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Idea#4: Ag Growth
Ag Growth is a highly profitable and well-run manufacturer of agricultural equipment. The company has a dominant market share in its specialized niche of grain handling and storage equipment. Went public in summer of 2004 as a Canadian Income Trust. Highly profitable business with gross margins of ~45% and distributable cash flow margins of ~23-25%. Business is much more stable than the highly cyclical cash crop industry because Ag Growth produces relatively low cost equipment that requires replacement every few years and because use of its products is tied to crop volume, not price. Ag Growth is consolidating the fragmented industry by acquiring high quality competitors at accretive prices. We believe that Ag Growth stands to benefit from a confluence of beneficial long term trends driving higher grain volumes, particularly corn, due to the rapid development of the corn-based ethanol industry in the U.S., as well as growing demand for corn and other grains worldwide.
Idea#4: Ag Growth
There are 11.225 million units outstanding at recent price of $C22.55, for a market cap of $C250 million. Company ended 2006 with $32 million net debt, for EV of $C282 million. 2006 reported revenue was $C81.5 million and FCF was $C22.5 million. Ag Growth announced acquisition of Hansen Manufacturing, a manufacturer of grain handling products under the Hi-Roller brand, for $18.5 million financed by debt. Ag Growth paid 5X 2006 EBITDA for Hansen, which is a growing business. At approximately 10X FCF and yield of 7.5%, Ag Growth is a cheap and safe back door play on the ethanol industry. As a Canadian Income Trust, the company will pay no taxes until 2011, and therefore has about four years with which it can make accretive acquisitions in its industry and benefit from the favorable tax treatment. We believe Ag Growth will still be reasonably priced when it begins paying corporate taxes in 2011; free call option on a favorable change in Canadian tax policy between now and 2011.
IDEAS
22 26 20 18 20 25 23 33 41 41 41 100+ 25
% TOP 10
77.2% 74.6% 73.0% 69.7% 62.0% 54.4% 53.2% 49.7% 45.0% 44.0% 38.9% 37.5% 52.1%
% TOP
27.0% 14.6% 9.7% 16.8% 15.0% 6.9% 9.4% 7.4% 5.2% 5.6% 4.8% 7.0% 6.5%
Note: For ease of comparison, all worsts are reported net of management fees but before incentive fees. Annualized returns from inception for our longest tenured fund (Centaur Value Fund) from August 1, 2002 March 31, 2007 net of management fee but before incentive fee were approximately 23%.
What type of portfolio is consistent with your portfolio and personal risk / stress tolerance? Can you sleep at night if you have -10% months? 25-30% peak-to-trough declines? What are your goals maximum returns (with the assumption of significant volatility) or satisfactory returns within a certain risk profile? How many ideas can you process and maintain? What kind of ideas do you prefer? How stable is your capital base? Are your investors prepared for significant volatility? Do you have safeguards in place to protect your capital from fleeing at the worst possible time? Do you work best alone or do you prefer a team environment? A team is going to generate more ideas than a solo practitioner.
Final Thoughts
Confronted with the challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY. -- Benjamin Graham, Intelligent Investor
Why is having a margin of safety important? Valuation is an imprecise art The future is inherently unpredictable Having a margin of safety provides protection against bad luck, bad timing, or error in judgment. We believe that the principle of margin of safety is just as applicable to portfolio construction as it is to individual investment selection.