Investment Pitches

Pitch Summary:
Xponential Fitness (XPOF) - Xponential fitness is a franchisor of boutique fitness concepts including Club Pilates, Pure Barre, Stretch Lab and others. The stock was previously a stock market darling, having nearly tripled from the 2021 IPO through 2023 highs, but then became the subject of a well-regarded short seller at this time last year, causing shares to plummet. The short report focused on 1) questioning the integrity of XPOF's CEO, and 2) cherry picking commentary from unhappy franchisees in select verticals to imply that the entire business was at risk. In May, XPOF's CEO was removed, causing shares to plummet, and I purchased our position on this weakness. Generally speaking, being a franchisor is a very good business, which explains why franchisors often trade at 20x EBITDA or more. At the time of the decline, if one assumed that every single franchisee had financed 75% of their franchise with debt, and then sued XPOF to recover this liability and won, I estimated that XPOF would have been trading at 12.5x their guidance for 2024 adjusted EBITDA. The idea that every single franchise would sue was extremely farfetched because first, many franchisees own more than one franchise, and it is unlikely this would be true if they were unhappy with their first franchise. Second, information on franchisee/franchisor litigation is widely available, and through 2023 XPOF averaged less than 2 conflicts per 1,000 units. Importantly, Club Pilates – XPOF's crown jewel – had zero lawsuits. Further, I believed that Club Pilates by itself could be worth more in a private sale than the price that public markets ascribed to the entire portfolio of concepts. Since the time of our purchase the company has named an impressive new CEO, made it clear that they are open to divesting underperforming concepts, and indicated that share repurchases are likely in the not-too-distant future. Additionally, future growth is all but guaranteed as the number of global licenses sold far exceeds the number of global studios that are currently open. Importantly, this dynamic should cushion the business during any economic downturns as license holders who have not yet opened studios would be incentivized to take advantage of favorable lease terms during economic downturns. I would note that XPOF grew and gained market share through COVID, while the industry suffered. Shares have rallied considerably since our purchase, but there is still a fair amount of uncertainty surrounding the business related to an SEC investigation instigated by the short report. I expect this investigation will be resolved with time, and shares will re-rate higher. If XPOF continues to execute and gets a franchise peer multiple, the stock could rally more than 200% from here. This leaves plenty of room for success if the market is suspicious about the durability of fitness concepts and XPOF trades at a discounted multiple.

BSD Analysis:
The manager presents a contrarian investment in Xponential Fitness following a short attack and CEO departure that created significant price weakness. The thesis centers on the high-quality franchise business model, which typically commands 20x+ EBITDA multiples, versus XPOF's distressed valuation of 12.5x even under worst-case litigation scenarios. The manager's analysis reveals the short report's claims were overblown, with litigation rates below 2 per 1,000 units and zero lawsuits for crown jewel Club Pilates. The business demonstrates resilience with growth through COVID and a substantial pipeline of sold but unopened licenses providing downside protection and future growth visibility. New management, potential divestitures of underperforming concepts, and share repurchases should drive value realization. The manager sees 200%+ upside potential if the company achieves peer multiples, with significant margin of safety even at discounted valuations.

Pitch Summary:
Cantaloupe Inc. (CTLP) – Cantaloupe is new to our portfolio for the second time, as we previously owned this company in 2020 and 2021. The original thesis was part special situation as the Company regained compliance with the SEC related to timely filing of financial statements and would thus be a beneficiary of forced buying by index funds, and part fundamental improvement under a new and much improved management team. In my view, both legs of that thesis have been playing out, but the market has thus far failed to reward Cantaloupe for the fundamental improvements they have made. Cantaloupe, perhaps best known in the vending machine world, provides hardware, payments and software solutions to self-serve retail including micro-markets, laundry, arcade, auto air/vacuum, and others. Self-serve retail is reasonably recession resistant, and Cantaloupe's products help customers increase revenue and cut costs. Payments and software revenue are recurring in nature, and historic churn has been close to zero. In December of 2022 management laid out a three year plan detailing their ambitions around growing revenue at a 15% CAGR by continuing to penetrate their markets, expanding internationally, and increasing ARPU. Importantly, there is significant operating leverage in the model, which management believes will lead to a 70% CAGR in EBITDA. This operating leverage is already beginning to kick in, and Cantaloupe is out-growing a history marred by a lack of profitability. Thus far the Company is on track to reach their goal of approximately $75M in EBITDA for fiscal 2026 (June, 2026 YE), although with a different revenue mix than expected. In brief, they have been overperforming on Transaction growth, and underperforming on Subscription fees. That being said, management has indicated that the problem with Subscription revenues is not a demand problem. Rather, they have a significant backlog of sold hardware that has not yet been installed due to a lack of labor. As these devices are installed and activated, presumably Subscription revenue will continue to grow. To be clear, Subscription revenue is more attractive than Transaction revenue, but in my view focusing on this "disappointment" without referencing valuation is short sighted. If the Company hits their goal of $75M in EBITDA, given a net cash position, substantial NOLs, and limited CapEx, I estimate this EBITDA will translate into approximately $60M in FCF regardless if the revenue is from Subscriptions or Payments. This suggests the company trades for a mid-high single digit multiple of FCF looking out a year or two. Considering that other payments linked companies trade at north of a 20x multiple, there should be plenty of upside to come for CTLP. Insiders at CTLP are seemingly confident as they recently purchased shares near current prices.

BSD Analysis:
The manager presents a compelling value thesis for Cantaloupe, a provider of technology solutions for unattended retail markets. The investment is based on the company's successful execution of a three-year growth plan targeting 15% revenue CAGR and 70% EBITDA CAGR through 2026. The manager highlights significant operating leverage in the business model, with the company transitioning from unprofitability to targeting $75M in EBITDA by fiscal 2026. While subscription revenue has underperformed due to installation backlogs rather than demand issues, transaction revenue has exceeded expectations. The valuation appears attractive at mid-to-high single-digit FCF multiples compared to payment companies trading at 20x+ multiples. The recession-resistant nature of self-serve retail, near-zero customer churn, and insider buying provide additional confidence. The manager views current market pricing as failing to recognize the fundamental improvements under new management.

Pitch Summary:
Delivery Hero – German-listed food delivery business Delivery Hero was also a top detractor. Despite reporting inline results and upgrading its revenue guidance, the stock underperformed due to competition concerns in Korea, its largest market, and the potential entry of China's largest food delivery platform into the Middle Eastern market, starting with Saudi Arabia, a crucial and profitable market for Delivery Hero. However, there were several positive developments. The company struck a deal to sell its Taiwan business to Uber for $950 million, nearly three times the enterprise value (EV) to gross merchandise value (GMV) multiple at which Delivery Hero was trading. In other words, Delivery Hero is selling 3% of their GMV for 8% of the group's EV. This accretive transaction will help reduce financial leverage, although the market is not pricing it in until the deal closes next year after the competition review. Additionally, we are excited about board renewal activity. A credible activist shareholder took a meaningful stake and joined the board, and Prosus, another investment of ours that owns 30% of Prosus, is also engaging more with the management team. We see significant opportunities for improved returns through revenue optimization, cost efficiencies, and portfolio rationalization, and we expect the renewed board to pursue these initiatives with urgency.

BSD Analysis:
Longleaf Partners maintains conviction in Delivery Hero despite competitive pressures, emphasizing multiple catalysts for value creation beyond operational performance. While acknowledging legitimate concerns about Korean competition and potential Chinese entry into Middle Eastern markets, the fund highlights the transformative Taiwan divestiture to Uber for $950 million. This transaction demonstrates significant value creation potential, as Delivery Hero is monetizing 3% of GMV for 8% of enterprise value, trading at nearly three times the company's current valuation multiple. The deal provides crucial deleveraging benefits while validating the portfolio's underlying value. More importantly, the fund is excited about governance improvements through activist involvement and increased Prosus engagement as a 30% shareholder. The combination of credible activist pressure and major shareholder engagement creates a powerful catalyst for operational improvements including revenue optimization, cost efficiencies, and portfolio rationalization. The manager expects the renewed board composition to pursue value creation initiatives with greater urgency. This represents a multi-faceted value creation story combining asset monetization, deleveraging, and governance-driven operational improvements.

Pitch Summary:
Eurofins – The global leader in laboratory testing and services Eurofins detracted for the quarter. The company had a relatively quiet quarter until the final week of June when the share price fell over 20% following a short report by Muddy Waters. Eurofins has since issued a rebuttal. Our pre-investment analysis had already examined the key issues raised in the report, reaffirming Eurofins as one of our top investments. While frustrated by the timing, Eurofins must wait until it reports its first-half results in late July to respond with tangible actions. However, the company and its controlling shareholder/CEO have indicated they may consider significant share purchases if current prices persist. Despite the short-term setback, our long-term outlook on Eurofins remains positive. The short report may ultimately prove beneficial, as Eurofins is now looking to find a finite solution for one of the core issues raised, the historic related party transactions, all over a decade ago, that left the founder and controlling shareholder as a significant landlord for the group. They are also revisiting capital allocation priorities, which may result in larger near-term returns to shareholders.

BSD Analysis:
Longleaf Partners demonstrates unwavering conviction in Eurofins despite a 20% stock decline following a Muddy Waters short report, viewing the situation as a potential opportunity rather than a fundamental threat. The fund's confidence stems from thorough pre-investment due diligence that had already examined the key issues raised by the short seller, reinforcing their view of Eurofins as a top investment. Management's indication of potential significant share purchases at current prices signals strong insider confidence in the business fundamentals. The manager believes the short attack may ultimately prove beneficial by forcing resolution of legacy issues, particularly historic related party transactions involving the founder's real estate holdings. Most importantly, the controversy is prompting management to revisit capital allocation priorities, potentially leading to enhanced shareholder returns. The fund maintains conviction in Eurofins' position as the global leader in laboratory testing services, viewing current weakness as temporary noise obscuring strong underlying business fundamentals. This represents a classic contrarian opportunity where short-term controversy creates long-term value creation potential through improved governance and capital allocation.

Pitch Summary:
Becle – Leading manufacturer of tequila and whiskeys Becle was the top detractor this quarter. The Mexican spirits company, known for the Jose Cuervo brand, faced macroeconomic and industry-specific challenges. Mexico's recent election strengthened the current ruling party, causing short-term fears about potential policy changes and leading to a depreciation of the peso. However, as an exporter generating over two-thirds of its revenue outside Mexico, this could benefit Becle long-term by providing a margin tailwind. Spirit sales were weaker than expected this year and Becle is not immune to short-term industry trends. However, tequila remains a strong growth segment, and the recent decline in agave prices, which had previously been a margin headwind, now offers another margin tailwind. While peers may see margins decline from all-time highs, Becle's margins are expected to improve. Additionally, the CFO change this quarter could be a long-term positive. The company is generating more FCF than it has in recent history, and we expect this trend to continue in the coming years.

BSD Analysis:
Despite being a top detractor, Longleaf Partners maintains conviction in Becle's long-term prospects, viewing current headwinds as temporary and potentially beneficial. The fund acknowledges near-term challenges from Mexican election uncertainty and broader spirits industry weakness but emphasizes structural advantages that should drive future outperformance. Becle's export-heavy business model, generating over two-thirds of revenue internationally, positions the company to benefit from peso depreciation through margin expansion. The manager highlights two key margin tailwinds: declining agave prices reversing previous cost pressures and currency benefits from peso weakness. While industry peers face margin compression from peak levels, Becle is positioned for margin improvement due to these favorable input cost dynamics. The recent CFO change is viewed as a potential catalyst for enhanced operational efficiency. Most importantly, the company is generating record free cash flow levels, which the fund expects to continue expanding. This represents a contrarian value opportunity where temporary macro headwinds mask improving fundamental trends and cash generation capabilities.

Pitch Summary:
Prosus – Global consumer internet group Prosus contributed for the quarter. Nearly 80% of Prosus's net asset value (NAV) comes from its stake in Tencent, which saw improved trends in gaming and advertising. Profits grew much faster than revenue due to a shift towards higher-margin revenue streams. Tencent continued its significant share repurchases aiming to buy back HK$100 billion worth of shares this fiscal year. Additionally, Prosus achieved profitability in its consolidated e-commerce portfolio while maintaining strong top-line growth, marking an important milestone that demonstrates management's focus on profitable growth rather than growth at any cost. Most importantly, capital allocation has shifted towards shareholder returns, with Prosus buying back 22% of its float over the last two years, resulting in material NAV per share accretion.

BSD Analysis:
Longleaf Partners highlights Prosus as a compelling value creation story driven by both operational improvements and enhanced capital allocation. The company's 80% NAV exposure to Tencent provides significant leverage to the Chinese tech giant's recovery in gaming and advertising, with profits growing faster than revenue due to margin expansion. Tencent's aggressive HK$100 billion share buyback program further enhances value for Prosus shareholders. The fund emphasizes Prosus's achievement of e-commerce portfolio profitability while maintaining growth, demonstrating disciplined management focus on sustainable returns rather than growth at any cost. The most compelling aspect is the dramatic shift in capital allocation strategy, with Prosus repurchasing 22% of its float over two years, creating material NAV per share accretion. This combination of operational leverage to Tencent's recovery, improved e-commerce profitability, and aggressive shareholder returns creates a multi-faceted value creation opportunity. The manager views this as a transformation from growth-focused to shareholder-focused capital allocation.

Pitch Summary:
HDFC Bank – HDFC Bank, the largest private sector bank in India, was a contributor this quarter. Results for the quarter ending March 2024 exceeded expectations, showing solid progress in deposit mobilization and reducing the loan-to-deposit ratio, a key market concern since the merger with HDFC Ltd. last year. Despite tight system liquidity, the bank reported impressive deposit growth, gained market share, improved its net interest margin and maintained excellent credit quality. We remain optimistic about the company's future. With best-in-class underwriting and a robust deposit franchise, the net interest margin is expected to improve as the bank replaces HDFC Ltd.'s high-cost borrowings with low-cost deposits. Additionally, the cost-to-income ratio will decrease as recently opened branches mature. While the improvement will be gradual due to the bank's size and scale, the trajectory is certainly positive.

BSD Analysis:
Longleaf Partners expresses strong confidence in HDFC Bank following its successful post-merger integration with HDFC Ltd. The bank exceeded quarterly expectations with impressive deposit mobilization progress, addressing a key market concern about the loan-to-deposit ratio since the merger. Despite challenging system liquidity conditions, HDFC demonstrated market share gains, margin improvement, and maintained excellent credit quality standards. The investment thesis centers on the bank's best-in-class underwriting capabilities and robust deposit franchise, which should drive net interest margin expansion as high-cost borrowings are replaced with low-cost deposits. The manager anticipates operational leverage benefits as recently opened branches mature, leading to improved cost-to-income ratios. While acknowledging that improvements will be gradual given the bank's scale, the fund maintains conviction in the positive trajectory. This represents a quality banking franchise benefiting from integration synergies and structural competitive advantages in the Indian market.

Pitch Summary:
Millicom – Latin American wireless and cable company Millicom was the top contributor for the quarter. This quarter saw significant free cash flow (FCF) growth due to operational improvements driven by Iliad's growing influence at the company, as mentioned in previous letters. Organic revenues rose approximately 4%, while total costs decreased by about 3.5%, leading to a more than 20% increase in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and a rise in the stock price. However, the quarter ended with Iliad proposing to buy the entire company for $24 per share, around the current market price but well below our value. The bid seems aimed at managing regulatory thresholds for acquiring over 33% of a Luxembourg company, even if the initial tender offer is rejected. We continue to monitor developments actively, while remaining confident in the company's continued strong performance and intrinsic value.

BSD Analysis:
Longleaf Partners maintains a bullish stance on Millicom, highlighting strong operational improvements driven by Iliad's influence. The company demonstrated impressive financial metrics with 4% organic revenue growth, 3.5% cost reduction, and over 20% EBITDA growth, resulting in significant free cash flow expansion. The manager views Iliad's $24 per share takeover proposal as opportunistic and below intrinsic value, suggesting the bid is primarily motivated by regulatory threshold management rather than fair valuation. Despite the takeover uncertainty, the fund remains confident in Millicom's structural improvements and long-term value creation potential. The operational turnaround story appears intact with meaningful margin expansion and cash generation improvements. The manager's decision to actively monitor developments while maintaining conviction suggests they believe the company's standalone value exceeds the current offer price. This position represents a classic value investing scenario where operational improvements are driving fundamental value creation despite market price volatility.

Pitch Summary:
Global toy and media company Mattel detracted for the quarter. The company reported what we viewed as solid quarterly results and an affirmation of 2024 guidance. We were particularly encouraged by their decision to increase their share repurchase program, which positions them well for FCF per share growth. As the quarter went on, however, the market focused on weaker consumer purchasing trends impacting Mattel and its peers. The market also seems to have moved past the success of last year's Barbie movie, but we believe there is significant upside from media and entertainment revenue streams that are not yet reflected in today's earnings expectations.

BSD Analysis:
Longleaf Partners remains bullish on Mattel despite market concerns about consumer spending weakness affecting the toy industry. The fund views the company's quarterly results as solid with management reaffirming 2024 guidance, suggesting underlying business stability. The increased share repurchase program demonstrates management's confidence and commitment to FCF per share growth, which should benefit shareholders over time. While the market has moved past the Barbie movie success, the fund believes this represents a short-sighted view that overlooks the longer-term potential of Mattel's media and entertainment strategy. The fund sees significant upside from expanding media and entertainment revenue streams that are not yet reflected in current earnings expectations, suggesting the market is undervaluing Mattel's transformation into a broader entertainment company beyond traditional toy manufacturing.

Pitch Summary:
Agricultural machinery company CNH Industrial was a detractor in the quarter for two main reasons. First, the global ag equipment market went into the year depressed yet has still underperformed expectations, driven by weaker commodity prices and higher interest rates. Second, CEO Scott Wine's departure, for personal reasons, has created a temporary management transition headwind. Despite these challenges, we remain optimistic about CNH's long-term prospects. It is a high-quality business with pricing power in a consolidating market. Its equipment and precision technology are essential for increasing farm productivity and meeting global food demand amidst constrained land and labor inputs. CNH is executing well, gaining market share, and improving underlying margins. We also believe that the largest holder of CNH, our highly aligned partners at EXOR (which is a holding in our Global and International strategies), will continue the company along its path of FCF per share growth and increased focus on its core business. CNH is undervalued at 7 times earnings and is committed to returning 100% of FCF to shareholders through dividends and buybacks.

BSD Analysis:
Longleaf Partners maintains a bullish long-term view on CNH Industrial despite near-term headwinds from depressed agricultural markets and management transition. The fund emphasizes CNH's high-quality business model with pricing power in a consolidating agricultural equipment market, positioning it well for long-term growth. The company's precision technology and equipment are viewed as essential for addressing global food security challenges amid constrained land and labor resources. Despite cyclical pressures, CNH continues executing well by gaining market share and improving underlying margins. The fund highlights the strategic advantage of EXOR's controlling stake, viewing this as aligned ownership that will drive continued focus on free cash flow per share growth and core business optimization. At 7x earnings with a commitment to return 100% of FCF to shareholders, the valuation appears compelling relative to the company's strategic positioning and shareholder-friendly capital allocation policy.

Pitch Summary:
Life sciences company Bio-Rad was the top detractor in the quarter. The company was one of our new investments last year, and so far, we have been early on our expectations for their life sciences business to return to more normal pre-COVID growth trends. We still believe that growth tailwinds are delayed, not derailed, and there have been no new material threats to Bio-Rad's competitive position since we established our position last year. We are encouraged by the company's use of a strong balance sheet to repurchase shares opportunistically. Current margins are below peer levels, suggesting potential for improvement, thereby further increasing FCF per share. The market also continues to undervalue their multi-billion-dollar stake in Sartorius. We anticipate Bio-Rad will return to solid growth. Many of its peers are valued as if this growth is already occurring, even in this tough industry environment. While we can't predict the exact timing, we believe this recovery will happen sooner than the market expects.

BSD Analysis:
Despite Bio-Rad being a top detractor, Longleaf Partners maintains conviction in their bull thesis, viewing current weakness as a timing issue rather than a fundamental problem. The fund believes they were early in anticipating the normalization of life sciences growth trends post-COVID, but emphasizes that growth tailwinds are delayed rather than derailed. Bio-Rad's competitive position remains intact with no new material threats emerging since the initial investment. The company's opportunistic share repurchases demonstrate disciplined capital allocation, while margins below peer levels suggest significant operational leverage potential. The fund highlights an underappreciated asset in Bio-Rad's multi-billion-dollar Sartorius stake, which provides additional value not reflected in current valuations. The relative valuation disconnect is particularly compelling, as peers trade at growth premiums despite the challenging industry environment, while Bio-Rad trades at a discount despite similar fundamentals.

Pitch Summary:
Global logistics company FedEx was the top contributor for the quarter. Late in the quarter, FedEx reported strong fiscal year results, highlighting a year of strong cost management in a challenging revenue environment. Earnings per share (EPS) increased by 19%, and reduced capital expenditures narrowed the gap between EPS and FCF per share. With the increase in FCF, the company has become a significant share repurchaser, which is a welcome change. The company also announced a strategic review of their Freight segment. Our appraisal has long accounted for the underappreciated value in FedEx's less-than-truckload operations. A potential spin-off or sale could unlock substantial value, as comparable companies like Old Dominion trade at significantly higher multiples on revenue, cash flow, and earnings than those applied to FedEx Freight by the market and our appraisal today.

BSD Analysis:
Longleaf Partners maintains a bullish stance on FedEx, highlighting the company's operational excellence and potential value creation opportunities. The fund emphasizes FedEx's strong cost management capabilities, which drove 19% EPS growth despite challenging revenue conditions. The narrowing gap between EPS and free cash flow per share, combined with increased share repurchases, demonstrates improving capital efficiency and shareholder-friendly capital allocation. The strategic review of the Freight segment represents a significant catalyst, as the fund believes this less-than-truckload operation is undervalued by the market. Comparable companies like Old Dominion command premium multiples, suggesting substantial value could be unlocked through a potential spin-off or sale. The fund's long-term appraisal has already factored in this underappreciated value, positioning them well for potential upside realization.

Pitch Summary:
Webster Financial Corp. (WBS) was one of our detractors this quarter, falling 13.4% to finish at $43.59, recovering a bit into quarter-end off its June 15th low of $39.34. We see tremendous value and neglect in the shares of WBS, as investors have pushed out their rate cut hopes, worried about commercial real estate and, in our view, have not done a deep dive into WBS's credit strength, its diversified deposit strength, or what could be a valuation catalyst in its HSA Bank division. We see Webster as having tremendous financial strength. Webster has a 10.5% CET1 ratio, well above the 6.5% CECL minimum requirement. Moreover, this level is temporarily depressed due to the just completed acquisition of Ametros Financial Corp. WBS is targeting to rebuild its CET1 ratio to 11% in the near-term. Webster also remains very profitable, with a Bloomberg earnings per share forecast of $5.59 for 2024, and rising to $6.27 in 2025, even with slightly higher reserve building levels. Webster's book value as of 1Q24 is $49.07, and has risen at a 9.9% CAGR since 1Q19 while its tangible book value of $30.22 has risen at a 4.3% CAGR since 1Q19. This is strong book value growth in a period where banks have endured significant headwinds, including Covid, Fed rate hikes, and growing loan competition from private credit funds (see our 6/28/24 Linkedin post Private Credit – An Exponential Growth Market Mired in the Shadows | LinkedIn). Webster also has what we see as significant business structure strength. At the parent level, its loan-to-total deposit ratio is 84.1%, which we see as protecting against potential modest deposit shrinkage (which we do not expect) while also providing firepower to grow loans. Moreover, the diversity of its deposits is a hidden asset and not a well understood competitive advantage for WBS. Only 71% of its deposits come from its traditional banking activities, with 44% from the consumer bank and 27% from the commercial bank. WBS gets 15% of its deposits from its Healthcare Financial Services unit (mainly HSA Bank) where the cost of deposits is a very low 15 bps. WBS also gets 10% of its deposits from its recent Interlink cash sweep acquisition and projects strong near-term deposit growth (movement to WBS) in the near-term. We think WBS has a strong Ability To Grow. With only an 84.1% deposit ratio, WBS has substantial room to grow loans, and we note that its footprint along the I-95 corridor between New York and Boston is a very attractive, populous and growing market. WBS forecasts total 2024 loan growth of 5%, accelerating off 1Q24's 0.7%, while deposit growth is forecast to be in the range of 5%-7%. With $76 billion of assets, WBS also has considerable room to growth before hitting the $100 billion asset threshold, which would increase compliance costs for stress testing, etc. WBS should also see continued strong growth out of its HSA bank (now Financial Services) unit, as HSA's gain popularity to help consumers manage the rising burden of healthcare costs. HSA's pre-tax net revenue continued to grow strongly in 1Q24, up 19.2%. Moreover, HSA Bank is the #2 HSA account provider, second to Health Equity (HQY) and these two leaders continue to consolidate the market. We see tremendous neglect in WBS as well. First, WBS, like most regional banks, has been shunned year-to-date by investors who were expecting the Fed to cut rates multiple times in 2024, but now have abandoned the bank trade, which they see as a beneficiary of rate cuts. We see this impact as a non-issue for WBS, as it can grow without a rate cut, while also seeing the potential tailwind of rate cuts in 2025 if they should occur. We also see neglect in the fears around WBS commercial real estate portfolio, as investors have seemingly "shot first without asking questions." While WBS does have a $20 billion commercial real estate lending portfolio, only $1 billion is in traditional office. None of these loans were on non-accrual status at the end of 1Q24, the loan-to-value (LTV) was 60%, average loan size was $5.6 million and WBS has a $50 million reserve against this book of business. Maturities are well staggered, with $260 million remaining in 2024 and $158 million in 2025. Its rent regulated multi-family portfolio is also well managed. Of the $1.5 billion of loans where rent regulation is over 50%, non-accrual rates are only 0.1%, the LTV is 61%, average loan is $3.5 million and remaining maturities are $99 million in 2024 and $56 million in 2025. While these lending sectors are facing headwinds across the industry, we see WBS's underwriting strength evident in low current non-accrual levels and well staggered maturities. We see a compelling valuation opportunity in WBS shares, which closed the quarter at $43.59, down 18.4% from the 12/14/23 high of $53.39. WBS is forecast to earn $5.59 in 2024 and increase earnings to $6.27 per share in 2024, for Price /Earnings ratios of 7.75x and 6.91x respectively. WBS is compelling on a price to book and price to tangible book basis as well, at .87x and 1.41x respectively, especially given the historical growth CAGRs of 9.9% and 4.3% over the last five years. Our near-term Assessed Fair Value price target for WBS is $60, up roughly 38% from 2Q24 closing levels. This valuation level is under a 10x PE for 2025, which in our view prices in some conservatism for WBS to build reserves if desired. Importantly, any reserve build, in our view, would likely be an income statement impact for WBS, and not a balance sheet issue, and thus we view our PE metrics as very conservative, with upside to a 12x-14x PE ratio if rates are cut in 2025 and CRE fears ebb. Moreover, WBS has the balance sheet strength and the will to keep paying its dividend, which has 3.69% yield. Lastly, although we don't incorporate sum-of-the-parts catalysts into our AFV targets, we see significant upside potential and immediate strategic need for WBS to do a 19.9% IPO of its Health Care Financial services segment. HQY, HSA's largest competitor, trades at a 28.5x PE multiple on this year's earnings, and it is using its higher priced stock to roll-up smaller HSA competitors. If WBS were to IPO 19.9% of its Health Care unit, it would retain full control of the low-cost deposits, but create a new currency, likely at a significant PE premium to WBS shares, to compete with HQY for acquisitions to grow and defend its market share. Any gain on the sale of these shares would also bolster WBS capital levels, which could be used for share repurchase, reserve building or balance sheet repositioning. While WBS has said it is not an outright seller of this unit, we were intrigued by CEO Cuilla's comments on the 4Q24 call when he answered the HSA spin/sale question as "we continually evaluate" all lines of business to "maximize economic profit of those business lines and whether or not that happens as a wholly owned activity or joint-venture opportunity". In our view, where there is smoke and undervaluation, there is fire.

BSD Analysis:
Rewey Asset Management presents a compelling bull case for Webster Financial Corp, viewing the recent 13.4% quarterly decline as creating an attractive entry point. The manager emphasizes WBS's strong capital position with a 10.5% CET1 ratio well above regulatory minimums, solid profitability with $5.59 EPS forecast for 2024 rising to $6.27 in 2025, and impressive book value growth of 9.9% CAGR over five years despite banking sector headwinds. The firm highlights WBS's diversified deposit base as a competitive advantage, with only 71% from traditional banking and 15% from low-cost HSA deposits at just 15 basis points. The manager sees significant growth potential through the bank's conservative 84.1% loan-to-deposit ratio, attractive I-95 corridor footprint, and the rapidly growing HSA business which generated 19.2% revenue growth. Rewey dismisses commercial real estate concerns, noting that only $1 billion of the $20 billion CRE portfolio is in traditional office with strong underwriting metrics. At current valuations of 7.75x 2024 earnings and 0.87x book value, the manager sees 38% upside to their $60 price target, with additional catalyst potential from a possible HSA unit IPO that could unlock significant value given competitor Health Equity's 28.5x PE multiple.

Pitch Summary:
For example, we have taken a long position in GM using long-dated call options. GM generates significant free cash flow (FCF) from its core ICE trucks and SUVs while gradually expanding its EV business. In June 2024, GM announced a new $6 billion stock repurchase program, roughly 11% of its total market capitalization. This followed the completion of a $10 billion share repurchase program announced in November 2023. Despite these developments, GM shares, up 38% YTD, remain significantly undervalued, trading at five times the FY24 estimated EPS. Through our options strategy, we achieved a leverage of 2x, effectively doubling the YTD return compared to the shares themselves. However, leverage has its risks; losses can also double if the wrong stocks are chosen. I highlight GM as it represents a position with limited downside and substantial upside potential.

BSD Analysis:
The manager presents a compelling value thesis on General Motors, emphasizing the company's strong free cash flow generation from its traditional ICE vehicle business while positioning for EV growth. The aggressive capital return program totaling $16 billion in share repurchases demonstrates management's confidence and commitment to shareholder value creation. Trading at just 5x forward earnings despite 38% YTD gains suggests the market hasn't fully recognized GM's fundamental improvements. The fund's use of long-dated call options provides 2x leverage while maintaining defined risk parameters. The dual revenue stream from established ICE operations funding EV transition creates a balanced risk-reward profile. The manager's emphasis on limited downside with substantial upside potential aligns with their quality-at-reasonable-price investment philosophy. This position exemplifies their strategy of leveraging undervalued, cash-generative businesses with clear catalysts.

Pitch Summary:
During the second quarter the Fund initiated an opportunistic investment in Barnes & Noble Education (BNED) after the company announced a highly dilutive rights offering to recapitalize itself. BNED, which was spun out of Barnes & Noble in 2015, is the largest operator of college bookstores across the US with 1,245 bookstores (55% physical / 45% virtual), serving nearly 6 million students. Since the spin, the company has faced increasing competitive pressures from eTextbooks, rentals and piracy. In response to these pressures, BNED launched First Day Complete (FDC), which provides students with required course materials prior to the first day of class at below market rates. When schools sign up for FDC, students are automatically enrolled, with an opt-out rate of less than 20%. As a result of significantly higher sell-through rates, BNED typically enjoys a course material revenue and gross profit uplift of nearly 80% and 100%, respectively, upon adoption. Students enjoy a 30-50% discount, but also benefit from enhanced educational outcomes when they have their materials before the first day of school. Publishers gladly provide these discounts since they are more than offset by the greater sell-through rates. Schools benefit when student outcomes improve and because the rent they receive from BNED is primarily tied to its revenues. Due to the win/win nature of the FDC program, the pace of adoption is accelerating. In its most recent fiscal year, BNED generated nearly $300 million in FDC revenue, up from just $100 million two years ago. As this growth continues, EBITDA should increase substantially, potentially into the hundreds of millions of dollars, up from $40 million currently. To fully realize this growth potential, BNED needed to recapitalize itself from an overleveraged position that worsened during the pandemic, when college enrollment took a hit. After engaging advisors to explore strategic alternatives in the middle of last year, the company announced a highly dilutive rights offering in April of this year at 5c per share. Given the low price of the offering and the amount of capital coming in, the transaction handed over 98% of the company to new equity. Unsurprisingly, the stock traded down significantly upon the announcement, given how unfavorable the deal was to old money. However, new equity was coming in at just 8x EBITDA, an attractive multiple relative to the significant FDC-related growth opportunity in front of the company. Furthermore, the much-improved balance sheet allows BNED to aggressively invest behind FDC, potentially further accelerating penetration from just a low teens percentage of the company's school base today. As such, in mid-April I invested 50 basis points of the Fund's capital into the company's shares at 23c each, which came with the right to invest up to an additional 3.5% of the Fund's capital into the company at 5c each, which would bring our average cost to 5.5c per share. Then in mid-May the stock went ex-rights, meaning that although the offering hadn't closed yet, the rights would be ours even if we sold our original shares. Less than a week later, the company filed a proxy statement for the deal, outlining that while it received a competing proposal, the board did not deem it to be a superior transaction and thus rejected it. However, that day BNED was lumped in with a handful of meme stocks, causing its shares to rally almost 8x over the next four days, allowing us to exit our initial 50bp investment at 3x the Fund's entry price. What's more, the shares stayed elevated until the transaction closed, allowing the Fund to dispose of most of its newly purchased shares also for around 3x its initial 5c cost. The shares then sold back down much closer to the rights price, allowing us to buy back some of the shares that we sold. Currently BNED represents approximately 3% of the Fund's capital. I expect the position to benefit when the company executes its growth plan in the coming years, and likely gets added back to the Russell 2000 mid-next year. It is worth noting that after the deal, BNED instituted a 100:1 reverse stock split so today's $10 share price is equivalent to 2x the price of the rights offering.

BSD Analysis:
The manager initiated an opportunistic position in Barnes & Noble Education following a highly dilutive rights offering that recapitalized the overleveraged company. BNED operates 1,245 college bookstores serving 6 million students and has been transforming its business through the First Day Complete (FDC) program, which provides course materials to students before classes begin. The FDC program has demonstrated strong traction, growing from $100 million to nearly $300 million in revenue over two years, with schools experiencing 80% revenue uplift and 100% gross profit uplift upon adoption. The manager views the 8x EBITDA valuation as attractive given the significant growth runway, as FDC penetration remains in the low teens across BNED's school base. The improved balance sheet post-recapitalization enables aggressive investment in FDC expansion. The manager executed a tactical trading strategy around the rights offering and meme stock volatility, ultimately establishing a 3% position. The thesis centers on BNED's ability to scale EBITDA from $40 million currently to potentially hundreds of millions as FDC adoption accelerates across its network.

Pitch Summary:
With shares up +40% year-to-date, Medical Facilities Corp. has moved firmly within our top five positions and shall remain there as long as they continue to execute the very simple strategy of running hospitals profitably and returning excess cash flow to shareholders via dividends and buybacks. Management has earned our trust by executing very well and doing what they say they will do, with the most recent quarterly results showing increases in revenues, decreases in costs, and strong cash flow conversion numbers. When I first came across MFC, it fit the mold of a turnaround by virtue of some very poor decision making by prior management. After getting familiar with the assets and earnings power, and with new management in place prior to our investment, I realized it was less of a turnaround but rather more a return to common sense. Management quickly simplified the entire cost structure, stopped doing value destroying M&A, and began returning all capital to its rightful owners, us. Given that MFC owns durable streams of cash flows in the form of hospitals that collect service revenue on the back of medical procedures, these cash flows should continue. I estimate MFC could generate greater than $30mm in distributable cash flow during FY24, against an enterprise value of around $270mm. These cash flows can be reinvested by MFC at mid-teens rates of return simply by repurchasing stock, which they've done by reducing the share count by nearly 25% during the past two years, letting shareholders know that long term value per share is the guidepost by which management is operating. Our position in Medical Facilities Corp. is a good reminder that we don't have to chase trends in A.I. or predict the future to generate strong returns. Investing in durable businesses with strong cash flows, smart capital allocation policies and cheap valuations works just fine. Significant potential upside also exists should the company decide to monetize its portfolio of hospitals via asset sales.

BSD Analysis:
The manager's bull case for Medical Facilities Corp exemplifies a successful turnaround story driven by management change and capital allocation discipline. The transformation from value-destroying M&A to shareholder-friendly policies demonstrates the power of operational focus and common-sense management. Current management's execution of a simple strategy—running hospitals profitably and returning excess cash—has generated strong results including revenue growth, cost reduction, and robust cash conversion. The business model of owning hospitals with durable procedure-based revenue streams provides predictable cash flows in a defensive healthcare setting. At current valuations, MFC trades at attractive metrics with estimated $30+ million distributable cash flow against a $270 million enterprise value. The 25% share count reduction over two years at mid-teens returns demonstrates exceptional capital allocation efficiency. The investment represents a classic value opportunity in a defensive sector with potential asset monetization upside, proving that fundamental investing in quality businesses with smart management can generate strong returns without chasing market trends.

Pitch Summary:
Limbach, our construction and engineering services business, has earned our trust by maintaining a long-term focus along with consistently exceeding expectations during our ownership. Companies that intentionally shrink a piece of their business that is not adding value, at the expense of top line growth (often a death knell for public market businesses) give credence to the idea that management matters, a lot. There are plenty of elements of Limbach's culture that I love and don't have the space in this letter to share, but I believe these cultural elements are leading to advantages which allow Limbach to displace competitors. Few businesses in Limbach's competitive universe take a relationship-based approach (as opposed to transactional) to servicing customers, which is now largely responsible for LMB's improving recurring revenue profile. Currently there are investments being made that will bear fruit by 2026 and beyond, at which point Limbach's brand will be strengthened, and they can likely take some price on ODR projects. Demand is high and ODR revenue as a percentage of consolidated revenue still has plenty of room to grow. Healthcare and data centers are two growing areas where Limbach can shine moving forward. Importantly, this will continue to remove the cyclicality associated with many of Limbach's construction focused peers. With continued execution, I estimate consolidated gross margins can exceed 30% over time, likely driving EBITDA margins toward 12%. If Limbach complements organic efforts with disciplined M&A, free cash flow per share could really accelerate, and would be worth a higher multiple over time.

BSD Analysis:
The manager's bull thesis for Limbach centers on the company's strategic transformation from cyclical construction to recurring revenue services through relationship-based customer approach. Management's willingness to shrink non-value-adding business segments demonstrates long-term thinking and operational discipline rare in public markets. The cultural competitive advantages and relationship-focused strategy are driving improved recurring revenue profiles and customer displacement opportunities. Current investments targeting 2026+ returns position Limbach for brand strengthening and pricing power in ODR (operations, development, and maintenance) projects. Exposure to high-growth healthcare and data center markets provides secular tailwinds while reducing construction cyclicality. The manager's projections of 30%+ gross margins and 12% EBITDA margins reflect significant operational leverage potential. The combination of organic growth in attractive end markets and disciplined M&A could accelerate free cash flow per share growth, warranting multiple expansion over time.

Pitch Summary:
APi Group has been in and out of client portfolios since inception (mostly in) and has earned our trust by carrying over the founding culture of the business on its route to becoming public, while increasing their focus on growing the more durable and higher margin fire safety services segment. The start of 2024 has been a busy one for APG with the recent retirement of their Series B Preferred stock, along with the acquisition of Elevated Facility Services Group, a leading provider of contractually based maintenance and repair services for elevator and escalator brands. I was thrilled to see this deal announcement given the revenue and EBITDA contributions, but also because management likely sees similar opportunities to grow non-discretionary recurring revenue by winning incremental service work. As a reminder, Safety Services, which represent 70% of APGs business, are statutorily mandated services that represent sticky, higher margin revenue and are largely recession resistant. APG's disciplined selection of shorter duration, smaller project sizes create a differentiated cost structure (read: lower) versus competitors, providing APG with the opportunity to raise prices over time, creating what should be operating leverage with further scale. I estimate that by 2027, APG will approach 15% EBITDA margins (200bps above management's 2025 targets) on close to $9 billion in revenues (6% consolidated growth). By then, 80% of EBITDA should convert to free cash flow, which means at today's price, APG would be valued at less than 13x FCF. Organic efforts continue to be complemented by M&A, as APG has made 25 acquisitions since going public, with 300 identified businesses remaining in the pipeline, most of which are sourced via proprietary channels. The combination of organic growth, M&A, pricing and de-levering means there are many ways to win here, which makes my job one of holding on and getting out of the way. With continued execution and strong capital allocation, shares should climb higher from here.

BSD Analysis:
The manager presents a comprehensive bull case for APi Group based on the company's transformation toward higher-quality, recurring revenue streams. The core thesis centers on Safety Services comprising 70% of business with statutorily mandated, recession-resistant characteristics that provide pricing power and margin expansion opportunities. Recent strategic moves including preferred stock retirement and the Elevated Facility Services acquisition demonstrate management's focus on building non-discretionary recurring revenue. The manager's 2027 projections of 15% EBITDA margins on $9 billion revenue (exceeding management targets) and 80% cash conversion suggest significant value creation potential at current valuations. APG's differentiated cost structure through smaller project focus provides competitive advantages and operating leverage. The robust M&A pipeline of 300 identified targets sourced through proprietary channels offers multiple growth avenues. The combination of organic growth, strategic acquisitions, pricing power, and deleveraging creates multiple paths to value creation, supporting the manager's high conviction in continued outperformance.

Pitch Summary:
Shares of Bel Fuse, our electronics component manufacturer, are up slightly for the year, despite industry de-stocking issues expected to impact the company's top line during FY24. Despite these well-documented issues along with the company's Magnetics segment still limping along, profitability improvements will remain sticky moving forward, resulting in continued ample cash generation. In terms of uses for that cash, Bel is entering into new product and market segments, gaining exposure in attractive end markets such as space and data centers, while M&A remains an option to accelerate top line growth. Most importantly, for the first time in the company's history, Bel Fuse established a share buyback program to the tune of $25mm, which should be exhausted by the end of this year. Given the current valuation, buying back stock with a double-digit cash flow yield is a great investment, and I welcome further reductions in the share count moving forward. Bel Fuse has earned our trust by communicating openly, changing capital allocation policies to benefit shareholders, and facing bumps in the road with humility. There is a continued path to strong returns here through a return to normalized operating conditions, further cost optimization, new business wins, and working capital improvements. I remain optimistic about what Bel Fuse can accomplish during the next few years.

BSD Analysis:
The manager maintains a bullish stance on Bel Fuse despite near-term headwinds from industry destocking and weakness in the Magnetics segment. The investment thesis relies on the company's improved capital allocation, particularly the inaugural $25 million share buyback program representing strong value at current valuations with double-digit cash flow yields. Management's expansion into attractive growth markets like space and data centers provides diversification and upside potential. The manager emphasizes the sustainability of profitability improvements and continued cash generation capabilities. Trust in management stems from their transparent communication and shareholder-friendly policy changes. The path to returns includes multiple catalysts: normalization of operating conditions, cost optimization, new business development, and working capital improvements. The combination of defensive cash generation and offensive growth initiatives in emerging markets creates an asymmetric risk-reward profile.

Pitch Summary:
It's been years since our first purchase of Sylogist shares, and I continue to admire the intrinsic qualities of the business. Sylogist possesses many of the investment attributes I crave which include a leading position in their industry, durable and counter-cyclical characteristics, strong growth prospects, and an impressive managerial record of operating and capital allocation. I remain confident that Sylogist's attractive economics and long runway for growth will produce improved earnings power and shareholder value over time. The core business for Sylogist, which consists of selling non-profit, government and education related software, continues to fire on all cylinders. Customer relationships are strengthening, SaaS revenue is growing, and Bill Wood and team are focused on strengthening the company's competitive advantage within their end markets. Sylogist began to earn our trust years ago, taking short-term actions (viewed as negatives) to make the business more durable and strengthen customer relationships over the long term. A hefty dividend was cut, and margins were temporarily lowered to make value-accretive growth investments, which are paying off today. Even amid aggressive investment spending, Sylogist's business remains highly cash generative. As SaaS revenues continue to grow, especially with the help of channel partners, the Professional Services segment of the business will naturally atrophy, while margins and cash flow will increase over time. I estimate that within 12-18 months, we should see a significant inflection in SaaS revenue growth along with the potential margin benefits stemming from the positive mix shift, at which point we will be the owners of a recurring revenue, high margin, cash generative SaaS business with a durable competitive position, counter cyclical aspects, and a cheap relative and absolute valuation. With further contributions yet to materialize via the Gov and Ed segments (which are wide open for the taking), revenues could accelerate even further than what I anticipate. It won't happen overnight, but Sylogist is on its way to CAD $100mm in revenues and likely 30% EBITDA margins, measured against an EV of less than CAD $250mm. We will continue to benefit from increases in intrinsic value over time, assuming the business isn't acquired beforehand.

BSD Analysis:
The manager presents a compelling bull case for Sylogist, emphasizing the company's transition to a SaaS model serving non-profit, government, and education sectors. The investment thesis centers on the business's counter-cyclical characteristics and durable competitive position in specialized vertical markets. Management's strategic decision to sacrifice short-term profitability by cutting dividends and investing in growth initiatives demonstrates long-term thinking that has begun paying dividends. The manager projects significant margin expansion as the higher-margin SaaS business grows while the lower-margin Professional Services segment shrinks. With an estimated path to CAD $100mm in revenues and 30% EBITDA margins against an enterprise value under CAD $250mm, the valuation appears attractive. The 12-18 month timeline for SaaS revenue inflection provides a clear catalyst. The manager's confidence stems from years of ownership and observing management's execution of their strategic transformation.