Why I believe my portfolio will outperform over the next 5 years

Full portfolio write-up and categorization

Disclaimer: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

Introduction

In my first post, I revealed my general framework when looking for multibaggers. While this framework holds true and serves as my ‘guiding star’, there is no grand formula which describes my ideal investment prospect, nor one grand formula which guarantees you excellent returns. Every investment thesis is different, and there is value to be found in many different places.

So, how is this helpful to anyone? If every investment thesis is different, how can anyone learn from and practically use it for anything? This is obviously one of the aspects that make investing difficult. I thought one way to make this more useful was if I went through each of my holdings and included a short and simple description for why I am holding them, and why I believe they will deliver excellent returns going forward. So that’s what I have done.

The Portfolio

1. Predictable cash generation at attractive FCF yields

"Why focus on cash flows? Because a share of stock represents a share in the ownership of a business, and value to shareholders is determined, over the long term, by the ability of the business to generate cash flows."

- Jeff Bezos, 2005 Letter to Shareholders

What is most attractive to me in an investment will always be it’s ability to distribute cash. That’s obvious, you might say. Any investor would tell you that. But in a world where stock prices bounce up and down, earnings surprise to the upside or downside, it’s important to forget that over the long term, cash available for distribution is all that matters (and the price you pay for that distributable cash). Investing in businesses which has the potential to increase its cash flow over time keeps me focused on what matters, making short-term price action irrelevant, reducing the risk of price volatility affecting my decisions.

Vistry Group ($VTY, $VTY.L)

16,7% of portfolio

I want to thank Crossroads Capital and Adam Patinkin form David Capital Partners for the work they have done on this name. I would not have been able to invest in this name without their work.

Summary: Business transformation to capital light partnership model will increase cash generation, return on capital and earnings potential, on the backdrop of huge regulatory tailwinds, long runway for growth and stunning capital return plan.

UK homebuilder Vistry Group is transitioning to a pure-play “partnerships” business to create a capital-light home construction enterprise. Vistry’s shift from a hybrid traditional/partnerships housebuilder to a pure-play “partnerships” business will not only make it the UK’s largest affordable housing manufacturer, but will also drastically improve its revenue stability and visibility, return on capital, and earnings potential.

The driving forces behind their future growth is that the UK housing market is egregiously undersupplied to the tune of millions of homes. The country has roughly 24 million homes and needs another 4-6 million, a supply deficit of 20-25%. By comparison, the US has 160 million homes and is likely undersupplied by less than 7 million homes, a deficit of only 5%. With Labour’s landslide election victory yesterday, this will only get accelerated.

I generally don’t like comparing one company to another (with the underlying unrealistic assumption that one company will be able to mimic the performance of another), but in this case I think its helpful. US homebuilder NVR went through a similar transformation in the 90’s. In 2023, Vistry appointed previous NVR board member, Paul Whetsell, on to their board, signalling an intention to take inspiration from NVR’s journey. And for those who don’t know, this has been NVR’s journey since the 90’s:

If you had invested during the lows in 1995 at around ~6$ a share, you would have made more than 1200x your money. The only difference between NVR and Vistry is that Vistry has a longer growth runway and is cheaper at this point in time than NVR was in the 90’s.

And if this wasn’t enough, late 2023 they also announced a stunning capital return plan targeting returning £1bn to shareholders over next three years from ordinary and special distributions, alongside the elimination of net debt.

If I wasn’t a chicken I would put 100% of my portfolio in this name.

BQE Water ($BQE, $BQE.V)

13,8% of portfolio

I want to thank

Jake LaMotta

for opening my eyes to this company. I had briefly looked at it before, but built the right conviction after reading Jake’s thorough work and well written write-up. You should check out his substack for the full company overview and investment thesis.

Summary: Capital light, cash generative business with a significant, tangible growth potential supported by regulatory tailwinds and a strong competitive advantage, trading at low-single digit forward EBITDA/cash flow.

BQE’s business model allows it to grow its free cash flows with limited capital reinvestment needs due to its operation of water treatment plants, which earn a “tolling fee” based on the amount and quality of clean water that is discharged by the plant.

Also, these free cash flows are likely to grow due to regulatory tailwinds and several large projects in the pipeline (referred to as ‘company maker projects’). It’s not clear how many, but it is likely that some of these projects will materialize over the next 5 years, where one project has the potential to conservatively increase its recurring revenue by 50% and company wide EBITDA by ~30%.

So, what about durability and ability to protect these cash flows? First of all, once a project is in operations, BQE has more or less locked-in recurring revenues for ~20 years. If you know of another company which can post similar fixed ARR durability, please let me know. Besides this, BQE has IP and technical know-how in a niche part of the market where they are the sole bidder in 60% of the projects, reducing pressure on margins. This blessing is actually also partly their curse. New plants need people to operate them, and due to the fact that BQE is more or less alone, finding enough people to scale up revenues can be seen as a challenge. I however don’t think this will be a problem for many years to come given the relative low scale of current operations.

Given some conservative assumptions, BQE will probably be able to sustain 30% EBITDA margins in 2025 and beyond. Also, given the absence of CAPEX, fixed assets, and interest bearing debt, EBITDA should be a fairly good proxy for FCF over the longer-term.

With some conservative assumptions, BQE is currently trading at low single digit 2025 EBITDA.

International Workplace Group ($IWG, $IWG.L)

9,6% of portfolio

I want to thank Yaron Naymark from 1 Main Capital for the work he has done on this name. I would not have known about this opportunity hadn’t it been for your work.

Uzo

also has an excellent write-up on his Substack. ‘@clonedcapital’ on Twitter has also done incredible work on this company.

Summary: Global leader trading a depressed FCF multiples due to historic market turmoil all while transitioning to a capital light model with a credible path to growing FCF/share at a 28% CAGR over next 4-5 years, with 4-5x share upside potential using reasonable assumptions.

I’m going to outright quote this section from

Uzo

’s writeup:

Since late-2022, IWG pivoted its focus towards management contracts and on a go-forward basis has virtually stopped securing new locations under the traditional model. This eliminates their responsibility for the upfront build-out capex costs and committing to pay a landlord a fixed market rate rent on a long-term lease. Now, the landlord pays for all capex and operating costs and IWG provides the brand, infrastructure, supplier terms, marketing, sources the customers and manages the entire operation in exchange for a 16% revenue royalty, under a 10-year contract. The benefit is higher margins, less operational gearing, lower capital intensity, and lower risk. The branded hotel operators (Marriott / Hilton / IHG) provide a clear example of how this model can generate exceptional long term shareholder returns and command high multiples (over 15x EBITDA and over 20x FCF).

Expanding ROIC is one of the strongest driving factors behind stock returns. IWG is currently undergoing a business model shift which will result in ROIC expansion, should their transformation be successful.

And all of this is happening while IWG is trading at an incredibly depressed multiple of ~7x 2025 FCF. You almost never see a profitable global leader with a long history of operations trading at such attractive prices. The depressed price is partly due to a share price fall during Covid, which never recovered, partly because people have lost faith in the future of office real estate. Another reason is that Mark Dixon, Founder and CEO, sold 35 million shares in late May, resulting in another ~10% drop. While we can argue about the future of office real estate, I believe the flex office providers will be the winners of future office real estate. And that is partly why I like this setup so well. You can essentially invest in the global leader of a segment which I believe will be the winning segment of a gigantic market, all while it is improving its business model, at an extremely attractive valuation. What’s not to love?

Cipher Pharmaceuticals ($CPH, CPH.TO)

6,1% of portfolio

I want to thank

Left

for the work he has done on this name. I also want to again thank

Jake LaMotta

for his write up on this piece. I would not have known about this name, and I would not have been able to build any conviction, if it wasn’t for their analyses.

Summary: Asset-light, high ROIC and cash generative business trading at low FCF multiples with a a huge potential catalyst which would result in significant cash returns to shareholders.

Pharma is generally high risk, high reward. High risk because future revenue streams hinges on approval of new drugs, of which the ordinary man has little to no insight. High reward because the margin and cash return profiles of pharmaceutical drugs are generally extremely attractive.

There is really nothing I can add to this name. If you are on Twitter and following Fintwit, everything there is to say has already been said. All I can say is that I like the setup, it fits my investment criteria perfectly, and I believe in the story, the potential upside and the protected downside. There is always a danger in throwing yourself after Fintwit’s most popular names. One of risks is perhaps the most dangerous risk: Being motivated by FOMO. As such, you should be extra cautious when investing in popular names. All of that aside, looking at the hard facts, the setup looks extremely attractive to me.

Cipher holds the exclusive Canadian licensing rights to two drugs currently in Phase 3 trials. Both of these will grow Cipher’s cash pile significantly. I believe one of them, MOB-015, will be a blockbuster (again, go look at the deep analyses done by

Left

). This belief has been further strengthened by early consumer data from Sweden (where the drug started selling earlier this year).

Should MOB-015 be approved, I believe its success is inevitable. The result would probably be a C1-3$ dividend per share elected by Craig Mull sometime in the future, which corresponds to a 12-40% dividend yield on the current share price. I will probably load up more in Cipher once I have available cash.

That’s it really. Does it have to be more complicated? Downside is more or less protected by valuation, balance sheet and legacy business with a significant future upside in approval of two new drugs, where the market is underestimating the dominance of at least one of them, MOB-015.

Moberg Pharma ($MOB, $MOB.ST)

7% of portfolio

Again, all credit should go to

Left

for his incredible work on this name

Summary: Cash generative business with multibagger potential stemming from a market which underestimates the impact of its new revolutionary drug

The investment thesis here is equal to that of Cipher, as the business models are similar in nature and that the thesis all hinges on the success of this new drug, MOB-015, of which Moberg Pharma is the creator and patent holder. Like with Cipher, if you have been following Fintwit, there is really nothing I can add to the table here, so I would refer to Fintwit and the work done by

Left

. All I can say is that I believe in the potential and find the risk/reward one of the most attractive in the market.

The only thing I can add is how special I believe this product to be. I have worked in venture capital and evaluated the potential of numerous new technologies and products. The Catch-22 is often that either i) Your product has a ton of competition, or ii) There is no competition due to the fact that no one has shown interest in the product.

With MOB-015, it’s different. I don’t think people fully appreciate how special it is for a product to become the market leader 1,5 months after launching in addition to expanding the end market by 52% over that same period. It’s without comparison and every venture capitalists’ dream. And here it is, staring right at us, and we are able to invest in it with the click of a button. I am not sure if we ever will be able to pretty accurately predict the disruption of a billion dollar market by a microcap ever again in our lifetimes.

2. Special situations with clear asymmetry

Investors can frequently find more attractive opportunities in securities outside the mainstream: distressed and bankrupt securities, post-reorganization equities, recapitalizations, spin-offs, merger securities, liquidations, litigation, and risk arbitrage.

- Seth Klarman, ‘Margin of Safety’

The second portion of companies I own fall into this bucket. The descriptions of these opportunities will be shorter than for the first bucket, as in a way they are simpler with a more binary outcome. Special situations can be very attractive as the setup can yield an attractive upside with limited downside. Sometimes, the upside is driven by an imminent and concrete catalyst with some downside risk should the catalyst not materialize, other times there is practically no downside, so the only way to go is up. The holy grail is the times where you get tremendous upside and practically no downside (these setups are where Joel Greenblatt would bet 40% of his portfolio). There is no religious or other reason for why I like special situations. It’s just a place where I happen to find many compelling bets.

Sintana Energy ($SEI, $SEI.V)

8,5% of portfolio

Big shout out to

Another oil and gas tourist

and

Name

for their work on this. My whole thesis is supported by their analysis.

You could argue whether this is a special situation or not. I would at least argue that the setup and risk/reward has several similarities with a typical special situation.

In short, Sintana’s assets consists of interests in the following Petroleum Exploration Licences (PELs):

• PEL79 (Namibia, Orange, Namcor): 16.5% net, looking for a farm-in partner 

• PEL82 (Namibia, Walvis, Chevron): 4.9% net, carried but details are missing

• PEL83 (Namibia, Orange, Galp): 4.9% net, carried to production

• PEL87 (Namibia, Orange, Woodside): 7.35% net, carried during the first stage of exploration (seismic data analysis and first well)

• PEL90 (Namibia, Orange, Chevron): 4.9%, carried during the first stage of exploration (seismic data analysis and first well)

• PEL103 (Namibia, onshore, Apprentice): 15%, not much work is expected

• VMM37 (Colombia, onshore, ExxonMobil): 100%, ongoing arbitration.

Then the question becomes, what are these interests worth? The short answer is, no one knows. These are petroleum exploration licences, i.e. there might be significant petroleum resources connected to these licenses, or there might be zero. Chances that there are no petroleum resources connected to all of these licenses is however almost zero, so these licenses must be worth something.

Another oil and gas tourist

and

Name

provide us with the following scenarios (you should check out their write-up, it’s really detailed and good):

Conservative: C$0.96/sh

Base: C$1.57/sh

Bullish: C$2.25/sh

At the time of their write-up, Sintana was trading at the most conservative scenario. It has since gone up and is now trading at C$1.33. However, since the conservative estimate was made, information has come out that the whole of PEL83 might be worth $20bn. That would translate to almost $1bn for Sintana’s stake at least, as being carried makes it more valuable. Their current market cap is C495m.

How much is Sintana worth? No one knows, but probably a lot more.

ADF Group ($DRX, $DRX.TO)

6,2% of portfolio

Big thanks for

ToffCap

for the work he has done on this name

I will make this one very short, as it’s one of my simplest thesis (and therefore probably the best): ADF Group has shown tremendous revenue and margin growth over the last 12 months (with the stock price soaring 305% over that same period). Valuation started catching up with peers during this period. On June 11, ADF reported another blockbuster quarter with the stock again soaring, but valuation fell as it couldn’t keep up with the company’s rapid growth. Management also reported a huge order backlog, continued growth prospects and that they would buy back ~9% of outstanding shares. Around the same time, Marshal-Barwick Holdings, a steel distributor which owns 9% of the shares, started aggressively selling, bringing the stock price down to the same levels as before the blockbuster quarter, the buyback announcement and everything else. The result was that ADF started trading at <6x EV/EBITDA on FY24e and ~15% FCF yield with all the signs pointing towards further growth.

There is nothing you need to do here to but wait for more blockbuster quarters and a valuation which should rerate up again (especially considering that industrial peers trade at 10-15x EBITDA). A multiple in line with industrial peers would imply a 80-150% upside from here. We will see if this plays out, but if it does, it can really be this simple.

Boat Rocker Media ($BRMI, $BRMI.TO)

2,2% of portfolio

Big thanks to

everyonehatespoetry

for his analysis and for putting this on my radar

Another incredibly simple one: Boat Rocker Media was trading at a premium to cash two week ago. On June 28th, before the open, Boat Rocker Media announced having sold their 51% stake in Untitled Entertainment for C51.8$m to TPG. After this sale, Boat Rocker Media is sitting on a total of C75$m available (pro forma taxes and fees), or C1.33$ of net cash per share. The current share price is C1.01$. The stock is as such a real net-net trading below cash. In addition to this, their normalized EBITDA is somewhere around C18$m. Putting all of this together with an increasingly active owner (Fairfax Financial) who is pushing for capital returns (hence why this sale probably happened) and sounder capital allocation, I don’t see how this stock can go much lower.

3. Specialist serial acquirers

Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive-looking price, you'll end up with a fine result.

- Charlie Munger

Over time, the skill with which a company's managers allocate capital has an enormous impact on the enterprise's value.

- Warren Buffett

I have long been fascinated by the serial acquirer business model. Partly because the business model specializes in of the most important aspects of running a business: capital allocation. Additionally, serial acquirers, generally, have a history of delivering superior long-term shareholder returns. These graphs, taken from REQ Capital’s ‘Deep Dive into Acquisition-Driven Compounders’ (Dec 2023), highlights the point (one for the Nordics, and one Global):

So, why focus on specialists when generalists have also shown ability to generate superior returns? To be honest, there is no super deep reason. If you focused on specialists serial acquirers in the 60’s you would have missed Berkshire Hathaway, the highest returning stock of all time. I however think that you get more synergies and a higher chance of Management being able to execute if they are specializing in a niche, rather than being tempted to dip their toes into waters they don’t understand. That is at least a safe way to start making poor investment decisions.

Lumine Group ($LMN, $LMN.V)

16,2% of portfolio

Lumine Group is the most recent spin-off from Constellation Software (CSU), following Topicus which was spun in 2021.  The Lumine spin-off was completed in February 2023 in conjunction with the acquisition of WideOrbit, and Lumine’s stock began trading in March 2023.

To understand Lumine, one needs to understand Constellation Software (CSU). CSU is known to most of you, and for good reason. The stock has returned more than >200x since it’s IPO in the mid 2000’s. One could spend a lot of time analyzing why CSU has been the success that it has. I believe the reason to be a combination of the following:

1. Disciplined

2. Data Driven Evaluation

3. Incentives

4. Learning

5. Decentralization

6. Buy and Hold

7. Cash Buyer

For those of you who are familiar with Hamilton Helmer’s book ‘7 Powers: The Foundations of Business Strategy’ I believe CSU holds “Process Power” where the key to their success is their internal processes (similar to Toyota), which other companies can’t seem to replicate, even though CSU is very straight forward with exactly what they do.

Enter Lumine:

Lumine acquires, manages, and builds VMS businesses in the communications and media industry.  Lumine has three operating groups, two primarily operating in the communications vertical (i.e., the legacy Lumine operating groups) and the other being the media operating group (i.e., WideOrbit). The communications operating groups together include twenty-two 22 independently managed business units.

The success or failure of an investment in Lumine shares rests on the success that Lumine management has in executing the CSU M&A system at the Lumine level, which I believe they absolutely can do. Besides this, I believe we get extra benefit with Lumine focusing on a specific vertical and the synergistic nature that follows from that. They also focus on more ‘hairy carve-outs’ where I imagine there to be less competition for deals and higher chances of acquiring assets at attractive prices. Provided that they are able to turn the business around and realize value.

When it comes to what a fair valuation for this company is, I honestly don’t know. I bought it last year at around C17$ following favorable spin-off dynamics and uncertainty related to limited financial history, and the stock has returned ~90% since then. The last quarters, Lumine has posted negative organic growth, which I believe the company should be able to turn around, in which case the stock should jump quite a lot. What I do know is that I believe in the long-term potential of Lumine, in which case the current valuation becomes less impactful. I would guess it’s around fairly valued at current prices.

To me, this stock is a “set in and forget it.” And I think that strategy will result in an attractive return over the next 5-10 years. If I realize any value from my special situations holdings, I will probably pump some of it into Lumine on any pullback. And if you don’t believe me, maybe you can believe Mark Leonard, founder of Constellation Software and one of the greatest capital allocators of our generation:

I hope my grandkids are still holding Lumine shares fifty years from now.

- Mark Leonard, Press Release

Terravest Industries ($TVK, $TVK.TO)

13,6% of portfolio

The company follows a roll-up strategy of acquiring, restructuring, and operating businesses that are generally mom & pops across storage tanks and pressure vessels (est. 55% of revenues), boilers and furnaces (25%), and oil & gas equipment (20%). Terravest has delivered total shareholder returns of ~30% p.a. for the last decade, which I believe it could do again over the next decade.

Instead of going through every detail, I have decided to sum up why I believe this company is positioned to continue delivering outstanding shareholder returns going forward:

1. Highly aligned and capable Management with a substantial part of their net worth in the stock, as well bonus incentives which is directly tied to stock performance

2. Proven long-term track record

3. Rather than competing in highly competitive markets, Terravest has a competitively advantageous strategy by focusing on dominating niche markets

4. Long runway for continued growth

5. Specialist sector focus provides synergies and impactful value creation initiatives through restructuring of acquired businesses

6. According to Plural Investing, Terravest is trading on 13x NOPAT after its existing acquisitions are restructured. That compares to an average of 15x since the management team took over in 2013, or 17x in the last three years as trading liquidity has increased and the company has gained recognition with investors. For context, industrial peers Worthington Industries and Arcosa trade at 18x and 25x, while successful roll-ups can trade at similar or higher multiples (Mind you that this analysis is from January 2024, and the stock has gone up quite a lot since).

As far as I can see, all of the ingredients necessary for continued stock performance is present and I will continue to hold this for a long time.

- H Capital