Investment Pitches

Pitch Summary:
Universal Robina Corporation (URC PM) is listed on the Philippines Stock Exchange, it produces and distributes branded consumer foods. The Company's products include snacks, beverages, meats, eggs, instant food, instant drinks, flours, and pet products. URC products are distributed to countries in Asia. The company's share price is now trading near its 2020 Covid low, and the 2022 Fed rate hike lows. With the company now trading at 15x trailing PE, revenue is expected to grow +8-9% in 2024 and due to margin improvements from lower costs, net profits to increase +13-15%. The current valuation, outlook and the share buybacks provide us comfort acquiring shares at these levels.

BSD Analysis:
The manager presents a compelling value opportunity in Universal Robina Corporation, a leading Philippine consumer foods company trading at attractive valuations near multi-year lows. With shares at 15x trailing PE, the investment thesis centers on a recovery play supported by solid fundamentals and improving operating leverage. The company is positioned to benefit from revenue growth of 8-9% in 2024, while margin expansion from lower input costs should drive net profit growth of 13-15%. The combination of reasonable valuation, growth prospects, and active capital allocation through share buybacks creates a favorable risk-reward profile. As a dominant player in the Philippine consumer staples market with regional distribution, URC offers exposure to Southeast Asian consumption trends. The manager's timing appears opportunistic, entering at cyclical lows with multiple catalysts for re-rating.

Pitch Summary:
The Fund recently added to its position in Cenovus Energy preferred shares. While we touched on this idea in our last commentary, it is probably worth adding some colour, given it is now a Top 10 holding. Cenovus Energy is an integrated Canadian energy company with equity market capitalization (total stock market value) of $56 billion, total debt of $7 billion and $1 billion in preferred equity outstanding. It is a producer with scale and a prolific generator of free cash flow (FCF) at a rate exceeding $1 billion a quarter (!) in today's commodity price environment. The company has indicated its FCF will be used to pay down debt until it reaches its leverage goals (likely 2H 2024) and to provide direct returns to shareholders. We believe all of its preferred equity will be called at the first opportunity for a number of reasons. The next coupon rate reset for its C, E, and G-Class preferred in 12/2024, 03/2025 and 06/2025, respectively, would be in the 7% area using today's 5-year Government of Canada bond yield compared with a tax-deductible long-term debt yield under 6%. In other words, debt is much cheaper for the company than its preferred equity, even more so on a tax-adjusted basis. Given the rate of free cash flow generation, the low amount of preferred equity outstanding in relation to the company's capital structure and the fact the company did not actually issue these preferred shares (they were inherited through acquisition), we believe the probability all the preferred shares are called at first opportunity results in likely double-digit total return up to the call date in all tranches.

BSD Analysis:
The manager presents a compelling bull case for Cenovus Energy preferred shares based on strong fundamental metrics and an attractive call scenario. With $56 billion market cap and only $1 billion in preferred equity outstanding, the company generates over $1 billion in quarterly free cash flow, providing substantial financial flexibility. The investment thesis centers on the high probability that all preferred shares will be called at first opportunity due to favorable economics for the company. The reset rates of approximately 7% for the preferred shares significantly exceed the company's debt costs of under 6%, creating a strong incentive for early redemption. The manager expects double-digit returns through the call dates, supported by the company's robust cash generation and deleveraging strategy. This represents a classic preferred equity arbitrage opportunity with asymmetric risk-reward characteristics.

Pitch Summary:
We seek to be objective analysts of businesses. And much as we love what we do, if we train our analytical lens on ourselves, we can't help but recognise that public equity investing as a business model has some weaknesses. Clients are free to leave when they wish and at modest cost (except when the fund is hard closed and likely to remain so – then redeeming risks the opportunity cost of being unable to get back in if one changes one's mind). Innovation has created low-cost substitutes in index funds and ETFs with effectively unlimited capacity. Regulatory requirements mean the entire portfolio is disclosed at periodic intervals, and decent chunks of it more frequently, so investors can try to "coat tail" well known investors. Performance is transparent daily. The main asset within the business is people, and whilst we have arranged our business to create an environment that is attractive to passionate investors, assets don't come much more mobile than people. Given this, portfolio managers have bargaining power and hence capture a decent share of the economics. We happen to think that our business is more robust than this analysis suggests. The average Ennismore tenure of our portfolio managers is 13 years, for instance, and two thirds of our clients have been with us for over twenty years. But we suspect that outside investors would be unlikely to attribute a very high multiple to Ennismore's earnings. Not that they will ever have the chance to! If we were to hire McKinsey (don't worry, we won't) to advise Ennismore on how to create equity value for its owners, they'd probably suggest creating a structure where clients are locked up for multiple years. Perhaps they'd recommend a model where returns can be juiced with leverage, and to consider taking control positions so that if leverage got an investee company into trouble, we'd have a decent shot at dividing and conquering the other stakeholders to manage things to our advantage. It would certainly help to be able to report performance only periodically, perhaps once every quarter, and to be able to report performance using model-based valuations, rather than quote-driven prices. This is obviously an unsubtle outline of a private investment firm. We draw these contrasts partly to highlight what a great business model private investing is for the business owners in the context of our investment in Petershill Partners. But also to remind you that Ennismore is set up to be aligned with its investors, and focused entirely on performance, rather than equity value creation. Keeping our ownership internal allows us to make those choices which most investment firms find hard, most obviously restricting assets under management. Capital has flooded into private investment businesses over the last decade, seduced by higher returns but perhaps particularly by the seemingly high volatility-adjusted returns (model-based reporting is particularly helpful on this score). Total private markets AUM has risen by 10% p.a. over the last decade. As these businesses have grown and matured, and the earlier generation founders have begun to move on, ownership models have matured too. There is now a decent cohort of listed private investment businesses, including most of the largest players: Blackstone, KKR, Apollo etc. For management teams who wish to monetise a proportion of their stakes in their own business (referred to as the general partner or "GP" in industry parlance) but are leery of the attention that an IPO can draw, an alternative is to sell a minority stake. There are a few "GP stakes" investment firms out there, but only two listed companies we know of where GP stakes investment is a large part of the company: Petershill Partners, and Blue Owl Capital through its Dyal Capital unit. These firms also provide advisory and consulting services such as support with fund-raising and recruiting as well as guidance and technical competence on matters such as implementing an ESG framework or incorporating data analysis more systematically. Particularly for smaller firms, such services help to offset the economies of scale of the largest private investment businesses. Petershill was founded within Goldman Sachs ("GS") in 2007 and raised its third fund in 2017. It was one of the very first GP stakes investors, and the first dedicated GP stakes firm to go public. Initially investments were made across the alternatives landscape, but over the last decade or so Petershill has been almost entirely focused on private investment businesses, which now account for over 85% of look-through AUM. The first three funds (with USD 4.9bn of aggregate capital) were collapsed into the entity – Petershill Partners – that completed an IPO in late 2021, whilst Petershill fund IV raised USD 5bn outside of the public entity with a final close in January 2022. Petershill Partners now owns stakes – with a weighted average 13% economic interest in management fee earnings – in 26 mostly American firms, with a proportionate share of fee-earning assets under management (AUM) of USD 37bn. The IPO has been a dud. The stock fell by 60% from the issue price to the trough in October 2023, and despite a recovery since, is still only slightly above half the issue price. Its proportionate share of AUM has meanwhile doubled since IPO. An equal-weighted basket of eight mid and large cap public PE businesses has returned over 25% over the same period. Some of the issues that deter investors are readily apparent. The company has a small free float, and trading is thin. Its management team is employed by GS. The investment team is also responsible for Petershill fund IV, in which Petershill Partners has no interest. The incentives of the management team are a bit confusing, potentially conflicting, and not fully disclosed: there is carried interest associated with the first three funds, but the sole investment of those funds is now the public entity Petershill Partners plc. We don't know how much that carried interest is, how it is shared amongst the investment team, or at what Petershill Partners share price it kicks in. On post-IPO investments by Petershill Partners the management team receives a performance allocation which is intended to replicate the carried interest the team would have received on investments in a private equity structure. However, shareholders keep all of any increase in Petershill Partners share price as the cost of carried interest is borne by the original investors in funds I-III. So the relative merits of deploying capital into buybacks or dividends compared with new investments are potentially quite different for the decision-makers compared to shareholders. These are valid concerns; incentives are crucial in this business. However, we believe that overall, our interests are actually very aligned with the management team, as we estimate by far the biggest financial rewards for Petershill Partners management will come from delivering returns to Petershill Partners shareholders substantial enough to trigger the carried interest in funds I-III. Management's actions support this view too: the company is currently distributing the large majority of its cash generation. We expect dividends and buybacks in aggregate to be more than 10% of our investment over the next 12 months based on our average entry price of 174p. More fundamentally, as we alluded to in our rumination on how McKinsey might advise Ennismore, we think private investment firms are good businesses. Barriers to entry are reasonably high. Credible founders are likely to be tenured professionals who have built up carried interest in old funds where it is being paid out. There would thus be a long financial valley as a new firm's first fund is unlikely to start distributing carried interest until year six or seven, perhaps. It is difficult to be a credible private equity operator, for instance, without a reasonable amount of infrastructure, given the level of process involved in vetting an investment and raising debt to part-fund it. Such infrastructure is costly, however. Established firms typically seek to increase the size of the funds they raise with each new vintage, and investors tend to have a fixed allocation they are seeking to make to private equity, or private markets altogether. Investors normally roll their allocations into follow-on funds by their existing firms. This dynamic is likely to restrict the available capital to invest into start-ups by many investors in private markets. Although the industry is not all that old, the evidence so far suggests that once established, private investment firms' success is persistent. The average Petershill Partners investee is over twenty years old. The average capital duration in the underlying funds of Petershill Partners' investees is currently nine years. The franchise value – in terms of recruiting and retaining staff, investor relationships, and credibility with lenders and vendors – is significant. Established firms also have excellent economics. The weighted average EBIT margin (considering management fees only) of Petershill Partners' investees was 58% in 2023. This is not surprising given the scaleability of the model. A mid-sized firm with, say, USD 10bn of AUM, might have an investment team of 30 or so people. Assuming typical management fees of 1.4% leaves an annual revenue stream of USD 140m to over the costs of that team as well as support functions. Petershill Partners' largest investment accounts for c. 18% of look-through AUM, whilst the largest single fund is just 5% of AUM. So we as shareholders are invested in a truly diversified collection of medium to large scale businesses. And the investees have greatly outperformed the industry in terms of both performance and asset growth. Given this diversification and track record, our framework for thinking about Petershill Partners' is as a royalty on the growth of the private investment industry. The portfolio is tilted towards private equity, which accounts for just under half of proportionate AUM, and infrastructure funds, which is another quarter. Private credit is a smaller proportion, accounting for a little over 10% of the portfolio. The financials are currently a little noisy. A slowdown in the M&A market has resulted in a sharp slowdown in disposals of investments (or "exits") for private equity funds. This means performance fees are depressed, and hence Petershill Partners' profitability is below what we think of as a normalised level. Relatedly, fundraising, and hence growth in AUM, has also slowed, because investors in PE funds typically rely on cash flows from exits to fund the commitments they have made to new fund vintages. On our view of normalised earnings in 2025, however, we have bought the stock at below 10x free cash flow. Given the long-term growth in private markets assets, and duration of the underlying asset base of the investee firms, we think this is very cheap. The main risk to the investment, in our view, is at the industry level rather than the company-level. If the dearth of exits continues, PE firms will at some point be forced into one of a couple of unpalatable choices: selling off assets at a discount or delaying the fundraising or investment period of a new fund. Either way the economics for Petershill Partners' investees would disappoint. More generally, the large flows of capital into the space raises the prospect of increased competition dulling returns – which could mean normalised earnings are lower than we are modelling (lower performance fee allocations), and in turn that the industry starts to see more substantial fee pressure. On a similar theme, private equity enjoyed forty years of declining interest rates through 2022. This has reversed over the last eighteen months. The longer-term implications are unclear, but the danger is the absence of this tailwind changes fundamentally the trajectory of flows into the industry. Finally, the performance of the investees will be correlated with broader markets – a sustained period of poor equity market returns would hurt earnings for Petershill Partners. Another risk is of course that the team blows up investors' money on poor investments, whether simply through poor decision-making or owing to an increase in competitive intensity in the industry. Our scuttlebutt on the investments to date suggests that the track record of the team is decent – we think Petershill Partners has a high-quality portfolio. And whilst a few new GP stakes business have been launched in the last few years, we believe Petershill Partners has several advantages: Goldman's deal origination platform, breadth and depth of advisory services, GS' branding and Petershill's over 15-year track record. At this valuation, and with the quality of the investees in the portfolio, we think we are more than adequately compensated for these risks. A 10% cash distribution yield on a collection of businesses that we'd expect to grow in the high single digits organically, and to expand through the acquisition of additional investments, is not an expensive price. Petershill Partners is trading at about twenty times earnings even if we entirely ignore the performance fee allocations. Moreover, this royalty-like, diversified collection of stakes in private investment firms, is trading at a very large discount to the valuations of individual listed PE businesses, which strikes us as the wrong way round, all else equal. Our base case return on this position over a three-year horizon is above 20% annualised. Perhaps in this case we can all come together in hoping for at least a select few GS employees to become filthy rich. If the Petershill team manages that, we should all do pretty well with this investment.

BSD Analysis:
Ennismore presents a compelling bull case for Petershill Partners, viewing it as an undervalued royalty on the growing private investment industry. The manager emphasizes the superior business model of private investment firms compared to public equity managers, highlighting locked-up capital, leverage capabilities, and model-based valuations that create sustainable competitive advantages. Petershill owns minority stakes in 26 established private investment firms with a weighted average 13% economic interest, providing diversified exposure to USD 37bn in fee-earning AUM. The investment thesis centers on attractive valuation metrics, with the stock trading below 10x normalized 2025 free cash flow despite a 10% cash distribution yield. Management expects over 20% annualized returns over three years, supported by the quality of underlying investees who have outperformed industry benchmarks. The fund views current earnings as temporarily depressed due to M&A market slowdowns affecting exit activity, but believes normalized profitability will recover as market conditions improve. Key risks include prolonged exit market weakness and potential fee compression from increased industry competition.

Pitch Summary:
Jason returned to BNN Market Call (you can watch HERE) where we highlighted VitalHub (VHI) as one of our top picks. We recently sat down with management and once again they continue to execute just as they said they would. We highly recommend reading the recent interview with the CEO published in the Globe (HERE). It provides a great overview of the opportunity, and we think the company is just getting started. We had a few meetings recently where the comparison of VitalHub today and where Constellation Software was 14 years ago was discussed. The market cap, growth rates, multiples, and margins are strikingly similar. VitalHub has balanced high organic growth with acquisitions well, and we expect 2024 to be a big year for not only acquisitions but also margin expansion as we believe cash earnings margins will almost double over the coming years.

BSD Analysis:
The manager presents VitalHub as a top conviction holding with strong execution momentum and significant growth potential. The investment thesis draws a compelling comparison to Constellation Software's early-stage profile, suggesting substantial upside potential. Management's consistent execution track record provides confidence in the company's strategic direction. The dual growth strategy combining organic expansion with strategic acquisitions appears well-balanced and sustainable. The manager expects significant margin expansion in 2024, with cash earnings margins potentially doubling, indicating operational leverage and scalability. The early-stage nature of the opportunity, combined with proven management execution and margin expansion potential, supports the bullish outlook for this healthcare technology platform.

Pitch Summary:
First, we recently visited the head office of Zedcor Inc (ZDC) in Calgary. This was a very helpful meeting as we got to see the inner workings of the company and get to know management better. There is a lot more to this company than building and selling security towers. They're signing contracts with large companies like D.R. Horton, Best Buy, and Amazon because of the high quality back-end service and not just the piece of equipment. The 24/7 multi-stage monitoring process which involves AI tagging and alerting plus human intervention is being done in-house at Zedcor in Calgary. This process is impressive and from what we have found, is head and shoulders above the level of service offered by any other competitor. Their expansion into Texas appears to be going well and they're on pace to grow revenues and earnings much faster than what they are getting credit for. We have the stock trading on less than 6x 2025 cash earnings and believe it will be significantly higher 12 & 24 months from now.

BSD Analysis:
The manager presents a compelling bull case for Zedcor based on direct management engagement and operational insights. The investment thesis centers on the company's differentiated service offering that extends beyond hardware to include sophisticated AI-powered monitoring capabilities. Key value drivers include blue-chip client wins (D.R. Horton, Best Buy, Amazon) and successful geographic expansion into Texas. The manager emphasizes Zedcor's competitive moat through superior service quality versus competitors. At less than 6x 2025 cash earnings, the valuation appears attractive for a company experiencing accelerating revenue and earnings growth. The combination of operational momentum and compelling valuation metrics supports the manager's bullish 12-24 month outlook.

Pitch Summary:
Penske is unique in that in addition to their domestic car dealerships they also own: auto dealerships in the UK, leading truck dealerships in the US, and ~29% of Penske Truck Solutions (PTS) a logistics/truck rental business (aka "the hidden asset"). The truck dealerships have always captured my attention as Parts/Service are an even larger chunk of the business than in autos (65-70% of profits for trucks). This is a very sticky, high-margin business that would trade at far higher multiples as a standalone entity. For accounting reasons, PTS is accounted for using the equity method which means their share of income comes below the operating income line and is often ignored or misvalued. Their share of PTS is conservatively worth $2.5-$3.5BB or 22-32% of the market cap of the entire company. The quality of PAG is not properly reflected in the share price. Management owns a lot of stock and seems to agree as the Company has bought back 17% of the Company in the last 2 years at attractive prices.

BSD Analysis:
Black Bear identifies Penske Automotive as a significantly undervalued opportunity due to the market's failure to properly value its diversified business model and hidden assets. The fund emphasizes that truck dealerships generate 65-70% of profits from parts and service, creating an even stickier and higher-margin business than traditional auto dealerships. The 29% stake in Penske Truck Solutions represents a substantial hidden asset worth $2.5-3.5 billion, or 22-32% of the entire company's market cap, that's obscured by equity method accounting. This logistics and truck rental business would command premium multiples as a standalone entity but is essentially being given away for free in the current valuation. Management's significant stock ownership and aggressive share repurchase program (17% of shares bought back in two years) demonstrates alignment with shareholders and confidence in the undervaluation. The combination of geographic diversification, multiple business lines, and the undervalued PTS stake creates a compelling value proposition that the market has yet to recognize.

Pitch Summary:
AutoNation operates auto dealerships across the United States. While much attention is paid to the number of cars sold, the strength of the model comes from the back of the house in parts and services where more than 50% of the profits come from. We are exiting a period of high margins on new and used car sales. While profits per car are at all-time highs, the volumes sold have mirrored prior recessions. My expectation is that dealers will likely make less per car but will mitigate some of that pressure by selling more cars, especially used vehicles, as prices drop. When an auto dealer sells a car to a consumer, they capture both the trade-in (inventory to sell) and the relationship for parts and services. It is a razor-razorblade model in a highly fragmented industry (many dealerships are owned privately by families). The large dealer groups have transitioned to an omni-channel model where much of the selling/pre-buy activity can be done online reducing the need for headcount and making the transaction smoother for their customers. The lower operating costs of the business are not appreciated by the market. They are appreciated by us and the management teams as most dealers, including AN, have been buying in lots of stock with their free-cash flow.

BSD Analysis:
Black Bear's AutoNation thesis centers on the underappreciated value of the parts and service business, which generates over 50% of profits and operates as a high-margin, recurring revenue stream. The fund manager recognizes that while new car margins may compress from current elevated levels, volume increases should provide some offset as prices normalize. The razor-razorblade model creates customer stickiness through ongoing service relationships that extend well beyond the initial vehicle purchase. AutoNation's scale advantages and omni-channel capabilities have reduced operating costs in ways the market hasn't fully recognized. Management's aggressive share buyback program, funded by strong free cash flow generation, demonstrates confidence in the business model and creates additional value for remaining shareholders. The fund appears to view current market conditions as temporary headwinds that mask the underlying durability and cash generation potential of the automotive retail model.

Pitch Summary:
Altius explores and develops mineral properties through a unique setup. While they spend a small amount of upfront capital to explore and identify prospects, they utilize 3rd party partners for the capital-intensive drilling/mining in exchange for a royalty on the production. Their assets are diversified across potash, copper, lithium, and iron ore among others. The beauty of a royalty structure is several fold. On the one hand, if there is increased volume of production, they get their share without any increase in their operating costs. The company doing the work pays for the labor/machinery etc. If the commodity price goes up, it is pure "extra" profit to the royalty holder. Additionally, on the way down there are very few fixed costs for the royalty owner as they can maintain a small number of headcount at HQ. The management team is aligned (they own a good amount of stock), think like shareholders and has done an excellent job. We own the Company at 50% of the underlying value of the assets using conservative assumptions.

BSD Analysis:
Black Bear presents a compelling case for Altius Minerals based on its unique royalty business model that provides leveraged exposure to commodity prices without operational risks. The fund manager highlights the structural advantages of royalty streams, including pure profit flow-through from commodity price increases and minimal fixed costs during downturns. Management alignment through significant stock ownership adds credibility to the investment thesis. The fund's valuation assessment suggests they acquired shares at a 50% discount to underlying asset value using conservative assumptions, indicating substantial upside potential. The diversified commodity exposure across potash, copper, lithium, and iron ore provides multiple avenues for value creation. This asset-light model with high operating leverage to commodity cycles appears well-suited for the current environment of resource scarcity that the fund emphasizes. The combination of discounted valuation, aligned management, and structural business model advantages creates an attractive risk-adjusted opportunity.

Pitch Summary:
Rounding out the top five contributors is Parker-Hannifin, a diversified industrial company that is executing extremely well integrating a recent acquisition.

BSD Analysis:
Madison expresses confidence in Parker-Hannifin's operational execution capabilities, particularly highlighting the company's successful integration of a recent acquisition. While the commentary is brief, the manager's inclusion of Parker-Hannifin among the top five contributors suggests strong performance and effective capital allocation. The emphasis on acquisition integration execution indicates Madison values management's ability to create synergies and drive value through strategic transactions. Parker-Hannifin's diversified industrial platform likely provides exposure to multiple end markets including aerospace, mobile, and industrial applications. The manager's positive assessment of integration capabilities suggests confidence in the company's ability to expand margins and market share through strategic acquisitions. This operational excellence in M&A execution represents a key competitive advantage in the fragmented industrial technology sector.

Pitch Summary:
At payment processor Fiserv, revenue and profits continue to steadily compound. In fact, 2023 marked the 38th consecutive year of double-digit earnings growth for the company, a remarkable accomplishment considering the wide range of economic environments experienced during that long period. It goes without saying that success over such a prolonged timeframe requires a combination of strong competitive advantages, dependable stewardship, and continuous investment in new products and services. In more recent years, Fiserv has rolled out the Clover payment platform for small-and-medium sized businesses. Clover has been very successful in large part, not only due to its superior functionality relative to legacy point-of-sale payment platforms, but also Fiserv's distribution scale across financial institutions and independent sales organizations, an advantage that is difficult to replicate by upstart fintech competitors. Investments like Clover give us confidence that Fiserv will continue to build upon its impressive long-term track record.

BSD Analysis:
Madison demonstrates exceptional confidence in Fiserv's long-term competitive positioning, highlighting an extraordinary 38-year streak of double-digit earnings growth through diverse economic cycles. The manager emphasizes Fiserv's durable competitive advantages, including strong management stewardship and continuous innovation investment. A key growth driver identified is the Clover payment platform, which targets the attractive small-and-medium business market with superior functionality compared to legacy systems. Madison particularly values Fiserv's distribution scale advantage through financial institutions and independent sales organizations, creating a significant moat against fintech competitors. This distribution network represents a critical competitive barrier that emerging players struggle to replicate. The manager's thesis centers on Fiserv's ability to maintain market leadership through technological innovation while leveraging existing customer relationships and distribution channels. The combination of consistent execution, market-leading platforms, and defensive competitive positioning supports Madison's conviction in continued long-term outperformance.

Pitch Summary:
Two of our insurers, Arch Capital and Progressive, were also large contributors during the quarter. While they participate in different areas of the insurance market, with Arch generally focused on commercial lines and Progressive on personal lines, they both are benefiting from attractive market conditions, which has boosted underwriting profits. Also, investment income should continue to rise as they roll over the fixed income portfolios at more favorable coupon rates.

BSD Analysis:
Madison expresses strong conviction in Progressive's positioning within the personal lines insurance market, particularly during the current favorable industry environment. The manager emphasizes Progressive's ability to generate strong underwriting profits, reflecting the company's sophisticated pricing algorithms and risk management capabilities in auto insurance. A key earnings catalyst identified is the rising investment income from rolling over fixed income portfolios at higher coupon rates, providing a significant tailwind to overall profitability. Progressive's focus on personal lines insurance, particularly auto coverage, positions the company well to benefit from improved pricing discipline across the industry. Madison's thesis appears to center on Progressive's market-leading technology platform and data analytics capabilities, which enable superior risk selection and pricing power. The combination of strong underwriting performance and rising investment yields creates multiple drivers for earnings growth in the current environment.

Pitch Summary:
Two of our insurers, Arch Capital and Progressive, were also large contributors during the quarter. While they participate in different areas of the insurance market, with Arch generally focused on commercial lines and Progressive on personal lines, they both are benefiting from attractive market conditions, which has boosted underwriting profits. Also, investment income should continue to rise as they roll over the fixed income portfolios at more favorable coupon rates.

BSD Analysis:
Madison maintains a bullish stance on Arch Capital, emphasizing the company's strong positioning in commercial insurance lines during favorable market conditions. The manager highlights improving underwriting profitability as a key driver, suggesting disciplined pricing and risk selection in the current insurance cycle. A significant catalyst identified is the reinvestment opportunity in fixed income portfolios, where Arch can roll over maturing bonds at higher coupon rates, directly boosting investment income. This dual benefit of strong underwriting performance combined with rising investment yields creates a compelling earnings growth trajectory. Madison's confidence appears rooted in Arch's commercial insurance focus, which typically offers better pricing power and risk-adjusted returns compared to personal lines. The timing of this investment thesis aligns well with the current hard insurance market and rising interest rate environment.

Pitch Summary:
Shares in PACCAR, a truck manufacturer, appreciated nicely as investors rewarded continued strong performance. Operating margins remain a particular bright spot, supported by new truck models, improved manufacturing efficiency and a growing aftermarket parts division. On this last point, PACCAR has done an excellent job growing the aftermarket parts business by increasingly manufacturing its own parts and opening new distribution centers to expand its geographic reach and improve in-stock levels and fill rates. All told, this division's operating profits have more than doubled over the last five years and provides a nice ballast to help offset some of the inherit cyclicality that comes with manufacturing commercial trucks.

BSD Analysis:
Madison highlights PACCAR's strong operational execution and strategic positioning in the commercial truck market. The manager emphasizes the company's expanding operating margins driven by new truck models and improved manufacturing efficiency. A key investment thesis centers on PACCAR's successful aftermarket parts division transformation, where the company has vertically integrated manufacturing and expanded distribution infrastructure. This aftermarket business has doubled operating profits over five years, providing crucial earnings stability and margin enhancement. The strategy of manufacturing more parts in-house while expanding geographic reach through new distribution centers demonstrates strong capital allocation and competitive moat building. Madison views this aftermarket revenue stream as an effective hedge against the inherent cyclicality of truck manufacturing, creating a more resilient business model with diversified profit drivers.

Pitch Summary:
Unlike MAB, which basically offers a royalty on UK mortgages, The Property Franchise Group plc (TPFG) is one of UK's largest multi-brand lettings and estate agency franchising groups. What this basically means is that TPFG enables its hundreds of franchisees in offering the best possible service to UK landlords and home buyers. Therefore, it takes a cut on every deal that happens within the system, i.e. every time a house is sold, or a new lease contract is signed. In essence, it offers a royalty on UK property sales and lettings contracts. Franchisees on the one hand manage around 76,000 properties for landlords by renting out the houses and apartments, collect the rent and make sure the services are compliant with UK regulation. Besides that, the franchisees broker thousands of transactions between buyers and sellers of UK residential real estate every year via its multi-brand high-street, hybrid as well as online estate agency offerings. Due to its franchising nature, TPFG is a very high-quality business model with a high share of recurring / annuity like revenue streams while parts of the business currently profit from rent inflation in the UK. Given that TPFG's business requires almost no property, plant, and equipment (PP&E) and that net working capital is often even negative, organic ROICs are extremely high. EBITDA margins are above 40%. Management is very focused on profitability and appears very cost conscious. The balance sheet is strong with only a tiny amount of financial debt and a net cash position at our initial investment. As of YE 2022, 58% of revenues come from Management service fees (MSF), which include royalty payments made by franchisees on sales and lettings activities. TPFG receives a c. 10% cut on revenues from their franchisees every month, which allows for favourable WC dynamics (often negative in years). Especially the lettings and property services pieces are highly recurring, annuity like and have basically no churn. EweMove is the only TPFG brand that has a slightly different estate agency model where franchisees pay a GBP 1.0-1.4k franchise fee a month for access to all operating systems, marketing support and 24/7 call centre. The brand is strongly growing its territories and could double territories from here, which offers a good margin and top-line opportunity. In this segment, MSF grew 15% y-o-y in H1 2023 despite the current headwinds. The second largest revenue stream is Owned offices (19%) where TPFG makes money from lettings, sales, and other services. The third largest revenue stream is Other (16%), which includes sales and IT support as well as software fees from franchisees. Financial services (6%) are a slowly but steadily growing contributor to the top line and offer another growth opportunity, which we believe should strongly accelerate in coming years. The underlying business model is highly cash generative, and earnings translate very well into free cash flow (basically 100%). At the time of investment, the share price (c. GBP 2.60) offered a 9.5-10.5% FCF yield. Shares traded at a single digit P/E multiple on a 1-year forward looking basis, which we believe is way too low for such a business. In our DCF analysis, the base case suggested a target price of GBP 4-5 or an upside of >70% and therefore a deep undervaluation and a significant margin of safety. Shortly after we had bought our first shares in TPFG, the company announced the intention to merge with its closest listed peer Belvoir Group plc (BLV). BLV is essentially the same company at roughly the same size and traded at roughly the same valuation. We had analysed the company closely and spoken to management before. At the time we very much liked it but preferred TPFG due to, in our view, a slightly stronger focus on cost control and return on capital employed. When we read in the release that the intention to merge was based on common ground and that TPFG's management would take over the helm of the combined group, we got very excited. There was a previous attempt to merge the two companies a couple years ago which had failed, but this time the path was way clearer, and the parties seemed to have learned from it. We used this opportunity to also acquire BLV shares below the merger price (ratio) at which we would receive new TPFG shares if the merger was signed-off and completed. This has happened by now and we are very happy shareholders in the combined entity (TPFG). We are absolutely convinced that the merger makes sense, and that management will be able to drive cost and revenue synergies out of it. With regards to our investment in MAB, we are also looking forward to growth in its network of mortgage advisors via the merger between TPFG and BLV. The latter runs MAB's largest advisor network and has significant expertise in doing so. The Financial Services Director who has extensive experience in running the business within BLV has now joined the TPFG management board and we are confident that a further roll-out of the network will be accomplished across TPFG's and BLV's networks. Given that it was an all-share merger, TPFG did not use cash to finance the deal. As BLV also had a very healthy balance sheet, the combined entity will end up with a very comfortable (net cash) balance sheet situation and will therefore be able to continue to invest into the network, return excess cash to shareholders and grow via acquisitions as well as support its franchisees in financing value-accretive acquisitions. A normalization of the property sales market should accelerate growth and margin expansion in the coming years. Since the rapid rate increases and the mini-budget crisis, the UK property sales market has been in decline over the past two years and has only seen signs of a recovery in early 2024 as indicated by the above chart. According to Rightmove, the lack of housing supply continues with landlords facing ongoing legislative and financing challenges. We believe though that TPFG's lettings business is currently facing tailwinds from this development due to rent level increases of +9% YoY across the UK. Given the recurring, high-quality and strong cash generation of the businesses we are convinced that the shares have a very good chance to trade at a (significantly) higher multiple once the market realizes the full potential of the group. This assumption is further underlined when we look at other listed franchising stocks as well as past private market transactions such as the Permira/Engel & Völkers deal. Finally, we expect the shares to become increasingly accessible to institutional investors. When we first entered the TPFG shares were quite illiquid and BLV shares' liquidity was even tighter. Now the new group has a combined market capitalization of more than GBP 200m, and we expect it to increase (significantly) over time. We will see where the daily traded volumes will end up in the short- to medium-term, but we are encouraged from the initial signs. Besides that, we are confident that management will market the story very well to new and existing investors. With the merger being effective as of March 2024, TPFG's FY2024 figures will only include 10 months of BLV. The first full year of combined reporting will therefore be 2025. By then, we also expect the first synergy potentials will have been utilised. For 2025, we estimate the shares (at GBp 330 per share) to currently trade at an EV/EBITDA of below 8x and a P/E of c. 10x as well as a FCF yield of above 9%. As of today, we are convinced that investors will sooner or later agree that this is way too cheap for a business of this calibre and are excited about the contributions we expect this investment to deliver for the fund.

BSD Analysis:
Gehlen Bräutigam Capital presents a compelling bull case for The Property Franchise Group (TPFG), a UK real estate franchising business that generates royalties from property transactions. The manager highlights TPFG's asset-light franchise model with 58% of revenues from recurring management service fees, creating predictable cash flows with minimal capital requirements. The business demonstrates exceptional unit economics with 40%+ EBITDA margins, negative working capital, and near-100% free cash flow conversion. The recent merger with Belvoir Group creates synergy opportunities while maintaining TPFG's disciplined management team at the helm. Trading at single-digit P/E multiples and 9-10% FCF yields, the manager sees 70%+ upside potential to their GBP 4-5 target price. The investment benefits from UK rental market tailwinds with 9% YoY rent increases, while the normalized property sales recovery should drive additional growth. The combined entity's GBP 200m+ market cap should improve institutional accessibility and liquidity over time.

Pitch Summary:
Cipher Pharmaceuticals has seen its stock rise significantly due to the potential of MOB-015, a topical treatment for toenail fungus, which could disrupt the Canadian market dominated by less effective treatments. The Canadian market for onychomycosis is largely untapped, with only 20% of sufferers currently seeking treatment. MOB-015 has shown superior efficacy in clinical trials compared to existing treatments, suggesting it could capture significant market share upon approval. The company is financially robust, with a strong cash position and no debt, allowing for strategic buybacks and potential acquisitions. Management's conservative approach and focus on cash-flowing assets provide a stable foundation for growth. The potential for market expansion and increased treatment rates presents a significant upside for investors.

BSD Analysis:
Cipher's existing business generates substantial cash flow, providing a solid financial base to support the development and commercialization of MOB-015. The company's strategic focus on acquiring cash-flowing assets and potential dividend initiation reflects a shift towards a more stable, non-speculative business model. The ongoing phase three trial results for MOB-015 could further enhance its market potential if it demonstrates improved complete cure rates. The approval and commercialization timeline for MOB-015 is projected for 2026, with a high probability of success given its existing approval in Sweden and recommendations in other European countries. The potential for market growth beyond the current 20% treatment rate could significantly enhance Cipher's revenue and profitability, making it an attractive investment opportunity.

Pitch Summary:
Climb Global Solutions: The Middle Man for the Middle Man

Summary Investment Thesis
1) Niche Cybersecurity and Data Center Software Distributor with Vertical Specific Expertise
2) Focus on Cybersecurity and Data Center End Markets along with Faster Growing Vendors Supports Double Digit Organic Billings Growth; Programmatic M&A Will Supplement Organic Growth
3) Attractive Financial Profile Given Capital Light Nature of Software Distribution and Minimal CAPEX Requirements
4) CEO with Impressive Industry Experience and Track Record

Company Overview
Climb Global Solutions is a specialty IT distributor focused on cybersecurity and data center software. CLMB differentiates itself from broadline distributors such as Arrow, TD Synnex or Ingram Micro through deep expertise with the limited number of products it distributes. CEO Dale Foster orchestrated this focused distribution strategy when he took over as CEO, reducing the number of vendors on the company's line card from 455 to 100. As a result, CLMB now serves as a more focused partner, dedicating all its sales and marketing expertise to a smaller list of vendors. CLMB acts as an outsourced sales force for its partners given their expertise with the products they distribute. Unlike many technology distributors, hardware only accounts for 6% of the company's adjusted gross billings, which has positive working capital and ROIC implications (discussed below). While the top 20 vendors account for ~70% of CLMB's sales, the company has a focused strategy of adding smaller companies with strong growth prospects to its line card. CLMB's vendor expansion strategy is achieved through organic new partnership agreements as well as through acquisitions of distributors with high growth vendor relationships.

Industry Structure
CLMB participates in the two-tier distribution part of the IT market. Whereas large vendors can go direct to end users thanks to their scale and broad product awareness, smaller vendors require the expertise of distributors to bring products to market. A slide from one of CLMB's European competitors, Exclusive Networks, lays out the market structure well (note the percentages are specific to the cybersecurity market, but the general market structure applies to the broader IT distribution market).

Effectively, large well-known products are bought and thus can be sold directly to end users or to the reseller/solutions integrator level. Smaller and up and coming products require more sales expertise, which is where CLMB fits in as an outsourced sales team for its software vendors. PFPT described the relationship well during a 2016 conference call, which highlights the durability of this industry structure.

"Now when I first arrived at Proofpoint, I got a lot of questions from all of you on what are you doing with the channel? What's the opportunity in the channel? And I have spent 1/3 of my career on direct sales. I spent 2/3 of my career working with the channel. I had to confess I'd rather work with the channel for the simple reason, it's a force multiplier. If you've got 100, 1,000 or 10,000 salespeople, your teams can get 10x larger if you get it right with the channel. And so what we've said a few years ago is we would relaunch the program. We did do that in just January of 2015… We'd rather -- I'd rather have less partners that really invest with Proofpoint. I don't want hundreds that don't care about Proofpoint. I want to have a select few that really spend time and invest with us. And in return, we'll invest back with them to ensure that we have strong growth and profitable growth together. And so we've made a lot of progress in, frankly, a short amount of time. Many of these logos you saw last year, companies like CDW, SHI. Optiv is a tremendous partner. NTT, formerly Integralis in Europe has been a great partner, but we've added some new logos to the board this year… Exclusive Networks is an interesting one and that they are one of Palo Alto's largest distributors and we signed them on in Europe. We're excited about the opportunity that, that represents. And then Ingram, we did tell you last year our intent to bring Ingram online. We did do that in Q4 this year. So it's still early days. But of course, Ingram opens up. We didn't have distribution in North America, so now all of the different solution providers that are regional in nature we can scale much easier as we move forward."
Proofpoint Analyst Day: June 8, 2016

Digging deeper into CLMB's position in the market, it's helpful to distinguish between a pure distributor and a value-added reseller. A value-added reseller ("VAR") such as SoftwareOne or Softcat specializes in advising, designing, purchasing and implementing a software package for clients. See SWON's diagram below.

CLMB, on the other hand, is just a specialized distributor that sells to this part of the value chain. The value proposition for software vendors is clear as they don't have to invest in a sales force and can leverage CLMB's broad customer reach. VARs also value CLMB's expertise as they are focused on more comprehensive solutions for customers and can utilize CLMB for specific point products. For example, CLMB was recognized by CDW as a Channel Partner of the Year in 2023, highlighting the symbiotic relationship between these two parts of the IT distribution market. Similar to NSIT (another portfolio holding of Headwaters Capital), the growing complexity of the IT landscape benefits the company as more vendors look to specialty distributor partners like CLMB as a go to market solution and VARs require this specialty expertise as part of their solutions integration.

CLMB's top vendor relationships include Solarwinds and Sophos. As discussed above, CLMB also has relationships with many smaller, private companies such as Vast Data, Wasabi and Extrahop, to name a few.

Financials
CLMB is unique in the specialty distribution space given that it focuses almost exclusively on software distribution. Consequently, CLMB does not carry inventory as license delivery does not require physical possession like a traditional hardware distributor. This means that CLMB's business is far more capital efficient than traditional hardware distributors (or distributors in almost any industry) as it does not carry this working capital burden and does not require investment in a physical distribution network. License delivery also minimizes inventory obsolescence risk given lack of physical possession. As a result, CLMB operates with negative net working capital, a key driver of the 30% ROIC for the business. Due to the favorable net working capital attributes of CLMB's business and the limited CAPEX requirements, CLMB generates strong free cash flow.

Management has a stated goal of doubling adjusted gross billings by 2026. Given the demand backdrop for cybersecurity broadly combined with CLMB's focus on higher growth vendors, organic revenue should grow at a +10% CAGR throughout the forecast period. Organic growth will be supplemented with M&A to reach the stated target of doubling AGB's by 2026. CLMB has ample capacity for M&A thanks to a $35mm net cash balance along with strong free cash flow. Similar to other companies owned in the Headwaters Capital portfolio, CLMB's M&A ambitions are more than just financial engineering, they are also sound strategic uses of capital. Acquisitions can broaden CLMB's geographic reach, add key vendors to CLMB's line card, and/or deepen relationships with existing vendors.

Management
Dale Foster (CEO) is an industry veteran who joined CLMB six years ago after leaving Ingram Micro. Dale sold his previous company, Promark, to Ingram Micro in 2012 and remained with Ingram until his transition to CLMB. Dale joined CLMB to run a similar playbook to the one he executed at Promark. He recognized that CLMB had tremendous growth potential given that the company had neglected investing in vendor relationships and had eschewed M&A. The combination of adding faster growing vendors along with a focused M&A strategy has transformed the growth profile of CLMB.

To assist with M&A, Drew Clark as CFO due to his extensive experience with acquisitions in roles at previous companies. Given his previous history, I wouldn't be surprised if Mr. Foster sought to sell the company in a few years. The software focus combined with targeted relationships with newer vendors would be very attractive to any of the broadline players or other specialty distributors. Additionally, the strong cash flow and net cash position could make this an ideal PE acquisition and PE has had significant interest in the space historically (Exclusive was owned by Permira).

Valuation
CLMB doesn't have any pureplay public comps in the US. CLMB's closest comparable company is Exclusive Networks (EXN.FR) in France, who currently trades at 10x EV/EBITDA multiple. Similar to CLMB, EXN is a distributor of cybersecurity products and has customer concentrations with legacy cybersecurity vendors FTNT and PANW. However, 25% of EXN's sales are hardware related, which should yield a lower multiple given the working capital and obsolescence risk associated with this revenue. CLMB is also more heavily exposed to the US and given premium multiples for US domiciled companies, provides further justification that CLMB should trade at a premium to EXN. The problem with using EXN.FR as a comp is that it has limited trading history since it came public in 2021 (at the height of market euphoria and company fundamentals) and I prefer to look at valuation history pre-COVID. Without this data, it's helpful to think about CLMB's valuation more broadly relative to the IT distributor landscape.

CLMB clearly deserves a premium multiple to broadline distributors given stronger revenue growth rates due to the cybersecurity focus and lower working capital/higher ROIC because of its pure play software focus. Broadline distributors have historically traded in the 6-8x EV/EBITDA range, suggesting a floor valuation of 8x. As explained above, the software focus suggests a more appropriate comparable could be Softcat or SoftwareOne, although CLMB doesn't have the services offering of these two companies. SWON has suffered from operational mis-steps since coming public in 2019, which has depressed its multiple. SWON's UK focus has been a headwind to its valuation and the company currently trades at 9x EBITDA (and the company recently rejected a takeover offer from Bain at this multiple). SFC.LN trades at a significant premium (18x EBITDA) given consistent double digit revenue growth, strong returns on capital and a diversified customer and vendor base. CLMB is unlikely to achieve SFC.LN's multiple in the near term given customer and vendor concentrations, but it does highlight upside to current valuations as the business matures.

CLMB currently trades at an 8x EV/EBITDA multiple, but I believe the business should trade in the 10-12x range as the cybersecurity and data center focus supports a faster growth rate than broader IT spend. The pure software focus also generates a return on capital profile that is superior to peers. As customer concentration diminishes over the next few years via a combo of M&A and faster growth from smaller vendors, I expect the company will trade toward the upper end of this valuation range. CLMB is also an attractive acquisition target for larger distributors and the multiple required to consummate a transaction would need to come at a premium to these peers. This provides further justification for a 10-12x EBITDA multiple for CLMB.

Assuming CLMB can approach its target of doubling AGB's by 2026, this would support EBITDA of $45mm in 2026. Even after utilizing cash flow for M&A, cash balances would actually grow over this time period. Assuming a 10x EBITDA multiple supports a $110 stock price, or a +26% CAGR from the share price at initial purchase ($58). Assuming a 12x EBITDA multiple supports a $130 stock price, or a +34% CAGR.

BSD Analysis:
Headwaters Capital presents a compelling bull case for Climb Global Solutions, a specialty cybersecurity and data center software distributor. The manager highlights CLMB's differentiated positioning as a focused distributor serving as an outsourced sales force for software vendors, contrasting with broadline competitors through deep product expertise. The investment thesis centers on the company's capital-light business model, generating 30% ROIC through negative working capital and minimal capex requirements, as software distribution eliminates inventory carrying costs. Management's strategic transformation under CEO Dale Foster, reducing vendor relationships from 455 to 100 while focusing on higher-growth cybersecurity vendors, supports projected 10%+ organic revenue growth. The manager expects M&A to supplement organic growth toward management's goal of doubling adjusted gross billings by 2026, supported by a $35mm net cash position. Trading at 8x EV/EBITDA versus comparable Exclusive Networks at 10x, the manager sees valuation upside to 10-12x multiples as customer concentration diminishes. The bull case projects 26-34% annual returns based on $45mm 2026 EBITDA and multiple expansion, with additional upside from potential strategic acquisition interest.

Pitch Summary:
The market responded positively to VU's improved profitability and the 2024 full-year guidance, which calls for €1 billion in sales at the low end. We continue to see a strong revenue upside and significant opportunities for margin expansion as the company expands its presence in the U.S. and scales its value-added service businesses. Our optimism is underpinned by the anticipated widespread adoption of electronic shelf labels and the potential to onboard tier 1 customers, particularly in the U.S. market.

BSD Analysis:
The manager's bullish stance on VusionGroup is predicated on the company's successful transition to profitability and ambitious revenue guidance of €1 billion for 2024. The investment thesis centers on two key growth drivers: geographic expansion into the lucrative U.S. market and the scaling of higher-margin value-added services. The manager sees significant margin expansion potential as VusionGroup leverages its electronic shelf label technology platform to capture the ongoing retail digitalization trend. The opportunity to secure tier 1 retail customers in the U.S. represents a substantial catalyst for accelerated growth and market validation. The widespread adoption of electronic shelf labels across the retail industry provides a strong secular tailwind for sustained revenue growth. The company's improved profitability metrics suggest operational leverage is beginning to materialize as the business scales, supporting the manager's conviction in continued margin expansion.

Pitch Summary:
Aligned with our projections, KSPI continues to captivate investor attention as prominent underwriters and Wall Street banks initiate coverage of the company. We hold firm in our belief that management's strategic decision to delist the company's shares from the London Stock Exchange, with the aim of consolidating liquidity, will bolster its appeal by creating a liquidity profile more aligned with institutional mandates. Looking ahead, we foresee an imminent capital influx prompting a re-rating of the company's P/E multiple, elevating it from ~15x to the ~20s range. We believe such a multiple expansion is warranted for a company poised to not only sustain a 20%+ top-line growth and high teens bottom-line growth but also demonstrate considerable potential for expanding revenue streams and geographical footprint.

BSD Analysis:
The manager's thesis on Kaspi.KZ centers on an anticipated multiple re-rating driven by improved institutional accessibility following the LSE delisting and NASDAQ consolidation. The strategic move to consolidate liquidity on NASDAQ is expected to attract significant institutional capital, as the improved liquidity profile better aligns with institutional investment mandates. The manager anticipates P/E multiple expansion from approximately 15x to the 20s range, which appears justified given the company's robust growth profile of 20%+ revenue growth and high-teens earnings growth. The investment case is further supported by Kaspi's potential for revenue stream diversification and geographic expansion beyond Kazakhstan. With prominent Wall Street banks initiating coverage, the company is gaining institutional recognition that should drive sustained capital inflows. The manager's confidence in the re-rating thesis reflects their belief that the market has not yet fully recognized the value of Kaspi's dominant position in Kazakhstan's digital ecosystem.

Pitch Summary:
NagaCorp's share price has experienced a notable rebound, driven by quarterly results that not only indicate a continued business recovery but also alleviate concerns regarding the July 2024 debt repayment. Despite these positive indicators, the market's expectations for the company remain tepid, as highlighted by NagaCorp's decade low P/E, forward P/E ratio, and P/B ratios. Such skepticism is not without basis. Historically, NagaCorp's gross gaming revenue (GGR) depended significantly on VIP referrals from junkets, a model that has been adversely affected by the Chinese government's crackdown on junket operators and the Southeast Asia "scamdemic." Contrasting with prevailing market views, we contend that an excessive emphasis on short-term hurdles obscures the true value of NagaCorp's historical profitability and the prospects for future earnings expansions. Moreover, sell-side coverage often lacks the necessary depth to appreciate the nuances of the local market and geopolitical dynamics, as well as NagaCorp's monopoly position and cost advantage. We posit that NagaCorp is on the path to becoming a more organically driven business, particularly as it shifts the majority of its business from referral VIPs (2% gross profit margin) to the more lucrative mass (71%) and premium VIP (23%) segments—a move expected to markedly enhance profitability. Now that the concerns over the firm's ability to repay its $472M debt obligations due in July has been largely mitigated, we expect NagaCorp to resize its Naga3 project at this stage to focus on profitability—a prudent move in our view as the company awaits tourism recovery. That said, with tourism recovery currently standing at only 73% of its 2019 levels and Chinese tourism at 29%, coupled with the anticipation of increased tourism flow from the new international airport offering more direct flights, particularly from China, we see significant long-term growth potentials and top-line surprises. Overall, we maintain a strong conviction that the market will eventually reward investors who are patient enough to wait.

BSD Analysis:
The manager presents a compelling contrarian thesis on NagaCorp, viewing the current market skepticism as an opportunity to acquire shares at historically low valuations. The investment case centers on a fundamental business model transformation from low-margin VIP referral business (2% gross margin) to higher-margin mass market (71%) and premium VIP segments (23%), which should drive significant profitability expansion. The manager emphasizes NagaCorp's monopoly position in Cambodia and structural cost advantages that are underappreciated by sell-side analysts. With debt refinancing concerns now resolved and tourism recovery still in early stages (73% of 2019 levels, Chinese tourism only 29%), the company is positioned for substantial upside as travel normalizes. The new international airport providing direct flights from China represents a key catalyst for accelerated tourism recovery. The manager's conviction is reinforced by the company's decade-low valuation metrics across P/E, forward P/E, and P/B ratios, suggesting significant multiple expansion potential as the business model transition becomes evident.

Pitch Summary:
With a market capitalisation of EUR 4bn, French-listed Verallia is the European leader and the world's third largest producer of glass packaging for beverages and food products. The company used to be part of the Saint-Gobain group, was then acquired by Apollo and Bpifrance in 2015, and went public in Autumn 2019. There are many aspects of the business to like, including predictable growth, relatively high barriers to entry, strong market positioning, healthy returns on capital and good cash generation. We believe the current weak European glass market combined with a low market valuation of the stock represent a good opportunity to get exposure to the name, and we are prepared to navigate some potential short-term volatility in an otherwise resilient business in order to benefit from the long-term potential we see in the shares. The European glass manufacturing industry presents what we believe are attractive characteristics. First of all, the industry has gone through significant consolidation and is today very concentrated, so much so that we consider it oligopolistic. In fact, in 2019 the top five players in Europe accounted for 71% of the market, which compares with a combined market share of below 50% in the early 2000s. Secondly, barriers to entry in the form of capital requirements are relatively high, with a full furnace and associated plant costing circa EUR 100m to build, having a mid-teen year lifespan, and are required to be run 24/7 at 1500-1600°C with circa 10 days to cool down in an orderly fashion. Geographical proximity to clients also represents a strong barrier to entry, providing local players with some pricing power and competitive edge given glass "doesn't travel well" due to high transport costs. Moreover, the industry has historically been a very resilient one, with organic annual growth in volumes averaging in the low single digits in the past decade, with a decline of only 1.5% for 2020 and, we understand, by circa 5% overall in 2008/9. From this perspective, 2023 was a very special year, with volumes estimated to have declined more than 10%. We believe this weakness in an otherwise very stable industry comes from both weak consumption and from industry destocking, with each, we estimate, accounting for about half of the decline. We are convinced both these factors are temporary in nature: weak consumption is driven by the current poor economic outlook, while destocking follows two years with strong demand, and we expect it to gradually recede as the year progresses. This has led glass producers to postpone new capacity additions that were planned for the next few years, and we have also seen furnaces across Europe being closed in response to the weak short term market outlook. We take this as a strong sign that glass manufacturers are remaining rational, which we believe is very important to keep capacity utilisation at good levels in an industry characterised by high fixed costs. In this context, Verallia is the European market leader with a circa 20% share, producing around 16 billion jars and bottles every year and operating 34 glass plants with 63 furnaces. Of its EUR 3.9bn sales, 90% come from Europe and 10% from Latin America. From an end market perspective, wine accounts for 43% of total revenues, followed by spirits at 16%, beer at 12%, soft drinks at 11% and food at 17%. We appreciate the company's market positioning and balanced end market exposure, and we believe they represent a good competitive advantage. In particular, Verallia has a relatively high exposure to wine which is a premium product with a high unit price compared to beer, soft drinks or food and is mainly sold in glass bottles, while the relatively high exposure to spirits is also attractive given they are almost entirely glass-packaged and, together with wine, benefit from interesting premiumisation trends. On top of this, the relatively new CEO Patrice Lucas has made ESG one of his strategic pillars, which we believe may prove a long-term competitive advantage as clients pay more and more attention to environmental aspects in an energy-intense industry such as glass manufacturing. The company has a vast client base of more than 10,000 customers, with the top 10 accounting for about 18% of revenues and the biggest one about 5%. The vast majority of contracts with clients are negotiated annually, with only circa 10% to 15% having automatic adjustment clauses to account for cost inflation. The company has been very successful in the past few years at significantly increasing prices to compensate for higher costs, particularly in energy, raw materials and transportation/packaging. This has been facilitated by an industry that in 2021/2022 was running at full capacity given strong demand, limited availability and longer lead times. As the situation started improving and energy and material costs started normalising in the past few months, industry players including Verallia have faced weaker demand, with the company having to reduce prices to clients. As mentioned before, we are convinced these trends are temporary: we believe customer destocking should end over the next 3-6 months and now that costs have started normalising on a lower level, we are convinced Verallia should be largely successful with its strategy of only reducing pricing in line with costs for the 2024 fiscal year. On the other hand, visibility on the exact timing of this stabilisation and recovery remains relatively low, and we are prepared to see through some short-term volatility in order to take part in the long-term upside potential. We are impressed with the margin progression at Verallia since 2016, with a gradual increase in operating profitability from around 8% back then to more than 21% in 2023, which equates to an attractive factoring-adjusted 22% return on capital after tax. Given the business's strong cash generation profile and overall long-term stability, we are comfortable with Verallia's 2023 net debt position excluding leases and factoring of around EUR 1.3bn, which leaves ample room for an expected healthy dividend yield of around 5%. At the current share price of around EUR 34, we believe the market is undervaluing this market leading, resilient, cash generative and high return business. We don't seem to be the only ones thinking this: at the end of February CEO Lucas bought circa EUR 100k in Verallia shares, while the company's main shareholder, private holding company Brasil Warrant Administração de Bens e Empresas with circa 28% of the share capital, has purchased more than EUR 15m worth of shares year to date, and we believe the company has room for opportunistic share-buybacks, like the EUR 50m that was launched in December 2022, should the valuation remain low. We are convinced a business like Verallia should trade on a fair enterprise value to operating profits after tax multiple of at least 14 times, which would imply an upside of circa 40% to the current share price to the end of 2025.

BSD Analysis:
Ennismore presents a compelling bull case for Verallia, the European glass packaging leader, based on attractive industry dynamics and temporary market weakness creating an entry opportunity. The manager highlights the oligopolistic nature of the glass industry with high barriers to entry (€100m furnace costs) and geographic moats that provide pricing power. Verallia's market-leading 20% European share and balanced end-market exposure (43% wine, 16% spirits) position it well for premiumization trends. The fund views 2023's 10% volume decline as temporary, driven by destocking and weak consumption that should normalize in 2024. Management emphasizes Verallia's impressive margin expansion from 8% to 21% since 2016, generating attractive 22% returns on capital and 5% dividend yield. Strong insider buying (CEO purchased €100k, main shareholder bought €15m YTD) and potential for share buybacks support the valuation thesis. The manager targets a 14x EV/EBIT multiple implying 40% upside by end-2025, viewing current €34 share price as undervaluing this resilient, cash-generative business.