This week, we review an outstanding convertible Loonie bond from TerraVest Capital that is currently trading at a nice discount and a yield to maturity of about 9%. TerraVest Capital is a publicly traded holding company focused on acquiring businesses with strong cash flow, long track records of operating success, strong balance sheets and committed management teams which will complement its existing businesses and expertise in the manufacturing of tanks and fuel containment vessels, as well as the fabrication of oil and gas processing equipment. In 2014, the company grew from two operating businesses to four and consequently more than doubled its revenues, growing from CAD $64.2M to CAD $131.6M. TerraVest’s acquisitions have been well-executed, bringing increased opportunities for economies-of-scale, judicious cost-savings as well as numerous opportunities to cross-sell products and services throughout their portfolio of companies. It has completed these acquisitions while keep debt levels low, boasting an extremely rare interest coverage ratio that well over 10x’s.
TerraVest continues to perform well, and appears to be in a strong position to take advantage of the current oil and gas downturn and augment its existing portfolio of businesses. Its common stock currently pays a quarterly dividend, which is about 6.37% annualized, and we think the convertibility feature of these notes bring significant additional capital gains potential to the already respectably high 9% yields indicated in these 5 year debentures. However, it should be noted that with a relatively small $25 million of these notes outstanding, there may be insufficient liquidity in the market to keep these bonds as attractively priced as we currently see them being offered. Therefore, we moved quickly to add these 7% couponed convertible debentures from Terravest Capital, denominated in Canadian dollars, to our FX2 and FX3 global high yield income portfolios.
About the Issuer
TerraVest Capital is a publicly traded holding company focused on opportunities within its management’s core industries that complement its existing businesses and provide many integration benefits. These industries include manufacturing of tanks and fuel containment vessels, the fabrication of oil and gas processing equipment, and oilfield services. The company currently owns five operating businesses: RJV Gas Field Services, NWP Industries, Gestion Jerico Inc., Diamond Energy Services, and Signature Truck Systems LLC.
Within TerraVest’s fuel containment segment, two companies are represented, Gestion Jerico (Jerico) and Signature Truck Systems (Signature). Jerico was acquired by TerraVest in February of 2014. The company is a leading North American manufacturer of items such as propane dispensers, commercial and residential containment units and bulk propane trucks. Jerico is the leading manufacturer in the residential oil tank market.
Although the company’s portfolio consists mainly of Canadian companies doing business in Canada, TerraVest has begun to expand south of the border. In March 2015, it acquired its first US based business, Signature, and it has been awarded its first major purchase order for oil and gas equipment to be delivered to a US customer later this year. Based in Clio Michigan, Signature assembles propane bobtail trucks as well as builds and services crane, cylinder and service trucks specific to the propane industry. The acquisition of Signature perfectly complements TerraVest’s existing ownership of Jerico, providing strategic synergies as well as geographical expansion into Michigan and the Northeastern seaboard, which is the United States’ largest residential propane market. With the recent, considerable weakness in the Canadian dollar against the US dollar, entering the US market gives TerraVest a considerable cross selling advantage, with the potential to realize larger margins on its Canadian made products.
TerraVest’s fabrication segment currently consists of two companies, RJV Gas Field Services (RJV) and NWP Industries (NWP). RJV has been in operation for 37 years providing fabrication, supply, installation and field service for well site production for the oil and natural gas producers in Western Canada. Its customers include several of the largest energy companies in Canada.
NWP, another fabricator of oil and gas wellhead processing equipment, was acquired by TerraVest in August 2014. NWP provides upstream oil and gas processing equipment, complementary to RJV’s suite of products, to oil and gas producers in Western Canada.
Diamond Energy Services rounds out TerraVest’s portfolio of companies and makes up the services segment of TerraVest’s business. Diamond operates 23 service rigs to provide well-servicing to the major oil and natural gas producers in SW and Central Saskatchewan.
TerraVest has operations and facilities across Canada and is supported by approximately 700 employees. It continues to look for opportunities residing in the manufacturing of tanks and fuel containment vessels as well as the fabrication of oil and gas processing equipment where expertise in metal fabrication and welding are required.
Reducing exposure to global oil prices
As global oil prices continue to decline, TerraVest has proactively directed the company to acquire business lines that are segregated from oil’s recent volatility. As of 12/31/2014, the company’s fuel containment segment (Jerico) represented 45% of TerraVest’s total EBITDA. Revenues and EBITDA from this segment are partially insulated from the decline in oil prices. With the recent addition of Signature, 55% of TerraVest’s EBITDA is being generated from assets that are significantly insulated from decreases in global oil prices.
One of TerraVest’s major stockholders (holding nearly 28%) is Clarke Inc., a Halifax-based investment company. Clarke has a history of acquiring companies and working closely with management to greatly increase revenues, EBITDA and shareholder value. Clarke also has a history of early debt repayments with a focus on creating a more flexible balance sheet. One of the businesses Clarke recently sold, went from an EBITDA of CAD $490K to an EBITDA of over CAD $10M in the six years of Clarke’s ownership, an incredible increase of nearly 20x. Clarke is solidly intertwined with TerraVest management, using their expertise to assist the company in identifying and acquiring value-added businesses to complement TerraVest’s portfolio of companies. An additional 38% is owned by TerraVest management and directors. We feel this level of internal ownership helps to align Clarke’s and management’s interest for growth and increased profits with the regular shareholders.
Convertible Bonds Mean Opportunity for Additional Growth
These bonds are convertible to common shares of TerraVest Capital at the strike price of CAD $8.25 per share, anytime prior to maturity at the bondholder’s option. About ¾ of the proceeds from this CAD $25 million offering were used to pay back the bridge loan used to acquire Signature Truck Systems, Inc. and Lakeshore Metal Works, Inc. (“Signature”) a leading propane product assembler in the U.S. which enlarged the geographic footprint for propane products as well as provided TerraVest with a number of propane product cross-selling opportunities. With TerraVest actively and continually scouting new acquisition targets, and considering the outstanding acquisitions made in 2014, this strike price represents a mere 5% annualized appreciation from the C$6.47 price TCN is currently priced at on the Toronto exchange. It is our belief here at Durig Capital that there is very strong upside growth potential remaining within this company, such as has been achieved in the Tricon Capital convertible notes that were first reviewed in November of 2012, and the overall return of these 2020 bonds may significantly exceed the 9% yield to maturity (at par) in 2020 that is indicated with its current price at about 92.
In 2014, TerraVest grew from two businesses to four businesses, acquiring both Gestion Jerico and NWP Industries. The two acquisitions have definitely been accretive for TerraVest as illustrated by the excellent numbers the company showcased for its fiscal year 2014. TerraVest grew from a company that generated CAD $64.2M in revenue to a company that generated $131.6M CAD.
Gestion Jerico, one of TerraVest’s 2014 acquisitions, had an excellent Q4 for fiscal year 2014 (ended 9/30/2014). The company registered CAD $4.7M EBITDA, the highest EDITDA in any three month period in Jerico’s history.
The solid financials have continued into the present fiscal year. For Q1 2015 (ended 12/31/2014), TerraVest had record EBITDA of $10.8M CAD, up from $4.3M CAD for the same time period a year earlier. Also in Q1, EPS increased by CAD $.09 per share, reiterating the company’s sound decision making in choosing acquisitions that add value. TerraVest’s second quarter ended March 31, 2015 saw increases in revenue and EBITDA of approximately 37% and 26%, respectively, versus the comparable period ended March 31, 2014. In Q1 2015, TerraVest also paid down CAD $10.0M in debt.
TerraVest has an exceptional interest coverage ratio. Its last posted quarterly results (Q2 fiscal year 2015, ended 3/31/2015) recorded EBITDA of CAD $5.985 million and interest expense of CAD $555,000 for an exceptional interest coverage ratio of over 10x. Net income for Q2 2015 was CAD $2.45 million.
The default risk is TerraVest’s ability to perform. Considering its historical and recent performance, its strong balance sheet, its sound cash position, and the excellent cash flow that is projected to service their interest bearing debt, as outlined above, as well as the shrewd acquisitions it made in 2014, it is our opinion that the default risk for this medium term bond is minimal relative to its more favorable return potential. An option that further reduces the default risk of this convertible bond, should at its maturity the company decide not to pay off or roll over the debt, is a conversion of the principal (at par) to TVK common stock at a 5% discount to stock’s 20 day average valuation at maturity on 6/30/2020.
Since part of TerraVest businesses service the oil and natural gas industry, demand for these services are affected by changes in the commodity prices for crude oil and natural gas. These fluctuations have an indirect impact on TerraVest’s various business segments, and while this impact is difficult to quantify, we feel TerraVest has done an excellent job to diversify its revenue in that greater than 55% of its EBITDA is now significantly insulated from the fluctuations in global oil prices.
As these bonds are denominated in Canadian dollars, there is also currency risk present. In 2015, the Canadian dollar has struggled to make up ground again the US dollar. While there have been some isolated rallies of the CAD rising against the USD recently, CAD have remained valued between $0.80 and $0.83 for the past few months. Even with a weak CAD against the USD, it is impressive to see that TerraVest has continued to excel. Any appreciation of the CAD against the USD will reflect favorably for US-based investors holding Canadian dollar investments.
These 9% yielding TerraVest 2020 bonds appear to have similar duration and risks to other convertible bonds we have reviewed on the Bond-Yields.com, such as the 5.6% Tricon Capital convertibles, 7.5% Tranglobe Energy convertibles, or the 9% 5N Plus convertibles.
Summary and Conclusion
With its most recent acquisitions, TerraVest has more than doubled in size in a little over a year’s time. The company’s accretive acquisitions, completed while keeping debt low and interest coverage at an impressive 10x, have provided increased value and revenues, while adding synergistic opportunities between its portfolio of companies. The 9% yield for these 5 year convertible debentures is nearly 6x’s the current five year US treasury yield. Consequently we believe these high-yielding Canadian dollar notes from Terravest Capital not only have a superb yield, we think they also provide a fantastic opportunity for added capital gains as a result of its convertibility feature. Therefore we are adding these extraordinary TerraVest debentures to our global fixed-income2.com and fixed-income3.com high yield portfolios.
Issuer: Terravest Capital, Inc
Ticker: TVK (TSX Exchange) / TRRVF (OTC Market)
Stock Price: 6.28 (CAD) / 5.30 (USD)
Bond Coupon: 7.00%
Conversion Option Price: $8.25 CAD
Yield to Maturity: ~9.0%
Disclosure: Durig Capital and certain clients may have positions in Terravest 2020 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.
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