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TerraVest Industries Inc. (TSX: TVK) - One Pager
"The Boring Compounder"
This write up was done in collaboration with Inbox Alpha. 99.99999% of the work/research was done by Inbox Alpha, I just put couple of final touches.
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Disclaimer is at the end.
TerraVest Industries Inc. (TSE: TVK.TK) is a Canadian-listed compounder that specializes in acquiring companies on the cheap. Since its 2011/12 conversion into the business it is today, the company has made ~16 acquisitions, becoming an expert at acquiring and integrating companies in the following three areas:
Fuel Containment – Specialized manufacturing of propane storage and distribution tanks and at-home heating oil storage tanks in the U.S. and Canada.
Procession Equipment – Manufacture and sale of wellhead processing equipment to the Canadian energy industry.
Service – providing a variety of services to the Western Canadian oil and gas sector, including fluid management, water hauling, environmental management, etc.
Between 2014 and 2022, it grew its revenue at a CAGR of 20%, its adjusted EBITDA at a CAGR of 18%, its earnings at a CAGR of 23%, and its Distributable FCF at a CAGR of 16.9%. Since 2017, it’s decreased its diluted share count by ~15%.
About 84% of TerraVest’s revenue is generated from the sale of products, the remaining 16% from the Service sector (though, as I’ll explain below, this has probably changed so far in 2023). In 2022, its Fuel Containment segment made up 56.8% of revenue and 58.3% of earnings, its Processing Equipment segment made up 27.5% of revenue and ~11% of earnings, and its Service segment made up 15.6% of revenue and 15% of earnings.
TerraVest effectively dominates the propane storage and distribution, heating oil storage, and wellhead processing markets in Canada and the Northern U.S. The industries it operates in are highly fragmented, and TerraVest is now the largest player in just about every sector, consistently buying up competitors at ~1x book value and what appears to be 4-5x EBITDA.
Today, the company trades at a C$650 million market cap, which puts it at roughly 14x 2022’s net income and 11x 2022’s Distributable FCF (FCF that adds back non-cash working capital expenses to smooth out results over the years). It typically generates an ROE of over 20%, using its cash flow to repurchase shares, pay dividends, invest in growth capex, and make acquisitions.
While Fuel Containment is relatively non-cyclical, the segment does occasionally face issues with warmer winters, given it’s pretty heavily tilted towards residential heating. In 2023, TerraVest actually separated the Fuel Containment segment into two separate arms of the business – (1) HVAC Equipment (which is mainly the heating oil storage business and branded HVAC equipment business) and (2) Compressed Gas (which is primarily the propane storage and distribution tank manufacturing business). The HVAC Equipment business actually saw declining revenue in 2023, perhaps indicating a cyclical issue or even sustained decline in heating oil demand (I don’t know for sure). Compressed Gas, on the other hand, grew by 23%.
The Processing Equipment and Service segments have seen depressed earnings and sometimes declining revenue since the downturn in oil and gas in 2015/16. But a lot of that changed in 2022 and 2023. Both segments saw rapidly increasing EBITDA and earnings growth – with Processing Equipment earnings growing by 42x and Service earnings growing by more than 4x. With higher utilization rates and now higher margins, both segments look ready to capitalize on the hot O&G sector and make up for lost time over the last several years.
Given its ongoing acquisition strategy as well as increasing growth capital investments, TerraVest has had to take on more debt over the years. It’s still healthily within all of its covenant requirements and has no problem servicing the debt, but rising rates definitely won’t make future growth easier. In addition, it’s operating in industries that can become quite cyclical given enough time. These are also industries that may, in the long run, end up being in structural decline.
This may, however, actually help TerraVest achieve even better long-term returns. At the moment, competition for its acquisitions are at a minimal, evidenced by the cheap prices it can get these companies at. And a growing distaste for the boring industries it operates in will only help it continue with its current strategy undisturbed. A large, fragmented market that is slowly declining can be a great place for a compounder like TerraVest to continue generating great returns through repeated acquisitions.
TerraVest has a long road of acquisitions ahead of it. And, fortunately, it has an experienced (and relatively young) management team who have, over the last ten years, proven themselves to be adept at the kind of strategy TerraVest hopes to continue executing in the future. Even though management is relatively tight-lipped when it comes to investor relations and media in general, they (along with what appears to be, at least in the past, a very involved board of former insiders and industry experts) own a decent chunk of the outstanding shares (thought the executive chairman and former CEO own the largest amounts by far).
Even without any organic growth or additional help from utilizing leverage, TerraVest is priced to outperform. If TerraVest just reinvests its Distributable FCF every year into a new acquisition (after dividends) and continues to generate the same return (an average 14% ROIC), you’d be looking at around a 3.5x return over something like 8 years (assuming a multiple of 15x). I think the potential return could be much higher if TerraVest continues to (1) grow organically (even at a slow rate), (2) continue utilizing debt to make larger acquisitions, (3) buys back shares, and (4) is assigned a higher valuation by the market (say, 20x Distributable FCF) in the future.
If you enjoyed this, Inbox Alpha has a much deep dive into TerraVest Industries on their website, click here to check it out (its 33 pages long!)
At the time of this publication, Inbox Alpha does owns shares in TerraVest Industries Inc. (TSE: TVK.TK) while I (YZ) don't.
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