An Under-the-Radar Gem Guy Gottfried Rational Investment Group - PowerPoint PPT Presentation

An Under-the-Radar Gem Guy Gottfried • Rational Investment Group Tel: (857) 453- 6623 • Email: guygottfried@rationalig.com

Investment Idea: TerraVest Capital Inc. (TSX: TVK)

Snapshot Recent Price Shares (Diluted) $9.35 22.3 million Market Cap Dividend $208 million $0.40 (4.3% yield) *All financial figures pertaining to TerraVest are in Canadian dollars unless otherwise noted.

Background  Canadian consolidator of manufacturing businesses in Canada and the US  Focuses on small, fragmented industries with little competition for deals  Typically buys from retiring or distressed owners

Why is TerraVest Worth Your Attention?  Trades at a 12% normalized free cash flow (FCF) yield Receive a double-digit, after-tax FCF coupon that will grow significantly over time   Consistent record of acquiring businesses at low-single-digit multiples of pre-tax FCF Long runway for additional transactions in the future   Within three years, even a below-market multiple should justify shareholder returns far in excess of 100%  Exceptional management with substantial ownership and insider buying

Why is It So Cheap?  Underfollowed: no analyst coverage and no quarterly conference calls Management focused squarely on creating shareholder value; spends virtually no  time on investor relations  Recently closed acquisitions have yet to contribute to consolidated results  Component of business serving energy sector is at cyclical trough and therefore under-earning  Underappreciated growth potential; TerraVest still in early stages of consolidation strategy

Acquisition Case Studies  A critical component of our thesis rests on TerraVest’s ability to make attractive acquisitions over time  Actions speak louder than words It is not enough to have a well-articulated strategy – we need concrete evidence  that this strategy can actually be executed  With that in mind, let’s examine every deal done by present management in recent years

Propar Group  Bought 90% of Propar in August 2013, remainder in September 2015 for cumulative price of $14mm  FCF has grown ~2.5 times since purchase of initial 90%  Paid approximately 2.5x current pre-tax FCF and FCF continues to climb *The initial 90% was acquired by Gestion Jerico shortly before Jerico was purchased by TerraVest (see later slide). Jerico was run at the time by TerraVest’s current Executive Chairman, making Propar relevant to this analysis.

NWP Industries  Bought in August 2014 for $12mm  FCF has actually stayed flat since the acquisition despite NWP’s industry crashing (produces oil and gas processing equipment)  Paid ~4x current pre-tax FCF, achieved during industry trough, and likely 2- 3x normalized pre-tax FCF

Signature Truck Systems  Bought in April 2015 for US$14mm (net of excess cash)  FCF has declined post-acquisition due to warm weather in each of the past two winters Warm winters reduced wear-and-tear of, and consequently replacement demand  for, Signature’s propane trucks  Paid ~6.5x current pre-tax FCF; difficult to estimate multiple relative to FCF under normal winter conditions but it should be considerably lower

Gestion Jerico  Bought in February 2014 for $54mm  FCF has since doubled and is poised for further growth going forward  Paid ~3x pre-tax FCF in its largest and most important deal to date *The aforementioned Signature deal was done within Gestion Jerico. The multiple referenced above excludes FCF attributable to Signature in order to avoid double-counting.

Recent Transactions  Three smaller deals from Dec. 4, 2015 to Jan. 1, 2017; paid combined $11mm  Motivated sellers: all three companies were capital-constrained (including one in bankruptcy)  While these are relatively recent acquisitions, we estimate that TerraVest will end up having paid less than 2x normalized pre-tax FCF for these businesses Bottom line: TerraVest has repeatedly proven its ability to execute extraordinary deals for shareholders; just as importantly, there is a long runway for additional acquisitions over time

Capital Allocation Case Study: Self-Tender  In 2012, TerraVest launched a tender offer for its shares at $2.75 per share  Bought back an impressive 36% of the company at a more than 70% discount to the current price and an even greater discount to intrinsic value Management’s capital allocation acumen extends beyond acquisitions to the repurchase of its undervalued stock

Insider Alignment  Largest shareholder: Clarke Inc. – Canadian investment company with noted record of value creation Owns 28% of fully diluted shares  TerraVest is Clarke’s biggest position, accounts for approx. one-third of its EV   Executive Chairman Charles Pellerin: second-largest shareholder, owns 15%  CEO Dustin Haw: former VP Investments at Clarke; was spending all of his time helping to run TerraVest before officially joining it as CEO Forfeited his in-the-money options at Clarke in order to join TerraVest  TerraVest shares and options account for vast majority of his net worth  Importantly, Haw and Pellerin are only 33 and 41 years old, respectively; shareholders can benefit from their intelligent capital allocation for decades to come (provided they don’t sell the company first)

Insider Buying TerraVest’s two largest shareholders bought 7% of the company last year Purchases by Clarke and Pellerin in 2016 1.5mm Diluted shares outstanding 22.3mm Purchases: percent of total 6.7%

Valuation: Normalized EBITDA $40.0 Maintenance capex (5.0) Interest (0.7) Taxes (9.9) Normalized FCF $24.3 Per share $1.09 FCF multiple 8.6 FCF yield 11.7% Investors receive a double-digit after- tax “coupon” that is highly likely to grow materially over time *Dollar amounts in millions except per-share amounts. Estimate assumes a full year of normalized results from recent acquisitions and that TerraVest’s energy-focused operations experience a partial recovery from present depressed levels.

Illustrative Valuation in Three Years Current normalized FCF $24.3 Incremental EBITDA from acquisitions 25.0 Incremental interest, capex, taxes (9.7) FCF $39.6 Per share $1.78 FCF multiple 5.3 FCF yield 19.0% Assumed trailing FCF multiple 12 Implied share price $21.31 Upside (incl. cumulative dividends) 141% FCF per share will grow meaningfully as TerraVest continues executing bargain-priced acquisitions; significant upside even at a modest multiple of 12 (“compounder” -type companies routinely trade at 20x or more) *Dollar amounts in millions except per-share amounts. Scenario assumes $100mm of debt-funded acquisitions at 4x EBITDA after synergies.

Catalysts  Additional deals – timing unknown but virtually certain to happen over time As demonstrated earlier, TerraVest’s acquisitions tend to be highly accretive   Contribution of recent acquisitions E.g. one important deal just closed in January and required meaningful  integration, so it has yet to make an impact on consolidated results A profitable “double - dip” for investors: the above factors – particularly the first one – will result in both FCF per share soaring and the stock receiving a more favorable multiple

Conclusion A company that can deploy substantial amounts of capital at outstanding returns long into the future, yet trades at a bargain price Management is heavily incentivized, has proven itself repeatedly, and is young, with years (if not decades) still ahead of it Stock will likely experience both material FCF growth and multiple expansion as investors begin to recognize TerraVest as a long-term compounder

Rational’s Edge with TerraVest  TerraVest is an unusual business whose historical financials don’t tell the full story, and whose management makes little effort to promote it  Rational’s long-term, research-intensive approach has enabled us to build deep relationships within the company and conduct extensive due diligence  We have thus developed an intimate understanding of TerraVest’s history, strategy and prospects while it is still relatively unknown by the investment community, allowing us to invest at a highly attractive valuation