Fargo), and was an options trader on the Chicago Mercantile Exchange.

Ryan’s proven track record of generating compelling risk-adjusted returns has lead to recognition in various publications and associations. Ryan’s research has been featured in numerous publications, including Bloomberg and The Wall Street Journal.

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