Investment Pitches

Pitch Summary:
Secure Trust Bank is a GBP 120m market capitalised UK specialist lender. We wrote about the company back in January 2019 and since then it has generated GBP 145m in net profit and paid out GBP 45m in dividends. Yet the market capitalisation has fallen by circa GBP 140m in this time, with the share price more than halving. This does leave however a situation where the stock could double or triple and still not look overvalued. On our expectations it is now trading on a ridiculously low 3.5 times earnings multiple and 67% discount to tangible book. Since we last wrote there has been a change of both CEO and CFO in 2021 and 2020 respectively and a strategic move to scale up the business via growth in some new markets as well as gaining from some competitors leaving the market. This has led to an increase in the loan book to GBP 3,200m at an annualised growth rate of circa 15% over the last 18 months to June 2023. The loan book proportions by segment haven't changed so much. Retail Finance and Real Estate are now even more important being 75% of the total book, each amounting to around GBP 1.2bn. As a reminder the Retail segment lends across various consumer products including furniture, electronics and sports season tickets growing at almost 30% in the first half of the year with over 85% in interest-free lending with much of the income paid by the retailer. Obviously growing at this rate, we are very cognisant of credit risk so it has been very positive to see provision rates not move substantially in a period of increasing economic difficulties for the consumer. Secure Trust via its V12 brand has been assisted in its growth due to some banks pulling out of the market, perhaps due to its fairly niche size and increased technology requirements. We believe their market share now to be in the low to mid-teens for new lending. The Real Estate segment's loan book is now mainly lending to residential investment and development, and due to the interest rate environment, is growing much slower than Retail Finance at around 7% but continues to show very low impairments which is testament to its conservative lending with an average Loan-to-Value of around 56%. One negative has been the Vehicle finance segment (circa 15% of the book) which has not grown as much as the company would have hoped as the prime/Personal Consumer Plan offering on their new platform has taken longer to scale via dealers than they expected. We believe they do have some mitigating factors though, with the recent historically unusual behaviour in used car values due to new car supply issues as well as different dynamics in car values for electric versus traditional engine making it harder to price correctly in a new lending subsegment. The plan is to put all of their lending propositions on one platform by the end of year which should help them to gain more traction with their dealer channel to market. The Commercial Finance segment, circa 10% of the loan book, is mainly factored receivables helping smaller companies working capital situation and very short duration lending with typically very low write offs. Similar to Real Estate there has been limited loan book growth currently. Optically overall the revenue margin on its loan book has decreased in the last five years by around 230bp to around 5.8%. However, the company has continued to move up the credit quality scale in its market positioning which is not being fully shown in its results due to accounting standards requiring premeditative provisioning for the loan book leading to only 40bp of improvement to 1.4% in that time. Overall, this has led their return on average equity to fall from 13.1% in 2018 to, we expect, a not disastrous but unimpressive just over 10% for 2023. They target a substantially higher figure, around 15%, in the medium term. We expect the return to be close to 12% next year as we see the increasing benefit of scale pushing the cost to income ratio to close to 50%, the low end of its 50-55% target. Given the growth strategy, management are aware that the returns need to step up to fund this strategy and we would much prefer that its 25% dividend payout policy was changed until their returns are shown to sustainably finance the greater than 15% loan book growth targets, given their Core Equity Tier 1 capital ratio currently sits around 13%, close to their internal 12% minimum target, the regulatory minimum is lower at 9.6%. As it stands the company sits on a historic 7% dividend yield which we would expect to increase this year given the dividend policy. Secure Trust Bank continues to be a fairly niche lender which is underappreciated by the market. Over the last few years, it has become more prudent on its lending book which we believe will lead to more consistent profitability in the future. They have also invested in technology which should enable good quality lending growth in Retail and Vehicle Finance with increasing scale leading to higher group returns. It was also positive to see the CEO David McCreadie buying GBP 176k of shares in August at current levels. Putting the business on 9 times earnings and around tangible book for 2024 leads to upside of over 200% over the next 15 months.

BSD Analysis:
The manager presents a compelling value thesis for Secure Trust Bank, highlighting extreme undervaluation at 3.5x earnings and 67% discount to tangible book value despite strong operational performance. The company has generated £145m in net profit since 2019 while the market cap declined £140m, creating significant upside potential. Management's strategic pivot toward higher-quality lending segments, particularly the rapidly growing Retail Finance division (30% H1 growth) through the V12 brand, positions the company to benefit from competitor exits and market consolidation. The conservative Real Estate lending approach with 56% average loan-to-value ratios demonstrates prudent risk management during challenging economic conditions. While ROE has declined from 13.1% to 10%, the manager expects improvement to 12% as operational leverage benefits emerge from the technology platform consolidation. The insider buying by CEO David McCreadie at current levels provides additional confidence in management's conviction. Target valuation of 9x earnings suggests over 200% upside potential within 15 months.

Pitch Summary:
Series of bad news starting with revenue miss are expected; SEC settlement for improper earnings management; insiders sold $1.5 bil of shares at $35 per share; rising debt; overvalued (28x 2023E EBITDA);

BSD Analysis:
Rollins is a market leader in pest control, benefiting from recurring revenue, pricing power, and acquisitions. The short case hinges on valuation, organic growth moderation, and potential regulatory scrutiny. Pest control is a defensive industry, but Rollins trades at a steep premium multiple versus peers like Rentokil. Organic growth is steady but slowing, with most incremental expansion driven by M&A. Labor and chemical input inflation are creeping into margins, while regulatory risk exists around pesticide use and consumer protection standards. While fundamentals are strong, the stock reflects near-perfect execution, leaving downside if growth cools or if regulators increase oversight.

Pitch Summary:
Stock promotion; over $300 mil self-registration is likely to lead to a significant dilution; accounting tricks for revenue growth; deteriorating balance sheet and eroding margin; given millions of shares to pay debt; insider sales; Update 10/25 - Follow-up via twitter: weak revenues; zero patents; weak auditor; DOJ prosecution; Update 1/19 - Follow-up: Thousands of shares were issued without disclosure;

BSD Analysis:
FingerMotion is a microcap offering mobile payment, top-up, and insurtech services in China. The bear case rests on limited scale, opaque disclosures, and concentration risk in partnerships with large carriers. Revenue has grown, but gross margins are thin and dependent on transaction processing rather than defensible IP. Expansion into insurance tech sounds promising but is speculative and unproven. Given its small float, volatility and susceptibility to retail-driven spikes are high. Skeptics highlight governance and sustainability of carrier relationships, with little visibility on profitability.

Pitch Summary:
Academy Sports and Outdoors (Academy) is a sports, outdoor, and recreational product retailer with locations primarily in the South. Academy's value proposition is to provide a wide selection of value-priced merchandise to customers. Academy currently has 268 locations across 18 states. Academy's products can be divided into four segments: sports and fitness (21% of sales); outdoors (31% of sales); footwear (20% of sales); and apparel (28% of sales). Over the past four years, Academy has generated revenue growth via store growth (8% annually) and same-store sales growth (5.4% annually). This is a more balanced growth profile versus other competitors like Dick's and Hibbett, whose growth is more reliant on same-store growth versus new-store openings. Academy also has the highest sales/square foot and profit per store versus the larger Dick's and the smaller Hibbett. Management has a four-year plan to grow sales to $10 billion and net income to $1 billion. This plan envisions 50% new stores in both the existing and the edges of the current footprint and within delivery distances from its three distribution facilities in Texas, Georgia, and Tennessee. Management is also expecting return on invested capital to increase to 30%, from 23% last year, as local economies of scale are realized from filling out and expanding its existing footprint at its edges. Inventory turns likewise are expected to increase to 3.5x, from 3.0x currently, as more distribution efficiencies are realized in the supply chain. These are higher turns than both Dick's and Hibbett. The plan also calls for increased net income margins from 9% today to 10% in four years from economies of scale. The execution of the growth plan will also generate 65% EBITDA FCF conversion allowing ample cash flows for buybacks at low stock prices or dividends at higher valuations. Academy has four levers for cash flow growth: 1) new store expansion within supply distance of distribution centers, developing higher sales and margins due to local economies of scale; 2) higher same-store sales; 3) higher inventory turns; and 4) distributing excess cash as dividends or buying back shares.

BSD Analysis:
Academy Sports presents a compelling growth story in the fragmented sporting goods retail market, with management targeting $10 billion in sales and $1 billion in net income through strategic expansion. The company's balanced growth model combining 8% annual store growth with 5.4% same-store sales growth differentiates it from competitors who rely more heavily on same-store sales. Academy's superior operational metrics, including highest sales per square foot and profit per store versus Dick's and Hibbett, demonstrate strong execution capabilities. The company's dominant position in hunting equipment and recreational shooting, where Dick's has exited, provides a defensible competitive moat. Management's plan to increase ROIC from 23% to 30% through local economies of scale appears achievable given their track record of operational improvements. The 65% EBITDA to FCF conversion rate provides substantial cash generation for value-accretive buybacks at current 7x earnings multiple. At current valuation, the stock trades at a significant discount to the implied Graham formula multiple of 46x for a 20% growth company.

Pitch Summary:
37% of the net income is non-cash payment-in-kind; 20% of the loan portfolio is loss and has not been fully recognized; excessive cash fees equal to 5.3% of the loans under management; questionable cash balance;

BSD Analysis:
AFC Gamma provides loans secured by real estate and other assets to cannabis operators. The short case emphasizes credit risk, sector volatility, and limited funding diversification. Cannabis operators are often undercapitalized, federally restricted, and face declining wholesale prices in key states—making defaults more likely. AFCG’s loan book is highly concentrated, with a small number of borrowers making up the majority of exposure. Funding sources are limited, and as a REIT, payout obligations restrict balance sheet flexibility. While the dividend looks attractive, bears argue it is not sustainable if credit losses rise. Loan extensions and restructurings could mask non-performing trends until equity capital is already impaired.

Pitch Summary:
Moving on to our new position in Seneca Foods, I may have just one-upped even our most boring investments by way of owning this microcap canned vegetable producer, the largest in the US. As a company trading below the value of its net current assets, along with real estate held on the balance sheet that could exceed the entire market cap of the business, Seneca Foods is a throwback to the Graham and Dodd style of buying companies below their net current asset value. However, unlike most Graham and Dodd 'cigar butt' investments, Seneca Foods has an actual operating business. One that is not in decline. In fact, the industry in which Seneca Foods operates has changed in such a way that stable market share and the resulting higher earnings should be the norm moving forward. Furthermore, there are clear cut reasons why the stock is mispriced. First, Seneca was booted from the S&P 600 index earlier this year, which resulted in forced selling, driving the share price down around 30% despite no significant changes to the business. Second, Seneca doesn't screen particularly well. The company has both a large debt load (due to inventory purchase requirements) and understated earnings given their inventory accounting methodology. If investors don't make the necessary earnings adjustments, GAAP earnings look non-existent. Third, management runs their business like a private company, with no IR strategy, no earnings calls, and no investor outreach (it took jumping through a few hoops to get management on the phone). The canned vegetable business is tough and has historically been a battle for market share among a few large competitors, resulting in price wars driven by tough periods of seasonality and ever-changing cost structures. Following the exit of Del Monte Foods from the private label canned vegetable business, Seneca and smaller private competitor Lakeside Foods now control around 85% of the market, which will aid in the investment case moving forward, given Seneca's substantial capacity versus their peers. Rather than pricing wars this time around, Seneca has been (and will be) able to pass along price increases to their customers, which will prove vital given the COVID-related increases in nearly all of their input costs. The importance of these factors can't be overstated, as reduced industry supply and a more rational competitive environment means that these changes are more durable than Seneca is being given credit for. Outside of the index removal, which proved a timely buying opportunity, a great time to purchase businesses in commoditized, highly competitive industries where they are fighting for market share is when the industry structure changes. There's a fairly well known investor who has also been successful investing against the backdrop of positive industry changes. We were able to purchase our shares at a mid-single digit multiple of earnings, and our downside is well protected, which means we can be patient as the company works through their current volumes, moves through their inventory, pays down debt and continues to generate strong earnings. We've done well since our initial purchase, but I think the share price should continue to trickle upwards, where I peg fair value to be significantly higher than today's price.

BSD Analysis:
Greystone Capital invested in Seneca Foods, the largest canned vegetable producer in the US, as a classic Graham and Dodd net-net value play trading below net current asset value with substantial real estate holdings potentially exceeding the entire market cap. The investment thesis centers on a fundamental industry structure change following Del Monte's exit from private label canned vegetables, leaving Seneca and Lakeside Foods controlling approximately 85% of the market. This oligopolistic structure has eliminated historical pricing wars and enabled Seneca to pass through cost increases, creating more durable earnings power than the market recognizes. The stock became mispriced due to forced selling from S&P 600 index removal (30% decline), poor screening metrics from inventory accounting methodology, and management's private company approach with no investor relations. The manager purchased shares at a mid-single digit earnings multiple with strong downside protection from asset value, expecting the stock to appreciate as the company pays down debt and benefits from the improved competitive dynamics.

Pitch Summary:
Medical Facilities Corp. found its way into the portfolio this quarter as an under-the-radar microcap that owns minority interests in a group of surgical hospitals in various geographies. The company's four core facilities are located in South Dakota, Oklahoma and Arkansas and provide services ranging from orthopedics to spinal care to various inpatient and outpatient procedures. Medical Facilities partners with physicians for ownership of these hospitals, and operates the facilities from an administrative, billing and back-office standpoint, while generating revenue by collecting a facility fee for their services. This model is a beneficial partnership for both the company and its physician owners, as doctors are free to provide medical care while MFC takes care of management of the facilities. I wouldn't typically be interested in this business or industry, as there is no shortage of bad examples of private equity surgical hospital rollups where scaled players who took on too much debt collapsed under the weight of a high fixed cost model. MFC is not a rollup, and when run well, surgical hospitals are licenses to print money. Furthermore, there are elements of this story that I believe have allowed us to purchase shares at bargain basement prices. Following years of mismanagement, recent activist involvement led to a management and board change, strategy shift, dividend cut, and operational improvements that were executed with the sole focus of driving shareholder value. The dividend cut and strategy shift caused the stock to sell off, which hasn't quite recovered despite the positive improvements that have taken place. Furthermore, MFC has some of the best performing hospitals in their geographies, carry less leverage than their peers, and have been in operation between 20-40 years, earning very high-quality scores among patients and staff. MFC will also benefit from favorable trends in the US healthcare market including an aging population and strong demand for orthopedic services moving forward. Despite this being a competitive space, MFC has some aspects of a soft moat, that have allowed the facilities to grow their patient volumes and revenues at mid-single digit rates for the past decade plus. These include: - High levels of patient satisfaction are driven by convenience, high standards of care and a less bureaucratic environment than a traditional hospital. This allows for more convenient intake and discharge as well as better scheduling availability - Physicians practicing at MFC facilities can drive their procedure volumes higher than a traditional hospital setting, thereby increasing earnings potential which leads to surgeon loyalty over time - The scale of each facility means that MFC can offer a wider range of procedures and patient choice, providing an equal alternative to a traditional hospital - Given the choices available, MFC can lead with billing transparency and avoid surprise medical bills for hospital visits I like our chances to do well here as the mandate for management is simple. Manage the hospitals efficiently, sell off non-core assets, and return capital to shareholders. MFC has been executing on all three initiatives, by divesting five of six non-core Ambulatory Surgery Centers, restoring hospital level margins, and returning a significant amount of capital by repurchasing nearly 20% of shares outstanding last year alone. It is likely the business will continue to divest both non-core assets and potentially surgical hospital assets over time. Selling into strength will benefit MFC. Significant consolidation is taking place across the industry, with the last 12-18 months representing one of the most active periods for M&A in industry history. The rise of physician owned hospitals, outpatient care, the need for market share gains and significant scale mean that MFCs assets are very attractive and could fetch strong valuations in a sale scenario. The closest public company comps, as well as every relevant M&A transaction I could find point to a sale scenario being one path to strong returns. Absent that, mid-single digit top line growth, even on a slightly elevated cost base, means that MFC should be able to generate $1.5 - $2.0 dollars in FCF/share within the next few years. The current share price is $6.75 USD. With the continued divesting of assets, more share buybacks, and potential margin expansion, our upside could approach 100% over time.

BSD Analysis:
Greystone Capital invested in Medical Facilities Corp., an under-the-radar microcap owning minority interests in surgical hospitals across South Dakota, Oklahoma, and Arkansas. The investment thesis is built on a post-activist turnaround story where new management has focused on operational efficiency, asset divestiture, and capital returns following years of mismanagement. The company operates a physician partnership model that creates competitive advantages through convenience, reduced bureaucracy, and billing transparency compared to traditional hospitals. MFC has achieved mid-single digit revenue growth over the past decade and maintains lower leverage than peers while operating high-quality facilities with strong patient satisfaction scores. The manager sees multiple paths to returns including continued operational improvements, M&A activity in a consolidating industry, and significant share buybacks (nearly 20% repurchased last year). With the stock trading at $6.75 and projected free cash flow of $1.5-$2.0 per share, the manager targets potential 100% upside over time.

Pitch Summary:
Market drawdowns provide good opportunities to buy shares in growing, cash generative, well-managed businesses at cheap prices. Our newest investment in Bel Fuse is no exception. Bel Fuse is a 75-year-old manufacturer of electronic components that designs products fit for use in telecom, aerospace, transportation, and consumer electronics end markets. For those with a non-technical background like your portfolio manager, Bel Fuse makes a lot of little pieces that go into bigger electrical systems. These little pieces are often very necessary for Bel Fuse's customers as they help electrical systems function or prevent them from malfunctioning. Bel Fuse operates through three segments, Power Solutions, Connectivity Solutions, and Magnetic Solutions where they provide a broad array of SKUs with a wide range of applications. The company sells its products directly through various brands as well as through distributors where they have favorable end market exposure among industrial, automotive, aerospace and network technology customers. When thinking about electronic components, the word commoditized might come to mind. At first glance, Bel Fuse seemed to fit that description given their large SKU count, low organic growth, and margins below peers. However, a deeper look into the business and industry dynamics revealed that BELFB has positioned themselves nicely between product design, implementation, and distribution, garnering a strong reputation for quality, which has led to trust and repeat business among their customers. I haven't discussed Bel Fuse products in depth, but Bel Fuse products need to work, often for safety reasons. Circuit protectors, cables that are needed to work in harsh environments, and fuel gauge monitors for military aircraft are all examples of products that may not cost much, but where there is a high cost of failure. That last point is important because it means that during their long operating history, Bel Fuse has developed sticky relationships with their customers, leading to input on the actual design and product specificity of some of their SKUs, which in turn protects them from competition on pricing and distribution. This can also lead to annuitized relationships with customers giving BELFB the ability to take some price over time. Evidence of industry success can be gleaned from Bel Fuse's peers such as TE Connectivity, Amphenol and Littelfuse, all of whom can be considered compounders, earning significant shareholder returns during the past decade with organic growth, exposure to favorable end markets and being integrated with their customers. Bel Fuse is in a similar spot today, and I believe it is mispriced. Typically, businesses with 75 years of history, especially ones that are still standing, offer elements of a moat and staying power. That applies here, although changes had to be made. Prior operating history would reveal that the company lost its way for a period of time under family ownership, failing to grow organically, lacking efficiency, and losing sight of margin goals and product management. During the past few years, this has changed dramatically, and evidence of the company's strong competitive position has begun to shine through. Although Bel Fuse is a family owned and controlled business, current operations are being spearheaded by new CFO Farouq Tuweiq, the first CFO in company history, and first non-internal hire in decades. Hired in 2021, Farouq has an industrial electronics background and has done a remarkable job of turning the business around by implementing operating efficiencies, overhauling the company's pricing strategy, and re-tooling the sales force to better align incentives throughout the organization. As a result, financial performance has improved drastically with gross margins up 1000 bps since Farouq's hiring, and EBITDA margins up more than 3x from when Farouq joined to today. Importantly, margins remain comfortably below peers, leaving room for additional upside over time with selective pricing, better fulfillment, and new product development. What started as a self-help story has now evolved into a business acceleration story, with notable operating momentum in each of the company's segments, and the ability to increase both margins and cash flow into the foreseeable future. Adding to my excitement is the fact that Bel Fuse has yet to reach a point where each of their business segments are firing together. There are several reasons for this including supply chain issues, lack of component availability and some cyclicality, but as BELFB continues to prioritize organic growth and margins, they will drive positive results over time. Furthermore, with operational improvements out of the way, Bel will have a clean net cash balance sheet very soon, where positive capital allocation can help drive additional upside. We were able to purchase our shares at a mid-single digit multiple of EBITDA, a low absolute valuation, and below peers, indicating there is room for multiple expansion. Insiders agree, having been purchasing stock since 2021, with Farouq's most recent buying spree taking place last month. This is one of those investment opportunities that I can't help but get excited about and can't wait to see what Farouq and the team can accomplish. I look forward to sharing more details about Bel Fuse in future letters.

BSD Analysis:
Greystone Capital initiated a position in Bel Fuse, a 75-year-old electronic components manufacturer serving telecom, aerospace, transportation, and consumer electronics markets. The manager's thesis centers on a dramatic operational turnaround under new CFO Farouq Tuweiq, who joined in 2021 and implemented significant operational improvements. The company has achieved remarkable margin expansion with gross margins up 1000 basis points and EBITDA margins up 3x since Tuweiq's arrival, though margins remain below peers suggesting further upside potential. Bel Fuse has developed sticky customer relationships through mission-critical products where failure carries high costs, creating pricing power and competitive protection. The manager purchased shares at a mid-single digit EBITDA multiple with insider buying supporting the valuation thesis. The investment represents a classic turnaround story transitioning from operational fixes to business acceleration, with the manager expecting continued margin expansion and cash flow growth as all business segments begin performing simultaneously.

Pitch Summary:
SOTK is another company expanding its footprint and backlog. I last wrote about this in 4Q21. The Milton, NY based company historically made specialty nozzles for depositing specific and measured amounts of liquified materials. Over the last decade it has transitioned from just manufacturing nozzles for OEM's to now designing, manufacturing and selling the units themselves. Two of their recent innovations are a roll to roll continuous system for fabric coating and a continuous glass coating system that is more precise and efficient than existing solutions on the market. The company owns the industrial park from which it operates and over the last few years as tenant leases have lapsed, it has taken over more of its space for manufacturing. With year-end backlog at record highs, additional capacity and easy comparisons, significant growth in '24 seems likely. A near term opportunity, towards which there is some visibility, is customers going "from the lab to the production" ie they used SOTK equipment "in the lab" and now need larger higher priced units to produce at scale. I believe one can observe an example of this in process. Here's a video from a start-up using SOTK equipment in the lab (the logo is covered in tape) and here's a photo from an article about that company in Fast Company with a larger piece of SOTK equipment in the background (their equipment sprays on the materials to form a catalyst that looks like a large bike tire repair patch). The long term opportunity, which in my view could yield multiples greater return, could occur if SOTK's spray deposition can replace some portion for the large market for higher cost batch process vacuum deposition. I believe that the company is pursuing R&D and / or license deals pursing this opportunity. In the meantime, without regard for any unknowable future, you have a profitable company funding its own growth, operating with a healthy balance sheet and patiently developing solutions around a core skillset. These are the kinds of things that favorably tilt the odds towards long term value creation.

BSD Analysis:
The manager outlines a compelling transformation story for SOTK, highlighting its evolution from a nozzle manufacturer to a complete systems provider with significant growth catalysts. The company has successfully transitioned from OEM component supplier to designing and selling complete coating systems, including innovative roll-to-roll fabric coating and continuous glass coating solutions that outperform existing market alternatives. SOTK owns its industrial park and has strategically expanded manufacturing capacity by reclaiming space from departing tenants, positioning for growth with record-high backlogs. The near-term catalyst involves customers scaling from lab equipment to larger production units, providing visible revenue growth opportunities. The long-term opportunity is potentially transformative - SOTK's spray deposition technology could disrupt the large vacuum deposition market, offering a more cost-effective alternative. The manager appreciates the company's self-funded growth model, strong balance sheet, and patient R&D approach focused on core competencies, creating favorable conditions for sustained value creation.

Pitch Summary:
PDEX is a small contract manufacturer in the medical device space. The core product is a battery powered handheld driver used by surgeons to screw implants or plates into bone (think knees, spines, facial reconstruction, et al) with a precise amount of torque to avoid stripping. The company has its own engineering team to develop its own products and works with branded device manufacturers to develop theirs (I believe Stryker is the largest single client). I don't normally think of contract manufacturing as a wonderful industry but there are few aspects about this company that make it an unusual, compelling and attractive long-term investment. I elaborate on three of these attributes below. The Board: Chairman Nick Swenson and Board member Ray Cabillot together own about 40% of the company. They are thoughtful investors who run their own hedge funds (AO Partners and Farnam Street Partners, respectively) and they manage the capital allocation strategy at PDEX. The evidence observed in the growth in book value per share, which I believe have their "fingerprints" suggests a focus on value creation. New manufacturing facility: The company doubled the size of its manufacturing space by acquiring a new facility four miles from the existing headquarters in Irvine, CA. The build out and validation of the space took much longer than expected, partially impacted by COVID, and partially because this is a tiny company that doesn't have a lot of experience doubling the size of its manufacturing space. The expansion is now complete. Obviously, the space doesn't promise additional revenues but it doubles the size of the opportunity. Backlog: Along with doubling the size of its manufacturing footprint, the company doubled the size of its backlog to $41M through a large order from a leading customer. The inference is that FY24 could be a high growth year.

BSD Analysis:
The manager presents a compelling bull case for PDEX based on three key catalysts: exceptional board composition, manufacturing expansion, and strong order backlog. The board's 40% ownership by experienced hedge fund managers (AO Partners and Farnam Street Partners) provides strong alignment and capital allocation expertise, evidenced by consistent book value per share growth. The company has successfully doubled its manufacturing capacity through a new Irvine facility, positioning it to capture significantly more business despite execution delays from COVID. Most importantly, PDEX has secured a $41M backlog (double the previous level) from a major customer, suggesting strong FY24 growth potential. The manager acknowledges contract manufacturing isn't typically attractive but views PDEX as an exceptional case due to its specialized medical device focus, engineering capabilities, and relationship with major OEMs like Stryker. The combination of expanded capacity and record backlog creates a compelling setup for accelerated growth.

Pitch Summary:
CTT was victorious in its arbitration proceedings against the Portuguese government and was awarded approximately €25mm, or 6% of CTT's market cap. This is a meaningful windfall, especially in light of CTT's ongoing share buyback, which it continues to execute daily. Given my belief that the company's enterprise value, after considering the value of its bank and excess real estate, is close to zero, share buybacks are extremely accretive. This windfall will only increase the amount of capital CTT can apply toward buying back its shares.

BSD Analysis:
Maran Capital's investment in CTT appears to be a deep value play centered on hidden asset value and aggressive capital return. The manager's thesis rests on the belief that after accounting for the value of CTT's banking subsidiary and excess real estate holdings, the core postal business trades at an enterprise value close to zero. This creates a situation where share buybacks become extremely accretive to remaining shareholders. The recent arbitration victory against the Portuguese government, resulting in a €25 million award (6% of market cap), provides additional capital for the ongoing daily share repurchase program. The combination of undervalued assets, aggressive share buybacks, and the arbitration windfall creates multiple sources of value creation. The manager views this as a classic sum-of-the-parts opportunity where the market is failing to properly value the company's diverse asset base, particularly the banking operations and real estate portfolio.

Pitch Summary:
Vistry reported its first half results and provided a strategy update during the quarter. Vistry announced that it will transform itself into a pure-play partnerships business, which is what the activist investors involved with the company were fighting for. Notably, approximately £1.3bn will be freed up and utilized to eliminate debt and for buybacks and dividends. The company is targeting £450mm of adjusted operating profit in 2023 with growth to £800mm in the medium term. Remember, the market capitalization of Vistry is just £2.4bn and the enterprise value is approximately £2.7bn. If Vistry can buy back one quarter of its shares while doubling operating profit and eliminating its debt over the next three to five years, I think very good things will happen to the stock price. If Vistry trades at an £8bn market cap (10x operating profit of £800mm, a multiple that we hope will prove conservative given the quality of the business; comparable transactions have occurred at 11-13x operating profit) and reduces its share count to 260mm shares, the share price would be 3100p, over four times the price at which the stock trades.

BSD Analysis:
Maran Capital's thesis on Vistry centers on a successful activist campaign that has forced the company to transform into a pure-play partnerships business, unlocking significant value through capital allocation. The manager highlights that Vistry will free up approximately £1.3 billion to eliminate debt and execute buybacks and dividends, representing a major strategic shift. With current market cap of £2.4 billion and enterprise value of £2.7 billion, the company is targeting £450 million of adjusted operating profit in 2023, growing to £800 million medium-term. The investment case relies on multiple value drivers working simultaneously: debt elimination, aggressive share buybacks (potentially 25% of shares), and profit doubling over 3-5 years. Using comparable transaction multiples of 11-13x operating profit, the manager calculates a potential share price of 3100p (over 4x current levels) if the company achieves £800 million operating profit and reduces share count to 260 million shares. The transformation to a partnerships-focused model should command premium valuations given the quality and predictability of the business model.

Pitch Summary:
Clarus received an offer of $160 million for its bullet and ammunition segment from Clarus' chairman, Warren Kanders. A situation like this obviously requires a thoughtful approach to managing the conflict of interest, but this transaction would lift the ESG overhang that accompanies businesses of this type and would bring Clarus to a net-cash position, highlighting the extremely cheap valuation of the remaining segments. Clarus' market cap is $210 million, and the company should have net debt of around $105 million at year-end, before contemplating the aforementioned transaction. Post-transaction, the company would have net cash of approximately $55 million (~25% of the market cap) and an enterprise value of $155 million. Investors and analysts frequently extrapolate recent results, whether they be positive or negative. Just as our hypothetical CEO in the example above was too optimistic about his results given his inside view, the market can frequently get too negative about a company by utilizing an inside view approach. I believe that may be the case with Clarus today. This myopic approach seems to be leading the market to say that the consumer is weak and Clarus' recent margins have compressed, and therefore that its margins will be low forever. What are normalized margins for Clarus' remaining businesses? The outside view would have us look at a large number of companies in similar industries and examine their average margins over time. Through this lens, I think that it is not unreasonable to assume that Black Diamond can generate double digit EBITDA margins at midcycle profitability. While the company targets 15-20% margins long term (a level that may be informed by too much inside view optimism), in looking at a number of comparable companies, both private and public, we think 10% normalized margins are a reasonable statistical bet. Clarus' brand, category leadership, and product lines, which includes many products that "save your life" (I don't think anyone wants to save ten bucks by buying an off-brand climbing harness), give further weight to the fact that it should be able to earn this fairly pedestrian midcycle margin. If in the next few years Black Diamond can generate this double-digit EBITDA margin on ~$225-250 million of sales, that segment would produce around $25 million of EBITDA. Similarly, Rhino Rack could potentially generate $18-20 million of segment EBITDA, as it approaches a 20% margin on ~$100 million of sales. Less cash corporate expenses, Clarus would generate ~$40 million of EBITDA in this scenario. This implies the stock is trading for less than 4x normalized EBITDA (and under 0.5x sales). This seems far too low. As with margins, so too with valuation. Rather than using an inside view to come up with a valuation, we can also turn to the outside view—in this case, over a decade's worth of comparable transactions in the outdoor industry. Since 2010, the average comparable transaction in the outdoor industry occurred at greater than 2x revenue. At this rate, Black Diamond Equipment would fetch more than $450 million and Rhino Rack, around $200 million. Together, along with the ~$55 million of net cash that the pro forma company should have, we're looking at greater than $700 million of value. If Clarus' remaining brands are just worth the industry average transaction valuation, it would be valued at $19/sh (more than three times the current stock price). If Clarus' brands are worth the lowest revenue multiple paid in the table below, CLAR would be valued at $14/sh (more than twice the current stock price). What is implied by Clarus at a ~$155mm pro forma enterprise value? There are many ways of answering this question. Using the average revenue multiple from the table above, Clarus' current valuation implies that its sales (again, pro forma for the contemplated sale of the bullet and ammo segment) would be just $74mm (rather than the $300mm+ that they are). We can also look at what the overall valuation implies regarding the valuation of the segments. I'll be blunt. Each of these seems absurd. Any of them highlight the deeply discounted valuation. Take the first box, for example. Buy Black Diamond for well less than 1x revenue and get Rhino Rack and Max Trax (recent purchase price: >$200 million) for free. We don't use price targets here at Maran. I think they can be too rigid and can lead investors to fail to update their beliefs as often as they should. Instead, I tend to think about probability clouds with respect to intrinsic valuations. There are many possible future sets of growth rates, margin profiles, economic backdrops, and investor sentiment profiles that we could live through over the next few years. It is not a good use of time to specifically guess which path will unfold. But the key is that the starting point positions us so that the vast majority of these paths yield substantial upside. We already saw that applying the average historical comparable valuation to Clarus' recent results can yield a triple in the stock price. If Clarus grows Black Diamond revenue to $300 million and Rhino Rack revenue to $150 million over the next three-to-five years, upside is into the high $20s or low $30s. And while no one wants to think about real upside scenarios during a time like this, let's not forget that Clarus' medium-term targets for Black Diamond and Rhino Rack are revenues of $400 million and $200-$300 million, respectively; if they achieve these targets, we could see valuations in the $40s and beyond. Any of these outcomes would be fantastic, but the key is that none of them are close to priced into the current stock price. Clarus has a history of opportunistic share repurchases, including buying back 10% of the company below $6/sh in 2015-2016 and tendering for stock at $8 in 2018. If Clarus enters 2024 with 25% of its market cap in cash and a stock price anywhere close to where it is now, I wouldn't be surprised to see it utilize this tool again. Finally, recall we still have a few hidden lottery tickets in this investment. Clarus' lawsuit against HAP Trading continues; a legal victory or settlement could prove meaningful relative to Clarus' current valuation.

BSD Analysis:
Maran Capital presents a compelling value thesis on Clarus centered around a transformative asset sale that would dramatically improve the company's financial position. The manager highlights that Clarus received a $160 million offer for its bullet and ammunition segment, which would eliminate ESG concerns and leave the company with net cash of approximately $55 million (25% of market cap). The core argument rests on normalized margin analysis, where the manager believes Black Diamond can achieve 10% EBITDA margins and Rhino Rack can reach 20% margins, leading to combined EBITDA of ~$40 million. At current valuations, this implies the stock trades at less than 4x normalized EBITDA and under 0.5x sales. Using comparable transaction analysis from the outdoor industry (average 2x revenue since 2010), the manager calculates intrinsic value of $19+ per share versus the current price around $6-7. The investment benefits from multiple catalysts including potential share buybacks (company has history of opportunistic repurchases), ongoing litigation that could provide additional value, and significant upside scenarios if management achieves medium-term revenue targets of $400 million for Black Diamond and $200-300 million for Rhino Rack.

Pitch Summary:
Since the quarter ended I have built a small- to mid-sized position in WK Kellogg ("KLG"). KLG is the North American business spun-out from the business formerly known as Kellogg. There is a ton of pessimism around this company. Two weeks before the spin the Wall Street Journal put out a scathing article on the cereal industry titled "It's the Breakfast of Champions No More: Cereal Is in Long-Term Decline." Unrelated, Ozempic and other GLP-1s have been a topic dejour and deemed to be a massive headwind to any unhealthy food product. Industry issues aside, KLG has recently performed worst amongst the big three (Post and General Mills being the other). In 2021 their production was stymied by a fire at their plant in Memphis and a strike by 1,400 people; production lagged and KLG generally lost share. Add in the fact that the spin accounted for only ~5% of the value of the parent company and it makes sense why most legacy shareholder receiving the stock would prefer to dump it into the market. KLG owns highly recognizable and established brands like Frosted Flakes, Raisin Bran, Special K, Fruit Loops, and even Kashi for the health-conscious consumer. They have historically generated about $2.8bn in revenue but EBITDA margins were only in the mid- to high-single digits. Part of this can be explained by being a small part of a much larger company. Some brands were run separately from others, geographies were split, and the sales force was responsible for selling not just cereal but the whole arsenal of Kellogg product. By eliminating silos and having a dedicated sales force management hopes to drive margin improvement and regain lost share. More importantly, however, they plan to invest several hundred million into their outdated manufacturing facilities. Management is targeting a 5% margin improvement over the next couple years which would still leave them below Post, which operates in the 15%-20% range. If margins don't move up much from here earnings are probably in the $0.75 range putting the stock at 13x. Assuming operating margins improve 3% off LTM figures (to account for any incremental depreciation expense) we would get to $1.50 in earnings or less than 7x. This all compares favorably to Post and General Mills multiples in the mid-teens. While there is a lot to dislike about KLG, the risk return seems attractive.

BSD Analysis:
The manager established a contrarian position in WK Kellogg, the spun-off North American cereal business, amid widespread pessimism about industry decline and GLP-1 drug headwinds. KLG owns iconic brands like Frosted Flakes and Special K but has underperformed peers due to operational disruptions from a 2021 plant fire and labor strike. The spinoff structure created forced selling pressure as legacy shareholders received only 5% of parent company value. As a standalone entity, KLG can eliminate organizational silos, deploy dedicated sales forces, and invest hundreds of millions in manufacturing upgrades. Management targets 5% margin improvement, which could drive earnings from $0.75 to $1.50 per share, creating a valuation of 7-13x versus peers trading in the mid-teens. The combination of operational improvements, capital investments, and attractive valuation provides compelling risk-adjusted returns despite industry headwinds.

Pitch Summary:
As you may recall I wrote up Distribution Solutions Groups ("DSGR") in my last letter. In late September they had an investor day during which they did a deep dive into their business lines and highlighted the various ways to drive revenue, profitability, and stability of earnings. While management had a lot to say on these issues, what stood out to me was their focus on driving value added services which in turn leads to higher profitability and customer retention. DSGR is making the upfront investment today in both people, to serve complex needs of customer, and physical assets. As the company gains scale, these costs get spread out over a larger base and drive further profitability. Management put out a 5-year goal of $5+ in earnings power per share which would be highly welcomed given that shares are currently trading for a bit over $30. While the stock price has understandably appreciated with the increased disclosure and long-term targets, it remains attractive even if they just get in the ballpark of their goals.

BSD Analysis:
The manager maintains conviction in DSGR following the company's investor day, which provided detailed insights into their value-added services strategy. Management's focus on higher-margin services drives both profitability improvement and customer retention, creating a sustainable competitive advantage. The company is making strategic upfront investments in human capital and physical assets to serve complex customer needs, positioning for operating leverage as scale increases. Management's ambitious 5-year target of $5+ earnings per share represents significant upside potential from current levels around $30 per share. The improved transparency and long-term guidance have driven some stock appreciation, but valuation remains attractive even with conservative achievement of management's targets. The scalable business model and focus on value-added services provide multiple paths to earnings growth and margin expansion.

Pitch Summary:
During the quarter I established a new position in Summit Materials ("SUM"). SUM is a construction materials provider with about 40% of their revenue from aggregates and cement, 30% from ready-mix concrete, and the remaining from asphalt and paving. I have followed the aggregates and cement industry for many years and have always been attracted to it. What's not to like given the lack of substitutes, limited competition due to permitting and transportation costs, and long-term demand growth. With the majority of product serving public construction needs, the industry should benefit from the recently passed infrastructure bills that have yet to truly hit the market. In early September the company announced that they would acquire the U.S. operations of Cementos Argos, a Colombian cement company. The market did not like the transaction as SUM subsequently traded down over 20%. While this move was not entirely unwarranted, I thought it was excessive and used the sell-off to establish a position. To be fair, SUM paid up for the assets (10x EBITDA) and I wouldn't be surprised if Argos had underinvested in them / they require additional capital. On the flip side, this acquisition will shift SUM's business mix to the more stable and higher valued business lines of aggregates/cement. Furthermore, it increases the company's exposure to growth states like Florida, the Carolina's, and Georgia. Add in the potential of operational synergies and high-return capital investments, and this deal might not be so bad after all.

BSD Analysis:
The manager initiated a position in Summit Materials following a 20% post-acquisition selloff, viewing the market reaction as excessive. SUM operates in an attractive industry with limited substitutes, high barriers to entry due to permitting and transportation costs, and long-term demand growth driven by infrastructure spending. The Cementos Argos acquisition, while expensive at 10x EBITDA, strategically shifts the business mix toward higher-margin aggregates and cement operations. The deal expands SUM's footprint in high-growth southeastern states including Florida, the Carolinas, and Georgia. Despite potential integration costs and required capital investments, the manager sees value in operational synergies and the company's improved geographic and product diversification. The infrastructure bills provide a favorable long-term tailwind for public construction demand. The contrarian entry point following the market's negative reaction to the acquisition creates an attractive risk-reward opportunity.

Pitch Summary:
Another example is our investment in Thryv Inc. (THRY) which is using its legacy Yellow Pages and other marketing businesses as a base from which to build software that allows small and medium businesses to move their operations from a system of sticky notes and excel spread sheets into the modern era. Thryv recently raised guidance, announced that margins on the SaaS side jumped 10 percentage points, and announced the release of new "centers" that should accelerate growth further. Shares traded down ~25% in the weeks following this news. In my mind, it is hard to think of a better development than the margin improvement. This improvement was tied to a decision to cut back on paid customer recruitment, because more than 40% of new customers are coming through referral, which is essentially free. Combined with customers that come out of the Yellow Pages "zoo," more than 80% of customers are coming with minimal acquisition costs. Why pay Google to help you find customers when you are getting so many for nearly free? Importantly, the referral business seems to validate my thesis around what I call "the 3 plumber problem." Essentially, if you live in a town with 3 plumbers, and one of those plumbers starts using Thryv so that they can schedule appointments, update you on timing, send you a bill, receive payment and more all by text message, the other two plumbers who are still saying, "I'll be there some time next week," have a problem. They basically have to update their own operations, or customers will simply use the plumber that has brought his business into the modern world. In my mind, proof that this dynamic is playing out – combined with the addition of new centers that broaden Thryv's capabilities and a management team that has a long history of under-promising and over-delivering – goes a long way toward suggesting that Thryv will hit their intermediate-term goal of generating $200M in EBITDA from their SaaS business. If that happens, and Thryv is valued similarly to other SMB software providers, shares could gain ~400% over the next few years. The problem? First is the obvious: anything "small and medium business" sounds scary in the face of a potential recession. However, Thryv's average customer has been in business for 15+ years and operates a relatively recession resistant business, like plumbing. My theory is that the bigger problem is that customers of Thryv's marketing businesses are being transitioned from a 15 month renewal cycle to an 18 month renewal cycle. This changes nothing in terms of the near-term cash flow, but when Thryv reports Q3 earnings next month, GAAP revenue recognition rules will create an air pocket in Thryv's revenue and EBITDA for their marketing business. Management has been telegraphing this for a year as it does not affect cash flow, but if you are a quant relying solely on GAAP inputs, this air pocket may trigger a sell decision, and if you are a short-term trader, this can be exploited. In any case, I can tell you with near certainty that small and medium businesses will modernize their operations and move to the cloud at some point. I can also tell you that with the ability to self-finance and the lowest customer acquisition costs out there, Thryv has real competitive advantages. Thryv also arguably has the best product at the lowest price, which is very difficult to compete with. Lastly, I can say that Thryv's intermediate term goal implies winning less than 2% of their TAM. This does not strike me as overly ambitious. What I can't tell you with any degree of certainty is when these things will happen. So why not stay on the sidelines? Again, there are likely to be step function advances in the stock at some point. They are at the point where the operating leverage typical of software businesses could kick in aggressively, and revenue from Thryv's SaaS business is just beginning to eclipse the revenue from Thryv's legacy print business, which could attract a new class of buyers. Similar to CDMO, in my view it is worth stomaching the volatility in order to participate in the upside that could/should be several hundred percent over the next few years. Similar to CDMO, management at THRY seems to agree with my assessment, as there has been recent insider buying.

BSD Analysis:
The manager presents a compelling transformation story for Thryv, a company transitioning from legacy Yellow Pages to modern SMB software solutions. The investment thesis centers on the "3 plumber problem" - competitive pressure forcing small businesses to modernize their operations or lose customers to more efficient competitors. Key metrics support the thesis: SaaS margins improved 10 percentage points, over 40% of new customers come through referrals, and 80% of total customers are acquired with minimal costs. The manager targets $200M in EBITDA from the SaaS business, implying potential returns of ~400% if valued like other SMB software providers. The company benefits from strong competitive advantages including low customer acquisition costs, self-financing capability, and what the manager considers the best product at the lowest price. With the intermediate-term goal requiring less than 2% market share capture, the thesis appears achievable despite near-term GAAP revenue recognition headwinds.

Pitch Summary:
For example, take our investment in Avid Bioservices (CDMO), our biologic contract drug manufacturer, which has been cut in half over the last few months after issuing disappointing near-term guidance tied to a slow down in biotech spending on early-stage projects. The near term is admittedly uncertain, but the bigger picture remains unchanged. There is still a very favorable de novo biologic drug pipeline, still a very favorable patent cliff/biosimilar pipeline, still a very favorable industry supply vs. demand dynamic, still a very favorable trend toward outsourcing among large pharma, and still very favorable forecasts from existing large customers. Further, simply zooming out a little bit shows that after a few years of cash going out the door to fund capacity expansion, Avid is now at a pivot point, and cash should shortly be coming in the door as that capacity has been built. That cash will come with tremendous operating leverage. The intermediate term analysis here is thus a very simple exercise. When the new capacity is filled, how much free cash flow will be generated, and what multiple will it deserve? In my estimation, before long Avid will be generating something around $100M in free cash, which is attractive vs. its quarter end enterprise value of ~$700M. Looking at M&A transactions and public competitors, it seems as if the market thinks businesses such as Avid (when mature) deserve to trade at 20x-30x free cash flow, which suggests a very bright future for CDMO stock (even If multiples compress), and the potential for returns of 200-400% over the next few years. The problem? I can tell you with near certainty that Avid's facilities will be filled, but I cannot tell you when. That uncertainty around timing – the unknown duration – is very difficult to overcome in a market that only cares about what the macro picture will look like next week or next month. My best guess is that it will take 4 to 5 years to reach capacity, and that the market will mostly price in success 12-18 months in advance. One may ask, "if success here is likely years away, then why not wait on the sidelines for a few years?" The answer is that there are likely to be step function advances along the way as Avid announces increases to backlog and new customer wins, and those could happen at any moment. Additionally, Avid does not even have an investor presentation. Now that they are at a clear pivot point, I think this is likely to change in the near future, which should increase interest in the name. Lastly, when the cash flow statement flips from negative to positive, surely quant based investors will take note. If we were playing month to month or quarter to quarter stock market games, we could not own a stock like CDMO. However, as we are investing in businesses with a 3 to 5+ year view, it is worth stomaching the volatility along the way in order to capture ultimate upside that I believe is extremely likely to be realized. Insiders at Avid seem to agree, as the recent selloff has been met with insider buying.

BSD Analysis:
The manager presents a compelling bull case for Avid Bioservices, a biologic contract drug manufacturer that has been severely punished by the market despite strong fundamental tailwinds. The thesis centers on the company reaching an inflection point where years of capacity expansion investments will begin generating substantial cash flows. The manager estimates Avid will generate approximately $100M in free cash flow when facilities reach capacity, compared to a current enterprise value of ~$700M. With industry multiples of 20x-30x free cash flow for mature CDMOs, this implies potential returns of 200-400% over the next few years. The investment is supported by favorable industry dynamics including strong biologic drug pipelines, patent cliff opportunities, supply-demand imbalances, and outsourcing trends among large pharma companies. While timing uncertainty creates near-term volatility, the manager views this as an opportunity to own a high-quality asset at attractive valuations, supported by insider buying activity.

Pitch Summary:
SOTK is another company expanding its footprint and backlog. I last wrote about this in 4Q21. The Milton, NY based company historically made specialty nozzles for depositing specific and measured amounts of liquified materials. Over the last decade it has transitioned from just manufacturing nozzles for OEM's to now designing, manufacturing and selling the units themselves. Two of their recent innovations are a roll to roll continuous system for fabric coating and a continuous glass coating system that is more precise and efficient than existing solutions on the market. The company owns the industrial park from which it operates and over the last few years as tenant leases have lapsed, it has taken over more of its space for manufacturing. With year-end backlog at record highs, additional capacity and easy comparisons, significant growth in '24 seems likely. A near term opportunity, towards which there is some visibility, is customers going "from the lab to the production" ie they used SOTK equipment "in the lab" and now need larger higher priced units to produce at scale. I believe one can observe an example of this in process. Here's a video from a start-up using SOTK equipment in the lab (the logo is covered in tape) and here's a photo from an article about that company in Fast Company with a larger piece of SOTK equipment in the background (their equipment sprays on the materials to form a catalyst that looks like a large bike tire repair patch). The long term opportunity, which in my view could yield multiples greater return, could occur if SOTK's spray deposition can replace some portion for the large market for higher cost batch process vacuum deposition. I believe that the company is pursuing R&D and / or license deals pursing this opportunity. In the meantime, without regard for any unknowable future, you have a profitable company funding its own growth, operating with a healthy balance sheet and patiently developing solutions around a core skillset. These are the kinds of things that favorably tilt the odds towards long term value creation.

BSD Analysis:
The manager outlines a compelling transformation story for SOTK, highlighting its evolution from a nozzle manufacturer to a complete systems provider with significant growth catalysts. The company has successfully transitioned from OEM supplier to direct equipment sales, capturing higher margins through vertical integration. Record-high backlogs combined with expanded manufacturing capacity (through taking over tenant space in their owned industrial park) position the company for strong 2024 growth. The manager identifies a clear near-term catalyst in customers scaling from lab equipment to production-scale units, providing revenue visibility and higher-value sales. The long-term opportunity involves potentially disrupting the vacuum deposition market with more efficient spray deposition technology, which could deliver substantial returns if successful. The company's self-funded growth model, healthy balance sheet, and focus on core competencies demonstrate disciplined capital allocation. The manager appreciates SOTK's patient approach to R&D and solution development around their specialized coating expertise.

Pitch Summary:
PDEX is a small contract manufacturer in the medical device space. The core product is a battery powered handheld driver used by surgeons to screw implants or plates into bone (think knees, spines, facial reconstruction, et al) with a precise amount of torque to avoid stripping. The company has its own engineering team to develop its own products and works with branded device manufacturers to develop theirs (I believe Stryker is the largest single client). I don't normally think of contract manufacturing as a wonderful industry but there are few aspects about this company that make it an unusual, compelling and attractive long-term investment. I elaborate on three of these attributes below. The Board: Chairman Nick Swenson and Board member Ray Cabillot together own about 40% of the company. They are thoughtful investors who run their own hedge funds (AO Partners and Farnam Street Partners, respectively) and they manage the capital allocation strategy at PDEX. The evidence observed in the growth in book value per share, which I believe have their "fingerprints" suggests a focus on value creation. New manufacturing facility: The company doubled the size of its manufacturing space by acquiring a new facility four miles from the existing headquarters in Irvine, CA. The build out and validation of the space took much longer than expected, partially impacted by COVID, and partially because this is a tiny company that doesn't have a lot of experience doubling the size of its manufacturing space. The expansion is now complete. Obviously, the space doesn't promise additional revenues but it doubles the size of the opportunity. Backlog: Along with doubling the size of its manufacturing footprint, the company doubled the size of its backlog to $41M through a large order from a leading customer. The inference is that FY24 could be a high growth year.

BSD Analysis:
The manager presents a compelling bull case for PDEX based on three key catalysts: exceptional board composition, manufacturing expansion, and strong order backlog. The presence of hedge fund managers Nick Swenson and Ray Cabillot as board members owning 40% of the company provides sophisticated capital allocation oversight, evidenced by consistent book value per share growth. The completion of a manufacturing facility expansion that doubles production capacity positions the company for significant operational leverage. Most importantly, the doubling of backlog to $41M through a major customer order provides strong revenue visibility for FY24. The manager acknowledges contract manufacturing isn't typically attractive but identifies PDEX as an exceptional case due to its specialized medical device focus, engineering capabilities, and relationship with major clients like Stryker. The combination of expanded capacity and record backlog suggests meaningful growth potential ahead.