Investment Pitches

Pitch Summary:
Converge Technology Solutions Corp. is a North American IT solution provider. They specialize in helping organizations modernize their IT infrastructure, leverage emerging technologies, and optimize their operations to drive business growth and innovation. Converge offers a wide range of IT services, including cloud solutions, cybersecurity, advanced analytics, digital infrastructure, and managed services. In 2018, Converge went public with a strategy to consolidate small and medium-sized IT service providers (ITSPs). Initially successful, it attracted investors, including us, interested in both inorganic and organic business growth. However, in 2022, the M&A strategy faced challenges due to accumulated debt and a declining share price. Converge acquired well, but the problem was that it was not integrating these acquisitions and deriving revenue or cost synergies. Our initial mistake in this investment was believing that the management team was doing both things well. Value investors typically step in as a stock declines like this, however, Converge's situation was complicated. The company had become a disparate collection of businesses through rapid M&A. In addition, Converge faced working capital problems. Capital tied up in working capital resulted in a lack of free cash flow, causing skepticism among value investors about reported earnings. There was also the issue of a reputed CFO departing just after a few months on the job! All this contributed to a decline in the stock price from C$12 per share in 2021 to a low of $2.3 per share in 2023 as there were no natural buyers of the stock. At its bottom, it was trading for 3x EV/EBITDA. We held several meetings with management, including the new CFO, Avijit Kamboj, and determined that Converge is headed in the right direction. At that point, we significantly added to the position. Since then, Converge has undergone significant changes including putting the M&A strategy on hold. We anticipate improvements in free cash flow conversion in 2024, along with structural changes leading to margin expansion. The outlook for 2024 and 2025 includes modest revenue growth, margin expansion, and low double-digit earnings growth. Additionally, with better free cash flow conversion, Converge aims to deleverage its balance sheet and repurchase stock. We believe all this will lead to a re-rating and narrow the gap to intrinsic value.

BSD Analysis:
White Falcon's Converge investment represents a classic turnaround story where the fund initially misjudged management's integration capabilities during the roll-up phase. The company successfully acquired IT service providers but failed to integrate them effectively, leading to working capital issues and poor cash conversion. The stock collapsed from C$12 to $2.3, trading at just 3x EV/EBITDA at the trough. White Falcon significantly increased their position after extensive management meetings, particularly with new CFO Avijit Kamboj. The investment thesis hinges on operational improvements: halting M&A to focus on integration, implementing NetSuite ERP across North America, restructuring sales incentives around cash collection and managed services, and consolidating front-end operations. Management targets 55-60% EBITDA-to-FCF conversion and 7-8% EBITDA margins (vs current 5-6%). With better cash generation, Converge plans to deleverage and repurchase shares, potentially driving a re-rating toward 10x EV/EBITDA peer multiples.

Pitch Summary:
ITAB Shop Concept performed well during April, mainly helped by the release of proforma 2024 numbers for the combined group following the large HMY acquisition. This demonstrated that the development of HMY had been better during 2024 than expected. A decent Q1 report also helped to derisk the case. While the overall direction (north) of the combined group's margin trajectory remains clear, ITAB's short-term margin levels are dependent on the mix within the group. Encouragingly, they secured a new order for their high margin gate solutions in the quarter.

BSD Analysis:
The manager presents a bullish case for ITAB Shop Concept following strong performance driven by better-than-expected integration results from their HMY acquisition. The release of proforma 2024 numbers revealed that HMY's development exceeded expectations, providing validation for the strategic acquisition. A solid Q1 report further de-risked the investment thesis by demonstrating operational execution. While acknowledging that short-term margins will fluctuate based on business mix, the manager emphasizes the clear upward trajectory for the combined entity's margins. The securing of new high-margin gate solution orders during the quarter provides additional confidence in the company's ability to drive profitability. This appears to be a successful post-acquisition integration story with improving fundamentals and margin expansion potential.

Pitch Summary:
In our FY 2023 letter, we noted our less-than-ideal experience with merger-arbitrage strategies, with Lifecore Biomedical being the sole remaining investment of this nature in the portfolio. We anticipated a positive outcome for this particular investment but that proved too optimistic when Lifecore's board of directors decided to end the strategic process without a deal. Lifecore was also a 3% position in the portfolio and, after this announcement, the stock declined from $7.5 to $4.5 per share. However, unlike our other merger-arbitrage positions we had made the decision that we will be happy owning the stock if a deal does not materialize. We bought more shares at $4.8 per share to bring Lifecore back to a 3% position. Our average cost is $5.3 and the stock closed at $5.8 at quarter end. Lifecore Biomedical is a Contract Development and Manufacturing Organisation (CDMO) with expertise in specialty formulation, aseptic filling, and final packaging of complex, injectable medical drug products. Our previous experience investing in similar businesses has taught us that these are very difficult to operate assets, largely attributable to a single factor - compliance. FDA grants authorization and conducts regular inspections of facilities to ensure compliance with regulatory standards. When a pharmaceutical product is developed and manufactured by a CDMO, the FDA holds both the CDMO and the sponsor (the company that owns the drug) responsible for ensuring that the product meets regulatory requirements for safety, efficacy, and quality. Lifecore is increasing capacity from 22 mn units to 70 mn units over the next 4 years. Not all capacity can be filled at the same price, but this means that Lifecore's revenues can increase 2-3x over the next 4-5 years. This, when combined with operating leverage, will mean a rapid growth in earnings - perhaps closer to 3x. Importantly, most of this capacity is already paid for, potentially leading to a surge in free cash flow.

BSD Analysis:
White Falcon's Lifecore position originated as a merger arbitrage play that failed when the board terminated the strategic process without a deal. However, the manager had predetermined comfort owning the business fundamentally, distinguishing it from other failed merger-arb positions. The investment thesis centers on a massive capacity expansion from 22 million to 70 million units over four years, potentially driving 2-3x revenue growth. With operating leverage, earnings could grow approximately 3x, while the pre-funded nature of the expansion should generate substantial free cash flow. The CDMO business model benefits from high regulatory barriers and FDA compliance requirements that create switching costs for pharmaceutical sponsors. While acknowledging the operational complexity of compliance-driven businesses, White Falcon sees the capacity expansion as a compelling growth catalyst. The manager added shares at $4.8 after the merger failure, maintaining a 3% position with an average cost of $5.3.

Pitch Summary:
Endava was down 40% after it reported earnings in February. This was a 3% position before this decline but we have since added to the stock to make it one of the top 5 positions (by cost) in the White Falcon portfolio. Endava is a founder-led IT service provider headquartered in London, UK. It competes with the likes of Accenture and provides IT services to clients in the financial services, travel, retail, software, healthcare among other industries. We believe scaled IT service providers are good businesses as they are essentially a 'royalty' on IT spend. They are an important link between technology and corporations who increasingly need technology to transform their business. We see a favorable backdrop for businesses like Endava with rising investments in technology, growing trends in outsourcing, and the emergence of new technologies such as Artificial Intelligence (AI). Importantly, we believe that Endava has the culture, scale and competencies required to succeed. So what happened? Endava guided for negative growth in its business for the current fiscal year (ending June 2024). On the other hand, management had made hiring decisions expecting a growth in revenues leading to a mis-match in the cost structure. Due to this, operating margins collapsed and Endava's earnings are likely to decline ~30% in FY 2024 compared to FY 2023. Client projects are being delayed due to three reasons, (1) AI is new and clients require time to discern the optimal use-case scenarios, leading to a cautious "wait and see" approach; (2) IT services ' over-earned' during Covid and had a stellar performance in 2022. Some of this is now normalizing as clients 'digest' previous implementations; and (3) Endava is over-exposed to the financial sector, specifically payments, a sector that is seeing a pronounced slowdown in demand. Clients may postpone these projects temporarily, but ultimately, they will need to invest in order to maintain competitiveness. In essence, Endava (and EPAM) is currently going through a phase of cyclical weakness which, we believe, will subside in the near future leading again to strong topline growth. Importantly, Endava has a robust balance sheet and a capable management team, instilling confidence in their ability to effectively navigate these challenging circumstances. At 11x LTM EV/EBITDA and potentially 8x NTM EV/EBITDA, we believe the risk-reward is favorable for an increased allocation to Endava.

BSD Analysis:
White Falcon views Endava's 40% decline as a cyclical downturn rather than a structural issue, positioning it as a contrarian opportunity. The manager emphasizes Endava's role as a 'royalty' on IT spending, benefiting from secular trends in digital transformation and AI adoption. The current weakness stems from three factors: client hesitation around AI implementation, normalization after COVID-era over-earning, and exposure to the struggling payments sector. Management's hiring decisions ahead of expected revenue growth created a cost structure mismatch, leading to margin compression and ~30% earnings decline in FY2024. However, White Falcon believes this cyclical weakness is temporary, as clients will eventually need to invest in technology to remain competitive. The fund increased its position significantly, making Endava a top 5 holding by cost. At 11x LTM EV/EBITDA and potentially 8x forward, the valuation appears attractive for a scaled IT services provider with strong culture and capabilities.

Pitch Summary:
As inflation continued to push prices higher and the threat of tariffs introduced the threat of further price increases, dollar stores presented an excellent opportunity for investment. As the low-cost (and in some towns the "only") provider at scale, both Dollar General (DG) and Dollar Tree (DLTR) can raise prices to increase both their top and bottom lines. Leading up to this point, both stocks were down significantly. We invested in both in early April. We continue to hold DLTR—in addition to its ability to take price, the company is undergoing a transformational change with the Family Dollar spinoff.

BSD Analysis:
Grey Owl's Dollar Tree investment thesis combines both tactical inflation-driven pricing power and a longer-term transformation story through the Family Dollar spinoff. The manager recognized DLTR's ability to raise prices during inflationary periods while maintaining its low-cost provider advantage in underserved markets. Unlike Dollar General which was sold for a quick gain, DLTR represents a more strategic holding due to the ongoing Family Dollar divestiture, which should unlock value and improve operational focus. The spinoff represents a significant corporate action that could reduce complexity and improve margins for the core Dollar Tree business. The continued holding suggests the manager believes the transformation story has further upside beyond the initial inflation-driven price appreciation. This position demonstrates the fund's ability to layer multiple investment themes - tactical inflation plays with longer-term corporate restructuring catalysts. The Family Dollar spinoff could potentially improve DLTR's competitive positioning and financial metrics over time.

Pitch Summary:
Perrigo Company PLC (PRGO) is an existing deep value holding that has slumped lately, but we're encouraged by the self-help progress. Shares of the consumer health company, with private-label brands spanning allergy and pain relief to digestive health products, fell in response to news that the cost to remediate its infant formula plants will run higher than expected. Last September, the Food and Drug Administration updated industry guidelines for the agency's approach to inspections and compliance for infant formula production. This included more frequent cleaning of manufacturing facilities, resulting in a slowdown in production. While the stock reacted to the disappointing infant formula update (which impacts 12% of company sales), we took away notable positives from PRGO's earnings update including clear signs of progress on market share, margins, and free cash flow generation. More recently, shares have recovered after the CEO appeared at an industry conference and reported faster-than-expected progress made on infant formula remediation. Ongoing progress on the issue should help refocus investors on the positive developments underway. Part of PRGO's self-help strategy includes making its U.S. operation look more like its business in the United Kingdom, where higher priced versions of the same molecule are manufactured/sold through PRGO's existing footprint (analogous to a "good/better/best" product offering often deployed by retailers). In a very asset-efficient manner, these newer products can be sold at 2 to 2.5 times the gross margin of a store-branded drug. Perrigo is also in the process of eliminating unproductive product lines, as more than 1,500 stock keeping units drive just 1% of operating profit. The stock is enjoying considerable insider buying and is attractively priced at just 12 times earnings.

BSD Analysis:
Heartland maintains conviction in Perrigo despite recent weakness from higher-than-expected infant formula remediation costs, viewing it as a deep value opportunity with compelling self-help catalysts. While infant formula issues (12% of sales) pressured shares, the manager emphasizes positive progress in market share, margins, and free cash flow generation across the broader business. The investment thesis centers on PRGO's operational transformation, including replicating its successful UK model in the US market where higher-margin products can achieve 2-2.5x gross margins versus store brands. Management's portfolio optimization strategy involves eliminating 1,500 unproductive SKUs that generate only 1% of operating profit, improving overall efficiency. Recent faster-than-expected infant formula remediation progress and significant insider buying support the turnaround narrative. At 12x earnings with multiple self-help initiatives underway, PRGO offers attractive risk-adjusted returns as operational improvements gain traction.

Pitch Summary:
As inflation continued to push prices higher and the threat of tariffs introduced the threat of further price increases, dollar stores presented an excellent opportunity for investment. As the low-cost (and in some towns the "only") provider at scale, both Dollar General (DG) and Dollar Tree (DLTR) can raise prices to increase both their top and bottom lines. Leading up to this point, both stocks were down significantly. DG had fallen over 72% from an all-time-high in late 2022. We invested in both in early April. We sold DG in early July realizing a gain of over 28% in a few months.

BSD Analysis:
Grey Owl identified Dollar General as a tactical opportunity during an inflationary environment, recognizing the company's pricing power as a low-cost provider with scale advantages. The manager's thesis centered on DG's ability to raise prices and expand margins during periods of inflation and potential tariff implementation, particularly given its position as the sole retailer in many rural markets. The investment was made after a significant 72% decline from 2022 highs, suggesting attractive valuation entry point. The position was executed as a short-term tactical trade rather than a long-term holding, with the manager successfully capturing a 28% gain over approximately three months. This demonstrates the fund's opportunistic approach to capitalizing on market dislocations. The quick exit suggests the manager viewed the opportunity as primarily a mean-reversion play rather than a fundamental transformation story. The success of this trade validates the manager's ability to identify and execute on tactical opportunities within their broader all-seasons framework.

Pitch Summary:
Another new position is The Hershey Company (HSY), the leading chocolate confectionary company in North America with a growing presence in salty snacks and non-chocolate confections. The maker of such popular brands as Hershey's, Reese's, Cadbury, and Jolly Rancher has historically traded at a premium to its consumer staples peers. But in an environment where consumer finances are stressed and input costs are climbing, that premium has disappeared. The stock is down 35% from its 2023 peak due to volume headwinds and margin pressures brought about by rising prices. We believe Hershey simply needs to demonstrate to investors that these headwinds are cyclical and temporary in nature, while once again showcasing its ability to balance superior profitability with modest growth and stable market share. Cocoa prices, a key input for HSY, have seen a nearly unprecedented price spike on supply disruptions in West Africa (where the majority of global supply originates). While we cannot predict when cocoa prices deflate, we are confident HSY and its largest competitors will be slow to reverse price increases required to recoup the input cost squeeze. Encouragingly, after being hampered by supply chain constraints in the post-COVID-19 environment, HSY has a greater innovation slate and more capacity in place to grow in the coming years. The stock, meanwhile, now trades near historic lows relative to other blue chip consumer staples, the consumer staples sector as a whole, and the broad market.

BSD Analysis:
Heartland established a new position in Hershey, capitalizing on the stock's 35% decline from 2023 peaks due to volume pressures and cocoa cost inflation. The manager views current headwinds as cyclical, believing Hershey will demonstrate its historical ability to balance profitability with growth and market share stability. The investment thesis relies on Hershey's pricing power during the unprecedented cocoa price spike, with management confident that price increases will be maintained even after input costs normalize. Post-COVID supply chain improvements have enhanced HSY's innovation capacity and production capabilities for future growth. The manager sees attractive relative valuation as the stock trades near historic lows versus consumer staples peers and the broader market. The combination of temporary margin pressures, enhanced operational capacity, and compelling relative valuation creates an attractive entry point for this defensive consumer staples leader.

Pitch Summary:
Donaldson Company Inc. (DCI), a filtration manufacturer with more than a century of experience in air, lubricant, hydraulic, and fuel filtration applications, is a new position this quarter. DCI, an example of a stock in our quality value bucket, typically trades at a premium to its peers, an indication of the market's appreciation for its economically resilient revenues and high profit margins. However, the company has faced margin headwinds lately, in part owing to heavy upfront investment in its fast-growing life sciences segment. Moreover, several of DCI's cyclical end markets, including agricultural, mining, and construction equipment, have been under pressure as lower equipment utilization has translated into fewer filter replacements. We think investors have already incorporated the life sciences operating losses in the company's valuation, but we believe the segment will ultimately be accretive to revenue growth and margins. If life sciences operating margin approaches the corporate average of around 15% over the next two years, that could translate to a 10-15% lift in total earnings power. For context, this segment's operating margin exceeded 20% prior to the current investment phase. Investors don't typically gravitate to industrials when the ISM Manufacturing Purchasing Managers Index is declining, as was the case from late 2021 through late 2023. Donaldson, however, has historically outperformed in scenarios when industrial activity weakens owing to a revenue base that is mostly consumable. This makes Donaldson a good example of a stock that could perform well on a relative basis if the economy slips into a recession while providing significant upside potential if the economy continues to grow. DCI is trading at parity today, implying that the market is already pricing in further earnings pressure while we expect the life sciences operational improvement to help buffer potential profit risk in the company's cyclical end markets.

BSD Analysis:
Heartland initiated a position in Donaldson Company, viewing it as a quality value opportunity trading at an attractive discount. The manager believes the market has overpenalized the stock for temporary margin pressures from life sciences investments and cyclical headwinds in agricultural, mining, and construction equipment markets. The investment thesis centers on DCI's resilient consumable revenue model and the potential for significant earnings uplift as life sciences margins normalize from current losses to the corporate average of 15%. The manager expects a 10-15% earnings power increase if life sciences achieves target margins over two years. DCI's defensive characteristics during industrial downturns, combined with upside potential in economic growth scenarios, make it an attractive risk-adjusted opportunity. The stock trades at parity valuation despite the manager's expectation for operational improvements to offset cyclical pressures.

Pitch Summary:
Our second largest detractor in the quarter was Visa Inc. (V) -6.0%. Visa continued to chug along with revenues increasing +10% y/y on payment volume growth of +8%. In March, Visa announced it had reached a settlement on a long-standing antitrust lawsuit that would result in slightly lower credit interchange rates and cap fees at current levels for five years. However, in June, the judge informed Visa that she deemed the changes inadequate and rejected the settlement. A potentially more costly settlement, combined with concerns of payment volumes decreasing as the American economy softens, have weighed on the stock price. However, we remain convinced that Visa's growth algorithm will continue to drive double-digit earnings growth for the foreseeable future.

BSD Analysis:
GreensKeeper maintains a bullish long-term view on Visa despite recent regulatory and economic headwinds affecting near-term performance. The manager emphasizes the underlying business strength, with 10% revenue growth and 8% payment volume growth demonstrating continued market expansion. While acknowledging the antitrust settlement rejection as a near-term overhang, the fund views this as a temporary regulatory issue rather than a fundamental business impairment. The potential for a more costly settlement and economic softening concerns are recognized but not seen as permanent threats to the investment thesis. GreensKeeper's confidence in Visa's "growth algorithm" suggests belief in the company's ability to benefit from secular trends toward digital payments and global commerce expansion. The manager's conviction in continued double-digit earnings growth indicates strong faith in Visa's pricing power and market position. Despite current headwinds, the fund appears to view Visa's network effects and global payment infrastructure as durable competitive advantages that will drive long-term value creation.

Pitch Summary:
Our biggest laggard in the quarter was Berkshire Hathaway (BRK.B) -3.3%. Berkshire's railroad and utility segments continue to struggle due to weakening volumes and wildfires, respectively. Despite these challenges, operating income continues to grow steadily, aided by acquisitions. Book value per share also continues to compound yearly, and we remain confident owning BRK.B as a core position in the Value Fund.

BSD Analysis:
GreensKeeper maintains strong conviction in Berkshire Hathaway despite near-term operational headwinds, viewing current weakness as temporary rather than structural. The manager acknowledges challenges in the railroad segment from weakening volumes and utility operations affected by wildfires, but emphasizes the underlying business resilience. The continued growth in operating income, supported by strategic acquisitions, demonstrates management's ability to deploy capital effectively across diverse opportunities. The steady compounding of book value per share remains a key attraction, reflecting Berkshire's long-term wealth creation capability. GreensKeeper's characterization of BRK.B as a "core position" suggests high conviction in the investment thesis despite quarterly volatility. The manager appears to view current operational challenges as cyclical rather than permanent impairments to intrinsic value. Berkshire's diversified business model and substantial cash generation capacity provide defensive characteristics while maintaining upside potential through capital allocation excellence.

Pitch Summary:
Our third largest contributor in the quarter was Elevance Health (ELV) +4.5%. ELV continues to perform well despite headwinds from fewer Medicaid enrollees following the unwinding of government-funded Medicaid programs in response to COVID-19. Elevance's conservative approach to underwriting policies has allowed the company to avoid the margin compression experienced by some of its major competitors. ELV's earnings grew 15.5% y/y in Q1.

BSD Analysis:
GreensKeeper maintains a positive outlook on Elevance Health, emphasizing the company's defensive underwriting discipline during a challenging industry environment. The manager highlights Elevance's ability to navigate Medicaid enrollment headwinds better than competitors, demonstrating superior operational execution. The conservative underwriting approach has proven particularly valuable, allowing ELV to avoid the margin compression plaguing other major health insurers. This disciplined approach to risk management suggests strong management quality and sustainable competitive advantages. The 15.5% year-over-year earnings growth in Q1 validates the effectiveness of this strategy, showing that conservative underwriting can coexist with robust profitability. While the Medicaid unwinding presents near-term challenges, Elevance's proven ability to maintain margins during industry stress indicates resilient business fundamentals. The company's outperformance relative to competitors positions it well for market share gains as industry conditions normalize.

Pitch Summary:
One idea we have yet to discuss publicly is Entravision (EVC), to which we made a significant allocation in March. A large contract loss from Meta drove shares down over 50%, allowing us to buy stock in the following at an implied value of $250m: 1. Remaining digital business likely worth $50-150m 2. Two legacy operating units with market value >$250m 3. Incoming deluge of 2024 political ad spending 4. Spectrum assets likely worth >$1B in a future FCC auction 5. A 13% dividend yield while you wait for #4 6. A CEO who needs to ~10x the stock price to vest all his equity awards 7. No active shareholders or meaningful public discussion of the opportunity We have confidence in EVC's ability to continue generating cash in the current climate and believe shares will trade higher once the company communicates their go-forward strategy to the market. We hope they choose to divest the remaining digital assets to focus on the company's legacy cash cows (TV and Radio operations), which should have significant interest.

BSD Analysis:
Kingdom Capital presents a compelling sum-of-the-parts value thesis on Entravision following a 50% decline driven by Meta contract loss. The manager identifies multiple value drivers including spectrum assets potentially worth over $1B in future FCC auctions, legacy TV/radio operations valued above current market cap, and a 13% dividend yield providing attractive carry. The political advertising cycle in 2024 should provide near-term revenue tailwinds for the broadcasting assets. Management incentives appear well-aligned with CEO equity awards requiring significant stock appreciation to vest. The lack of active shareholder engagement and public discussion suggests an overlooked opportunity. The fund expects value realization through strategic communication and potential asset divestitures. This appears to be a classic deep value play with multiple catalysts and downside protection through asset values.

Pitch Summary:
Unlike Sprouts, Zengame hasn't performed well in terms of share price. From our initial purchase price of HK$1.15/share several years ago, the price reached an all-time high of HK$5.88/share in December 2023 before coming back down to HK$2.26/share today. Despite the depressed stock price, we still think Zengame remains an attractive opportunity. However, the investment thesis has changed, and we are certainly cognizant of that. Zengame continues to have hit games in its portfolio that generate revenue from in-game item purchases and ads. The current flagship game is Fingertip Sichuan Mahjong, and it consistently ranks in the Top 5 in its category on the iOS bestsellers list. Also, Fishing Master is a game that's rising in popularity. The game has broken into the Top 20 lately and may break the Top 10 if the game continues its current growth trajectory. The deep-value valuation multiples are what really make Zengame a compelling investment. Depending on how cash and short-term investments are accounted for, Zengame trades for less than 2x EV/EBIT and the pretax return on invested capital is between 29% and 48%. The company is also currently trading for ~5X earnings and FCF, 0.84x tangible book, and 1.07x NCAV. There's also a 6.6% dividend yield. In other words, the company has all the key metrics stacked in its favor. The company is being priced as if it was in permanent decline. We've seen much worse companies trading at these multiples. So the question then becomes whether or not Zengame can recapture its previous growth in terms of revenues, earnings, and KPIs. For the base case, we would view Zengame as a no-growth company going forward. This is a pessimistic view, but it's best to go with this conservative scenario. Even in a no-growth situation, there's enough delta between the base case and the market's perception of the company for us to make money on the stock. The floor valuation has already been established. If the company does in fact continue to grow, there likely will be significant upside in the share price. Continued growth from Mahjong isn't out of the question, and it seems like there will be more growth from Fishing Master going forward. All the other games in Zengame's gaming portfolio are also free options. Any of their existing games could explode in popularity. Overseas revenue is another way the company could grow. At current prices, it pays to be invested to see what Zengame can do over the next two to three years. All high-growth companies go through bad quarters and years at some point. Regardless of whether or not the slowdown is temporary or permanent, our downside is protected going forward. If the stock price goes any lower, it would qualify as a Graham net-net. Even in that scenario, we would be happy to own the company. Zengame would certainly be one of the highest quality net-nets globally.

BSD Analysis:
RF Capital maintains a contrarian bullish position in Zengame Technology despite significant share price volatility, with the stock declining from HK$5.88 to HK$2.26 after their initial purchase at HK$1.15. The manager acknowledges the investment thesis has evolved but remains attracted to the company's deep-value metrics including sub-2x EV/EBIT, 29-48% pretax ROIC, 5x P/E and FCF multiples, 0.84x tangible book, 1.07x NCAV, and 6.6% dividend yield. The gaming portfolio shows promise with Fingertip Sichuan Mahjong consistently ranking Top 5 in its iOS category and Fishing Master gaining traction in the Top 20. The manager adopts a conservative base case assuming no growth, yet believes significant upside exists if the company can recapture previous momentum through existing games, new releases, or overseas expansion. The investment represents a classic deep-value opportunity where downside protection is substantial given the extreme valuation discount, while multiple catalysts could drive meaningful appreciation. RF Capital views the current pricing as overly pessimistic and sees asymmetric risk-reward favoring patient value investors over the next 2-3 years.

Pitch Summary:
Our second largest contributor in Q2 was Vertex Pharmaceuticals (VRTX) +12.1%. VRTX's cystic fibrosis (CF) portfolio continues to generate robust revenue growth, and on July 1, the FDA announced approval for the improved Vanza Triple therapy. This new CF therapy is subject to meaningfully lower royalty payments compared to the rate payable on the current CF portfolio. During the quarter, the company also announced positive results for a pipeline therapy, VX-880, a stem-cell therapy that can potentially restore the body's ability to regulate glucose levels and reduce or eliminate the need for insulin injection in type-1 diabetics.

BSD Analysis:
GreensKeeper expresses strong conviction in Vertex Pharmaceuticals, driven by the company's dominant position in cystic fibrosis treatments and promising pipeline expansion. The manager highlights robust revenue growth from the existing CF portfolio, which provides a stable foundation for the investment thesis. The FDA approval of Vanza Triple therapy represents a significant catalyst, particularly given the improved economics with meaningfully lower royalty payments compared to current treatments. This margin expansion opportunity should enhance profitability while maintaining Vertex's CF market leadership. The positive VX-880 results for type-1 diabetes represent substantial pipeline value, potentially opening a massive new addressable market beyond CF. Stem-cell therapy for glucose regulation could transform diabetes treatment and significantly diversify Vertex's revenue streams. The combination of a cash-generating CF franchise with breakthrough pipeline opportunities in diabetes positions Vertex for sustained growth and margin expansion.

Pitch Summary:
Sprouts continues to perform well and has posted strong Q1 2025 results. QoQ, SFM's net sales, comp store sales, and diluted EPS growth increased by 18.7%, 11.7%, and 61.6%, respectively. The high EPS growth rate may or may not be sustainable over the long term. However, SFM is currently executing at a high level. The gross and EBIT margin profile continues to improve. SFM also continues to open new stores. For FY2025, management is projecting at least 35 new stores. This is certainly doable and is actually shy of their target store count growth rate of 10%. We would like to see them hit that target, but it's best to be prudent going forward in the current environment. Comparable store sales growth also looks great and comes at a time when other retailers are struggling. E-commerce sales has been growing at a high rate as well. The addition of Uber Eats as a partner has certainly helped. Going forward, Sprouts will continue to benefit from tailwinds based on current healthy living and wellness and longevity trends. The company's upside potential also remains strong given a potential store count of 1,200 stores in the US. Currently, there are 443 stores in 24 states. As long as they keep opening new stores and maintain decent comp store sales going forward, SFM still has a long runway for growth. Additionally, the customer loyalty program that is currently being rolled out will be a comp driver for 2026 and beyond. Our only concern with SFM is the elevated valuation multiples. As value investors, we prefer to own companies that are optically cheap. However, SFM's current valuation is certainly justified given the growth in sales and earnings. For that reason, we continue to hold SFM. The valuation isn't egregious, and we are perfectly content with maintaining our position. From our initial purchase price of $15-$16/share to the current share price of ~$172, it's been quite the ride. SFM is the perfect case study for why it pays to hold investments for the long term - even if it feels boring to hear about and see the same company in the portfolio year after year.

BSD Analysis:
RF Capital maintains a bullish stance on Sprouts Farmers Market, highlighting exceptional operational execution with Q1 2025 results showing 18.7% net sales growth, 11.7% comp store sales growth, and 61.6% EPS growth. The manager emphasizes SFM's strong fundamentals including improving gross and EBIT margins, continued store expansion with 35 new locations planned for FY2025, and robust e-commerce growth enhanced by the Uber Eats partnership. The investment thesis centers on secular tailwinds from health and wellness trends, significant expansion runway (443 current stores vs. 1,200 potential), and upcoming customer loyalty program benefits. While acknowledging elevated valuation multiples as a concern, the manager justifies the premium based on strong growth metrics and views the current valuation as reasonable rather than egregious. The position represents a massive winner, appreciating from an initial cost basis of $15-16 per share to approximately $172, demonstrating the power of long-term compounding in quality growth stories. RF Capital continues holding despite valuation concerns, confident in the company's execution and long-term growth trajectory.

Pitch Summary:
Our top contributor in the second quarter was Alphabet Inc. (GOOGL) +20.7%. The company posted 31% adjusted operating earnings growth y/y in Q1, bolstered by double-digit revenue increases across all its major segments. GOOGL's search revenues continue to advance at a healthy rate despite investor fears that they will begin losing search market share to emerging AI competitors like ChatGPT. ChatGPT4 has been accessible to the public for 16 months now, and GOOGL's search market share stands at 91%, down marginally from 93% at ChatGPT4's launch. Importantly, GOOGL also continues to make progress in developing its own AI capabilities. We highlight that GOOGL's compute costs for its AI search platform fell 80% y/y, along with an increase in queries driven by its Search Generative Experience.

BSD Analysis:
GreensKeeper maintains a bullish stance on Alphabet, highlighting the company's resilient search dominance and AI progress. The manager emphasizes that despite ChatGPT's 16-month public availability, Google's search market share has only declined marginally from 93% to 91%, demonstrating the durability of its competitive moat. The 31% adjusted operating earnings growth and double-digit revenue increases across all major segments underscore strong fundamental performance. Particularly compelling is the 80% year-over-year reduction in AI compute costs while simultaneously increasing query volume through Search Generative Experience. This operational efficiency improvement suggests Google is successfully integrating AI capabilities while maintaining cost discipline. The manager's confidence appears well-founded given Google's ability to defend its core search business while advancing its own AI initiatives. The combination of earnings growth, market share resilience, and AI cost optimization positions Alphabet favorably in the evolving search landscape.

Pitch Summary:
Leon's Furniture Limited (LNF.TO) operates as a retailer of home furnishings, mattresses, appliances, and electronics in Canada. It operates in two segments, Leon's and The Brick. The Company provides repair services for household furniture, electronics, appliances, home office products, and more. It also operates as a commercial retailer of appliances to builders, developers, renovators, property management companies, hotels, extended care industries, and more. The Company sells its products through a network of retail stores under the Leon's, The Brick, The Brick Outlet, and The Brick Mattress Store banners. Leon's Furniture Limited was founded in 1909 and is headquartered in Toronto, Canada.

LNF has several characteristics we like including (1) a highly resilient business model with a strong market share and customer relationships, (2) a highly cash-generative business with modest capital expenditure needs, (3) a strong focus on value-added services with "stickier" customer relationships, (4) durable demand expected to grow alongside the Canadian economy, (5) a strong competitive advantage primarily due to scale, (6) an attractive valuation trading at less than 5x adjusted EBITDA, a double-digit free cash flow yield, and 10x earnings, (7) a track record of strong growth in revenues, adjusted EBITDA, and adjusted EPS since FY 2013, (8) disciplined management team with a track record of strong performance, (9) a "Ft. Knox" balance sheet with net cash position of about C$110m, (10) a long-term strategy to grow sales, (11) a high-ROIC business model with limited capital requirements, and (12) an additional catalyst from a potential REIT spin-off that could unlock C$0.5b or significantly more in real estate value.

LNF has 68m shares outstanding, with a share price of C$23, giving it a market cap of approximately C$1.6b. With net cash of about C$110m, LNF has an enterprise value of about C$1.5b. Over the last 10 years, LNF has generated over C$1.5b of free cash flow and repaid all its debt from acquiring The Brick in 2013. LNF has bought back stock and paid dividends to shareholders. LNF has a ROIC of ~20% illustrating their strong return expectations and generates a double-digit free cash flow yield with strong long-term growth potential at current price levels.

We believe LNF can continue to grow sales and maintain their net income margins at current levels while maintaining their strong cash position. As they execute their high ROIC, cash-generative business model, we expect adjusted EBITDA could grow from current levels of around C$300m to C$350m to C$400m over the next several years. We believe LNF could trade for a modest 7x EBITDA multiple which, based on 68m shares outstanding, would result in a share price of C$36 to C$41 or higher. In addition, LNF has very significant owned real estate assets which it may spin off into a REIT, which could generate potentially another C$0.5b or more in value.

Founded in 1909 and approximately 70% family-owned, the company has a long track record of growth, leading to its position as the largest furniture retailer in Canada, with about a 15% market share in the segments they operate in. LNF operates 202 corporate-owned stores and 101 franchised stores. Their revenue breakdown is as follows: furniture accounts for 50%, appliances for about 30%, mattresses for 15-20%, and electronics for around 5%. The Company experienced significant inorganic growth through its acquisition of the Brick in 2012.

In recent years, management has actively sought to unlock value for shareholders, believing that LNF shares are undervalued. They have increased investor materials and engagement, repurchased a significant number of shares, and have discussed spinning off their real estate into a REIT.

LNF has a resilient business model that has performed well over its 100+ year history of operations even in difficult economic environments. Over the past 14 years, the store has demonstrated steady financial performance, maintaining gross margins in the low to mid-40% range and net income margins of 4% to 9%, without any recorded losses. This impressive consistency reflects their dedication to a conservative and efficient long-term approach.

During Covid-19, LNF benefited from the investments made in its ecommerce presence that smaller competitors could not replicate. LNF's omnichannel capability allowed the company to continue to operate through the lockdown and post very high year-over-year growth rates. LNF has an ability to manage through challenges as they arise.

LNF has a highly cash-generative business model with low capital expenditure needs. LNF has generated approximately C$1b or more of cash from operations over the past 5 years, which is over 80% of its current enterprise value. The free cash flow generated by LNF puts the company in a very strong financial position. In 2013, LNF took on about C$500m of debt to buy The Brick. Since then, LNF has generated over C$1.5b of free cash flow which it used to pay down its debt, repurchase shares, and pay dividends.

LNF has a well-established track record as a retail operator. We like to invest in companies with a demonstrated track record of disciplined, successful growth over many years. Between 2013 and 2023, LNF grew system-wide sales at a cumulative annual growth rate, or CAGR, of 3.7%, adjusted EBITDA by 7.4%, net income by 7.3%, and EPS by 8.8%. In that same time frame, the Company repurchased C$410m of common shares, paid out over C$500m in dividends, and repaid C$445m of debt.

We believe that LNF will continue to grow as the company benefits from macro tailwinds. High levels of immigration in Canada are likely to drive an increased number of households translating into increased home furnishings sales as people need furniture, appliances, and mattresses in their homes. These macro tailwinds along with its strong distribution network and a core focus on omnichannel capabilities should put LNF on a strong growth path over many years.

LNF has a "Ft. Knox" balance sheet with a net cash position of C$110m. We believe that LNF's strong balance sheet substantially reduces the long-term risk of investment. We also believe it gives LNF significant optionality to return capital to shareholders. Its strong balance sheet enables LNF to conservatively fund investments in existing businesses as well as additional opportunities.

With 70% insider ownership, the original Leon family remains deeply involved in operations. Leon's adopts a customer service-centric approach, led by CEO Michael Walsh, who places a strong emphasis on enhancing customer experiences.

With over 300 stores, LNF is the largest furniture retailer in Canada. This extensive network provides them with a valuable distribution system, convenient locations for customers, low prices through economies of scale, greater marketing resources, and preferential inventory purchasing. These advantages are particularly beneficial in Canada's fragmented furniture retail industry.

LNF creates a differentiated customer experience by offering name-brand products with a broad selection that includes value-priced items. Their approach is different from Ikea, which operates under a different model and targets a different type of customer. Ikea focuses more on one-off pieces, while LNF offers sets and preassembled furniture. Additionally, Ikea has only 16 large stores in Canada, each averaging 300,000 to 500,000 square feet, compared to LNF's approximately 300 stores, which average 100,000 square feet per store (excluding the BC locations). This allows LNF to cater to a wider range of customer needs and preferences.

As the largest furniture retailer in Canada, LNF is tied to how the Canadian economy performs over the long term. While there will be economic downturns in Canada's future, over the long term the Canadian economy should continue to prosper as it has for the past decades.

Canada's economic strength is further enhanced by its close ties to the U.S. economy, the largest and most influential in the world. The country's richness in raw materials, coupled with its favorable rule of law and strong regulatory framework, creates an environment conducive to business. Additionally, Canada's population growth, driven significantly by immigration, has been a key driver of economic expansion. Canada leads the G7 with its assertive immigration policy, welcoming 1.8 million people in the past five years. Over the next couple of years, another 1.5 million arrivals are expected, which will further boost the population and household numbers.

With a population now at approximately 40 million and a steady growth rate of around ~1.1% per year, the country continues to offer a growing market for businesses. Furthermore, Canada's GDP per capita, currently the 18th highest globally at approximately $56,000, has seen robust growth at an average rate of about ~3% annually over the past two decades. This economic stability and growth make Canada an attractive place for investment and business, ensuring a favorable environment for LNF's continued success.

LNF operates a portfolio of brands including Leon's, The Brick, Appliance Canada, and specialized outlets like The Brick Outlet and Mid-Northern Appliance. This brand diversity allows them to serve different market segments, from high-end to budget-conscious consumers, effectively covering a wide range of customer needs across the country.

We believe LNF can continue to grow sales and maintain their net income margins at current levels while maintaining their strong cash position. As they execute their high ROIC, cash-generative business model, we expect adjusted EBITDA could grow from current levels of around C$300m to C$350m to C$400m over the next several years. We believe LNF could trade for a modest 7x EBITDA multiple which, based on 68m shares outstanding, would result in a share price of C$36 to C$41 or higher. In addition, LNF has substantial owned real estate assets, which it may spin off into a REIT, which could generate potentially another C$0.5b or more in value.

BSD Analysis:
Lowell Capital presents a compelling value thesis on Leon's Furniture, Canada's largest furniture retailer with a 15% market share and 100+ year operating history. The manager highlights LNF's exceptional financial profile: trading at 5x EBITDA with a 20% ROIC, generating C$1.5 billion in free cash flow over the past decade while maintaining a fortress balance sheet with C$110 million net cash. The investment case centers on multiple value catalysts including potential REIT spin-off of real estate assets worth C$500+ million, continued market share gains in Canada's fragmented furniture market, and demographic tailwinds from immigration driving household formation. Management's shareholder-friendly approach is evidenced by C$410 million in share buybacks and C$500 million in dividends since 2013, while 70% family ownership ensures aligned interests. The company's omnichannel capabilities and scale advantages provide competitive moats in a capital-light, cash-generative business model. With EBITDA projected to grow from C$300 million to C$350-400 million and a target 7x multiple, the manager sees 60-80% upside to C$36-41 per share. The thesis combines defensive characteristics with multiple expansion potential in an undervalued Canadian retail franchise.

Pitch Summary:
The Fund's investment in coal-fired, independent power producer Hallador Energy (HNRG) drove another 2.38 percentage points of first half Fund gains as investor sentiment soared on the growing prospects for substantially increased electricity demand from the booming AI-data center industry and expectations increased for an administrative roll-back of burdensome Federal regulations. With a substantial amount of uncontracted electricity production capacity, Hallador appears particularly well positioned to lock in a longer-term power agreement at strong pricing, which could drive further equity gains.

BSD Analysis:
Hallador Energy contributed 2.38 percentage points to fund performance as investor sentiment improved dramatically around the coal-fired independent power producer's prospects in the evolving electricity market. The investment thesis centers on two key catalysts: surging electricity demand from the rapidly expanding AI and data center industry, and expectations for regulatory relief under the new administration that could reduce operational burdens on coal-fired generation. The company's strategic advantage lies in its substantial uncontracted electricity production capacity, which positions it to capitalize on tightening power markets by securing long-term power purchase agreements at attractive pricing. This contrarian investment in coal-fired generation appears well-timed as the AI revolution creates unprecedented electricity demand that may require all available generation sources, regardless of fuel type. The potential for regulatory rollbacks could further improve the company's competitive position and profitability. Hallador represents the type of special situation the fund seeks - an undervalued company with hard assets positioned to benefit from specific industry dynamics and policy changes.

Pitch Summary:
Bio-Techne is a premier provider of life sciences tools and reagents, serving highly specialized niches and delivering mission-critical solutions for its customers. The company provides tools for advanced research in areas like proteomics, cell and gene therapy, and precision medicine. Although recent concerns about biotech end markets and funding may weigh on sentiment in the short term, we remain confident in the company's ability for long-term growth through innovation, disciplined M&A, and solid execution. We believe Bio-Techne's exposure to secular growth drivers, such as cell and gene therapy and liquid biopsy development, makes it a compelling addition to the Portfolio.

BSD Analysis:
Polen Capital initiated a new position in Bio-Techne, viewing the life sciences tools provider as a compelling addition despite near-term biotech funding concerns. The manager emphasizes Bio-Techne's premier market position serving highly specialized niches with mission-critical solutions, providing defensive characteristics and pricing power. The investment thesis centers on the company's exposure to secular growth drivers including proteomics, cell and gene therapy, and precision medicine - areas expected to drive long-term demand regardless of cyclical funding fluctuations. Polen highlights Bio-Techne's proven ability to drive growth through innovation and disciplined M&A, suggesting confidence in management's capital allocation capabilities. The company's focus on liquid biopsy development and cell and gene therapy tools positions it at the forefront of transformative healthcare trends. While acknowledging short-term sentiment challenges from biotech funding concerns, Polen maintains conviction in the long-term growth trajectory driven by fundamental innovation in life sciences. Bio-Techne's specialized product portfolio and customer relationships provide sustainable competitive advantages in the fragmented life sciences tools market. The timing of the initiation suggests Polen views current weakness as an attractive entry point for a quality growth story.