Description

This is an idea for PAs. TerraVest Industries is a manufacturer with a core focus on sophisticated metal fabricated products. The company manufactures pressure vessels; fuel containment units; propane trucks and trailers; and complex wellhead processing equipment for the Oil and Gas industry which involves vessel fabrication, electrical and assembly.

Business segments

Fuel Containment (63% of EBITDA):

•          Propar Inc. manufactures large propane containment vessels and assembles propane transport trucks
•          Granby Industries manufactures high quality steel tanks, residential boilers and furnaces and fiberglass storage tanks.

Fabrication (26% of EBITDA):

•         NWP is an Alberta-based manufacturer of large custom wellhead processing equipment such as line heaters and separation equipment.
•         RJV is an Alberta-based manufacturer of standardized well processing equipment, focused on high volume, low cost production
•         SegreTech is an Alberta-based manufacturer high performance multi-phase desanding equipment
•         EnviroVault is an Alberta-based manufacturer of specialized chambers installed in storage tanks for the upstream oil and gas production market.

Services (11% of EBITDA)

•       Diamond Energy Services, an oil and gas well servicing company in the Southwestern and Central Saskatchewan. It currently operates 21 rigs and is the largest well servicing company in the region.

Historically an underperformer, TerraVest’s fortunes changed when Clarke started buying shares in the company and eventually built a influential stake. Starting in 2010, TerraVest began divesting sub-par businesses, ranging from HVAC to furniture. In 2014, Terravest started their second leg of the transformation by acquiring Jerico and NWP industries for about 3x FCF and 4x FCF respectively. Other acquisitions include Propar group for 2.5x FCF and Signature Truck systems for around 6x FCF. Since 2010, Terravest has grown revenues from $46 mm to $193 mm or 22% CAGR while EBITDA has grown from $7 mm to $25 mm or about 20% CAGR.

TerraVest is a consolidator of North American manufacturing businesses focusing on a fragmented industry where they encounter little competition for bidding. We believe to be a compelling idea for the following reasons:

•         TerraVest has been able to purchases businesses at attractive valuations, usually low-single-digit multiples of FCF
•         Management have been great stewards of capital, have a good deal of ownership hence are highly incentivized.
  •     As of December 14, 2017, Executives of TerraVest own approximately 30% of the shares outstanding.
•         Trades at a 10% normalized FCF yield while generating high-teens ROIC

As Terravest continues their acquiring spree, we should not be surprised if they increase their FCF by high teens in the future and get re-rated to > 10x FCF. We believe that due to the non-existent sell-side coverage and lack of earnings call, this business has been overlooked by many investors. Furthermore, the company has very little outstanding shares available for purchase, a little bit more than 30%.

Catalyst

• Further accretive acquisitions
• Time