Investment Pitches

Pitch Summary:
TerraVest is a materials fabrication and service firm providing components and services for oil and gas extraction, transportation, distribution, and commercial and residential usage. TerraVest's products support the transportation and storage requirements for oil, natural gas, LNG, and RNG across the US and Canada. TerraVest has three market segments as: 1) a manufacturer of tanks for residential oil and gas storage, furnaces, commercial oil, and water storage tanks and boilers, as well as vessels for liquid natural gas storage and truck transportation; 2) a manufacturer of natural gas wellhead processing, storage, and transportation equipment; and 3) an oil and natural gas services provider including fluid handling, water management, heating, rentals, and well servicing utilizing 21 servicing rigs. TerraVest is a collection of firms competing with smaller private businesses or divisions of large firms in niche markets described above. In each of its market niches, TerraVest is the number one or number two competitor. The common theme amongst these businesses is metal bending for high value-add applications. Management strategically acquires businesses in direct negotiation with primarily family-owned sellers or out of distress for 4-5x cash flow. By the time the business is integrated, another turn of cash flow is realized from inherent synergies. In many instances, the families that own these businesses don't have descendants who want to take them over. About 30% of the acquisitions have been purchased in distressed financial situations. The business acquisitions are financed primarily by debt which is paid down from cash flow generated from the acquired firms. Over the past seven years, management has acquired fourteen firms. The acquired firms have ranged in size from $10 to $100 million in revenues with a median revenue of about $25 million. The size of the firm targeted (median deal size is $15 million) is below the size of most private equity firms' interest, so the competition is less than it would be for larger deals. TerraVest's target acquisition markets include not only their core markets, but also firms in adjacent markets such as: green energy containment and transportation (RNG and hydrogen), chemical tanks, septic tanks, air filtration and purification, and other metal fabricating applications. One of the two members of the senior management team focuses on acquisitions. TerraVest has four levers for cash flow growth: 1) buying a firm in their core or adjacent market; 2) expanding within existing markets; 3) paying down debt; and 4) distributing excess cash as dividends or buying back shares. The acquired firms generate cash flows in excess of what is needed to modestly grow the firm, which is used to purchase firms in its target or adjacent markets. If no firms can be found that meet management's operational and valuation criteria, then management will buy back shares as the shares have typically traded at modest valuations reflecting organic growth but not the value of future acquisitions. Management is very selective in the firms they acquire. With a full pipeline of deal opportunities, management expects to spend 2/3rd of its cash flow to either buy firms, pay down debt, or buy back shares. The remaining 1/3rd will be invested in its current business, including growth opportunities which comprise about 2/3rd of investments in the current business.

BSD Analysis:
The manager presents TerraVest as a disciplined serial acquirer with a proven consolidation strategy in fragmented industrial markets. The investment thesis centers on management's ability to acquire family-owned businesses at attractive 4-5x cash flow multiples, then realize additional value through integration synergies. The company operates in niche markets where it holds #1 or #2 positions, competing against smaller private firms rather than large corporates. TerraVest's acquisition strategy benefits from limited private equity competition due to smaller deal sizes ($15M median) and management's dedicated M&A focus. The business model generates excess cash flow that funds further acquisitions, creating a compounding growth engine. Historical performance validates this approach, with 14 acquisitions over seven years driving 25% CAGR in cash flow and 30% unlevered ROIIC. The manager's detailed valuation analysis suggests significant upside, with current 10x earnings multiple appearing cheap relative to 15% projected growth rates. Using Graham's formula and comparable analysis, the manager targets C$125 per share, implying 35% IRR over five years.

Pitch Summary:
Millicom, a Latin American telecommunications firm that provides high-speed internet, cable, and wireless to nine markets, has become a special situation, as two strategic investors are either bidding for the entire firm or purchasing large stakes in Millicom. Below is a refresh of highlights from the last quarterly letter. Millicom is also in the process of separating both its towers business (about 10,000 towers) and its TIGO Money business for either sale or co-investment. Based upon historical tower sales by Millicom and comparable transactions and trading prices for Latin American tower businesses, we think the towers are worth about $1.4 billion, or $8.00 per share. Given the current price of Millicom, the stub has an implied value of about 9.9x 2023 FCF or 3.2x projected 2028 FCF. Millicom's debt level is low, and the company will be in the position to buy back shares next year while continuing to invest in its fiber rollout. There is additional value outside the core business in Millicom's data centers and TIGO Money. Given a conservative projected EPS growth of 10% per year (vs. the 18% projected FCF growth rate), Millicom should trade at 20x earnings using Graham's formula of 8.5 + 2 * growth rate adjusted for EM risk. Applying this multiple results in about a 2x return using the 2023 FCF midpoint (including $1.0 billion tower valuation) and a 4.5x return in five years. Recently, there have been two bids for Millicom from two parties. First, Marcelo Claure, a Latin American billionaire, and Apollo have made a bid for Millicom (reportedly in the mid-$20s). Second, French tycoon Xavier Niel purchased about 20% of Millicom. Niel founded French fiber telecom firm Iliad and is also invested in Eir, an Irish fiber telecom. Niel has been appointed to the board of Millicom and is part of a group bidding on other Latin American assets, including a Brazilian supermarket.

BSD Analysis:
The manager views Millicom as a compelling special situation with multiple value catalysts converging simultaneously. The core investment thesis revolves around asset separation opportunities, with the tower business alone worth $8 per share based on comparable transactions. Strategic interest from Marcelo Claure/Apollo (bidding mid-$20s) and Xavier Niel (20% stake, board seat) validates the underlying value and creates competitive tension. The manager's sum-of-the-parts analysis suggests the remaining stub trades at attractive 3.2x 2028 FCF after backing out tower value. Millicom's fiber rollout in Latin America, low debt levels, and upcoming share buyback capacity provide additional upside drivers. The TIGO Money fintech business and data centers represent further optionality not reflected in current valuations. Using conservative 10% EPS growth and emerging market-adjusted multiples, the manager sees 2x near-term returns and 4.5x five-year potential. The combination of strategic bidders, asset monetization, and operational improvements creates multiple paths to value realization.

Pitch Summary:
One of our holdings in the distribution theme is Ashtead Group (Ashtead), a clustered general and specialty equipment leasing firm. Ashtead's growth model is driven by organic growth (3% per year due to market growth and 3-6% per year from increased penetration (driven by specialty penetration) and 4% per year from buy-backs and synergistic M&A). These are enhanced by opportunistic operational leverage from scale and share repurchases (5% annual growth). Over the past 10 years, Ashtead's net income margins are up from 11.6% to 17.6%, with a 6x increase in revenues. These factors should lead to about a 17% EPS growth going forward. Ashtead has had 25% EPS growth over the past 10 years. Since FY2018, Ashtead has repurchased 12% of its common stock. The real drivers of Ashtead's earnings are the dollar utilization of the rental equipment and the net margins. Rising dollar utilization to the upper-50%s and margins have held steady over time as Ashtead has scaled over the past five years. Ashtead currently trades for a FY2023 EPS multiple of about 16.7x and an earnings yield of 6%, with mid-teens expected EPS growth. Given a conservative projected EPS growth of 12% per year, Ashtead should trade at 32.5x earnings using Graham's formula of 8.5 + 2 * growth rate. Applying this multiple results in about a 2x return today and a 3x return in five years.

BSD Analysis:
The manager presents Ashtead as a high-quality equipment rental business with multiple growth drivers and superior unit economics. The investment thesis centers on Ashtead's clustered strategy and specialty equipment focus, which drives higher utilization rates and margins compared to competitors. The company's growth algorithm combines 6-9% organic growth (market expansion plus penetration gains) with 4% from M&A and buybacks, targeting 17% EPS growth. Historical performance validates this model, with 25% EPS growth over the past decade and margin expansion from 11.6% to 17.6%. The manager's detailed unit economics analysis shows Ashtead generating 17.9% IRRs on equipment investments, superior to competitors URI (16.5%) and HERC (10.9%). At current valuations of 16.7x earnings with 12%+ growth expectations, the manager sees significant multiple expansion potential using Graham's formula, targeting £163.98 per share. The combination of operational excellence, market leadership, and valuation discount creates a compelling risk-adjusted opportunity.

Pitch Summary:
Consolidated Communications (CNSL) is a broadband communications provider who is rolling out a fiberoptic network described in detail in previous letters. Recently, CNSL received a buyout proposal from Searchlight, the private equity firm who funded the fiberoptic rollout to date. The offer was for $4/share. We believe this vastly undervalues CNSL. For example, using an exit multiple of 11x EBITDA (about 50% of current fiberoptic transition multiples) and the projected 2027 EBITDA based upon management's current plan results in a value of $35/share. If an 8.5x EBITDA multiple (the current depressed multiple for broadband providers) is applied to the projected 2027 EBITDA, the result is $20/share. As a result, we sent a letter to CNSL's special committee describing our valuation and proposing other options they might consider to secure the additional funding to ensure the fiberoptic network can be rolled out. We received an acknowledgement of receipt, but that is the extent of the feedback for shareholders who sent letters to the special committee.

BSD Analysis:
The manager strongly opposes Searchlight's $4 per share buyout offer for Consolidated Communications, viewing it as significantly undervaluing the company's fiber-optic transformation potential. The investment thesis hinges on the substantial value creation from the ongoing fiber network rollout, with the manager's analysis suggesting fair value between $20-35 per share based on 2027 EBITDA projections. Using conservative 8.5x EBITDA multiples yields $20 per share, while applying 11x EBITDA (still below typical fiber transition multiples) results in $35 per share target price. The manager has taken activist steps by writing to the special committee proposing alternative funding solutions to complete the fiber rollout. This represents a classic value-versus-growth tension where the private equity buyer may be attempting to acquire transformation value at a discount. The manager's detailed valuation work and activist engagement demonstrate high conviction in the undervaluation thesis.

Pitch Summary:
Another compound mispricing holding, Telecom Italia (TI), the Italian incumbent telecom firm with wireline and wireless holdings in Italy and Brazil, is still in negotiations about the sale/merger of their core network. The asset sales require the approval of the Italian government. There has been some progress in the negotiations and offers over the past quarter. The share price has gone up on hope of higher bids and then down as these higher bid prices failed to materialize. The bidders are resubmitting their bids as the first-round bids were below management's expectations. Vivendi has a large stake in TI and a board seat and has been pressing for a higher price for TI's network assets. We will see how the process develops over the next six months.

BSD Analysis:
The manager views Telecom Italia as a special situation driven by ongoing asset sale negotiations for the company's core network infrastructure. The investment thesis centers on the potential for higher bids in subsequent negotiation rounds, particularly given that initial offers fell below management expectations. Vivendi's significant stake and board representation adds activist pressure for maximizing asset values. The Italian government's approval requirement creates regulatory complexity but also suggests strategic importance of the assets. The manager appears positioned for a catalyst-driven outcome within a six-month timeframe. However, the volatile share price movements reflect execution risk and uncertainty around final bid prices. The compound mispricing classification suggests the market is not fully valuing the sum of TI's parts, particularly the network assets under negotiation.

Pitch Summary:
LG Corporation is a compound mispricing which has become more interesting as its price has increased less than its NAV. The company includes stakes in some of South Korea's largest and most-profitable firms such as LG Electronics, LG Chem (including its EV battery division), and LG Household & Health Care. Some of the growth drivers include EV batteries (LG Chem), computer processing (LG Electronics) and China consumers (LG Household & Health Care). Earnings are projected to increase by 10% per year over the next four years (dividends have grown by 9% per year over the past five years) with 1.5% per year of share buybacks, and preferred shares have a dividend yield of 5% for a total return of 17%, assuming no reduction in discount to NAV or changes in multiples. The trading multiples of the large subsidiaries are reasonable given their growth prospects.

BSD Analysis:
The manager presents LG Corporation as a compelling compound mispricing opportunity trading at a significant discount to its net asset value. The holding company structure creates a valuation gap that the manager expects to close through improved governance and potential corporate actions. Key growth drivers include exposure to secular trends like EV batteries through LG Chem, computer processing via LG Electronics, and Chinese consumer markets through LG Household & Health Care. The manager's sum-of-the-parts analysis suggests substantial upside, with the preferred shares offering a 5% dividend yield and projected 17% total returns. The investment thesis relies on multiple expansion as the discount to NAV narrows, supported by consistent earnings growth of 10% annually and modest share buybacks. The reasonable trading multiples of underlying subsidiaries relative to their growth prospects provide additional valuation support.

Pitch Summary:
Viceroy obtained the complaint by the US against MPW over related party transactions, fraudulent payments and undisclosed substantial interest in a company Olympia, which is insolvent. Update 12/6 - Follow-up report: Briefing on the dispute with MPW. Update 1/5 - Made a second request for document disclosure. Update 2/14 - The short seller sent a letter to the auditor. Update 7/30/24 - Follow-up report.

BSD Analysis:
Medical Properties Trust is a specialized REIT owning acute-care hospitals globally. The short thesis is built on aggressive related-party transactions, circular financing with tenants, and concerns around inflated asset values. Bears argue MPW props up weaker tenants (like Steward Health) through rent deferrals and loans, obscuring true credit risk. Rising rates compress cap rates and increase refinancing burdens, while tenant health remains fragile. The dividend has been cut, but equity is still priced as if assets retain high quality. Sophisticated investors should examine tenant EBITDAR coverage, related-party disclosures, and NAV assumptions under stressed discount rates.

Pitch Summary:
Poorly run auto retailer with unsustainable $6.5bil debt; shares went up 160% based on misguided optimism; extreme cost-cutting would not alter the company's insolvency; outdated internal system; the competitive advantage is gone;

BSD Analysis:
Carvana remains highly leveraged with thin margins and cyclical exposure. Bears highlight governance concerns, high interest burden, and questions over long-term viability of the online car model.

Pitch Summary:
Castlebay recently had the opportunity of speaking at the London Value Investor Conference where we presented the 'Next Surprise'. Our presentation focused on two main ideas—the extent to which we use mental models to navigate the investment world; and secondly, how Next plc has used some of these mental constructs to evolve its business model over the last decade and create a business that has actually got stronger through the disruption in the UK high street. One of the mental models mentioned was the principle of 'Inversion'. In the early 2010s, Lord Wolfson and his management team at Next, realised the landscape of British retail was changing. Next stores numbered in excess of 500 at the time and yet it became clear that consumer preferences, through the desire for greater convenience, were moving more online. 'Beginning with the end in mind' - a type of 'Inversion', they realised that the business needed to pivot. This was not an easy task to undertake. Often businesses resist change as the perceived costs of change are too high. Blockbuster video could have snapped up Netflix, in its infancy, but ignored them and resisted changing their business model because of the money they made from those annoying 'late fees'. Then it became too late to repel the Netflix juggernaut! In order for Next to change their business model they had to accept a certain amount of cannibalisation of their store sales in order to develop their online business. Yet having a picture of a multi-channel retailer in their minds, allowed them to take this step back in the short-term for the longer term benefit of the business. They reinvested their thirty year knowledge from the catalogue business into developing their online presence. Incidentally, we're not saying that Next had all the answers as to what today's business would look like back in 2010. It's the principle that's important here. As they climbed the steps towards an 'anti-fragile 2023' they corrected their course, adapting to changing opportunities. In 2014 Label was created online. It was designed to be a distribution platform for third party retailers, accessed through Next's own website, Next.co.uk. Four years after its advent, Next innovated again with a system called Platform Plus. This allowed it to consolidate customer orders, combining the stock of its Label retailers from their respective warehouses to Next's. In 2018 there were around 500 retailers on Label. Platform Plus helped to double that number by 2020. The table shows the four main business models used for Label customers: Commission; Wholesale, Licensing and Wholly-owned. Next though, continue to encourage the first of these—the Commission model; and they do this for two main reasons, even though it makes the lowest net margin. Firstly, the revenues of this Commission model have grown three times faster than for the Wholesale model. This is from where the growth will continue to come. The second, even more important reason, is shown in the table's column entitled 'Stock risk'. Commission is the only model where the third party retailer takes all the stock inventory risk—and here is where the magic lies! Imagine two retailers 'Catch the Trend' and 'Oops we missed the Wave', both of which are on Label. Next charges them both 37% commission on their gross revenue transactions delivered through the Label platform. As the sales flood into 'Catching the Trend', Next benefits as the sterling value of their commission increases from rising revenues. As 'Oops we missed the Wave' sees its revenues go nowhere, Next doesn't bear any risk of inventory write-downs, as stock is priced lower to try and sell it. In other words, there is an asymmetry in the risk profile with this model—with the upside disproportionately benefitting Next in relation to the potential downside. Furthermore, having 997 retailers currently on Label should mean that a good proportion of them are catching varying fashion trends at any given time. Label is effectively helping retailers lower their direct to consumer operating costs—which can often be around half the value of revenues. The 37% commission rate which has already been reduced, will likely continue to become more attractive for retailers, as Next pass on their scale efficiency benefits to their Label customers. By 2020, Next was ready to evolve their business model further with the introduction of Total Platform. Given their experience in retail, logistics, IT and distribution. So they started taking equity stakes in businesses like Reiss, UK Gap and more recently Joules, Made.com and Jojo Maman Bébé. This allows these brands to have their stand alone websites and focus on designing great products. Next effectively takes care of everything else from distribution to website functionality. Yet the benefits don't stop there for Total Platform customers. Total Platform retailers also get access to friction free capital expenditure growth. Effectively they are gaining advantage from the significant investment that Next has made in its warehouses—and it has been significant. Over the last three years Next has invested over £400m in technology and warehouses. Its automated, boxed warehouse at Elmsall near Leeds is nearly complete. It will reduce the marginal labour cost per unit by around 40%. Effectively, Next is taking its expenditure from developing new stores and reallocating it to the development of warehouse capacity. This new capacity gives Next far greater optionality in following future customer demand, whether it comes through its core retail brand, Label or Total Platform. So what is the Next surprise? Simply put it is the realisation that Next is not just a clothing retailer. It's also a third party distribution platform and an equity investor as well. Furthermore, these three pillars of the business have evolved over the last decade to create a special type of business. To coin Nasem Taleb's book of the same name, it has created an 'anti-fragile' business. One that benefits from disruption. As any shopper will tell you, UK retailers have been at the centre of a great disruption over the last eight years.

BSD Analysis:
Castlebay presents Next as a compelling transformation story that has successfully evolved from a traditional retailer into an 'anti-fragile' multi-platform business. The manager highlights Next's strategic pivot in the early 2010s under Lord Wolfson's leadership, where the company cannibalized store sales to build online capabilities and develop third-party distribution platforms. The Label platform, launched in 2014, now hosts 997 retailers and generates commission-based revenue with asymmetric risk profiles—Next captures upside from successful retailers while avoiding inventory risk from underperformers. The Total Platform evolution allows Next to take equity stakes in brands like Reiss and Joules while providing full-service distribution capabilities. The company's £400m investment in automated warehouses, including the Elmsall facility that reduces labor costs by 40%, demonstrates significant operational leverage. This business model transformation has created three revenue pillars: core retail, third-party distribution, and equity investments, positioning Next to benefit from retail disruption rather than suffer from it.

Pitch Summary:
Verallia (ENXTPA-VLRA): Verallia is the world's third largest producer of glass packaging for food and beverages. The company was originally a part of the French conglomerate Saint-Gobain (SG), and took its current form following an SG division reorganization in 2007. In 2014, Saint-Gobain sold Verallia's North American operations to the Ardagh Group of Ireland, and then the remaining European and LatAm businesses to PE firm Apollo Global in an LBO the following year. Apollo took VRLA public in 2019, and had fully exited its stake two years later. While certainly unglamorous, glass bottle manufacturing tends to be a good industry. Demand grows slowly but steadily thanks to glass's properties of infinite recyclability, chemical inertia (preserving taste), and enhanced quality perception relative to alternatives like plastic. A high weight-to-size ratio makes long-distance transportation expensive, and many products are subject to appellation requirements in order to be considered authentic. As a result, supply options for consumers are generally limited to producers in close geographic proximity. Furthermore, the European glass bottle industry has consolidated significantly in recent decades, and the top 5 players now control 70% of the market (see graphic below). The concentration is even greater in the more relevant Western European sub-segment, in which the top 4 comprise 85%. This reduction of competitive rivalry has allowed VRLA to increase gross margins and returns on capital (which are now approaching 15%) each year since 2016. Nearly half of VRLA's sales are still and sparkling wine bottles, mainly to small producers with limited nearby alternatives, which makes VRLA much more of a price maker than a price taker in its negotiations. Glass packaging, especially for wine and spirits, also benefits from being a relatively small COGS item for the beverage producer, yet of outsized importance in terms of conveying product exclusivity and quality – a critical concern for small vineyards and premium liquor manufacturers looking to differentiate themselves in the marketplace (see graphic below). When it first went public in 2019, Verallia was around 2.5x levered and trading at a premium multiple of 40x earnings. Since then, the company has managed to remove a turn of net debt while still paying a sizable dividend and purchasing one of the largest premium glass players in the UK. Thanks to 40% cumulative sales growth and 7% operating margin expansion, EPS has nearly tripled over three years. However, the formerly premium multiple turned into a discounted one, and as a result shares are only about 20% above their initial IPO price. In its Q1 release, VRLA reported 35% organic revenue growth, driven almost entirely by price and mix. Meanwhile EBITDA margins expanded nearly 5% despite significant cost inflation. Far from being a one-off blip, management guided to at least 20% sales and 17% EBITDA growth for the 2023. While such growth rates are clearly unsustainable for a glass packaging company, it does demonstrate VRLA's ability to take price when needed. Energy costs will remain an area of concern, but VRLA's exposures are roughly 85% hedged, and its margin expansion in midst of the widespread input cost inflation of the last 15 months proves it's a manageable issue for the Group. Going forward, we think VRLA can maintain a double-digit earnings growth rate from ~5% organic sales growth (below its 7% CAGR from 2016-2020) and 2% annual cash production cost reductions combined with modest operating leverage and share repurchases. The company's closest peer is probably Spain-based Vidrala (VID), which has similar profitability levels, capitalization ratios, and geographic scope as Verallia (not to mention a similar name). VID currently trades at 17x earnings, near its 10-year average of 18.5x. With a few turns of multiple expansion from its current 11.5x, and adding in its 4% annual dividend, a 20%+ total return IRR should be possible for VRLA over the next few years. While we wait, management is taking advantage of the opportunity to retire shares at discounted prices. Verallia's four-year year run as a public company has been a great success thus far. The company has already surpassed mid-term targets given at the time of its IPO, managed to remove the overhangs of elevated leverage and a PE exit, and further expanded operations with its UK acquisition. 6x EBITDA, a significant discount to closest peer Vidrala at 11x, is too cheap for market leader that is well-positioned in a solid, defensible industry. So, while investment pitches for F&B packaging companies generally make investors glassy-eyed, the attractive risk-reward here will hopefully be enough to get some of them to take another look.

BSD Analysis:
The manager presents a strong bull thesis for Verallia, highlighting the company's dominant position in a consolidated European glass packaging market with attractive industry dynamics. Verallia benefits from high barriers to entry due to transportation costs, regulatory requirements, and industry consolidation where top 4 players control 85% of Western Europe. The company demonstrates exceptional pricing power, particularly with wine producers where glass packaging represents a small cost but critical quality differentiator. Despite tripling EPS over three years through 40% sales growth and 700bp margin expansion while deleveraging, the stock trades at only 11.5x earnings versus peer Vidrala at 17x. Recent Q1 results showed 35% organic revenue growth with 500bp EBITDA margin expansion, demonstrating pricing power amid cost inflation. The manager projects 20%+ IRRs from multiple expansion to peer levels, supported by double-digit earnings growth from modest organic growth, cost reductions, and share buybacks at discounted valuations.

Pitch Summary:
SDI Group (AIM-SDI): SDI is a British rollup of scientific instrument designers and manufacturers. Its Digital Imaging division, comprising about 40% of sales, is a group of subsidiaries that make highly sensitive cameras and precision viewing tools for life science and industrial applications. The Sensors & Control division, which makes up the other 60%, houses companies that produce a wide range of products ranging from flow meters to safety fume cupboards to anti-static machines. SDI operates a buy-and-build strategy that generally sees them add anywhere from one to four operating businesses to the portfolio each year; since 2014 it's completed 17 acquisitions and grown its portfolio from 2 to 14 (net of mergers). It follows the Berkshire model in that all targets must already have management in place, and that once acquired the business is able to continue operating with a considerable degree of autonomy. The Group's markets are quite niche (there are only so many buyers of laminar flow cabinets) and generally single-digit growers. However, this often works to its advantage for M&A, as targets are often not large or fast-growing enough to move the needle for many would-be bidders. As a result, SDI is often able to buy at 5-7x earnings multiples from founders looking for financial security while remaining involved in their businesses. Improvements to the "build" side of the strategy – accelerating organic growth and driving margin improvement at newly-purchased subsidiaries – as well as SDI's track record of being an attractive purchaser and friendly integrator, has led to expanding ROCEs now approaching 30%. The success of SDI's strategy to date can be clearly seen in the company's consolidated results. Revenues and operating profits have improved steadily and at an impressive CAGR. Importantly, cash generation has remained strong and allowed the company to maintain conservative leverage ratios (currently about 1x net debt/EBIT) while funding most acquisitions internally – particularly important in a higher interest rate environment. And at its current $170 M USD market capitalization, there remains a substantial runway to execute further M&A before the Group is forced to begin fishing for acquisitions in larger and more competitive ponds. Unsurprisingly, business success has created stock success over time – SDI equity has compounded at 22% over the last decade. However, the market may have gotten ahead of itself in early 2021, and following a significant run-up near the end of 2020, SDI has mostly tread water despite strong underlying business performance, causing its earnings multiple to contract from a peak of 41x to less than 20x today. Last month, the Group put out a trading update in which they announced that operations were tracking as planned for the year, but that an OEM customer who purchased £8.5 M worth of PCR cameras in FY23 was unlikely to make any further orders. Despite being a relatively short-term issue that was already communicated to the investing community, the stock finished the day down 14%. We viewed this as a myopic reaction and increased our position significantly. Management seems to agree, as they were buying shares in the open market the same day. Given a robust pipeline of opportunities and its resources to take advantage of them, we think SDI is well-positioned for the years ahead. I expect FY24 profitability levels to be hindered by additional investment into the four CY22 acquisitions, but recover by FY25. Modeling financial projections from a company that relies on inorganic growth is difficult, but if SDI can deploy a similar amount of capital at similar purchase multiples it should be generating around £18 M in operating profit by the end of FY25. Assuming modest increases in interest costs and share count, this works out to about 13 pence in EPS. Roll-ups in different industries with a wide range of financing strategies trade at a wide range of multiples, but SDI's 10-year average of 25x trailing earnings seems reasonable considering its track record and defensible market niches. Applying this multiple works out to an IRR of about 30% in just under three years; keeping it at its current level would still produce annual returns above 20%. European scientific instrument peers currently have a median P/E north of 30x (closer to 35x for those with a life sciences bend), so if the company is ever ascribed platform value or valued in line with comps, there is upside to this number. But given what should be double-digit intrinsic value growth for the foreseeable future, as long as we're buying at a solid price – which I'm confident we are today – such expansion is simply an added bonus, and not required to generated a satisfactory return.

BSD Analysis:
The manager presents a compelling bull case for SDI Group, a British scientific instruments rollup trading at attractive valuations. SDI operates a proven buy-and-build strategy, acquiring niche scientific instrument companies at 5-7x earnings multiples and integrating them while maintaining operational autonomy. The company has demonstrated strong execution with 17 acquisitions since 2014, growing from 2 to 14 subsidiaries and achieving impressive 30% ROCEs. Despite strong fundamentals including conservative 1x net debt/EBIT leverage and consistent cash generation, the stock trades at only 20x earnings versus historical 25x average and peer median of 30x+. A recent 14% selloff on temporary customer order concerns created an attractive entry point that both the fund and management capitalized on. The manager projects potential 30% IRRs based on normalized 25x multiple expansion and continued M&A execution, with substantial upside if valued in line with European scientific instrument peers at 30-35x earnings.