TerraVest Industries Inc.

About TerraVest Industries:

Consolidator of Manufacturing Businesses TerraVest operates as a Canadian and U.S. consolidator of manufacturing businesses, deploying its cash
Pitched: August, 2020 flows from existing businesses to acquire businesses with strong economics within small, fragmented
industries that lack rapid growth, have little competition for deals and are complementary to TerraVest’s
existing operations. The business enters these niche industries through buying from retiring or distressed
owners as one of the only sophisticated operators within the space. TerraVest was founded in 2004 and is
Ticker: TVK headquartered in Vegreville, Canada.
Exchange: TSX The Company originated in the home heating oil sub-sector where they benefit from monopolistic
positioning making heating oil tanks, as the market leader, ranked #1, in North America. TerraVest entered
Recommendation: BUY the propane tank industry and than lateralled to the NGL transport vehicles and storage vessels industry, in
which they are #1 in Canada and #3 in the U.S. The Company also manufactures oil and gas wellhead
Price (July 20, 2020): $15.21 processing equipment, and are currently ranked #1 in Canada. Management has repeatedly executed their
52-Week-High: $17.25 core strategy of entering into adjacent sub-sectors through acquisition, creating sizeable operations and
52-Week-Low: $9.50 gaining market share to secure a dominant position, and looks to continue this in the future.
Target Price: $19.56
Implied Upside: 28.60% Investment Theses:
1. TerraVest operates within fragmented industries with attractive economics and growing end-
2019 FY Revenue Breakdown markets supported by strong overarching tailwinds
5% TerraVest is well positioned for growth as a market leader within multiple stable industries supported
by the strong fundamentals of the Canadian oil and gas industry. Additionally, the Company generates large
33%
51% synergies from consolidating fragmented industries and improving operational efficiencies.
44%
67% 2. Dominant market positioning drives pricing power and scale advantages
TerraVest maintains a leading market position in all the sectors it currently operates in. These dominant
positions will drive pricing power, as smaller and less operationally efficient players die out and TerraVest is
Fuel Containment the only remaining company at scale. Additionally, as many of their services provided are essential for
Canada United States
Processing Equipment customers, and lack substitutes, their market positioning creates substantial customer lock-in. This pricing
Service power combined with an ability to produce products at a lower cost per unit will drive margin expansion and
$350 free cash flow growth, as TerraVest continues to solidify their market positioning and attract new customers.
12.2% CAGR
$300 3. Exceptional management team with substantial skin in the game and proven capital allocation
$250
capabilities
$200
$150
TerraVest’s management has strong insider alignment as their CEO and Executive Chairman own 11%
$100 and 17% of the company, respectively, accounting for the bulk of their net worth. The largest shareholder is
$50 Clarke Inc., a Canadian holding company with a strong record of value creation, owning 30% of the total
$0 shares outstanding. In 2012, TerraVest conducted a tender offer for it’s shares and bought back 36% of the
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
company at an 80% discount to the current stock price and an even greater discount to intrinsic value. In
2019, management thought the stock was cheap launched two tender offers, repurchasing 10% of
$400 25% TerraVest’s diluted shares outstanding at 6.5x of 2019 FCF. Management has repeatedly displayed an ability
to opportunistically deploy capital, making large share repurchases when the stock trades at a discount to
20%
$300 intrinsic value and has generated substantial shareholder value.
15% 4. Consistent record of acquiring businesses at low-single-digit FCF multiples and a long runway
$200
10%
for additional acquisitions in the future
$100
A critical component of the investment thesis rests on TerraVest’s ability to make attractive
5% acquisitions over time. Over the past 7 years, management has made 6 large acquisitions, paying 3.4x pre-tax
$0 0% FCF cumulatively. After leverage and taxes are factored in, TerraVest paid a P/FCF of around 2x.
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Management believes the company can continue to execute this strategy as they grow, but there is a
Revenue EBITDA EBITDA Margin
substantial margin of safety, as they don’t have to pay 2x FCF on all their deals to generate value. TerraVest
Robust Unlevered Free Cash Flow has repeatedly proven its ability to execute extraordinary deals for shareholders and, there is a long runway
$50 25.0 x
15.6% CAGR
for additional acquisitions over time in which management can deploy large amounts of capital at very high
$40 20.0 x returns through targeting niche companies with discounted valuations.
$30
15.0 x
5. Undervalued by the market on multiple valuation methods; trades at 7.5x free cash flow with a
$20 13.3% FCF yield despite material growth prospects and ability to compound capital over time
$10
10.0 x TerraVest is a company with material growth prospects, growing ~22% annualized for the past three
$0 5.0 x years, a strong and well-aligned management team and has executed multiple acquisitions at low single digit
FCF multiples that have generated 2-3x returns. TerraVest is underappreciated by the market as
-$10 0.0 x
management owns the majority of the company and doesn’t spend time promoting the business, hence no
FCF P/FCF
analyst coverage, they operate in a fairly boring and unnoticed industry translating to their underappreciated
TVK 1-Year Price Volume Chart
growth potential especially as management is still in the early stages of building this company. Additionally,
$18.00 350000 the energy-related portion of the business is currently in a cyclical downturn, and is therefore underearning,
$16.00 300000 but will recover strongly with the North American oil and gas market.
$14.00
250000
$12.00
$10.00 200000 Risks & Catalysts:
$8.00 150000
Risks: Catalysts:
$6.00
100000
 Execution risk for its acquisitions; risk of  Additional deals that align with their strong
$4.00 overpaying or overleveraging the business historical acquisition record
$2.00 50000
 Potential privatization  Growth drives increased investor awareness
$0.00 0
16-Jul 16-Nov 16-Mar  Shocks in the oil and gas industry increase  Large share repurchases when the stock is
By: Thomas Dixon the volatility and uncertainty of cash flows trading at a discount to intrinsic value