I went briefly through their Q1 2026 financial statements and MD&A. I always hope to find an interesting idea in what they disclose, and I generally like a bit of detective work that is needed post Q4 information release.

First, the easy changes.

Pintree bought Topicus (Vertical Market Software in Netherlands) - by my estimate, roughly 48 thousand shares at CAD 85, or for a total consideration of CAD 4,080 thousand. Prior to this, the biggest lot of shares in Topicus Pinetree bought happened in Q2 2022 when they purchased shares at roughly CAD 67 per share. The cumulative difference between the two prices is 27% over almost 4 years. It’s safe to guess that the intrinsic value of Topicus has grown more than that in the same period. It’s also safe to guess that whatever hurdle rate Pintree uses, it has not changed (or at least decreased) since then.

Enghouse was sold in full, with a loss, and no particular mention in the MD&A (except Enterprise Software is now being shown as having no investment at all). Pinetree owned roughly 220 million shares of Enghouse at an average cost of CAD 24.9. The total cost of their investment was CAD 5,471 thousand. Pinetree lost 32% of initially invested capital, or for the proximate holding period of 1.25 years, they have achieved the CAGR of -26% on Enghouse. This was their third worst completely closed investment measured by CAGR alone (Crealogix and LiveVox being second and first, respectively). In terms of their total absolute loss, Enghouse was the largest individual realized loss they have had. This is a good cautionary tale, as many have followed Pinetree into Enghouse with their money or minds (me being the latter and having invested a lot of time into understanding Enghouse). But apart from that, it’s also a warning about how Pinetree can be late in recognizing its mistakes (if at all we can call investment in Enghouse a mistake) and also how unanchored they are in their prior conviction. Investment in Enghouse was not a one-time capital allocation. Pinetree started investing in it during Q4 2024 and has added to it during Q2 2025, Q3 2025, and even Q4 2025. If you read Enghouse transcripts and filings, you will see that not much has changed in this period; however, Pintree changed their mind. Most likely based on the opportunity cost of keeping money not invested in Topicus or whatever else they found in the VMS space. To end with Enghouse, the table below shows how Enghouse investments performed, assuming for simplicity that each tranche was executed at the quarter end and that Enghouse was ultimately sold at CAD 17 per share (roughly the price at the time when I assume they invested in Topicus).

From here it gets interesting.

In December, Pinetree disclosed a new investment in an Australian VMS company. The total fair value of the Pinetree investment was CAD 4,021 thousand, or AUD 4,383. They also disclosed that they held 1.5% ownership of the investee, implying a market capitalization of AUD 292 million. My initial searches pointed to Energy One (energy trading software provider), Praemium (business similar to Bravura), Nuix (investigative analytics software company), and ReadyTech. If the last sounds familiar, it’s because Topicus, through TSS, tried to acquire them recently, and ReadyTech declined.

Be that as it may, ReadyTech, or unknown Australian VMS, was sold during Q1 2026, with a loss of CAD 1,550 to allocate capital to other investments.

I mentioned they allocated some 4,080 to Topicus, which had a fair value of 4,413 on Q1 2026.

Interestingly, since we know one Canadian company was sold, we know that one was also bought (there are 2 again). At least we are certain that size-wise, it does not belong to an over 1 billion bucket where Topicus and OpenText are. So it can only be under 350 million in size, which had a fair value of 6,759. Similarly, in Australia, ReadyTech was sold and replaced with something new that had a fair value of CAD 3,359. Most likely in under 350 million in market capitalization.

It also appears Pintree invested in an entertainment software business in the UK that is below 350 million in market capitalization.

Who are these? Well, by descriptions maybe:

I know very little of them, but maybe it’s worth taking a look in detail (I still have not, and the list is fresh).

Going further, if we assume CAD 4,080 was invested in Topicus, and the total VMS cost is now CAD 17,395, this leaves CAD 13,315 to be invested across the other two VMS investees. MD&A then reports a CAD 2,288 unrealized gain for a VMS business that “reported disappointing organic growth, moderated near-term outlook, and withdrew longer-term guidance,” which seems to be a fit of Sylogist who reported revenue decrease and have suspended their guidence according to their Q1 2026 earnings call transcript. This then means that CAD 4,268 was invested in an Australian VMS.

Australian VMS had a market capitalization below CAD 350 million, so Gentrack can be eliminated. Out of the two remaining, Atturra sounds like a more likely candidate, simply from current pricing and lack of AI in its promotional offering.

We also know that fair values of Sylogist and Atturra should have been CAD 6,759 (implying 2,073,313 shares owned) and CAD 3,359 (7,758,491 shares) respectivly.

But by simply looking at revenue multiples and EV to EBITDA, it seems that Pinetree invested in Accesso Technology Group (not Asseco), Atturra Limited, and Sylogist. Again, these are all guesses. Like the guess that Damien Leonard would be reading this. If so, it would never hurt you to subscribe, Damien.

Subscribe now Damien

Like many others, this quarter added more to my confusion about what and how Pinetree is trying to do. They seem as random as ever. The history of times to come will probably show us that we should have all invested 100% of our portfolios into Topicus, or even Sygnity, but Pinetree follows its own path.

As always, here are some numbers I follow.

Imprecise trading book with so far completely closed transactions (highlighted rows are acquired companies).

Portfolio turnover

Pinetree NAV:

Pinetree NAV with Trubridge at acquisition price:

For the following two tables, I have corrected the amount of loss carry forward and net income for the Trubridge effect (price included in the quarterly report was close to USD 14, while I have treated it as USD 26.25—its acquisition price).

Pintree implied IRR by realized result:

Pinetree implied IRR by realized and unrealized results:

I am not adding to Pinetree yet. I would love to do so at some point.

Although, L6 Holdings does:

I hope you enjoid this read. Shorter than usual, but hopefully enough to spark some independent thinking on your side.

Disclaimer and kind request

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During the past year I experimented greatly with LLMs in an attempt to create an ever-present 10th man, but I have come to the realization that no matter how I structure the expected outputs, define the prompt, set limitations, or set the tone I would expect, I fail to extract much value from them. One exception is special situations and risk arbitrages, where they are more than helpful in quickly discovering relevant content in whatever documentation there is (and usually there is quite some).

I will, however, try to keep the notes I publish brief in the future, limited only to the natural intelligence-generated conclusions. With this digression, on to Pinetree.

Sometimes during 2025, Pinetree was trading at almost 4 times its book value, and on that particular day and hour, I commented on how the price level was dangerous.

Pintree shares were trading just above CAD 22, and like many times before, I have proven to myself that I can unconsciously make perfect market timing decisions on which I do not act. In hindsight, it would have been nice to have liquidated my position back then, but at the same time, I am certain that I would not have bought a share of Pinetree since then, as they have never been below my threshold value. To be transparent, I would like to invest below the cost of the Punetree portfolio per share, or alternatively, 40% below the fair value of the portfolio and cash net of annualized operational cost and preferred shares, and at least at a promise of 15% IRR (more on this later).

Why below cost per share? I think Damien and Shezad are good investors based on their track record and better and more committed to it than me. This is the simplest way to beat them, and me, in that game.

Why at 25% below net fair value per share? I have no better answer than the TSX Composite historical drawdowns from the peak.

Where I would consider deviating from this rule is in case I can estimate the intrinsic value for more than 50% of their portfolio with conviction. In that case, I would substitute the prices of certain companies owned in part by Pinetree and again apply a certain margin of error I make on estimating those. Some while ago I wrote about Trubridge, and among other things I provided a distribution of intrinsic value estimates per share. Using the produced results as an example, I would use USD 30.34 per share (or simply 30), and I would calculate the NAV per share.

I was close to achieving this when the Pintree portfolio included Trubridge, Quorum, Topicus, and Sygnity. Unfortunately for me, all but Trubridge are no longer in their portfolio (although I believe they might have purchased some shares in Topicus during January and February 2026).

I hold Pinetree still as a position that I am actually interested to follow, as I hope to give me insights into L6 Holdings investment philosophy - now popularly known as PEMS, and historically known as value investing.

Year 2025 was actually quite interesting for Pinetree. They had one of their biggest flops in their investing history, and they might have hit a jackpot with Trubridge. On top of that, portfolio kept turning at a high pace, as it should for the tax shielded entity. Shezad came back from his Bravura mission. Henry Rachfalowski joined the board of directors.

Individual inestments

When I started writing this note, Trubridge was only in discussions to get a potential non-binding offer from IKS Holdings. This all changed yesterday when the definitive offer was announced. Initially, IKS Holdings was speculated to acquire Trubridge for total consideration of USD 600 million, which, when netted out of debt and cash and cash equivalents, would result in an offer of roughly USD 30 per share.

On 23rd April, 2026, Trubridge filed an 8-K informing the world it had entered into a Material Definitive Agreement to be acquired at USD 26.25 per share in cash. l6 Holding, Pinetree, and Ocho support the transaction. My guess is that Strikwerda would also do it.

I think that the offer is fair. In a perfect outcome, one could have hoped for a bit more. But for Pinetree, this is a big win and probably the only way Trubridge could have played out for them. Trubridge as a business has a natural moat, but it also prevents it from growing. Small hospitals won’t replace their RCM software on their own, and they have very little motivation to switch providers. Most of the churn Trubridge had up until recently was more likely due to acquisitions that are happening in the small hospital space than to their customers looking for a different service provider. At the same time, it is hard for Trubridge to grow organically due to this. Moat without a bridge. The only option for Trubridge to grow is through acquisitions, but here it would need to deleverage either through equity raises (something IKS Holding can probably provide) or by issuing shares. It is simply overleveraged and has too expensive debt.

Quorum was a similar type of bridgeless moat business with low leverage, and I can only guess the frustration with it being acquired when they were on the verge of acquiring it themselves.

How did Trubridge play out for Pinetree? I kept track of all transactions in Trubridge shares made by L6 Holding, Pinetree, and Strikwerda. Figures below show them in this order. My assumption is that all of them will hold their shares until settlement at 26.25 on 30 June 2025.

Pinetree is set to achieve a total time-weighted CAGR of 37%. Most of it is owed to their 2024 investment. Sadly, their single biggest transaction in Trubridge shares will result in the compounded annual loss of -3.6% (although also interesting at the same time since they saw high potential return when they made this investment tranche).

L6 Holdings did worse, if 32.5% CAGR can be called that way.

Strikwerda won. Master capital allocators barley anyone pays attention to.

For those interested, Bravura is the next largest holding where all three appear as shareholders. Aptitude Software has L6 Holdings and Pinetree as shareholders and has recently announced a strategic review, which, I would guess, could end similarly to Trubridge.

Trubridge is a playbook Pinetree could follow. It was their only way out of the investment of this size without destroying the value in the process.

My belief is that they segment their portfolio into three parts. One consists of pure market investments where they invest in companies they identify as under stress but turn around and sell below stable state fair value and in which they take no active role.

Second are pure market opportunities like Topicus at the time, a few years ago.

The third part involves active involvement, like in the case of Quorum, Trbridge, and Bravura. PEMS is not a term most of us reading this give meaning to. Looking at Pinetree, I would much prefer CSI did TEMS (Temporary Engaged Minority Shareholder) instead of Permanent). Pinetree is a living example that it can work, at least with the part of their portfolio they have turned. My suspicion is the P in PEMS was more a dogmatic decision in case of CSI, than one led by an idea of optimizing returns, but I have no evidence nor need to prove this. More relevant for Pinetree, the first two invesmtnets I mentioned were clear candidates for acquisitions as they had limited opportunities to grow and management looking to retire. For Bravura, I still dont know what they plan with it and I probably need to look at Bravura deeper.

The issue I am having with it stems from the fact that Pinetree needs to turn their portfolio around if it is to use up its capital loss carryforward. And it’s only logical they do.

Portfolio NAV and development

As of today, Pinetree NAV, book value, or fair value per share based on its holdings looks like this:

When Trubridge leaves the book, Pinetree will have more cash than ever before relative to its portfolio. Currently, they are showing no sign of slowing down.

What is important to consider in parallel with the last figure is that in most cases, what Pinetree sells, they sell with a profit. Actually, if you compare the hypothetical CAGR from Trubridge, it would be considered historically not the best result in relative terms. Value-weighted CAGR on closed transactions is 45%. If Pintree were to have 100% portfolio turnover, that would be its ROE.

One additional detail is interesting when one goes through Pinetrees transactions. Their investees get to be acquired. In this list, the number of companies that got acquired while they were invested is quite high. What is interesting in this overview is that out of 25 transactions in it (related to 21 names), 10 investments ended with their investee being acquired or taken private. This is a lot, but it is even more when one considers that Crealogix (bought by none other than CSI) was acquired and CompuGroup taken private after Pintree sold their investment.

When looked at separately, return on acquired companies is even higher.

Valuation

I offer several ways to value Pinetree.

The simplest is their book value. One can simply keep it updated daily and hope that the price gets well below the market value of their portfolio less their preferred shares and annualized operational cost, with added annualized dividend and interest income. For the current value calculated like this, scroll a bit above (but it’s CAD 9.3 if you skipped).

The other two ways are by measuring the speed by which Pinetree can use up its capital gains tax shield.

Their first option is to assume perfect timing and frictionless selling of any investment they make. In other words, one can start from the fair value of the portfolio, calculate the average relative net income achieved on that portfolio (including realized and unrealized gains and losses), and see at which point the cumulative net gain will be equal to the capital loss carryforward today. Then you would assume Pinetree will sell their whole portfolio in a day and distribute the proceeds to shareholders. This future amount I then discount back to today (more details you can find in my original Pintree post). Out of the three approaches, I find this the most dangerous since you can argue that exactly investments like Bravura and Trubridge violate assumptions from the beginning of this paragraph.

Be it as it may, Pinetree currently operates at the normalized net income return of 26.5%, or 6.05% per quarter, based on 5.25 years of historical data. But keep in mind that their annualized portfolio turnover is close to 40-50% measured against the portfolio at fair value.

Under this approach, the fair value of Pinetree is close to CAD 23 per share. But if one is to pay this price, he is effectively buying the market index return at the cost of perfect execution of all investments over a period of the next 7 years. If you think that is a probable outcome, an IRR of 24% awaits you.

Alternatively, I grew fond of my approach of valuing Pinetree through the return they achieve on their portfolio at cost or on how much they have paid for what they have and how much cash they get from it. Measured on cost and on cash returns on cost, Pinetree has generated a 23 million gain by selling their investments in the last five years and a quarter. This has resulted in the average normalized realized net return of 14% per year over that period.

Using this logic and starting from the value of the portfolio at cost today, it would take Pinetree a further 15 years and a quarter to use up all their capital gains loss carryforwards.

If they can do so, they deserve to be valued at CAD 10.5 per share if one is to set his return expectations at the level of the discount rate of 10%. At today’s prices, this would imply an IRR of 10.8%.

As a summary. Would I invest in Pinetree now? No. Risk is too high to justify the expected return. I would at least need a promise of 15% IRR to reconsider it, which is equivalent to a price of cost per share of CAD 7. I do wish them the very best, though, and congratulate them on what they have done so far. Investing is a psychologically hard task for most normal people, but so far Damien and Shezad are doing it well (and based on what I heard about them, they are normal people).

Disclaimer and kind request

Before you take any actions based on this article, remember, you are trusting an experimental analysis of an anonymous person. However, if you like it, and you think it makes sense, feel free to support my writing which I do in my spare time, while working a full-time job.

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Appendix - Fun fact

I managed to dig out very little about Henry, and all I managed to find about him is that he likes to play golf and taxes.

BFF Bank is an interesting long term prospect for those who can stomach investing in a bank. Unlike most banks you will find in Europe, BFF is mostly focused on factoring (non recourse purchase of receivables and their collections) from public institutions which can have delayed payments, but have low released losses. Real losses BFF faces are mostly due to time value of money in case of overdue payments, and not due to not being able to collect on the purchased receivables in part or in full.

The focus of this note is on the special nature of BFF as investment right now. For those who missed it, on November 2nd, BFF provided two press releases, the more relevant one being that providing confirmation that the ban on capital distribution (dividends) is removed.

The second part of the press release carried a different message. That of increased CET1 ratio floor for capital distribution. If you are not familiar with banking, think of CET1 ratio as a ratio of certain equity items and risk weighted assets, or regulatory estimate of the risk exposure of the bank - the riskier portfolio, higher the capital requirements, even if book value of assets is the same. As a result, each additional euro of portfolio growth can be achieved by lower leverage (more equity), thus literally strangling the bank relative profitability measured through ROE. In case of BFF, keeping a higher threshold, means that simply less equity will be distributed in the future to the shareholders, which is bad, as banks have limited organic growth options, and capital distributions are a significant element of shareholder returns.

But the second to last paragraph mentions something interesting. BFF has mandated (contracted) advisors to evaluate strategic capital management options on its credit portfolio. On the first read, I was confused why they would need such advisory, but then I noticed that the focus was on a credit portfolio, and not on capital distribution strategy. Then I remembered that BFF has historically sold parts of its portfolio though securitization only a few times, last being in 2016. And then I remembered this from the Q2 2025 investor call.

It’s Antonio from Bank of America….So what would be the pros and cons of you to explore a disposal of a securitization of a big chunk of your contaging invoices. Just because looking at from the outside, and I’m conscious that we don’t have the full details, but it looks extremely appealing as a way to really put to bed this issue. So any thoughts you can share around just the sort of the qualitative pros and cons of pursuing this option would be super helpful.

Massimiliano Belingheri

Antonio, look, the -- when we look at our contaging portfolio, we have, at the end of the day, a number of levers where we can collect organically and clearly selling that portfolio even in a securitization where we will probably sell the junior notes to achieve the consolidation, therefore, have a pretty strong capital impact, as you point out, still leaves some money on the table. And also, we want to be in a position where our collection processes are fine-tuned so that a purchaser of that portfolio will clearly be even more comfortable about those invoices being collected in due course with clearly interest as well. And so the -- we are working on that. We’re working also on preparing for a potential disposal, which also means thinking what portfolio we might want to dispose of because of that contaging portfolio, a portion is -- has a high multiplier, if you want. So if we sell that, we actually get rid of proportionately larger share of the infected portfolio, so to speak.

There are other portion of that portfolio where that effect is not as strong. So probably doesn’t make as much sense to sell. So it’s that consideration. The business continues to generate a lot of capital. And we think at the moment, we don’t really need to put pressure on that. At the same time, we don’t want to be in a position where we need to take provision on that portfolio. So we want to be ready ahead of that to potentially dispose of those assets.

I think if you look at Page 13, we take a lot of comfort by the fact that this is a very dynamic portfolio. And the fact that we have reduced in 6 months, 40% of what we had at year-end, which by the way, a portion of which was after that we purchased after the reclassification, if we were to look at, actually the previous portfolio would be gone down even further, gives a sense of how dynamic the portfolio is. And we think we have with the acceleration in legal activity that Giuseppe mentioned before, quite a lot of levers to deliver a reduction in the overall portfolio. But we keep the option of also selling or securitizing, which is probably the most likely outcome that portfolio as one of our tools. And also all the support from a regulatory point of view that makes securitization effective easier. It’s also welcome because it means actually we can execute on a shorter time frame than it was normally expected in the past.

The advisors are most likely there to structure the securitization transaction.

I cannot assess which part of that portfolio is high income generating and which is not. I am oblivious to the legal difficulties of executing securitization. But I can play with numbers enough to check what an impact in some simple scenario could be.

Keep in mind the above, the following is just a thought experiment.

Current situation

As of Q2 2025, BFF had 303 million in NPL loans where receivables at hand are more than 90 days past due. These invoices from particular obligors, have put them in the NPL status and thus had a cascading effect on all other invoices from the same entities.

The core of the problem was in how default definition, designed to identify credit deterioration of loan clients, was applied to factoring. Even in 2019, what I suspect to be BFF, came forth with the question to EBA, on how to deal with situations where there is a continuous overlap of past due days greater than 30 days among receivables from the same entity.

Ultimately, EBA suggested that rolling and overlapping past due periods, cause the NPL status to be extended to effectively all receivables from an entity behind them. Ban of Italy enforced this with a delay. BFF, as primarily factoring bank, was hit hard.

As a result of the Bank of Italy finding, BFF recognized additional 1,480 million in NPL. Since these receivables are getting repaid in full but with a delay, where penalty interest of above 10% is charged (and collected by law - remember these are government institutions behind), provisions for these loans are low. Basel standards say that for public sector debt, RWA (risk weighted assets) weight is 20% (20% of balance sheet amount is considered risk equivalent). In case of default, and underprovisioned default (below 20% provisions), this risk weight goes to 150%. Using the number above, while 1,480 million exposure resulted in RWA of 296, after reclassification the same exposure would now result in RWA of 2,220. Why is this relevant? Because banks manage their real leverage (debt to equity, we see in balance sheet) using the risk measure of equity. By multiplying the RWA with their regulatory set capital requirement, banks determine the level of equity they need to have. In case of BFF, capital requirement is 9% of RWA. This reclassification in turn required BFF to set aside an additional 9% of 1,924 million or 173 million in capital.

Numbers reported show similar figures.

Effectively, to meet its new capital requirements, and be above 12% CET1 ratio, BFF had to withhold capital distributions it would usually make each year through dividends and buybacks.

If the current NPL levels were permeant state, it would be much more difficult for BFF to generate capital in excess of its CET1 ratio of 12% (13% after the latest change in dividend policy), as for NPL portfolio each 1 euro of receivables effectively needs 13.5 cents (150% * 9%) of equity vs 1.8 (20% * 9%). Market value of BFF reacted accordingly.

Why is all this relevant?

Scenario

Because we can reverse engineer it and see how BFF would look like if it sold it contaging portfolio, and subsequently cured most of its NPL portfolio 3 months following the sale.

In order to do that, I have to make two strong assumptions.

First in on the amount of contaging portfolio, BFF would sell. They themselves made it clear that this portfolio is earning money (remember the provision levels) and that they will have to assess which part of the portfolio to sell and which to keep. Since I cannot judge the level they would keep, I would assume all of it would be sold.

What would the discount be for sold receivables? One can only guess, but to make an educated guess once can only look on any historical data that is there.

Bank of Italy provide a study where the closest match to non-recourse factoring from I found to be related to the sale of unsecured loans from Non-financial corporations. In reality, risk behind non-recourse factoring is much lower than in NFC loans, but at least this can serve as a conservative proxy. But, these receivables are not from non-financial institutions, but from public entities, or effectively government. If one is to search a bit, it’s easy to find that BFF outstanding bonds yield close to 3.3-3.5% (use IT0005619140 as an example, maturing in March 2028). Equivalent maturity bond of Italian Government yield between 2.2-2.3% over the same period.

Since the ultimate obligor is the Italian state, the baseline risk of BFF is Italian sovereign risk, which at this point remains less risky than the bank itself.

Look at it differently, BFF earns more than 10% on these loans per year, and time until repayment is variable, and can be long. Which discount rate should you use to bring the value below 100% of the outstanding? Is the use of discount rate that much greater than 10% justifiable for a bank having a funding cost of 3% and current yield on issued bonds of 3.4%. Just for the sake of leaving some decent profit on a table for the counterparty who will buy these receivables, let’s assume the discount on sale is 90%. This would leave some alternative asset manager with 5% return based on difference to the nominal, and additional 10% per annum until repayment (would even out at 11% per year). If they fund it with some leverage, they will achieve a market beating return on equity.

Through both the sale of contaging portfolio and curing of the rest of NPL portfolio, BFF would release 2,085 million in RWA, 188 million in CET1 capital requirements, lose close to 15 million on the discount for sold receivalbes, ending with 500 million in CET1 requirements, and 17.7% CET1 ratio.

In this scenario, this would allow them to release at maximum 132 million in capital at 188.64 shares outstanding, which translates to 0.7 EUR per share (or 7% yield on current price). On top of this, BFF generates close to 120 million in net income per year (0.64 EUR, or 6.5% yield per share), with aim of bringing this number to 240 million (12.7%).

This while, growing their portfolio at 14%, and with ambitions to grow it further.

How realistic these plans are is questionable, and not a subject of this note. When I invested in BFF, I did it with a shorter term horizon, counting on that the increase in NPL will not result in real costs (other than opportunity costs). Once contaging portfolio ordeal is over, I would expect a price to go up a bit more. Then, I will reconsider how I proceed with BFF as an investment.

This was just a though experiment, filled with errors. Act on it accordingly.

BFF Bank will publish its quarterly results and provide further updates on November 10th. I wonder how much of the outcomes of my random thinking would be confirmed or disproved in the updates they will surely provide. If you are an analyst reading this, feel free to base your questions based on this. I hope you had fun with this one.

Disclaimer and kind request

Before you take any actions based on this article, remember, you are trusting an experimental analysis of an anonymous person. However, if you like it, and you think it makes sense, feel free to support my writing which I do in my spare time, while working a full-time job.

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This is an actionable idea that can vary in the level of profitability and riskiness, depending on your own personal risk preferences. Below, I list actions I took, but not as investment advice, but only as a personal log. Those few that are voluntary paid subscribers, if they chose to act similarly and this arbitrage plays out as it should, would get their money’s worth from their subscriptions so far.

I discovered this through Google alerts I have set up. Gemini helped in researching it. Kindle and reading was the ultimate weapon of choice. Paywalled until the exchange ratio for the transaction stabilizes, and risk of loss is reduced. I would hate to lose you money.

On October 10, 2025, Lennar officially launched an exchange offer to divest its remaining 20% stake in Millrose Properties. This follows an initial spin-off in February 2025, where Lennar distributed approximately 80% of Millrose’s stock to its shareholders. The current offer, set to expire on November 7, 2025, allows Lennar shareholders to exchange their Lennar Class A common stock for shares of Millrose Class A common stock at a 6% discount to the volume-weighted average price of Millrose shares. This exchange is subject to an upper limit of 4.1367 Millrose shares for each Lennar share. The primary motivation for Lennar is to complete the separation from Millrose. For those reading this, motivation should most likely be in the “odd-lot” provision behind this transaction.

Details of transaction

According to the details provided, the exchange offer permits the exchange of your Lennar Class A Common Stock (not Class B Common Stock) for shares of Millrose Class A Common Stock at a 6% discount to the per-share value of Millrose Class A Common Stock. For each $100 of Lennar Class A Common Stock accepted in the Exchange Offer, you will receive approximately $106.38 of Millrose Class A Common Stock based on the indicative ratio as of October 10, 2025, subject to an upper limit of 4.1367 shares of Millrose Class A Common Stock per share of Lennar Class A Common Stock.

The exchange ratio is determined by assuming that USD 100 worth of Lennar stock you tendered entitles you to USD 106 worth of Millrose stock, making the quantity of Millrose stock variable but limited to 4.1367.

This then entails that once the short and the long leg of the transaction are formed, additional stocks of Millrose should be shorted if the exchange ratio is lower than that implied by the price of the short and long leg of the transaction you took.

Using real-life figures:

• Lennar long leg

  • 99 shares * $119.10/share = $11,790.90

• Millrose Shares to Receive at implied exchange ratio:

  • The value of Millrose to be received for each Lennar share is $119.10 / (1 - 0.06) = $126.70

  • The exchange ratio is $126.70 / $31.08 = 4.0766

  • Millrose shares to receive: 99 * 4.0766 = 403.58 shares.

• Gross Proceeds from Short Sale:

  • 404 shares (rounding up) * $31.08/share = $12,556.32

• Gross Profit (Pre-Costs):

  • $12,556.32 (Proceeds) - $11,790.90 (Cost) = $765.42

The final exchange ratio will be determined based on the simple average of the November 3, 4, and 5, 2025, daily volume-weighted average prices (VWAPs) for stock traded on the NYSE. This is where the real risk lies.

In case the final exchange ratio is higher than the one I achieved, I would be happily stranded with an additional 5.53 shares of Millrose (MRP), which I would then sell for pure additional profit. However, if the exchange ratio decreases, each 0.1 decrease would require me to short sell an additional 9.9 Millrose shares. In the extreme scenario of 3 as an exchange ratio, I would receive 107 shares less of Millrose than I hoped, and I will have to buy them to close my short position, resulting in a net loss of 11.15 per additional share (remember I sold them at 31.08) and a total negative payoff for the transaction of -448.18.

I know very little about Millrose, but such a price increase in a span of a month cannot last for long (although Millrose is not something to be obviously shorted).

The current borrow rate at Interactive Brokers is close to 0.55%. Any amount you generate from the short leg above your long leg generates a higher rate of return as a daily deposit. It could spike, though.

If the Exchange Offer is oversubscribed and Lennar cannot accept all tenders of Lennar Class A Common Stock at the exchange ratio, then all shares of Lennar Class A Common Stock that are validly tendered will generally be accepted for exchange on a pro rata basis in proportion to the number of shares validly tendered, which is referred to as proration. Stockholders who beneficially own odd-lots (less than 100 shares) of Lennar Class A Common Stock and who validly tender all of their shares will not be subject to proration. I have not found any mention of proration being applied to odd-lot holders if they themselves subscribe the total volume of shares tendered (33,298,764 shares or a total of 336,351 odd lot holders), but I estimate the risk of this to be small.

Details and the formation of the final exchange ratio can be followed on this link.

Final exchange date will be announced on November 7th.

Following this date, I would expect that I will receive Millrose shares within a week (by November 14). This expectation is based on the analysis provided by Special Situations Investing.

Risks

The prospectus of the transaction lists standard termination clauses in these types of transactions (similar to 16. Cummins split off of Atmus Filtration Technologies.) These include

• Failure to Obtain SEC Effectiveness: This is a critical condition. If the SEC does not declare the S-4 Registration Statement “effective,” the transaction cannot be completed. Lennar has explicitly noted this as a risk, particularly in the event of a U.S. federal government shutdown.

• Material Adverse Change (MAC): This is a broad clause that allows Lennar to terminate the offer if there is a fundamental negative change in the business, financial condition, or stock price of either Lennar or Millrose. This could include a major stock market crash, a severe downturn in the housing market, or a significant lawsuit.

• Legal or Regulatory Prohibition: The offer can be terminated if any court or government agency issues an order injunction or passes a law that would make the transaction illegal or prevent its completion.

• Inaccuracy of Representations: If any of the official statements or warranties made by either company in the prospectus are discovered to be materially false or misleading, the deal could be called off.

One of the risk-reducing statements can actually be found in the quote below.

Lennar currently owns 33,298,764 shares of Millrose Class A common stock as of October 7, 2025, representing approximately 20% of the outstanding shares of Millrose Class A common stock. Lennar is offering to exchange up to all of these shares for outstanding shares of Lennar Class A common stock. If the Exchange Offer is consummated but not fully subscribed, Lennar intends to dispose of the shares of Millrose Class A common stock that were not exchanged through a subsequent spin-off, split-off, public offering, private sale or any combination of these potential transactions. If Lennar stockholders tender shares that would entitle them to receive more shares of Millrose Class A common stock than Lennar owns, Lennar will accept only a pro-rata portion of the shares that are tendered by each Lennar stockholder.

One way or another, Lennar will dispose of Millrose Class A stock, and it does not require shareholder approval, as it is a voluntary offer (you vote by action). Most importantly, this transaction will not be cancelled in case only those reading this tender their Lennar shares (undersubscription does not prevent it).

Execution risk (exchange ratio in which one enters the deal) and market risk (affecting the final exchange ratio) are the major real risks here.

Why the opportunity exist

I know of only one fund (trust) that would even consider spending time chasing a USD 700 profit while putting the money at risk of capital loss. This setup does not work as close to being risk-free for anyone but odd lot holders. Even then, there is a low probability it could lose you money.

Hopefully this provides you with enough funds to finance one financial substack subscription of your choice, guilt free. This time I will recommend and his bizalmanac. Although of low frequency, it is a real finstack (if there is such a term), and there is an actual person managing its money behind it.

Edit: 16.10.2025

I came to realize Berkshire added Lennar A and B stock to its portfolio. It will be curios to see if they opt for prorated conversion to Milrose A stock.

Disclaimer and kind request

Before you take any actions based on this article, remember, you are trusting an experimental analysis of an anonymous person. However, if you like it, and you think it makes sense, feel free to support my writing which I do in my spare time, while working a full-time job.

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To keep on good terms with whoever is reading this, there will not be many actionable ideas in this note, at least according to my risk-return preferences below. Still, there will be some notes of activities one might find to his liking and implement in his own capital management approach.

If these notes give you at least one profitable idea or prevent you from making one money-losing decision, think about becoming a voluntary paying subscriber. Rarely anything from my notes will be put under a paywall, and if it does, usually it will only be temporary.

Berkshire dividend-in-kind

I performed my annual sale of put (edit: upon publication I mentioned I sold call option by mistake) options on Berkshire Hathaway. This time with a June 2026 expiry at a 390 strike price. This is something I have been doing for the past few years, and it has incrementally turned Berkshire into a 20%+ pa investment in my portfolio. Not bad for an investment in a company of that size. My reasoning here is very simple and possibly carries risks I am not aware of.

My basic assumption is that the options will expire worthless. In the highly unlikely scenario that they are in the money and execute, I would acquire shares of Berkshire at a price I now consider to be a nice price to pay (if someone gave you a share of Berkshire B series for USD 390 today, how would you feel?). Why that particular value? Many years ago I started reading about Berkshire, some 10 years ago I became interested in valuing it on my own. This took a great deal of effort, and ultimately it produced some sort of estimate of value based on cash flows of operating business and valuation of the investment portfolio above the float (similar to my analysis of drivers of value for Markel). Post 2020 chaos, I discovered Semper Augustus letters by Christopher Bloomstran. Needless to say, the reasoning and depth of Berkshire analysis I found in them was more advanced, detailed, and informed than anything I was capable of producing, and they viewed overall Berkshire value and value development similar to how I did. I do go through Berkshire annual reports still and follow the development of the whole conglomerate. I read Semper's letters after trying to be critical and not just a passive reader. If I find no fundamental objections, I will accept the value estimates provided there, and I will not invest a week of effort in making my own. If I ever had concerns, I would sell my position despite the certain degree of emotional connection I, like many other shareholders, have with my Berkshire investment. My gut feeling is that this will not happen in a decade or so more. Since then, my strategy has been simple. Collect the mean estimate of per share value of Berkshire B series stock, and underwrite options with a strike at a 25%-30% discount to it (depending on liquidity).

Given that historically Berkshire has grown its fundamental value at 10-12% or so, this is in effect a 37%-42%+ discount by the time of expiry of the option. It would be a rare drawdown that pushes these options into money, and even then, if I were to change my mind and choose not to wait for the execution, I could always roll them forward at the same strike and most likely significant net premium.

To visualize the probability of options being in the money, or better yet, to visualize the volatility of the price of Berkshire on a single stock level, I also use my simple Monte Carlo simulations based on historical volatilities to get a feeling of what randomness of markets might bring. In the case of Berkshire, the strike I mentioned above seems a safe bet and a nice price to pay for Berkshire as it is today (barring any unexpected catastrophic event).

Now that the model forecasts are here, I would like to be remanded to look at them a year from now.

Just to satisfy curiosity, here is the same time of simulation for the SP500.

Sygnity

Sygnity has proven to me that it is CSI like acquirer. I added some shares to my holding. I hope to add more in the future if the price becomes more favorable. Sygnity seems and most likely is expensive compared even to the rest of the CSI. However, they have two favorable real options. One is that they are simply smaller and can grow in a region historically neglected by the rest of CSI. Second is that, although not without political risks, these regions will grow faster than the rest of the economies CSI invests in, simply because countries like Poland, Lithuania, Estonia, and Latvia will benefit from proximity to developed parts of Europe and should grow faster in nominal terms. Producing organic growth at rates CSI never dreamed is a real possibility there. I will publish my valuations on Topicus, Constellation, and Sygnity in a separate note, just to show my assumptions, without explaining much about what they do (there are so many others online that do that better than me).

Proeduca Altus

Proeduca Altus was another spread transaction I did (I also mentioned it on Substack and Twitter). This was a rare opportunity, probably available only because of the low float. In a span of 10 working days I was able to purchase shares at 33.6 and tender them away at 34.01. This was quite literally a zero-risk spread at the time. More below on how I found it.

Global Blue acquisition by Shift4Payments

I purchased some shares of Global Blue at 7.35 and have subsequently sold them at 7.41 in a few weeks span. At the time of the purchase, which I funded with borrowed money, internal rate of return implied by the price and some reasonable estimate of time remaining until the acquisition is fully completed, was just slightly above to the interest rate I would pay on the borrowed funds. I was making a bet that the spread would close a bit in the meantime, and it did. Spread might seem tiny, but add a high level of certainty of transaction closing (100%, unless an unimaginable scenario occurs) and the probable expectation that the deal should close in November-December 2025, and leverage could be used to fund something with almost no risk.

Put in numbers, this could translate to 4% annualized if the transaction closes in January 2026 or 8% if it closes in November 2025. Difference between the two? Latter can be funded with 100% debt at a maximum of 5.8% per annum. Somewhere in the middle of the above interval of time (December 2025) cost of holding this position with borrowed funds at the highest rate will become higher than the after-tax proceeds one would get after Global Blue is delisted.

To provide some details here on the Global Blue and Shift4Payments transaction. Since the official Shift4Payment tender offer has expired on July 2nd, remaining 2.6% Global Blue shares remained in float. According to available information, shareholders owning them will be squeezed out at USD 7.5 once Global Blue is ultimately delisted. Global Blue has scheduled an Extraordinary General Meeting (EGM) for August 18, 2025, with the primary agenda item being the approval of the merger agreement that will facilitate the squeeze-out by Shift4 Payments.

The agenda for the EGM, which will be held in Zurich, Switzerland, explicitly asks shareholders to approve the "merger agreement between the Company as transferring company, GT Holding 1 GmbH ('GT') as surviving company and Shift4 Payments, Inc ('Shift4') as GT's parent." The meeting documents further clarify that this is for the purpose of a "statutory squeeze-out merger."

What this means for the Squeeze-Out Timeline:

• Key Approval on August 18: The shareholder vote on this date is a critical legal step required under Swiss law to execute the squeeze-out. With Shift4 holding approximately 97.37% of the shares, the approval of the merger is a formality.

• Path to Completion: Following the approval at the EGM, Shift4 will be positioned to finalize the squeeze-out process. This typically involves a formal delisting of Global Blue shares from the New York Stock Exchange and the compulsory acquisition of all remaining shares.

• Improved Estimated Timeline: While a final date for the delisting and the payment to squeezed-out shareholders has not been announced, the scheduling of this EGM makes a completion of the entire process in the third quarter of 2025 highly probable. Previously, the timeline was estimated to potentially extend into early 2026. This EGM significantly accelerates that outlook.

Following the successful EGM vote, the company will release further information regarding the final delisting date and the process for receiving payment for the surrendered shares.

With some luck, I would be able to perform this maneuver a few more times. If one of you grabs the some of the low float remaining instead of me, I am happy for you.

Interesting prospects I decided to pass

I researched two new companies. These were small companies, one being profitable at a level unusual for its size, growth, and stage in corporate development, the other being a turnaround in the making.

First one is Connexion Mobility, a small Australian automotive software provider with a current market capitalization of AUD 21.6 million and an EV of AUD 14.4 million (note the difference). By any measure, Connexion seems like a healthy, profitable, fast growing, and reasonably priced business. It is even faced with the issue of having to employ the excess capital it generates, since it does not need it for the type of growth they do.

It generates its revenue through the SaaS model by selling subscriptions for its OnTrac (mostly) and Connexion platforms.

These software solutions are designed to help with managing courtesy transportation programs (substitute vehicles car dealerships provide, trial runs, shuttle management, paid rental, pick up and delivery etc.) predominantly for GM. And this is this is where problem starts. OnTrac was developed in cooperation with GM in GM's attempt to increase its cost-effectiveness and is mandated as the software solution of choice for all GM car dealerships in the US. Issue is, if GM ever decides to end the relationship with Connexion, Connexion would in effect, lose most of its revenue source. Not all, but close to 99%.

At the same time, management is not ignorant of this. Excess cash generated is stockpiled and invested in low risk securities serving as a buffer in case of the business continuity disruption.

In total, Connexion today has over 5 million in cash and cash equivalents (market capitalization of 21 million). Enough to finance 2 years of R&D and SG&A if needed.

There is a high degree of insider ownership, with the CEO, Aaryn Nania, owning a growing number of shares awarded through an internal incentive plan (total diluted share count is 965.9 million). Periodically, Connexion repurchases shares, which are then distributed to employees as a part of the employee incentive scheme.

Aaryn Nania seems like a driven CEO. He got involved with Connexion in 2020 as a non-executive director, while previously being a founding partner in Lucerne Investment Partners (the fund achieved below-market returns during his involvement; however, that was a short period of time, and I have not analyzed the mandate of the fund).

Currently, it is a business generating 2.2 million of net income, some of which (10%) is due to its portfolio of securities, no debt, and EV of 14 million. In case of GM discontinuing the partnership or negotiating lower prices, most of it could be gone, and for me this hurdle is hard to pass. If this was one of 100 holdings in my portfolio, then possibly I would consider it. In any case, it will be interesting to see how their generalized solution, Connexion Mobility, continues to develop and how their announced connexion to Uber evolves. Until then, I am passing this idea on to the efficient market.

Second interesting company I researched, but failed to get a clear view on, is Janison Education Group Limited, which is a turnround in the making. The company's operations are structured into two primary business units:

• Janison Solutions: This is the core and most valuable part of the business. It provides the Janison Insights platform, an enterprise-grade, software-as-a-service (SaaS) solution for authoring, delivering, and managing high-stakes digital exams at scale. This segment primarily serves governments, national education authorities, and professional accreditation bodies. This unit also contains a legacy LMS business, which has experienced revenue decline and is no longer a strategic focus.

• Janison Assessments: This unit owns and sells proprietary assessment content and products, primarily targeting the K-12 schools market, as well as parents and teachers directly. The portfolio was largely assembled through acquisitions, including the prestigious ICAS competition from UNSW Global, Academic Assessment Services (AAS), and Quality Assessment Tasks (QATs).

Janison made a series of questionable acquisitions in its recent history but at the same time has a quite valuable software platform in Janison Insights. This platform is used through long-term contracts with blue-chip government and education bodies globally, including the Australian Government for its national NAPLAN testing program. Probably the crucial point in understanding what might happen with Janison is linked to the current CEO, Sujata Stead, who was appointed in May 2024. Sujata Stead has over 25 years of experience, of which the most notable is her period as CEO of Cambridge Boxhill Language Assessment since 2013, which she built into a successful global business. Where I have stumbled on is in understanding what happened with Boxill Language Assessment. Some clues were left in the Annual Reports from Box Hill, which owned Cambridge Boxhill Language Assessment and showed it in their books under the equity approach. My first reading is that she grew the business, without the need for additional capital, at a high rate of growth and profitable along the way. If this could be confirmed, the probability I would assign to Janison becoming a successful turnaround would be higher, and it would be attractive even at today's prices. Until then, I lack clarity to make any decision on it.

I spent a considerable amount of time researching Plover Bay, and at this point I made no decision to pass or buy. It is a very interesting business, with what seems to be a healthy corporate culture and a driven and incentivized management and employees, but with a high degree of geopolitical risk.

Idea generation

My idea generation is random. To that extend that above Global Blue I identified while reading about Shift4Payments. Proeduca Altus I knew from before and discarded as a potential investment due to nepotism in the management structure, but looked at again accidentally while reading about Janison Education, which I picked up from a screen I run from time to time. Historically, situation is no better. My fastest doubling of initial investment happened after glancing on a random Zacks article about GasLog Partners. I first spotted Constellation by looking at lots-of-chart at Koyfin and going though all Canadian stock price histories. Constellation seem to go up all the time. I was curios why. Constellation then brought me to fintwit, and this has impacted my portfolio greatly. Through Liberty and his podcast I learned some details about Constellaition. Following CJopp3l and NotMarkLeonard on twitter also helped a lot. Understanding Constellation, made me curios about Topicus. Understanding them both changed the what I look in investments. It became business agnostic, but rather capital allocation focused. Some I found by random by checking companies others mentioned. One I found by having lunch with my wife on a bench on the shore of Drava river and wondering what that big building across the river was (Lam Research). Some by asking others if they know of anything similar to what we both own (I identified Vysarn like this). My idea generation is random, and maybe that is an edge. This randomness is something to be cultivated. I often wonder how many siloes like that focused on the serial acquirers on fintwit, is there completely hidden from by sight.

Tracking portfolio and searching for own biases

I feel tempted to invest when everything seems to be going up. I always hoped this feeling would disappear as I gained experience, but it does not. The only way I found to restrain myself a bit is by looking at what I have done historically with my current portfolio position. One way of looking at it is to identify at which stages of the market and individual business cycles as perceived by the market I have actually allocated my funds.

Hopefully, my history of capital allocation decisions should show that I invest the most during the market drawdowns. This can be viewed from two angles. First, by tracking each individual allocation by its current market value and measuring their CAGR, and second by tracking it at the cost of the initial investment and measuring their CAGR. These then, I would compare to market drawdowns over the same holding period. Note that the next two figures only show investments where my holding period is longer than half a year for better representation (calculating CAGR based on a week's worth of return is not the best idea).

Both of the above can be compared to the mirror image of the drawdowns of the SP500 over past six years.

It is difficult to judge. At least in 2024 most of my investment occurred during small index corrections, but my patience to wait for good opportunities seems to be limited and should be improved.

On a separate note, I found it amazing that unknowingly, none of my pre Covid positions remains in my portfolio (Berkshire and Allianz being the exceptions, however I did sell it at the beginning of the covid panic and then had luck to buy them again).

Portfolio

Portfolio is doing well. It is still ahead of its target value for 2026, but there are far less opportunities to safely allocate capital among the names I own. Quorum possibly being and exception to this. On the other side, nothing seems so overvalued, that I would consider selling my position while being rightfully compensated for the expected growth or price to value gap I see to those positions (if its a growth company, I would consider selling when my implied rate of return drops to a rate of a risk free 10 year bond in the same currency, if its a value investment - close to my fair value estimate or market implied rate of return).

Disclaimer and kind request

Before you take any actions based on this article, remember, you are trusting an experimental analysis of an anonymous person. However, if you like it, and you think it makes sense, feel free to support my writing which I do in my spare time, while working a full-time job.

If anything you pick up from my Substack or Twitter/X account results in you earning a reasonable profit, or avoiding unreasonable loss, keep the karma going. Subscribe as a paid subscriber, even for a month. Even years after you have read something from me, hopefully based on realized experience.

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In any case, it does not hurt to subscribe for free, share this article or comment. It hurts me if you don’t 😇

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Philips

Philips was a relic of my old investment approach, and it was more speculative and with a lower buffer for mistake than I would prefer if I were to invest anywhere now. When I invested in it initially during COVID lows, I was in effect a factor investment in a company I viewed as having successfully completed its transition from a domestic appliance producer to a healthcare technology company. It was supposed to be a value investment until their transition was fully confirmed by the market. This all changed when Philips announced a voluntary recall of several products in their Respironics division, which resulted in several years of uncertainty over the final outcome of the process. Over time, it became deeply undervalued, and I performed some maneuvers I generally tend to avoid. In sequence, I harvested my losses, waited more than a month, and reentered with an even greater amount in both stock and long call options. This was quite close to a multidecade low price, but my timing was sheer luck. Full costs of the lawsuits are mostly known (EU part is somehow neglected), Philips went into yet another restructuring, and Exor invested in it. But over the years, I simply failed to predict how management might react to any crisis or opportunity. Either due to lack of time now or having less experience back then, value estimates I produce are dispersed to the level I cannot even guess if I have a margin of safety on it. Luckily for me, it made a decent profit as a whole. I still own it through my Exor investment, however, this one also is close to be eliminated from my portfolio.

Topicus

Topicus was overlooked in a way for a few months this year as they went into capital overallocation. We don’t get much precise information on the acquisition sizes, but one report from RBC gave some insights on just how much capital they have employed in 2025.

When grasping the numbers below, I tend to convert Asseco investment in revenue equivalent. It is straightforward to compare Topicus revenues and capital invested (total equity + interest bearing debt + accumulated intangible asset amortization) and derive that with every euro allocated, Topicus tends to generate 0.8-0.9 euro in revenue.

This then turns into new equity with 30% adjusted net income (the largest adjustment there being adding back intangible asset amortization). Since Topicus allocated, or agreed to allocate some 700 million euros (170 million in acquired Asseco shares, 250 million on additional Asseco shares subject to approval, 240 million on other acquisitions not yet completed and 45 million of completed acquisition transactions in Q1 2025) in a short period of time, this can be seen as equivalent of ensuring revenue growth of 560-630 million revenue acquired, or 168-189 in additional adjusted net income. Current LTM revenue and adjusted net income for Topicus are 1.344 million and 440 million. It is interesting to see how successful this idea of capital allocation externalization with Asseco, but looking at it like revenue equivalent (and assuming that equivalent for Asseco gets reinvested) does not look that bad for Topicus.

Apart from this, Topicus is doing as well as it can and still seems fairly priced if you assume that they are able to reinvest at these rates for 5 or so years.

Similarly, for Constellation (remember it owns Topicus in part), for a brief period of time, the market price for which it was selling implied returns that are 20-30% higher than average historical or implied market return (in different words it implied IRR of 10-11% vs market 8%). For most businesses, this is not a good enough margin of safety, but I view Constellation as a much more stable and profitable set of business than what is currently under the broader market index, at least I believe it to be. And if the changes made by Constellation in the last few years tell us anything, that is that for years to come they don’t plan to do anything else other than allocating capital at above-market rates of return, wherever they might find them.

Quorum Information Technologies

Quorum Information Technologies is at the crossover, in my opinion (I would be interested in yours). They are at the point that they are generating far more cash than they need for any ongoing business financing decision. Nothing spectacular happened with the year-end 2024 and Q1 2025 results, except that in itself is special. Looking at the income statement, one would consider this to be a suddenly bad quarter due to the drop in EBITDA margin, but a great deal of the drop was due to the decision to recognize R&D spend as expense instead to capitalize it (see figures below).

Revenue is almost flat as during the whole year, margins also. Restructuring is almost complete. They will generate enough cash that they would be able to repay the mezzanine and cash loan from BDC within a year. They will not repay it in full as it would cause them high penalties, and the mezzanie loan (10% interest rate) will be repaid in annuities until August 2027.

Outstanding BDC loan is 3.7 million. Quorum has 3.7 million in cash today. It might generate close to 6 million per year from now on, assuming tariff wars don’t collapse car sales, their announced savings measures materialise, and there are no unexpected working capital developments (see some numbers in charts provided below).

Reading this data visually shows why cash flow statements remain one of the greatest hidden treasures of those who invest.

Looking at the transformation from the cash flow point of view, Quorum made in the last 2 years is remarkable. Where cash from operations is misleading a bit in case of Quorum (EBITDA also for that matter, and their cash EBITDA) is in the fact that it does not proxy well the stable state cashflow generation ability.

For this, something that Terravest regularly publishes can be modified for this purpose. Starting from cash flow from operations, I would eliminate the impact of working capital changes (assumption that a non-growing business has stable WC requirements, i.e. not changing). I would also subtract lease payments and capitalized R&D (Terravest takes out maintenance capex, but for a non-growing software business, R&D is capitalized, or expense is maintenance spend). Figures look different now. Better.

Add to whichever amount from the figure above, expected 1.3 million cash savings, and you will get to a hoped-for stable state cash generation power. By my account, roughly 6 million, mentioned previously.

The interesting part about Quorum is that they will have to do something with the cash they generate and cumulate. At least, according to their last few call transcripts, they were looking for new acquisitions. One point, which I found interesting, is that they finally recognized that the rooftop count they used to disclose is not relevant information. I spent a great deal of time analyzing how rooftop growth from acquisitions and organically has impacted revenues, and the only conclusion I managed to make is that not all rooftops are equal and that it is difficult to cross-sell products into acquired rooftops. One way of looking at the latter is as a barrier to growth for Quorum. Another is to look at it as a barrier for the growth of any player in DMS software. Quorum cannot take someone else’s clients, just as that someone else cannot take it away from Quorum. The most obvious example of this is Quorums relationship with Auto Canada. Quorum provides BDC services (call center) to Auto Canada. CDK Global (owned by Brookfield) provides DMS software (ERP) to most of its dealerships. Over time, CDK, who is one of the largest providers of dealership software, did not manage to squeeze out Quorum. Nor has Quorum cross-sold its software to Auto Canada (if they did, it would have a material impact on their revenues, maybe even increasing them by 20%). The only financially rational way to grow a company in this field is though acquisition. My bet on Quorum is in effect a bet that current members of a Board sat down, talked and recognized this.

Alternatively, if they do not plan to grow or return capital, they will most likely plan to become a nice acquisition target. Low debt, excess cash on balance sheet, cash being generated. Add leverage to the acquisition price calculation and nice return on equity could be extracted by a competitor or asset manager of some sort. The point just made is just speculation on my side.

What is the enterprise value of a stable, non-growing business generating 6 million cash after taxes (this number might go down in the future as Quorum uses up its tax shield)? Without running DCF, it’s close to 60 to 80 million. Quorum, current EV is 70 million. What is the value of the same business if it starts investing its residual cash in attractive and instant cash returns? What is the value of the same business if it invests residual cash accompanied by the leverage it can support in the eyes of the bankers, with their stable cash generating capabilities? It is much higher, but we do not know if they will do it. We can only hope they do. For an investor like me, hope, used in forming a thesis, reduces the portfolio share of the position. However, if one were to sit on a board of the company and have some insight into the future plans, this position could be a more significant one.

If you need reasons not to invest in Quorum, provided a nice antithesis.

Kreuzmann’s Ideas

Why I passed on Quorum Information Technologies

Hi, I was thinking a lot about sharing my work on companies, that I found interesting but decided not to invest in them (for now). You can call them watchlist ideas, but I stick mainly to reasoning that idea (or speculation) is a good one or it is not. Of course many speculations can grow into investments and I am not saying that these wont be investible…

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a year ago · 14 likes · 4 comments · Jakub Kreuzmann

Pinetree

This is a nice segue to a Pinetree current book value per share estimate.

Suffice to say, I did not add to Pinetree in these turbulent times. I did not sell it either.

I would like to believe that Damien and his coworkers can continue to compound Pinetree book value as they did in the last two years, but we have just reached a point where they have five years and one quarter of accountability for the book value development.

In December 2019 MDA, the following was disclosed:

Since the majority of cash and investments came under control of current management of Pinetree (December 2019), book value per share has grown cumulatively 138% until March 2025 (18% CAGR). Price per share increased by 443% until March 2025 (38% CAGR). If I were to use the latest price of Pinetree shares and measure CAGR until the end of May, the last pair of figures would read 627% and 44%. In defense of the higher CAGR in share price, Pinetree stock did sell at a close to 30% discount to book value in December 2019.

This is a hefty premium to pay for future performance. Especially if one justifies it with book value growth from the last market bottom two and a half years ago.

Enghouse

I mentioned Enghouse on few previous occasions and I invested additional time into it. I also experimented with several deep research models in an attempt to validate or counterargue my own thesis on it. Ultimately, I decided on using Gemini and after a week or so of questioning what I knew or did not know about them, this report was generated:

Equity Research Report Enghouse Systems Limited

449KB ∙ PDF file

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It is not quite what you would expect from a typical equity research report. But what is interesting is, that in this case, I was not relying on this blindly. I went through a great deal of Enghouse reports, their product offerings, and transcripts since 2019, and this is not far from how I would have written it. It has something to do with the fact that I was shaping it through my own questions (a lot of questions), but I also tried to challenge any strong assumption I made or was considering to make. Strongest among them, most likely, is how AI will affect Enghouse contact center software solutions (augmentation vs replacement debate). Needless to say, it seems that Sadler could be correct when providing this answer to the potential AI impact on Enghouse products.

One though is also in the back of my mind after reading the latest Quorum earnings call transcript a few days ago. Then, as well as Enghouse, see contact center services as something to be augmented by AI, and not fully replaced. I am still trying to figure Enghouse out.

Mergers and spreads

For those who missed it, I wrote about one cash and share acquistion I receintly found.

I have not taken position, but I am watching it closely. It seems nothing can prevent this acquisiton. But the narrow and volatile (sometimes even negative) spread makes it almsot imposible, at least for me, to create a posiiton.

One interesting odd lot out there might be tender by Air Canada to repurchase half a billion dollars worth of it stocks. But more importantly, within those half a billion those holding up to 99 shares are guaranteed at least the lower bound in the tender. Not much, but it is there for the takes on an odd marjet day.

Portfolio

Portfolio is doing well. I am lucky that there are still some companies in it worth allocating the remaining liquidity I have, or will generate if I decide to close some of my minor positions.

Disclaimer and kind request

Before you take any actions based on this article, remember, you are trusting an experimental analysis of an anonymous person. However, if you like it, and you think it makes sense, feel free to support my writing which I do in my spare time, while working a full-time job.

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I found an interesting cash and share acquisition, in which I have not taken any position. When confronted with situations like this, and in order for me to underwrite any risk, I would either need to be able to estimate with a high degree of certainty if the Urban Logistics shareholders are getting a fair offer, or I should be certain that the shareholder approval is just a formality or close to being one. I am not able to value REITs, so the former is out of my reach. For the latter, I provide some details below.

I will leave a financial construct used at the end of the note. Consider it an idea exchange for any additional inputs you who read this could provide (you are still a small group).

On the May 9th, 2025, Urban Logistics REIT plc received a takeover offer in cash and shares from LondonMetric Property plc.

According to the offer document, each shareholder of Urban Logistics would receive 0.5612 of newly issued LondonMetric shares and 0 .428 pounds, subject to court and Urban Logistics shareholder approval of a 75% majority.

The level of those who are committed to voting in favor of this deal is low, especially having in mind that 75% of Urban Logistics shareholders have to vote in favor of this deal in order for it to be approved. Voting will occur between May 23rd and June 30th (the exact date should be known on May 23rd).

One additional shareholder which might vote in favour of the acquisition is Achilles Investment Company Limited, run by Chris Mills and Robert Naylor, which owns 8.8% of Urban Logistics. Achilles made a polite request to fire the current management of Urban Logistics.

This was also followed with an explanatory note providing more details on potential issues with Urban Logistics. Among other things, the idea of sale of Urban Logistics was mentioned.

Where Achilles showed major distrust in the Urban Logistics management was related to the involvement and connections of M1 Agency LLP (a property consultancy firm specializing in the logistics sector) with Urban Logistics and Logistics Asset Management. When in March 2025 it was announced that Urban Logistics would acquire Logistics Asset Management and put Richard Moffitt to be a new CEO of Urban Logistics.

The connection between M1 Agency and Urban Logistics centered around Richard Moffitt, who held key positions related to both entities. Moffitt was the CEO of Logistics Asset Management LLP. Logistics Asset Management LLP was the external investment adviser to Urban Logistics. This means they were the company contracted to manage Urban Logistics REIT's property portfolio and investment strategy. Simultaneously, Richard Moffitt was a partner in M1 Agency LLP. Urban Logistics employed M1 Agency for services such as specialist advice, sourcing off-market property acquisitions, and brokerage services. Over a four-year period ending March 31, 2024, Urban Logistics paid over £6.3 million in fees to M1 Agency LLP. This was in addition to the fees (approximately £22.7 million over the same period) paid to Logistics Asset Management LLP (the external investment adviser where Moffitt was CEO). This total consideration paid was a significant portion of the total cumulative operating expanses in this period.

Achilles publicly highlighted these concerns, questioning the appropriateness of these payments and the governance structure. There might be merit to their concerns about the governance of the existing management team. Apart from canceling their request for an extraordinary general meeting at Urban Logistics in April 2025, after the initial offer from LondonMetric was mentioned, Achilles made no new announcements. My assumptions are that they have maintained their stake in ownership and that they would vote in the favor of the proposed deal, bringing the total vote in favor to 15.17% (8.8%+6.37%).

Who are the remaining owners of Urban Logistics? This is a difficult bit of information to obtain. To my best effort, I managed to identify that the following entities were involved in purchasing Urban shares (and in some cases shorting LondonMetric as a hedge) since the initial possible offer of LondonMetric was announced on April 11th (based on Form 8.3 provided at the following link).

Assuming all those who were dealing with Urban Logistics shares after the offer became public, intent to vote in favor of the deal, we are now at 46.68% of the votes in favor (note that two entities highlighted above are holding companies owned by Achilles). Some of these names are just brokerage accounts, but this assumption is probably not that far from the true intention of those still holding the shares.

Finding the remaining shareholders from here is difficult. The simplest source of information I found is actually from TIKR. From it, I assumed that institutional investors, some pension funds, and some hedge funds, as well as insiders, would vote in favor, resulting in a total vote count of 85.37%. Note that TIKR data has no information on Sand Grove Capital Management LLP, L&G - Asset Management Limited, Samson Rock Capital LLP, Glazer Capital, LLC, Kryger Capital Limited, Aberdeen Group plc, and Franklin Resources, Inc., from the table above, which jointly own 13.78% according to my count (my count can be wrong). Vote seems to be in favor, or at least close to being plausible that it is achieved. I would assume that the organizations like ISS (Institutional Shareholder Services) or Glass Lewis, or similar companies, will issue their formal voting recommendation for the proposed acquisition once the final scheme document is disclosed on May 23rd.

As for LondonMetric, historical acquisitions from LondonMetric indicate that this is not their largest deal historically:

1. Target Company: Urban Logistics REIT plc (SHED.L)

   • Status: Recommended Offer

   • Announced Date / Effective Date: Announced: May 8/9, 2025; Expected Completion: By June 30, 2025

   • Consideration per Target Share: 0.5612 new LMP.L shares + 42.8p cash + 4.35p interim dividend (retained by SHED.L shareholders)

   • Implied Value of Acquisition (Approx.): £698.9 million

2. Target Company: Highcroft Investments PLC

   • Status: Recommended Offer, Scheme Effective

   • Announced Date / Effective Date: Announced: March 27, 2025; Scheme Effective: May 21, 2025 (Expected)

   • Consideration per Target Share: All-share offer (Valued each Highcroft Share at 842.1p based on LMP.L price on Mar 26, 2025) + 35p interim dividend (retained)

   • Implied Value of Acquisition (Approx.): £43.8 million

3. Target Company: LXi REIT plc

   • Status: Completed

   • Announced Date / Effective Date: Effective Date: March 5, 2024

   • Consideration per Target Share: All-share merger (0.55 new LMP.L shares per LXi share)

   • Implied Value of Acquisition (Approx.): £1.9 billion

4. Target Company: CT Property Trust Limited (CTPT)

   • Status: Completed

   • Announced Date / Effective Date: Announced: May 24, 2023; Effective Date: August 7, 2023

   • Consideration per Target Share: All-share offer (0.455 new LMP.L shares per CTPT share)

   • Implied Value of Acquisition (Approx.): Not specified in summary, but shares issued

5. Target Company: A&J Mucklow Group plc

   • Status: Completed

   • Announced Date / Effective Date: Year: 2019

   • Consideration per Target Share: Not fully specified

   • Implied Value of Acquisition (Approx.): £0.4 billion

6. Target Company: Metric Property Investments plc

   • Status: Completed (Merger to form LondonMetric)

   • Announced Date / Effective Date: Year: 2013 (Effective Jan 2013)

   • Consideration per Target Share: Merger with London & Stamford Property plc (0.94 new LMP.L shares per Metric share)

   • Implied Value of Acquisition (Approx.): £830 million (deal value)

Interestingly enough, I found no evidence of cases where LondonMetric publicly disclosed an offer, which was then retracted or rejected by the targeted company.

Transaction

In order to execute a partially hedged transaction, one would need to do the following:

There is an interesting element here to consider if you look at the above. Having a profitable outcome in this construct assumes that the proposed dividend of 4.35 pennies is paid. If Urban Logistics were to, for whichever reason, decide to withhold dividend payment before the transaction, one would stand to lose close to 2% on its long leg. This, however, I believe is highly unlikely, because it was mentioned as a part of the deal announcement and board proposal, and changing the proposal like this cannot rationally motivate shareholders to accept this deal.

There is another hurdle to overcome, and that is one of the transaction costs. Depending on your broker, this might vary, but at least on Interactive Brokers you will end up paying significant fees on purchasing shares of Urban Logistics (close to 0.55%). Add to this borrow rate for the short leg currently at 0.13% (annualized 0.9%) and 0.05% fee on selling London Metric, and some 0.73% of any remaining spread is gone. This might eat up your return and boost the returns of Interactive Brokers. If you decide to use leverage for the long leg, you would be facing an annualized borrow rate of 0.81% over the holding period, or 5.7% annualized. The total cost of a fully leveraged position, which would save one from the FX risk, would come up at around 0.69% (including fees), removing almost all the spread available.

Alternatively, using no leverage and assuming a long position would expose one to all the currency risk with added fees. And potential compensation of existing spread minus the costs, which as of the moment of publishing sits at 0.93% of the long position. Is this adequate compensation for currency risk? Hardly.

For those interested, some data is in the Excel attached.

Urbanlogistics

49.5KB ∙ XLSX file

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Download

I have still not taken a position in Urban Logistics, nor LondonMetric, however I will reconsider it again once more information becomes available as of May 23rd. Hopefully the spread increases with no new real news in the meantime.

Ultimately, this was a worthy effort, if for anything, than because of how the idea was generated. I simply asked one of the LLM AI tools to “find M&A transactions in which publicly traded companies are acquired, which will close within two months, and where the difference between offer price and current market price is more than 1% (market price should be lower than offer price)". The work above is my own, and AI-free, but asking any research tool to do the same for you would probably result in something similar. The world of investing is changing rapidly.

Disclaimer and kind request

Before you take any actions based on this article, remember, you are trusting an experimental analysis of an anonymous person. However, if you like it, and you think it makes sense, feel free to support my writing which I do in my spare time, while working a full-time job.

If anything you pick up from my Substack or Twitter/X account results in you earning a reasonable profit, or avoiding unreasonable loss, keep the karma going. Subscribe as a paid subscriber, even for a month. Even years after you have read something from me, hopefully based on realized experience.

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Diversification has a bad reputation, but it gives such an optionality in times like these. There are always nice opportunities to rotate your portfolio distribution in times like these. Recent turnarounds usually don't follow market drawdowns, but provide above average returns if successful. Certain sectors, like insurance, still benefit from rate hikes and the hard insurance market. This is a nice time to rotate them into higher beta quality companies one owns. Similar goes for telecom companies and utilities now, which are getting priced to perfection. It never feels right, makes your guts turn, irrespective of your age. With every sale, you think you are making a mistake. With every buy, you think you are exaggerating it, but in the long run, it's rational.

I tend to diversify my portfolio, not by the number of companies or sectors in which they operate, but by the financial constructs they are. Some are turnarounds and value situations (Trubridge, Quorum or Philips), some are growth companies still in their early years (Mader and Tasmea), some are capital allocators (CSI universe), and some are simply leveraged economy trackers (insurance businesses in my case). They all tend to reach their fair values, or get overvalued, at different times in the market cycle, forcing you to time the market by reducing your positions or selling them out completely. One of the best examples I had in my portfolio was my holding in Lam Research, which I sold out gradually during the AI craze, when my estimate of the IRR was far below the risk-free rate on 10-year US government bonds. This does not mean I can estimate the exact IRR (I am more likely to understate it since it always implies a slowdown of a business), but it does give me this warning light that maybe my money could be employed somewhere else with a greater probability of higher return.

Where I did allocate a lot of capital, before the March drawdown, was in Penneo (I made a mention of it in my last portfolio update). Since it reached a risk-free stage of its take private journey, I tried to acquire as many shares that were not initially tendered (remaining 10% of the float) and tender them again until 28th February. On some days, I was the only one picking up the volume. This I financed fully with leverage in Interactive Brokers, ensuring a net annualized return of 5% (but since it is fully on leverage and only equity invested is interest cost, real return was above 300% - if only this was scalable). On a portfolio level, proceeds from this transaction would add some 0.4% pretax to my current net asset value. It is marginal, but it is real money and relatively effort-free by the time I executed it. Initial investment in Penneo, while it was not risk-free, required much more work. Prior to conducting this transaction, I had an exchange with ABG Sundal Collier who worked as a financial advisor of Visma on Penneo acquisition, where any concerns I had were answered. I still find it remarkable that a small individual investor can obtain information like this simply by asking the parties involved in a transaction.

I added to my positions in Topicus and Terravest. I was a little late to add to Topicus after initial disclosure of their stake in Asseco, but I revisited my valuation after I learned that Pinetree also invested in them in Q4 2024 at around CAD 118 per share. When valuing Topicus, using my standard approach, I was reaching the value per share of CAD 160. And this was before the Asseco transaction and Q1 acquisitions. But after they have allocated more to acquisitions/investments in Q1 of 2025 than in FY 2024 and FY 2023 combined, it is fair to assume that they also propelled themselves a few years into the future, at a cost of debt that is far below the ROIC they will get on these investments. They will probably take on significantly more debt than they had, but Topicus had historically low leverage compared to the Constellation, especially before last year's dividend distribution.

Terravest also presented a nice opportunity to add to my holding in the wake of the tariff narrative and conflict between Canada and the US. According to my understanding, tariffs would have only a limited impact on Terravest through steel prices, except if they result in overall North American recessions. I am not a good political analyst, but I believe that incentives are low for any political leader or party to push an economy that managed to avoid a recession, into one. History of the US presidents who caused a recession without a need to combat a real problem is short (in my recollection, Regan and Hoover are most well known cases, but in both situations, there was a significant issue before they took their actions - high inflation and 1929 market crash). I was lucky with my timing here, since I managed to increase my position by 20% in share count a few weeks before EnTrans acquisition.

Both previous additions I financed with the sale of my Philips shares (which is becoming more and more complicated for me to value) and realized return from Penneo.

There is no certain way to value Terravest, and investing in it will always include paying up for some future expected growth (except in the rare, extreme situations). Probably the simplest way to value it is to form your own view on how long will Terravest continue acquiring cash flows and at which pace will it compound what will ultimately become its stable state cash flow (their measure of cash available for distribution works well to approximate this). To simplify even further, you can then discount those cashflows with something around 10%, and you should be close to the fair value estimate. Terravest was until recently 100 - 120 million cash generating economic asset. After the latest acquisition of EnTrans, this has probably increased to a range of 150-180 million.

From here, one should decide on two more variables. Compounding factor for the cash available for distribution, and the period over which the compounding might happen. The compounding factor is linked to current management and their acquisition identification and appraisal abilities. Depending on what you consider a breaking point in Terravest history, the long term CAGR of CFAD varies between 17% (from December 2012), 18% (from December 2014), or 30% (December 2017 - year in which Dustin Haw became CEO).

Taking this further, and just as an example, assuming these rates of growth continue over the 5 and 10 year periods, you get the following distribution of present values for the terminal cash flows (excluding the present value of the dividends that will be distributed).

This is far from proper valuation, but it is one way to do it. Note that these are EV and not market capitalization equivalent values, but it is a nice shortcut to gauge market expectations or any premiums you might be paying at this moment in time. To quantify it, if you took current share count and CAFD base values above and discount them at 10% as perpetual cash flow, you would get EV estimates of 1,500 million and 1,800 million, or CAD 77 to CAD 92 per share, implying a high premium for growth included in the current price per share, especially when you take into account that after the EnTrans acquisition, Terravest probably carries close to 850 million in debt, or roughly CAD 44 per share. It is far from an undiscovered acquirer at this point.

Investing in any growth company is undeniably linked to the trust you have in the management at hand, and trust that they will continue the growth approach in which you have invested. Reality is that they can change their approach to running their businesses tomorrow, irrespective of how you will it. There is no law or higher moral code that forces them to maintain their capital allocation policy. They are responsible to shareholders, but this responsibility can always be used and misused. It is impossible to price this risk effectively, which is probably why most of the best serial acquirers are trading below their fair values today, estimated in hindsight 10 years from now. Successful ones, at least.

I like to believe that markets price serial acquiring strategies in alignment with average CEO tenures, which are surprisingly low. If a median CEO is at the helm of a company on average for five years, there is a reasonable doubt to have about the strategy of the company after this period. In effect, whenever you make a forecast related to a business further away than 5 years, you are betting on the unknown actions of an almost random individual. In the case of Terravest, Dustin Haw is there as CEO much longer.

Virtual friend and a fellow Substack writer, 💚📡(with much better content than you find here - if one odd lot from below earns you money, subscribe to his publication), gave me an idea to draft my more detailed valuation approach for Terravest. Time permitting, I will try to publish it soon.

I spent a considerable time studying Enghouse. Most of the information on them can be picked up from their earnings calls. If anything, they give you a great deal of details on how profitability and client dynamics differ in SaaS vs. license models and on-premise vs. cloud (private or multi-tenant) options for software distribution. Management running it, and especially CEO Stephen Sadler do seem to work in the direction of creating shareholder value. They acquire VMS enterprise software companies, lately distressed ones, cut out unprofitable revenue and keep the remaining profitable core, and sometimes whole teams of developers if they are talented ones, irrespective of their product assignment. The obvious risk in their case is the impact AI might have on their call center solutions, but this seems to be overinflated, since Enghouse has been integrating AI solutions in their products even before the ChatGPT broke through. The bigger issue, not really an issue, but a suboptimal situation, I identified is their reluctance to allocate all of their excess capital. They seem to pride themselves on their cash pile and the fact that they don't use debt in acquisitions. Any debt they had in mid-term history came only from debt that was acquired. They seem to target IRRs of 16-20%. Use of leverage on the level of Topicus or CSI when it was smaller would increase their return on shareholder equity to similar levels of CSI. Reading the transcripts from 2019 onwards, I don't think they will change their approach, either to leverage or hoarding cash and keeping it as a security.

With this, it is fair to assume they will grow their free cash flow at some 10% in some mid-term future at least (2020 and 2021 years were affected by abnormal values in their video communication solutions, so the trend line ignoring these two years is indicative of their real growth). Most likely, their margins could also recover by a few percentages as the pricing pressure from unprofitable SaaS communication companies goes down in the next few years (on a few occasions they did mention this pressure in 2021–2022). On the other hand, they might remain on these levels as they are open about the SaaS model being less profitable than the perpetual license model of software distribution.

I still don't have a clear idea what Pinetree might see in Enghouse, but I am happy at least to own them at this price, though Pinetree. They definitely won’t treat it as Bravura or Trubridge where they do have some level of control through shareholder voting power now. I definitely do see some attraction to it as a value investment, with my IRR estimate now being greater than that of Trubridge. I will continue researching it.

During this period I identified two odd lot opportunities, none of which I managed to use. One was from WEX Inc, where a tender was issued to repurchase shares in a modified Dutch auction with a range of USD 148 to USD 170 per share. I was hoping that the price would go down to 146 on an odd day, and there were a few of these in the overall market in this period, but it failed to happen. Other odd lot opportunity that is still available out there is from Lithium Royalty Corp. It expires on April 30th, 2025 and the offer also provides an opportunity to tender the shares in the modified Dutch auction in the range of CAD 4.50 to CAD 5.20 per common share. This might seem trivial to most, but I like these incremental gains when I can have them at low effort (significantly reduced effort with the help of some AI tools). Usually, the proceeds are used to finance some newsletter subscriptions I would find useful.

My own portfolio is still doing well. It is close to its historical maximum absolute value (excluding the latest contribution of funds) ever, with still some investments within being undervalued according to my estimates, and probably some close to or above their fair value (insurance companies). Since COVID lows of March 2020, it's after tax liquidation value has compounded at 22.5% (or just above 30% before tax by simple division with 72.5% to account for taxation). I don't think this is sustainable. It is amazing to think that close to five years have passed since. All of us had many different visions of the world today back then, and reality is that the world has not changed that much since. My portfolio grew from levels that are not that significant to a nice safety cushion to provide a life of privilege to my family. Passage of time joined with compounding is an amazing thing, especially if you witness it firsthand, but the price for time gone by always seems too high. Hopefully, in a decade or so, it turns into generational wealth.

March is also my fund contribution month (I add funds two times a year, according to my contract with myself), resulting in some cash being available out there for additional investments.

Finally, the end of March is also an annual cut-off date for my portfolio tracking, and following the practice of many keeping their thoughts public, I prepared an annual letter to myself. Where I differ is probably in the fact that I have automated it a bit in an effort to save time. Values below show overperformance or underperformance to the hypothetical cumulative after tax value of my portfolio if it compounded at my 15% after tax return target (I cannot avoid 27.5% tax irrespective of the holding period). So here it goes:

Disclaimer and kind request

Before you take any actions based on this article, remember, you are trusting an experimental analysis of an anonymous person. However, if you like it, and you think it makes sense, feel free to support my writing which I do in my spare time, while working a full-time job.

If anything you pick up from my Substack or Twitter/X account results in you earning a reasonable profit, or avoiding unreasonable loss, keep the karma going. Subscribe as a paid subscriber, even for a month. Even years after you have read something from me, hopefully based on realized experience.

Click here to support

In any case, it does not hurt to subscribe for free, share this article or comment. It hurts me if you don’t 😇

Subscribe now

Or just share your best idea you can quantify with me.

Best of luck to all of us! 🍀

Below you will find my usual tacking and valuation of Pinetree and some alternative way of appraising it. Also, I tried to identify changes in Pinetree portfolio in hope that in the long term I manage to pinpoint the hurdle rate they used. I am still to define their investment style, but it is as interesting to follow as ever.

Here are some notable portfolio development details, apart from new positions.

1. Pinetree seem to have added 20 thousand shares of Topicus at CAD 118 (their historical cost was CAD 67) to their Q3 holding of 30 thousand shares. This was nicely timed before the announcement of TSS purchase of shares in Asseco.

2. Position in Trubridge was effectively doubled in value during February 2025 at an average cost of USD 27.97 (prior average cost was approximately USD 8.71). I cannot explain why this was done. It is correlated with appointment of Dris Uptis of Ocho Capital, and Jerry Canada (former Group President of Harris Computer) to the Board. Jointly, L6, Pinetree, Rorema Beheer B.V. (Strikwerda) and Ocho now own 1,828,393, 768,250, 760,450 and 1,114,178 shares respectively, comprising the grand total of 4.47 million shares of 14.32 million Trubridge float.

   

   Since my estimate of Trubridge value is close to the last tranche average cost, I cannot really explain this. One alternative is that Pinetree wishes to establish a controlling influence on Trubrige operations to either change the growth policy, or start some sort of strategic review now that the poison pill from Trubrige is gone. The second alternative is that simply I am wrong about Trubrige in the first place. I believe my understanding the businesses Pintree owns is far more simplistic than that of Damien Leonard and Shezad Okhai. Whatever it is, Trubrige and Bravura are not positions that Pinetree cannot exit that easily without affecting their price, meaning that they will either remain long term holdings or will be liquidated though some off market transaction.

3. Sapiens International Corporation appeared in the portfolio again (it exited the portfolio in Q3 after some 70% gain was realized over a period of less than 2 years, only to be back in Q4). This time at an average cost of USD 37.9 per share. Unlike Topicus, this transaction seems to be poorly timed at the moment. Pinetree is not a perfect market timer, if that is what you are looking for.

   

4. SS&C Technologies was sold in full, after, according to the Pinetree MD&A, it reached their fair value estimate. As investment, over the period of two and a half year, SS&C worked out just fine returning 54% in total price change, or 18% CAGR (SS&C pays divided of 1% not included in these numbers). Timing here also was unlucky, which is fine since Pinetree is not trying to time or trade. More interestingly, by studying SS&C it is possible to identify how they quantify fair value. Something I plan to do.

   

What is an interesting development, is how Pinetree’s portfolio turnover develops. Pinetree needs to turn its holdings. faster they do it, greater the present value of their tax shield. Currently, they are showing no sign of slowing down.

Valuation

There are several ways to value Pinetree, all of which making strong implicit assumptions, all of which imprecise.

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Below, one can find mentions of: Tier 1 SA, BFF Bank, Penneo AS, CompuGroup Medical, Topicus, Vysarn and Sygnity.

I purchased some of the Tier 1 SA which was taken private by Retex at 3 EUR per share. This individual transaction almost resulted in me ending up with the ownership in the private company due to an internal deadline for selecting a choice for corporate action with Interactive Brokers. Since I purchased shares on December 12, 2024, I was notified that the window for opting for sale of shares was closed, an hour after it was closed. The official deadline for selecting a choice action was December 16, 2024, but I overlooked that a broker might want to collect information beforehand, as they have the right too. Chasing these kinds of merger and acquisition spreads is risky, and this operational risk is something I neglected up until now. Lucky for me, customer support from Interactive Brokers is outstanding in my experience, and they did not fail now. My choice to tender the shares was submitted post internal deadline and the transaction has since closed.

In December, I sold part of my holding in BFF Group in order to harvest tax losses for the year. At the moment I assumed that there will be no relevant disclosures until the middle January 2025 when I planned to add back to my original holding size, and I was lucky enough to do it in January below the price I sold at initially. BFF is scheduled to present its FY 2024 results on February 10th, 2025. In case this backfired, I was still going to be fine. On a portfolio level, this was just a small holding, but a high IRR bet for me. I will publish my notes on BFF sometimes after this post. BFF is in a complicated situation, where they were required to increase their regulatory capital before they can continue to implement their shareholder capital distribution policy. They have two options in how to solve their problem. Accept permanently higher NPL and regulatory capital requirements and thus omit dividend distributions for past year and reinstate growing dividends at levels above historical, or work on optimizing how they manage and collect their purchased receivables from Italian NHS and how they calculate RWA (switch to AIRB approach) and free up capital from regulatory requirements, thus even enabling future special capital distributions to shareholders. Former applied, BFF is at just below fair value, later applied, it gives more than a sufficient margin of safety and potentially above average returns as a value investment alone. However, second option is targeted by the management. They have even implied that the additional RWA of 1.8 billion should be cleared by the middle of 2028 (duration of the bond they issued in 2024 was tied to expected rundown of this portfolio). There is also a strong motivation for BFF to clear their NPL portfolio from books until June 2026, when this vintage of the NPL should be fully provisioned under prudential provisioning rules. This provides some level of asymmetric expectations compared to current state, as at least so far BFF has been reducing its contagion portfolio (cause of RWA increase), and has taken legal steps to increase the speed of collections (court injunctions against overdue counterparties). Given that BFF is a bank, whatever financial model I build for it, it is inherently instable and volatile, and I prefer to share it only upon request, and if you have your own opinion about it. Feel free to request, and challenge thereafter.

Continuing with merger and acquisition spread chasing, I purchased shares in Penneo AS after the announcement was made by Visma that has launched a cash offer to acquire it at 16.50 per share. Since then, offer documents were published by Penneo of December 19, 2024 on their website with the following timeline of the transaction:

I managed to acquire a relatively small number of shares at 15.70 for a spread of 5% before tax. I intended to keep this a relatively small position due to risks of the deal failing. At a moment of an offer, close to 53% of shareholders have committed to accepting the offer, with approval of 90% of shareholders being needed to accept the offer. My assumption was that Penneo shareholders would accept the offer, which was more fair, even under the assumption of aggressive future growth. I wrote down my thoughts at the time in a note.

Shortly before the offer acceptance period, I closed my position at DKK 16.3, providing me a 3.8% pre-tax return over a less than a month long holding period. Those who decided to wait for the shareholder vote, got pleasant news on January 22, 2025, that the vote was in favor by 91%. Remaining minority shareholders will be forced to sell at 16.50 in weeks following February 3rd, 2025, leaving some spread on the table still. I managed to cumulate even larger positions than originally at DKK 16.3.

For those who remember, I speculated that CompuGroup Medical has once again become a holding of Pinetree in somewhere before June 2024, and that Pinetree increased their position prior to Q3 2024 results publication. Given the comment Pinetree provided in their MD&A, I was guessing that it also sold down on their stake since they mentioned questionable CEO successions (son of the old CEO, became a CEO although having limited business experience, but strong academic background). Shortly after that CompuGroup received a take private offer from CVC capital, requiring 67% shareholder approval (which was guaranteed based on announcements) which would leave the current management and owners as operators. Spread after the announcement was narrow, and I formed my position at EUR 21.7 per share (offer price was EUR 22). As a precaution in these acquisition transactions, I always leave an order to sell above the offer price. In this case, on no news of change of the offer, except reinstated recommendation of the CompuGroup board to the shareholders to accept the offer, price jumped to 22.2 on January 6th and 22.5 on January 7th 2025. My order was filled at EUR 22.1, but on a subsequent day I shorted the stock at EUR 22.2. Reason why I did this was because:

• the necessary vote in favor of the transaction was secured, and

• there was no indication that CompuGroup would seek to ask for a higher price given that they refer to EUR 22 price as a fair offer, and current owner operators will not sell their stake, but convert it to private ownership. Sometimes, markets seem inefficient for brief moments.

A few days later, I closed a short position. Same day I was long again and tendering the shares. Price again went above offer price close to the offer period end, and I sold them again. Not something I hope to do for the most of my time, but opportunity presented itself, and it was interesting to do almost risk-free trading from both sides at the time. In hindsight, I was lucky here, since I did not consider a possibility that someone might be acquiring shares in CompuGroup with an idea to remain as a partner in the private entity (buying shares above offer prices and choosing not to tender them). I am not quite certain, but I believe I was exposed to the risk of short squeeze at the transaction settlement date, in case that I would not have closed my short position before the offer close date.

These kinds of situations might seem like a waste of time for most, but they do offer some monetary benefit which measured on an annualized IRR basis, over the holding period, seem far above market returns (until one falls into a trap). What is also an element of added value for me personally, is that I get to know companies I would have never looked at normally, since these are usually not the best businesses put there. I hope I subconsciously pick up some of their properties and patterns, which in future prevent me from investing in them on a standalone basis. Lastly, they satisfy the urge to do something in what I think is an expensive market environment in a relatively safe way.

Apart from this there were no other additions in the past two months, though it was tempting to trade in and out of the certain names I know and own, and there was ever present subconscious pressure to find attractive opportunities supported by loose narratives.

Like many, I was tempted to add to Topicus after the announcement of Cipal Schaubroeck NV acquisition, which will increase their total revenues by roughly 9% in FY 2025. However, I chose to wait a better opportunity. I don't think investing in Topicus now would give bad returns. I would just like better. I want implied return from figure below to be above 10%.

Keep in mind that I have historically bad timing in my Topicus purchases, and to date it is one of the lowest CAGR investments in my portfolio.

My to-do list currently consists of the following companies I am researching in more depth and might post some notes on them in the upcoming period:

• Quorum Information Technologies (trying to understand the chaos of ERP software used in North American car dealerships)

• BFF Bank

• Valuing Vysarn Asset Management (VAM)

• Doing regular biannual review of the Constellation

• Aptitude Software (another Pinetree holding). I know very little about it at this point, except that they keep buying their shares at around GBPp 320.

• Brown and Brown and Arthur J Gallagher (just researching capital allocators and trying to figure out why intangible assets exist in insurance brokerage industry).

I have very little insight into Aptitude Software, but they have a daily habit of repurchasing their shares. In past few months, they occur daily.

Regarding VAM and Vysarn, they remain my constant object of interest and hopefully source of returns in future. From time to time I do random searches and recently VAM became a little more real. Existing webpage was updated with content, albeit not much of it. I cannot help myself from not thinking: “Why advertise if you will not sell anything soon?”

Interestingly enough, image above is that of Harding Dam - major source of fresh water in Pilbara, close to many aboriginal territories whose corporations might consider a JRA similar to that made with Kariyarra. There are some minor details appearing in the public around VAM. But the Harding Dam, itself might be an interesting source of projects for Vysarn according to the following:

One interesting outcome that could be linked with the above, would be a potential JRA, or at least a project with Banjima nation. Why Banjima? They are geographicaly close to Harding Dam, but moreover, in their latest annual report, Banjima Corporation mentioned some involvement with Pentium Water

While this is speculative for VAM, there was some real progress made with the Kariyarra JRA. I managed to find the news that Pentium Water hired MGA for providing cost estimates on pipeline construction in Pilbara, titled Wodgina Transfer Pipeline. Wodgina mine, in Kariyarra region, is 100 km away from the Port Hedland.

I would guess, that the first pipeline operated by VAM, will be roughly 100km long. I would also guess, that there would be more JRAs in not so distant future.

Close to the end of January, I increased my holding in Sygnity, at the expense of some shares of Philips (Sygnity is still a relatively small position in my portfolio, but I view it as a part of the larger Constellation and affiliates position which is almost 25% of my portfolio at this point). This was not based on any news, rather than a simple math I did while waiting for g.on experiance acquisition, or any other acquisition for that matter.

Above assumes that the total additional debt capacity, plus 20 million in cash, is reinvested in acquisitions today, which is not realistic, but it shows that compared to the rest of the CSI, Sygnity is yet to start with acquisitions as their ongoing operating model. Currently, they sit on excess capital (real and potential), and have sizable team of M&A people with significant prior experience. It is rational to assume that they are working, and in a way its reassuring that they are not deploying this capital irresponsibly. One can interpret a lack of acquisitions as a result of adherence to Constellation acquisition playbook.

At some point, Sygnity will start completing acquisitions and their revenue, income and free cash flow generation will grow and compound.

Finally, my own portfolio is still doing well, probably unsustainably well. It is ahead of the targets I set up a long time ago, and currently it's more than a year and a half ahead of its through the cycle expected size. As always, it lags the returns of most fintwit and financial substack, but is higher than 0% over the log run, and above my 15% post tax target CAGR rate. For the time being, I will be just going through the limited number of companies I have on my to-do list, and reevaluating some of the holdings I have. Hoping for a downturn, and getting mentally prepared for inevitable portfolio price (not value) correction. I run a small portfolio, but I would run it the same if it was 10 times bigger. Hopefully I am there in 15 years time and this is true.

Unrelated to investing, I like the format and process of creating this note more than expected. Draft of it was being created throughout past two months as a personal investment log, and was modified as the time went by. I am curios how I will be looking at these decades from now, so I might keep this format going forward.

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Continuing with a merger-and-acquisition-spread chasing hobby of mine, I purchased shares in Penneo AS after the announcement was made by Visma that it is launching a cash offer to acquire it at 16.50 per share expected to close at the beginning of February this year. Below are some of my notes created over the past few days. They are far from a deep dive into Penneo business or Visma operation.

Timeline of the offer was published by Penneo of December 19, 2024 on their website with the following timeline of the transaction:

I managed to acquire a relatively small number of shares at 15.70 for a spread of 5% before tax. I intend to keep this a relatively small position due to the risks of the deal failing. At a moment of an offer, close to 53% of shareholders have committed to accepting the offer, with approval of 90% of shareholders being needed to accept the offer.

The Board has made a recommendation to accept the offer. Institutional ownership is small (close to 5% based on what I managed to find), and I would always assume that institutions would be in favor of the deal that offers a price above the prior market price by a margin of 100%.

Not crucial to the point, but it also helps that one of the founders decided to move on and search for other opportunities.

In case that this 90% acceptance is not achieved, there is a small probability that price or threshold could be renegotiated over time, or Visma might accept to take certain share (at least currently pledged 53%) of the company, start a delisting process and force remaining shareholders to private company ownership in an attempt to drive out minority shareholders unwilling to sell at this price. In theory, Danish law would allow this.

Danish law distinguishes between two takeover situations:

i) where an investor has already obtained a certain control over the target company, or

ii) where an investor wants to obtain control over a company but has not yet achieved such control.

In the first scenario, the investor is required to present an offer to the remaining shareholders of the target company to acquire their shares. In general, control is deemed to exist when a shareholder, directly or indirectly, holds at least one third of the voting rights (unless the shareholder can prove that such holding does not constitute control) or otherwise has control over the target company.

The second scenario arises when an acquirer wants to obtain control over a company and as a result presents an offer to the shareholders to acquire their shares.

Some of the key distinctions between a mandatory and a voluntary offer are that in a mandatory scenario the offeror must offer a fixed price, which under normal circumstances must be equal to the highest price paid by the investor for shares in the target company in the last 6 months. Additionally, the consideration can only consist of cash or shares, and the investor is not allowed to attach any conditions to the offer.

A voluntary offeror, on the other hand, can set the offer price freely and pay in whatever way the offeror chooses (except that all shareholders must be treated equally) and decide to make the offer subject to certain conditions (typically minimum acceptance threshold, anti-trust approval and MAC).

Source: https://kromannreumert.com/en/news/public-takeovers-key-considera-tions

Visma seems committed to complete this acquisition, and they generally do not back off from publicly disclosed offers. Obtaining the majority shareholder rights at the given price and postponing the acquisition of the rest of the company is a realistic outcome, but probably not the most likely.

There is also a risk that the Danish Competition Authority will not provide the acquisition approval. Visma had a similar transaction attempt in 2016 when it tried to acquire Fortnox AS in Sweden for SEK 1.4 billion. Close to the end of the offer acceptance period, SCA (Swedish Competition Authority) did not approve the transaction and Visma backed down. In hindsight, it would have been a good acquisition for them. Fortnox AB shareholders did approve in required majority before though (68% of shareholders voted in favor, while 50% acceptance was required).

Just by seeing the above, maybe Fortnox AB is worth taking a look.

Contrary to Fortnox, Penneo offer is not subject to any regulatory approval. However, the Danish Competition and Consumer Authority has the power to call in mergers if the combined turnover of the involved parties in Denmark exceeds DKK 50 million, and there is a suspicion that the merger will significantly impede effective competition, particularly if it is likely to create a dominant position. In case of this deal, these criteria are satisfied, but such action has not been initiated by the authority.

Also, its worth mentioning that Fortnox and Penneo are different companies at the times the offers are being made, and Penneo has probably much weaker prospects than those of Fortnox in 2016 were (simplest way of looking, Fortnox was profitable since 2010 when it was equal in size of Penneo in 2019).

By seeing the above, maybe Fortnox AB is really worth taking a look, at least to keep on a list of potential investments.

As for Penneo, without going deeper, they seem to struggle in producing cash from operations at this point, but they compensate for the operational cash burn and capitalized R&D (reported in cash flow from investments) with stock issuance at not-the-most-opportune-moments.

In their defense, capitalized R&D is amortized and expensed, but far more R&D spend is capitalized than expensed through amortization.

Capital allocation by Penneo is not the best and not in the main focus. Company is still young, and it’s focused more on the revenue and revenue per customer growth, instead of profitability. Even in their own disclosure, describing how cash is used, comparison is given between the sum of Cash flow from operations and Cash flow from investing and recurring revenue growth. Now, how comparing total cash flow generation with incremental revenue generated is useful information, is beyond me. But even looking at the figures they have provided, and by comparing their investment cash flow with incremental revenue, it appears that Pennneo invests a growing amount of 20 million per year to generate incremental 17 million in revenue. They would need to convert revenue to free cash flow margin on revenue of at least at 12% to generate incremental ROIC at some average cost of capital of 10%.

What is their FCF yield? At least using tikr as a source (which is a good proxy in this case), have been close to that at least as of recent.

Why I mention this is because, although Penneo is a growing business, how it turns its revenue to cash flow and how it turns their assets into revenue, results in median ROIC at best. It is a growing business, but not a value growing business.

For now, Penneo is managing to achieve both cost reductions and continued revenue growth, but there is a risk that their R&D spend might go down and thus limit their growth (they did reduce their headcount by 20%). There is a risk that Penneo might even stall in midterm (after announced expansion in Germany) due to aggressive cost-cutting. Thus, viewing it as a growth story without risks is not rational.

Maybe just to clarify, Visma probably hopes to turn it around and expand Penneo in Germany, where they already started selling their software and other EU economies, and generate value from there. Once acquired, some back office functions would most likely be transferred within Visma which would be a cost optimization that Penneo alone cannot do.

But as a current shareholder of Penneo, one should take stock of the current offer and contemplate what Visma expects to get when they pay DKK 550 million, or DKK 500 million with cash netted out, for an intellectual property and operating asset generating negative FCF of DKK 20 million per year. In order to make it a reasonable investment in a stable business, you would need to convert it to a stable 50 million FCF generating business. Looking at Penneo LTM figures for each quarter below, how achievable is it to generate that level of FCF in some midterm (keep in mind you are stating from 94 million in revenue)? Not so much.

Alternatively, assuming Penneo can be converted to 20 million FCF generating,or 20% FCF margin on existing revenue, or 4% yield on takeover offer, business with short term cost optimization, and that you can grow its FCF at 20% for next 7 to 8 years while reinvesting DKK 5 for each DKK 1 of incremental FCF (assuming 20% reinvestment return), rough math would imply a take private IRR of 8% at this level and Visma offer is made at a fair price, or at least close to it.

This 20% reinvestment return seems to be getting within a reach using unit economics data Penneo provides and comparing average ARR in the first year for the new customers times a hypothetical 20% FCF margin and dividing this number with customer acquisition costs (this approach unfortunately ignores R&D expense related to product development needed with its expanding use cases). As a shortcut when reading the table, if the ratio between average ARR in the first year for the new customers and customer acquisition costs is close to 1 and one assumes 20% FCF, this equates to an incremental ROIC of 20%. Since Penneo started its cost optimization in Q4 2023, it seems they are getting close to that.

To put previously said differently, expecting that historical growth continues over next 8 years and thus turning Penneo DKK 300 million business, while assuming FCF to revenue margin that was never achieved prior, and incremental ROIC reinvestment rates above historical, price one gets from Visma seems to be fair.

Again, a disclaimer, this is just a rough calculation, and I might be omitting important value drivers that those who have more insight in Penneo understand better. My sole aim is to derive expectations that would justify the price offered by Visma.

Should shareholders of Penneo, accept this offer? Or better yet, should they accept the offer at a price that factors in 20% business growth over the long term in a way that IRR on their investment equals that of the S&P 500 over the next 10 years, with far more company risk tied to an individual holding versus the index? Yes.

Should you accept the offer if you purchased Penneo shares at the beginning of 2021? All I can say is that I am sorry for your loss, but it seems Visma is offering a dignified way out.

Disclaimer and kind request

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November saw two of my acquisition spread investments close successfully (they are not merger arbitrages, since they carried risk). One was OneSoft solutions, the other was Trinity exploration. OneSoft contributed only slightly to the overall portfolio return, but IRR over the investment period was high. Trinity, about which I wrote, was a particularly nice find since the shareholder vote was never going to be against the proposed acquisition.

I financed both investments with debt at reasonable rates from Interactive Brokers. There are many acquisitions waiting to be closed, but I need some sort of certainty before investing into them, as I don’t run a diversified portfolio of these. I am yet to regret this approach. For those interested, one source to track these deals could be Alpharank.

I made significant additional investment in Vysarn when the price reached 0.44 AUD, and then again after the AGM when price briefly went down to 0.275 AUD (I managed to add to my holding at 0.39 AUD). I estimate that Vysarn’s fair value at this point is around 0.5 AUD, but excluding any future income or cost associated with VAM. If you followed Vysarn story, you will recognize that most of their activities are gearing towards VAM becoming a center of their operating model. I have many scenarios for VAM transferred to numbers. Most of them lead to profit. Some to significant profit. Below is my base scenario valuation for Vysarn and a possible timeline of net income flows from VAM (not included in the valuation).

I made a small library card investment in Tasmea Limited. Tasmea is an acquirer in of the mining fixed plant maintenance companies in Australia, that has shifted its model from construction to maintenance over the past decade. It seems like an ambitions and fairly easy business model, and I will definitely continue to follow it. One downside is that it reached a certain level of retail fame among Spanish investors (cannot explain why) that could lead to unhealthy shareholder base. This can also be a nice opportunity to add to the holding later on, as low conviction shareholder base usually leads to higher price volatility that is not strictly related to fundamental business developments.

I sold my small position in GEE Group and Converge Technology as I have no faith that existing management will ever really act in the interest of shareholders (this is generally a rare property to find globally). I consider both investments to be mistakes on my side. Companies are still undervalued by any measure. But, for Converge, I simply cannot guess what the future holds, and for GEE Group scenario where management simply drains the available cash for personal gain is realistic. Proceeds were used to fund the part of the next speculative investment in Trubridge and Quorum Information Technologies.

I invested in Trubridge after realizing the role of the new CFO in business optimization. More details of that investment can be found here 21. Trubrige Inc: Second time around. Most of my position was formed before the release of the article, with subsequent purchases after.

On multiple occasions, I was purchasing small quantities of BFF Bank. Logic here is simple. BFF is generating capital as always, however that capital serves a large RWA base. Once the portfolio that caused RWA increase is gone from the banking book (part of receivables having high RWA%, but low real loss), capital will remain. This will result in higher distributions to shareholders thereafter. That is at least the idea.

I sold my shares in Synchrony Financial after the price reached my estimate of its fair value. Few weeks after that, as a result of the USA presidential election, price of the shares rose almost by 20%. Whatever the outcome of the next presidency is, it wont be immediate, it is not certain at this point and it should not push the price above the fair value this much. As a result, I shorted one third of my previously held position measured through the number of shares. I closed the short position few days ago.

Going though Pinetree latest MDA, I decided to go through the rest of the holdings they have with a goal of learning and finding potential investment. This resulted in adding a small position in Quorum Information Technologies, which I view only as a value investment. As Quorum stabilizes its cash flow, market price should approach its value, which is roughly two time higher according to my estimates. Figures below show what Quorum achieved since 2022 when they started optimizing their current business at the expense of business growth.

Lastly, like many Pinetree shareholders, I was also happy and confused with share price run up.

My Q3 updated tracker does not support this value, and current NAV is some 35% below market price. For more details on how I value Pinetree go following notes:

Updated NAV tracker looks like the following:

However, if I add my fair value estimates for Trubridge, Quorum and Topicus in, and analysts targets to others (ignoring the one for Sygnity), price seems a little more explainable.

Someone out there must have a complete faith in Pinetree and its holdings reaching their targets. John Bouffard, CFO of Pinetree, is one of them (at small scale though).

At this price, I find it risky to invest in Pinetree.

I am still searching which Australian utilities software company was added to Pinetree portfolio, and feel free to suggest in comments.

Finally, my own portfolio is doing well, probably unsustainable well. It lags the returns of most fintwitt and financial substack, but is higher than 0% over the log run, and above my 15% post tax target return rate. For the time being, I will be just going through the limited number of companies I have on my to-do list, and reevaluating some of the holdings I have. Hoping for a downturn, and getting mentally prepared for inevitable portfolio price (not value) correction. I run a small portfolio, but I would run it the same if it was 10 times bigger. Hopefully I am there in 15 years time.

Disclaimer and kind request

Before you take any actions based on this article, remember, you are trusting an experimental analysis of an anonymous person. However, if you like it, and you think it makes sense, feel free to support my writing which I do in my spare time, while working a full-time job.

If anything you pick up from my Substack or Twitter account results in you earning a reasonable profit, or avoiding unreasonable loss, keep the karma going. Subscribe, even for a month. Even years after you have read something from me, based on realized experience.

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Until then, efficient market will have to be patient. Those of you who communicated with me, but do not wish to pay the subscription, feel free to contact me for the access to the notes.

I am a numbers' person. My ideal investment is manifested as a company that has a procedural approach to every aspect of its operations. I rejoice when I discover companies with roles devoted to margin planning and management, that use scenario analysis and hurdle rates in their capital allocation decisions or constrain their growth with own generated cash flow.

Trubridge, formerly known as CPSI or Computer Programs & Systems, does not fit any of these categories, or at least it did not until Vinay Bassi was appointed as CFO as of January 1st, 2024. Below analysis is based on last three annual reports and conference calls Trubridge held since February 2021. I had no contact with Trubridge or any of their past or present larger shareholders from which I could shape any of my views. Analysis below, is my own subjective view with great potential of being wrong.

Premise

It all starts on the February 9th, 2021 when Trubridge decided to make a strategic shift into focusing on their revenue cycle management (RCM) solutions as opposed to splitting the focus between it and EHR.

During the past several months, we have partnered with a premium consulting firm to review our business and growth opportunities and to assist us in identifying the best path to increase value for our shareholders while also safeguarding the interest of other critical stakeholders such as our clients and employees.

The purpose of this assessment was to more clearly define a strategy that would drive long-term sustainability and stewardship, grow CPSI's footprint, and maximize our success in a post-COVID world.

Our assessment confirmed and identified several compelling opportunities to grow our core business while investing in new technologies and improving overall profitability. The outcome is an aggressive yet attainable plan that is intended to provide significant shareholder returns over the next 3 to 4 years, culminating in an end goal of $80 million in adjusted EBITDA in 2024.

There are 3 equally important components to this plan that we will pursue simultaneously: core growth, margin optimization and tangible upside growth through innovation. The core growth component of our plan is concentrated around our current markets and, along with margin optimization, will help drive our targeted 2024 adjusted EBITDA.

The initiatives for core growth utilize our 41 years of success in the healthcare market and our most valuable asset, the client base that we have acquired along the way. The core growth component includes 3 initiatives intended to drive higher demand, penetration, and share in our current fields of play.

First, we will continue expanding our established sales relationships by cross-selling TruBridge services (author note: RCM) into our substantial acute and post-acute EHR bases. While this initiative is not new to CPSI, we look to improve our execution on this opportunity, turning the page from good to great.

With a total market opportunity of $400 million in annual revenues, we have confidence in a target of $60 million in incremental annual TruBridge revenues through cross-sell efforts by the end of 2024.

J. Boyd Douglas, CEO, Q4 2020 Earnings call

For perspective, these are the operating results of Trubridge at the time, and how they adjusted their EBITDA since.

Fast forward to today and we are here.

Let this serve as a warning in taking the rest of this analysis for granted.

Business overview

TruBridge, formerly CPSI, provides healthcare solutions and services for community hospitals, clinics, and other healthcare systems in the United States and internationally. The company operates in three segments: Revenue Cycle Management (RCM), Electronic Health Record (EHR) and Patient Engagement. Of the three segments mentioned in the description, RCM is the key, EHR is the tool, and rest can be considered legacy business which will become less and less material over time.

In simplest words, RCM is a rounded accounts receivable software specific to the USA healthcare system. EHR is a patient health and progress tracking software. More details for those who want to save some time from reading 10-k reports are below.

RCM: This segment is in theory the company's primary growth engine, comprising 57% of consolidated revenue in 2023. TruBridge offers a comprehensive suite of RCM services, including:

• Central Billing Office (CBO) services: Provide end-to-end revenue cycle management outsourcing.

• Extended Business Office (EBO) services: Focus on collecting outstanding patient balances after insurance payments.

• Coding services: Assist hospitals in accurately assigning medical codes for billing and reimbursement purposes.

• RCM analytics and complementary outsourcing services: This capability was strengthened through the acquisition of Viewgol, which specializes in ambulatory RCM solutions.

• Subscription-based RCM software: TruBridge offers a software product designed to streamline revenue cycle processes.

Within RCM, CBO and EBO are apparently the key into stabilizing and potentially growing Trubridge as a business. It’s worth noting that Trubridge RCM solutions are independent on who is the provider of EHR. It could be them, or some third party, in both cases integration is possible. Also, RCM is a more human intensive business and as such has lower margins. However, based on Trubridge own estimates EHR has much larger addressable market since the majority of hospitals uses in-house RCM solutions (80% to 85%), and Trubridge aims to outsource that role from them. Think of it this way, a small 400 bed hospital would have to hire probably 5 to 10 people working on accounts receivable management. Over time, expertise would get concentrated in one to three key people. Moment, they leave or retire, issues with denial claims, wrong coding and delayed collections would arise. For a larger hospital this inefficiency could be overcome by financing working capital with loans, but the smaller the hospital, the harder it gets to overcome the irregular revenue stream. Trubridge is there to provide business continuity (they keep your working capital staffed) and apply constant level of management practice. Once they are in as a service provider, there is very little reason for a hospital to change back to in-house team.

EHR: This segment provides a digital version of a patient’s medical chart that can be shared across different healthcare providers and organizations. EHR is offered under different licensing under perpetual licensing model (now minority) and software as a service. Trubridge makes no secret that growth in EHR is not a priority (in January 2024 they have divested from American HealthTech, which Healthland, acquired by Trubridge in 2016, acquired in 2013 from HealthTech Holdings, LLC). There is little clue left why this is so. My only assumption is that this market faces much lower labor intensity once EHR system is implemented (either in-house solution or third-party solution), so one variable that would affect the continuity of the process is gone and with it an argument for a change. However, within EHR, TruBridge offers nTrust, EHR/RCM bundle. In simplest words, if current EHR customers get converted to nTrust, they have also become RCM customers. nTrust is Trubridge shortcut to cross-selling.

Today, Trubridge is moderately leveraged business with high cost of debt (8.5%), margins depressed compared to historical levels or levels of the industry in which they operate, and with small issues in working capital management (ironical for the company that sells accounts receivable management software). They have grown organically, but mostly through acquisitions which we mostly overpaid. For past 3 years they have been undergoing strategic business model optimization with a goal of moving away from EHR to RCM which caused significant severance costs which still reduce profitability. Owning it over the past few years was not fun, but this has created an interesting situation. We are now faced with a company that can improve its margins to some industry average level (plausible outcome), manage its working capital better and through that increase its cash flow generation, reduce its expensive debt and potentially refinance it once healthier operating results are achieved.

Below is an overview of some of for me relevant financial matrices for better understanding Trubridge. Data is taken from Tikr, but it is a fair representation of the financial statements (LTM values for each quarter since Q1 2021 are shown).

Working capital at the end of 2023 was affected by large amount assets held for sale prior to the divestiture from American HealthTech.

Trubridge no longer generates enough CFO (that has changing in last two quarters though) to cover its current liabilities, although current assets cover them. They do not have any large lump sum loan repayments and do not have concentrated sources of revenue. This reduces the risk of them not being able to service their current liabilities.

There are early indications, visible also above, that active collection efforts are being taken to reduce days sales outstanding, and it seems that both the trend in increase of days outstanding is going to revert, and the gape to days payables outstanding is going to narrow.

Looking at debt levels and interest coverage situation seems scary at first, but EBITDA (LTM) shown below was affected by large goodwill impairments related to the mentioned divestiture. Without them, interest coverage would be higher (more on debt is provided below).

Trubridge is currently a 340 million dollars business measured through revenues, and it has grown to this level though a mixture of organic growth and probably value destructive acquisitions, with the latest one happening in October 2023 when it acquired Viewgol.

These acquisitions were targeting growth primarily in the revenue cycle management product offering, but at the great cost.

Since March 2016 and acquisition of Healthland, Trubridge has cumulatively invested over 310 million in acquisitions, and managed to grow its revenue by 60 million on annual basis, while reducing its cash flow from operations from an average 30 million per year to it now being just above 0. On a positive note, some level of organic growth was always being achieved.

Before continuing, I will just point that, prior financial history carries a lot of noise in case of Trubridge. Instead of adjusting historical statements for one-offs and legacy inflows and outflows in order to get a quantitative measurement of a stable system though time, in this analysis I will apply a top-down approach. I will take current state as it is. and by analyzing what Trubridge has communicated, I will attempt to estimate realistic capital structure in their future stable state, realistic operating and net profitability and cash flow generation. For that we need to go through the recent history of disclosed information and try to find out, what is it that Trubrige has been trying to achieve past three years.

Restructuring plan

Trubridge does not publicly provide a clear target they want to achieve in their effort to reshape their business, timeframe in which they want to achieve that state, nor means by which they want to achieve it. Everything from this point is my own interpretation of publicly available data from their financial statements, result and conference presentations and earnings call transcripts.

Based on the information provided in the transcripts, the following quantifiable activities that can work in favor of making Trubridge more profitable are mentioned.

Leverage and capital deployment

Although not stated as one of their most important targets, throughout the last few years leverage ratio of up to 2.5 Debt to EBITDA was mentioned. Initially, it seemed that this threshold is controlled for.

However, debt levels have increased significantly in the past 2 years, driven by acquisitions, Health Resource Group (HRG) and Viewgol. Looking to more recent periods (below), extreme negative value in debt coverage was due to 35 million goodwill impairment booked prior to sale of one of EHR businesses (American HealthTech, also known as AHT, to PointClickCare). During 2023, AHT contributed to 16 million in revenue and 2 million in Trubridge adjusted EBITDA (sold for 21.4 million).

Trubridge was not that active in prepaying their debt, and this is not surprising since it struggles to generate operating cash flow. Debt reductions that occurred lately were financed by proceeds from divestiture.

Since relative debt to profitability has gone to extreme levels, Trubridge had to renegotiate its debt several times over, and was on a verge (it is still) of defaulting on its debt and being treated as a workout client by their creditors. Currently, Trubridge is paying on average 8.5% interest on its debt, or about 4-4.5 million interest and 0.9 million in principle quarterly repayments. There is a tendency to disregard debt related cash flows when valuing companies, and just deduct the debt value from the final economic value estimated. However, in this case, always keep in mind the scale of debt related outflows Trubridge has. Trubridge generate roughly 40 million in gross income, not operating or net income, at close to 50% gross margin per quarter. 12-13% of that goes to servicing debt. The rest is not that much, and often, quarterly cash flow from operations does not suffice in covering this cash need.

At the same time, debt reduction could be one of the biggest, most certain and simplest value drivers in case of Trubridge.

More on this in one of the valuation approaches at the end.

Offshoring

Offshoring is the single biggest value driver for Trubridge. In case you are wondering what is meant by that, simply, it's hiring people in India in favor of the USA domiceled workers. If executed correctly, it can transform Trubridge into a stable cash generating business. If executed badly, it can decrease customer retention (which is close to 95% per year) thus undermining their SaaS model, and also result in additional ram up of costs through local hiring of the customer services.

First hints of staff reduction and replacement with employees outside of North America were given in early 2021. Initial cost reductions of 25 million on annual level were expected based on organizational changes, which included both offshoring and organizational changes.

Our operational initiatives over the next 3 years will seek to optimize margins, further supporting our 2024 adjusted EBITDA target of $80 million as we execute towards targeted cost savings of $25 million by 2024. The first facet in our margin optimization efforts is an organizational realignment intended to help create a more nimble and dynamic organization that will spur faster decision-making by flattening our organization to bring our leadership closer to our customers and frontline employees.

The 8-K that we filed today reflects our efforts to date with this optimization initiative, with 1% of our employee base impacted by today's position eliminations. While these were certainly difficult decisions, they were essential to fostering the transformation necessary for CPSI to reach our long-term goals.

All told, the actions announced in today's 8-K filing will result in annualized cost savings of $3.9 million, with a $3.3 million impact to 2021's financial results. By realigning our organization, we have the framework in place to begin improving how we work. We are establishing efficiencies by defining and standardizing processes and activities by function, aligning incentives to ensure productivity and desired outcomes, and reassessing vendor partnerships that may present expanded automation and offshoring opportunities in the future.

J. Boyd Douglas, CEO, Q4 2020 earnings call

At the beginning of 2023, 100 people were offshore, with a plan to bring that number to 400 people by the end of 2023. Interestingly enough, offshoring started in late 2021, and according to transcripts, it has been deliberately slowed down in order to limit the operational risk of employing less than adequate workforce.

And so it was an 18-month build to get to this 100 employees fully offshore, which if you think about it, a really long time, when you think about the size and scale of some of the offshore vendors that are out there providing this work, they have thousands and thousands of employees that we could have turned the switch and be at 600 employees in 6, 8 months.

And I'd say all that to say that we knew that there was risk. We wanted to make sure that more than anything that we did not put at jeopardy the service that we were providing and the relationships that we've created with our customers. And so again, being very intentional over that 18-month period to feel confident about, one, the workflows that we've now chosen to do offshore; and two, the partners that we've selected to perform that work so that now we feel confident in ramping this up.

~ Christopher Fowler, CEO, Q1 2023 earnings call

A big change in the offshoring strategy came with Viewgol acquisition. Prior to it, Trubridge used third party agencies to hire workforce abroad. But this, apparently, did not work as planned and has affected the speed of onboarding of new clients. Viewgol is a 20 million revenue RCM business, producing 4.5 million EBITDA and 1.5 net income. Under the terms of the agreement, the purchase price is $36 million in cash, with an additional earnout of up to approximately $31.5 million based on a combination of achieving certain profitability metrics for 2024. By any measure, Viewgol is a low ROIC investment, and I can only sympathize with those who were shareholders at the moment of announcement. But inheriting a bad investment is not as bad as inheriting a bad investment policy, at least for subsequent shareholders. Viewgol was most likely acquired as a “strategic” investment, where the goal was more to obtain the own platform for hiring workforce abroad, than earning directly from the acquired business.

First, availability of domestic and global resources have put pressure on timely deliveries and performance in our RCM business. This isn't really anything new to us as the scarcity of domestic resources was essential motivation behind our global workforce strategy. What's incremental, however, over the last 90 days has been the inconsistent resourcing from our global partners, which has led to some delayed go-lives for RCM services.

Global partners will continue to be an important contributor to our workforce strategy. However, they are now part of a broader solution for us. Our sole reliance on partners put us at a disadvantage as we were working to scale our global workforce. With the acquisition of Viewgol, I am confident that we are on a better path to eliminate this bottleneck.

For context, we expect to have 400 global resources by the end of this year and a total of 800 global resources by the end of 2024. And we anticipate 30% at a minimum of these global resources to be CPSI employees, thanks to this acquisition. This deal also provides some wow factor margin expansion potential by bringing these efforts in-house. Initially, our offshore partners helped us lower our labor expense by 41% for each FTE but the Viewgol transaction will enable us to bring offshore capabilities in-house, bringing the savings opportunity closer to 75% per FTE.

~ Christopher Fowler, CEO, Q3 2023 earnings call

With Viewgol, Trubrige got access to an entity which can hire direct workforce in India. Viewgol has a large part of their workforce operating from India (salary levels there, for the same level of work, tend to be 4 to 5 times lower. Take this moment to appreciate the benefits of organized and wealthy societies that many take for granted). With Viewgol, Trubridge got a chance to eliminate the middleman for finding workforce in less expensive geographies. To put it in perspective, an average FTE in Trubridge is responsible for between 90 and 110 thousand dollars gross according to my estimate. Shift these through a third party staffing agency and cost is now between 54 and 66 thousand. Move to Viewgol and cost is in the range of 23 and 28 thousand. This translates to savings of 2.1 to 3.8 million in staffing costs per year for each 100 FTEs that were previously employed through third parties compared to Viewgol (there are risks associated with growing Viewgol too fast, though). The above quote was provided before Viewegol Acquisition, and it’s safe to assume that by the end of 2023, 400 people were indeed offshore employees. Substituting them with own Viewgol employees would result in annual savings of 8.4 to 15.4 million. Compared to current levels of revenue of 340 million, this could increase the operating margin by 2.5% to 4.5%. More importantly, having additional 400 people offshore and through Viewgol would decrease operating costs by further 26.8 to 32.8 million compared to the USA based workforce, or 7.9% to 9.6% increase in the operating margin. Combined mean effect of both employee migration I mentioned would increase the operating margin by more than 12% (restructuring outcome #1).

Beginning of the 2024 saw a mention of a long-term plan of having 70% of the workforce offshore and 30% in the USA. No mention of the timeline was provided.

Longer term, our goal is to achieve a workforce comprised of 70% offshore and 30% U.S.-based employees. While we work through this transition, it remains a top priority to remain -- to maintain the same quality of service for all of our customers. As we look forward into 2024, our entire organization is committed to returning to growth and realizing the operational leverage that our global workforce can achieve.

~ Christopher Fowler, CEO, Q4 2023 earnings call

In 2024, it became clear that offshoring of CBO (Central Billing Office) and EBO (Extended Business Office) services. As of June 2024, 43% of the workforce was reported to be offshored, compared to 25% in March 2024. Initial plan was that 800 employees should be hired outside of the USA by the end of 2024. Based on the above reported progress in 2024, it is fair to assume that the process of workforce substitution will finalize in 2024. Severance costs and some parallel functions facilitating know-how transfer might still exist in 2025 though.

Offshoring comes with risks. Detach your customer service and development teams from the cultural, language and geographical areas in which your clients operate, and you are risking higher customer churn. This might have happened.

As we stated last year, we did see some hiccups with our offshore partner, which spurred us on to the acquisition of our own captive offshore operation with Viewgol, but some of last year's challenges with that offshore partner has translated into slightly lower retention this year. To counter this, we're doubling down on our client retention efforts and being more proactive by leveraging Viewgol's extensive experience and best-in-class approach to customer management, specifically getting the domestic client management teams and offshore production teams aligned quickly and as smoothly as possible. We look to end the year on stable footing and continue to be optimistic about the delivery of the offshore staff.

~ Christopher Fowler, CEO, Q2 2024 earnings call

It could be that integrating Viewgol could be challenging and that there are some issues in communication between US and non-US domiciled teams.

Target size of RCM business

Throughout transcripts, the figure of 400 million for the total cross-selling opportunity for RCM business is mentioned. This was a number circulating even before Viewgol acquisition. Initial plan was to achieve this figure through cross-selling to EHR customers alone and selling outside of the EHR base. A total of 180 million was expected to be added by cross-sell to RCM, and an additional 75 million though new contracts. Trubridge was a 260 million business at the end of 2020 when the plan was laid out. Expectations were made based on the assumptions of organic growth alone.

With a total market opportunity of $400 million in annual revenues, we have confidence in a target of $60 million in incremental annual TruBridge revenues through cross-sell efforts by the end of 2024.

Second, an estimated 85% of our hospitals are still managing their RCM operations in-house. With hospitals facing increasing financial pressure due to fluctuating patient volumes, increasing self-pay accounts and the impact of COVID-19, we expect to see a continued shift to outsourcing, and we remain confident in our ability to continue expanding TruBridge market share of those providers that use competitor EHRs, including upmarket into larger hospitals and health systems.

With a total addressable market outside of more than $1 billion in annual revenues, our target of $25 million in incremental annual TruBridge revenues from outside of our EHR base by the end of 2024 is attainable

J. Boyd Douglas, CEO, Q4 2020 earnings call

Slight change in this narrative occurred since, and both revenue and EBITDA resulting from acquisitions started being added while explaining distance from the set of 2024 targets.

An even bigger change in narrative occurred in 2022, when CEO succession was announced, with 400 million targets now being related only to the installed customer base (cross-selling to EHR customers). At that time, Mr Boyd retired after more than 30 years in Trubridge and was succeeded by Christopher Fowler, who had over 20 years of experience in Trubridge.

But over the next 2 or 3 years, our growth accounts for -- or actually the models that we have expects more growth from our installed customer base. So there is a very close dependency between the success and the retention of our EHR customer base and the conversion of success for TruBridge. So again, I think the number I shared in the prepared comments was $400 million, which is what's left from an opportunity standpoint for TruBridge inside the installed customer base, both acute and post-acute.

~ Christopher Fowler, Q1 2022 earnings call

By the middle of 2022, the message was being sent out that Trubridge is ahead of achieving its revenue target for 2024.

With next quarter, cross-selling market size was first time communicated as arrange of value from 300-400 million, although still emphasizing 400 as the goal.

As I mentioned earlier, we see tremendous opportunities for TruBridge within the CPSI client base, which we estimated between a $300 million and $400 million cross-sell opportunity. In fact, cross-sell bookings increased 30% sequentially. RCM-centric services represent close to 60% of total CPSI revenue today compared to roughly 40% of revenue 3 years ago. To illustrate our progress in this regard, trailing 12 months cross-sell bookings from TruBridge are 28% higher than pre-pandemic levels. And net new bookings are 31% higher.

~ Christopher Fowler, Q3 2022 earnings call

In the same call, more emphasis was given to M&A growth, deviating from the initial idea of organic growth only. This was prior to Viewgol acquisition and it’s safe to assume that initial contacts have been already made at this point.

To review, the 3 tenets of our long-term plan we are committed to are, one, growing the core. This means net new customer adds as well as increasing wallet share across our existing base. Leveraging our TruBridge brand of RCM services is integral to unlocking the $400 million potential that we discussed. We also will continue to support and grow the Evident brand, which is the trusted EHR solution of choice in our market of rural and critical access hospitals.

Number two, operational efficiency, namely unlocking value through automation and offshoring in the form of driving scale and margin enhancement enabling CPSI to deliver more value to our customers. And lastly, making key investments in adjacencies that enable CPSI to accelerate growth beyond our core. Get Real Health and our migration into the public cloud are 2 such examples.

Finally, we intend to continue following a measured and disciplined capital allocation strategy. We aim to balance R&D investments to meet the evolving needs of our customers with selective M&A in strategic areas like TruCode and HRG previously that added value to our solution set, enhancing our brand and creating scale.

~ Christopher Fowler, Q3 2022 earnings call

Throughout the period, HGR acquisition was used as an explanation for reducing EBITDA margins as it was described as services-intensive offering (human intensive).

At the beginning of 2023, significant change in narrative has occurred. By this point, Trubridge was a 326 million sized business by turnover, and it became obvious that achieving 400 million revenues by the end of 2024 (within 24 months) is not possible. The old goal was substituted with:

The company had previously provided an $80 million EBITDA target for 2024, but we now feel the more appropriate target is returned to double-digit organic revenue growth over the next 24 months, with strategic acquisitions being additive to that growth.

From a margin perspective, we believe we can achieve 20% adjusted EBITDA margins over the same time period.

~ Christopher Fowler, Q4 2022 earnings call

One of the reasons stated for lower-than-expected revenues were the changes made in the sales teams in the prior year. This change was disclosed in Q4 2022 when only a mention was made of client executive to customer ratio, then being one third of what it used to be. Fast-forward half a year and:

In hindsight, we were far too bullish on our sales force expectations following our reorganization last fall. We should have taken into account that sales is a relationship business and that it would take a few quarters for the reorg sales force to establish the new contacts needed to close new business. As a result, bookings are coming in just shy of expected levels, but we are up the learning curve now and back on track for the second half of the year.

~ Christopher Fowler, Q2 2023 earnings call

This is nothing short of blunder in planning of business expansion. Sales are a relationship business and always have been, but Trubridge learned this through lost growth.

Added to this, Trubridge started facing issues in converting bookings, or potential revenues based on signed contracts, to real revenues after service offering started. These are nothing by implementation issues, and one of the challenges that Trubridge discovered when approaching larger clients.

Again, as we have signed a greater proportion of larger deals in the past 2 quarters, we have realized that the timing to fully implement these contracts is also a bit longer than we have historically seen. As we looked into the detail of the deals this quarter and last, we have found that the timing of full implementation extended further out than we were expecting. And the lesson learned is that we are now learning not to be quite as aggressive with our bookings-to-conversion revenue assumptions that we've had in the past.

What this means is that our revenue guidance from 2024 is coming down slightly from a range I gave last time of $340 million to $350 million to a revised range of $330 million to $340 million.

~ Christopher Fowler, Q1 2024 earnings call

Similar goal was reiterated in 2023 by then new CEO (since July 2022) Christopher Fowler.

Next, while total bookings of $21 million were relatively flat year-over-year, as Chris shared, the real story is that RCM bookings grew 41% with cross-selling efforts making up 47% of total RCM bookings

~Matt Chambless, Q1 2023 earnings call

Digging a bit deeper on the RCM bookings, 47% was a result of cross-selling our RCM solution into our large and loyal EHR customer base. In the majority of these cases, the customer knows they need an RCM solution, and choosing to move forward with CPSI as their provider is an easy one given the existing relationship.

A particular note, we signed a nearly $2 million nTrust contract, which -- nTrust, which bundles together our full RCM services along with our EHR solutions. The $2 million contract was for 4 hospitals with one of our longest-standing and largest EHR partners. This continues to represent a meaningful opportunity for us with a dollar amount of cross-sell bookings in the quarter being just a small percentage of the $400 million annual revenue cross-sell opportunity.

~ Christopher Fowler, CEO, Q1 2023 earnings call

Trubridge is keen to point out that bookings (signed contracts measured in total value) carry different meaning between RCM and EHR. In case of RCM 1 million of bookings translate to 1 million of annual revenue. In case of EHR, this figure is spread over 5 years, resulting in 200 thousand of annual revenue. The timeline in which bookings are converted to service offering is unknow, though some mentions of three to six months are provided. Nevertheless, bookings as a measure tell little, since they can refer both to new and existing customers. They are calculated as the total contract price (for non-recurring, project-related amounts) and annualized contract value (for recurring amounts). Given high client retention ratios Trubrige discloses, and evolution of total revenue since 2021, it can be assumed that bookings are related to new customers only in part, however this is difficult to prove, and for the time being I will ignore the information on bookings.

What is more important is that the true size of the RCM business that is achievable through organic growth is not 400 million. With this pace, it will take Trubridge more than a decade to achieve this level of revenue from RCM in nominal terms. When valuing Trubrigde this assumption is best to be left as an aspiration than a real goal.

Cost savings

Apart from savings Trubridge wishes to achieve through offshoring, until recently there was very little information related to any other cost optimization. If anything, Trubridge was focused on being a growth company for past four years, and with a legacy of multiple acquisitions, cost inefficiencies could be expected. This is not necessarily bad, as I am looking at the Trubridge as at a potential turnaround. More dire by manageable its current situation, the better.

As of Q1 2024, new CFO (Vinay Bassi), appointed in January 2024, started making some interesting comments on how the overall business is being viewed now. Most notably, instead of focusing on simply revenue growth and EBITDA, he started talking in terms of return on investment (ROI). Within a few months after his appointment, several smaller projects were shut down and headcount and capex reductions resulting from this have allegedly reduced run operating rate cost by 8 million per year. Again. Using 340 million as run rate revenues, this would translate into the 2.3% increase in operating margin. Before buying the Trubridge stock just on the basis of this information, it’s worthwhile to stay grounded to reality and accept recognize the fact that module which development was put to a stop was replaced by a third party offering from Multiview. This means there will be recurring costs. Since this deal was announced as a partnership by Multiview, it’s fair to assume that it will be a fixed percentage of revenue generated through their product. How much will this be, I cannot tell, but I will assume 1% cost, resulting in the remaining 1.3% in true cost savings for Trubridge resulting from this partnership (restructuring outcome #2).

We have made meaningful progress on the financial initiatives I laid out last quarter. Specifically, we have taken a fresh look at our capital allocation and rightsizing of cost when we can't find a clear near-term ROI. On a run rate basis, our CapEx is lower, and there is still work to be done in the rightsizing process. We have already shut down a couple of projects and reduced headcount accordingly. As an example, late in the first quarter, we shut down the development of a financial management application. While we felt this type of solution would be helpful to our customers, it was outside of our core competency. So as Chris noted, we found a partner with a track record in health care that has experienced success in this area.

We also found $2 million in permanent cost saving opportunities per quarter. We implemented these cost savings in the second quarter and expect to realize $1 million in second quarter. Going forward, we anticipate $5 million in cost savings in 2024 and an annualized run rate of $8 million. These savings are from headcount, further optimization of cloud and reduction in noncritical vendors. The headcount savings are primarily from shutting down projects with low ROI as well as rightsizing the organization.

~Vinay Bassi, CFO, Q1 2024 earnings call

Furthermore, Bassi started mentioning working capital management. This may seem irrelevant, but currently non-cash and non-debt working capital needs of Trubridge are roughly 10% of revenues.

To finance this, Trubridge pays 8.5% per year, so this already has a high cash cost just though interest alone. It is not likely that Trubridge can reduce its financing cost for the next year or two, however they could try and reduce working capital requirements. Historically, working capital requirements (excluding divestiture affected quarters) ranged from 6% to 12% (using on quarterly level using last twelve months revenue data. It’s fair to assume that at least some lower percentage than current of close to 11% can be deliberately achieved.

The second part is harder, but very doable is working capital management. Working capital management is -- my path goes through collections, putting a maniacal focus on that, and that's what I've said in my prepared remarks, reviewing daily collections. I've boosted by 100% my collectors team and putting more focus on how it needs to be done from a focus perspective. And the second part relating to that is payables. It's just making sure we do a good working capital management on that because otherwise, I'm using my debt to pay my AR. So part to that free cash flow goes through my improved EBITDA from gross margin. We're very tight, getting a lot of operating leverage from OpEx and then improved working capital.

~Vinay Bassi, CFO, Q1 2024 earnings call

If my reading of the transcript is correct, expenses have been made to boost collection teams. Time will tell if they really do collect. Be it how it may, assuming Trubrige is able to reduce its working capital needs by 200 basis points, would in effect increase its FCFF by slightly less than that (restructuring outcome #3).

There are limitations in cost savings, and it seems that Trubridge is about to exhaust this source of operational performance improvement.

I would say 3 months in I would say where -- how we are -- how I'm designing the cost saving optimization, I call it more the optimization is figuring out areas that we need to get more efficiency. So there are 2 or 3 buckets which are mainly -- one is the ROI focus approach on projects. So we have just started on that. So there might be a little more room there, again.

And then I think where we are, the second bucket is more about noncritical vendors. I think that we have cleaned up a good amount by now. Inefficiencies or the rightsizing of the organization in OpEx, I think we have covered 80% plus. But I would say I don't expect another significant like this amount, but there could be a smaller amount as we go through the balanced quarters.

…

On the EBITDA side, why we kept that is these cost savings, what I have given is not that it has not started. We have already executed -- started executing some of these savings and a good proportion will be done -- has already been done and will be done in the coming weeks. How you should look about -- look at the EBITDA ramp in the second half is think about it in my first half again using the midpoint from a first half to second half, the improvements will come from $4 million, $5 million from my cost saving by offshore the conference cost won't be there for that.

And then the $5 million of in my example, will give me leverage our gross margin again of approximately 50%, 2.5 million. So based on that, I feel you should get confident at from a ramp, getting the $4 million, $5 million is coming from a cost savings I have the NCC costs, the conference cost is no longer there, and I do have the offshore and then the gross margin pickup.

~ Vinay Bassi, CFO, Q1 2024 earnings call

My only reading into this quote is that very definitive cost savings can be expected to be visible even with Q3 2024. In addition, some 2 million of conference costs mentioned, are a real recurring cost, but they happen once a year in the first half of the year and should not be ignored. According to Bassi, gross margin of close to 50% can be expected. This is in line with historical levels, so the question why are savings not visible already? Answer provide by Trubridge is usually referring to one off expenses, severance costs and parallel staffing in the transition period to independent offshore workforce. This is a plausible answer, but one that should be use only for a few quarters more. Otherwise, this thesis breaks.

Peer analysis

When I am faced with understanding a new business like this, my starting point is gaining the understanding of how the average industry in which it operates performs. In absence of Bloomberg terminal, here I borrow from professor Damodaran data, knowing fully that it might contain errors.

Trubridge operates in the Health Care Technology Sector (Healthcare Information and Technology in the data I used for benchmarking).

Looking at US companies in the same industry we can set the benchmark.

Historically, Trubridge had gross margins on par with the industry. However, it had drastically lower EBITDA margin especially as of late.

Although a hated measure by many, their own adjusted EBITDA holds important clues, however. Not going into justifications for other adjustments, Severance and other non-recurring charges should decrease drastically once the restructuring is complete. Stock based compensation is a real cost, just paid with a different form of currency. With this in mind, Trubridge generates roughly USD 11 thousand quarterly or, EUR 44-50 million EBITDA (by annualizing quarterly or data for last six months). In effect, this brings it close to the level of the average company in their industry (13% to 14.5% EBITDA margin).

Now, coming back to what I identified above as their potential savings, it seems that just ending the restructuring without affecting the current product, and it's maintenance development, would produce results. Add to that the savings on workforce they hope to achieve (mean savings of 12% of revenue) and Trubridge would be 25% to 26.5%, or an 85 to 90 million EBITDA generating business. Sounds great. But there is a catch

One important part missing in this adjustment relates to amortization expense. While TruBridge takes out their intangible asset amortization expenses from EBITDA, it omits to add back a regular expense, which they choose to capitalize. Trubridge capitalizes part of their R&D expenses. In FY 2023, they capitalized more than 20 million, roughly equaling the amount of their intangible asset amortization for the year.

So these R&D investments can be considered as maintenance capex, and are a real cash outflow, although not treated as expense. This means that if one is to adjust EBITDA to better reflect operational efficiency of the business, it should take into account also this. Returning to our range of 85-90 million EBITDA, we are now at theoretical 65-70 million adjusted EBITDA.

Can they, do it? They should be able to in theory, as this would result in them being 19.5% EBITDA margin business. Nothing but averagely profitable company in their sector.

Do they have the will to do it? Pinetree, L6 Holdings, and Strikwerda think so in part (since only part of their portfolio is invested here). And additionally, L6 Holdings is asking them to.

Summary of expectations

Before proceeding to valuation, I will just provide a shorer summary of what I consider to be reasonably expected changes and future plans for Trubridge:

1. They will acquire no businesses in some short to midterm (next 2 to 3 years) and will instead operate what they have.

2. Overall business volume measured through revenue will grow at some 5% per year. I would expect them to reinvest 1 dollar for each dollar of organic growth additional to their amortization and depreciation costs (excluding intangibles amortization).

3. Research and development costs and capital expenditure will go down. I have no estimate for this, and I will not include it in my valuation, but it is in line with low business growth, and positive for the cash flow generation. Once there is more clarity on this, I will update my expectations.

4. RCM and EHR mix in revenue will not change dramatically and legendary 400 million cross-selling opportunity will not be won.

5. a Significant portion of the RCM workforce will operate from India, and effects of this transition will be visible from 2025. Median savings as a percentage of revenue will be 12% (with a range of 10.4% to 14.1% - decimals here can be ignored since they probably offer false precision)

6. Non-cash (and non-current debt) working capital needs should be reduced from the current level of 9% to 11% by at least 200 basis points, or to the level of 7% to 9%, freeing additional free cash flow to the firm.

7. Additional savings like in the form of outsourcing non-core financial products' software to external providers (Multiview) should provide reduction in costs at the level of 1% of revenues.

8. Once offshoring is complete, severance costs should reduce to some stable level of 4 to 5 million per year, from current 15 million. As a percentage of revenue, this is close to 1% of cost reduction.

9. There will be no extreme debt reduction. Current indication is that Trubrige wants to keep overall debt to EBITDA of 2.5 to 3 times, which implies debt reduction of around 20 million. If I had a choice, I would use all of FCFF to repay expensive debt, as it is the simplest way to increase the per share FCFF (in effect double it in three years).

To summarize, in a stable state, I would expect 5% organic revenue growth, cost reductions equal to 14% of revenues pre-tax, or 10.5% post-tax. Intangibles amortization should amount to 7% of revenues (until intangible assets are expensed) and reinvestment needs above depreciation and amortization costs (other than intangible assets) of close to 4% of revenues. This would leave Trubridge as 13% FCFF to revenue generating business with invested capital turnover slightly above 1 (in simple terms, ROIC between 10% and 11%). This is quite close to the median company you can find out there. Nothing spectacular. In turn, it makes this outcome plausible.

Valuation

Valuing Trubridge, or any other potential turnaround, is an ungrateful task, especially in the case that the end goal is not defined by the company and can be only speculated about. Here I will provide my standard DCF of what I think is a reasonable pathway for Trubridge (I have many more in my archive), in line with the above summary of my own expectations (intentional emphasis on this). But keep in mind that even a slight deviation from my assumptions can have significant impacts on the value of Trubridge in future (and present value today).

After defining my base scenario, I then ran 10,000 simulations around it, allowing for the variation in the organic growth rate before leveling it off with the long term inflation rate, and by varying the overall level of operating profitability across the full forecasting horizon (and terminal year). I have no way of defining the distribution of these variables, so I assumed that any outcome within this range can occur with equal probability. My medium simulated estimate is USD 35.5 per share, which is a discount of more than 60% to the current price (USD 14.31 as of November 12th, 2024). My 25th percentile of distribution results in value of USD 33 and 75th in USD 37. This does not mean that these values are likely to realize, but just that DCF model does not break apart with high variations applied.

Alternately, one can just value Trubridge based on owner earnings, which would result in the following:

if you are interested in this approach, you can find it the book Value Investing: From Graham to Buffett and Beyond explained through examples.

For the last, there is one, though, experiment I could not escape. It's probably the simples way of generating per share value Trubrige has. Currently, Trubrige carries 180 million in debt. I roughly estimate that it can generate 50 million free cash flow to the firm (post tax cashflow before debt repayment and dividends). Trubrige can repay its debt in 3 year and continue producing its 50 million FCFF, which would then be almost fully free cash flow to equity holders. Assuming no growth from there and discount factor of 10%, we would end up with 500 million EV, which would also be its market capitalization (no debt outstanding). Take these 500 million, discount them to today, and you would have 375 million in present value (discounting is cruel). Divide with 14.33 million shares, and we would end up with slightly more than USD 26 per share.

All of the three approaches above are by definition wrong in assessing the value of Trubridge, however they point to one common property. If there is a will, and some level of skill within Trubridge management to significantly increase the value of their business, there is also a way.

I own a small position in Trubrige, and I will keep it small as it is a speculation more than an investment.

I will leave you with this, and ask for your comments on what the end story for Trubrige could be.

Disclaimer and kind request

Before you take any actions based on this article, remember, you are trusting an experimental analysis of an anonymous person. However, if you like it, and you think it makes sense, feel free to support my writing which I do in my spare time, while working a full-time job.

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Investing is driven by random idea generation in my case, and this one came to me unexpectedly. While waiting for my Trubridge notes, Trinity will have to suffice.🍀

In short, Trinity Exploration is being acquired by Lease Operators Limited, on behalf of Well Services Group from Netherlands, which in turn is owned by Excellence Logging, for 68.05 pennies per share in an all cash transaction. These are four companies you never heard most likely, and this is not that relevant. What makes this an interesting opportunity, is the set of circumstances before this acquisition offer was announced.

For detailed offer document, and to do your own due diligence, you can go to this link. Where sources are not named, I have taken the document snippets from here.

At least on consolidated level, Excellence Logging seems to be large enough to finance this acquisition

More importantly, Lease Operators have secured the financing and guarantees for the transaction.

On May 1st, 2024, Trinity received the offer from Touchstone Exploration for all shares of Trinity in exchange for 1.5 newly issued shares of Touchstone.

This offer was subsequently lapsed by Touchstone as Trinity received another offer, this time for an all cash transaction from Lease Operators for a 68.05 pennies per share. In transaction to become effective, 75% of the shareholders of Trinity have to vote in favour and regulatory approvals have to be obtained by the Trinidad & Tobago regulatory authority.

What is interesting, is that the shareholders already voted in favor of the Touchstone offer, which reduces a risk of failed shareholder vote when it comes to Lease Operators offer. Arguably, current offer is better for the shareholders simply by offering cash instead of shares alone.

following the Court approval and shareholder vote transaction should terminate within 14 days.

In addition, in their latest operational update, Trinity released the details of the meeting that is scheduled at October 30th, 2024.

After the 15 minute Court session, General Meeting will take place, where shareholders will vote on the offer.

Looking at top 25 shareholders, and assuming that those who are connected with the company, are institutional investors, or have this as their only holding will vote in favour, shareholder support for the deal seems to be there.

I expect this to close by the end of November the latest.

I have a minor position in Trinity Exploration.

Disclaimer and kind request

Before you take any actions based on this article, remember, you are trusting an experimental analysis of an anonymous person. However, if you like it, and you think it makes sense, feel free to support my writing which I do in my spare time, while working a full-time job.

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But not nearly enough. I made a mistake in my initial position sizing and it’s almost not relevant in my overall portfolio. Nevertheless, following Pinetree is similar to a free investment course, so I will continue following it closely and posting my notes on it (in hope that new safe buying opportunity occurs).

Purpose of this note is just to provide brief overview of the current status of Pinetree before their Q3 release to hold myself accountable. For more details on how I view Pinetree and why I consider some parts of their financial disclosures more relevant than others, please see my other note - 17. Pinetree Holding: Special situations vehicle of Leonard family.

Pinetree Q2 update

As I noted in my previous note, story of Pinetree is the story of how existing loss carryforwards can be used as efficiently as possible in order to benefit existing shareholders. By efficiency, I primarily refer to speed in which they can be used to realize capital gains, without diluting effect of raising additional capital to achieve those capital gains. Dilution can be a good thing, like the time Shezad was brought in thanks to it, but should not occur only for the purpose of having more funds available. So far there is no indication that this will happen. For the matter of fact, Shezah is not even there anymore (although he should be back any time, since his tenure at Bravura Solutions has ended).

As of the last quarter loss carry forwards that can offset future capital gains has been reduced to CAD 394 million.

There is no certain way to value Pinetree. What I consider as reasonable metrices are NAV measured through cost and fair value, paired with DCF of alternative levels of normalized earnings until deficit is fully utilized.

If you remember, in my valuation attempt I used this deficit as a budget for estimating remaining life of Pinetree. Speed of utilization of this deficit would determine the number of years over which I would discount some estimated amounts of normalized earnings, both realized and unrealized, since under my valuation assumptions, once deficit is fully used, Pinetree will be dissolved. This of course is only a speculative assumption on my side.

Back then I provided following expectation of deficit development (zoom in):

Based on my then normalized earnings assumption, deficit should have been around CAD 402 million by now. However, mostly unrealized gain in the Q1 2024 of CAD 11 million has eaten up a larger chunk of it than I expected.

Equivalent of the beautiful table above would now look like this:

Shown as a figure:

Changing the assumptions for the normalized yield, following scenario values can be produced (scenario of 15% equates cumulative realised and normalised realized yield over the period of 4.25 years).

Compared to my initial notes, adjusted yield changed by 100 basis points due to high unrealized gains in Q1 2024. However, this was a period of market recovery and one should not take it away from Pinetree. They started in the normal market conditions, experienced two downturns and are going back to normal again. Market cycle is complete for them.

Apart from the mentioned scenario, one is free to choose the scenario based on his expectations from the table below.

To make it clear, market will never value Pinetree like this. Simply, it’s a risky thing to do since there is always a risk of failed concentrated investment removing years of positive results and track record. If anything, the fair values indicated above can give you the insight into potential IRR you could expect if any of the above mentioned scenarios realizes over the period of Pinetree existence (divide the cost of equity with % to value for a quick measure).

Measured though NAV by any definition, Pinetree is currently priced above them.

• Using 30.09.2024 values

• Using 18.10.2024 values

My personal threshold for investing in it is some level close to the cost value at the moment of investment.

As for their realised transaction (or partially realised transactions in case of Sygnity), Pinetree continues to close their positions at 40% CAGR.

But more importantly, they continue to turn their portfolio and utilise their capital gains buffer. The fact that they are selling their Sygnity and Topicus holdings gradually, indicates that there is some process behind their operation and a level of ruthlessness when it comes to their holdings. I hold both Sygnity and Topicus in my portfolio, but I am not considering selling either of them even if I consider Sygnity slightly overvalued and Topicus at fair value on a probability weighted outcome basis.

Notable absences from their portfolio are Trucontext, sold for realized gain of CAD 1,007 thousand, or 154% return over the holding period (resulting in 36% CAGR), Sapiens sold for realized gain of CAD 1,665 thousand, or 70% return over the holding period (resulting in 36% CAGR). Horizons High Interest Savings ETF position of 2,454 thousand was eliminated probably for no significant loss. All these fund have gone into two new positions. One of them is now the largest position in Pinetree’s portfolio - Trubridge.

Other is unknown and all information that was disclosed was that it is Germany- Healthcare Software company. Last time similar description company was in their portfolio was in 2023, when during the first quarter, position was closed in its entirety.

Then, Compugroup Medical, was sold after roughly a year of being bought. I have very little insight into this company, but it seems that understanding the intricacies of this business, might come in as a useful knowledge given latest market reactions.

With no other evidence, I am only left to speculate that Pinetree again invested into Compugroup. But more relevant for Pinetree, focus should be on TruBridge.

Trubridge is an interesting investment for Pinetree. By my measures, it their largest position that they cumulated in such relatively short time.

First shares were purchased at late January this year, with majority of the current holding being acquired in May at about USD 7.8 per share.

What is interesting about this investment is also that similar to Bravura Solutions, Pinetree is accompanied by like-minded investors seeking to create shareholder value, namely L6 Holdings and Strikwerda family.

Together with them, existing management (CEO, CFO, COO, CTO and many others) have purchased quite a lot of shares since the beginning of the year.

Over past month or so I have been attempting to put a value, or range of values on Trubridge in order to understand what Pinetree sees in them from investment point of view. I will release my notes on them in next few days, but before raising expectations, have in mind that I am not able to identify exact outcome of the Trubridge transformation confidently at this point. Unlike in Bravura where plan was laid out in a more precise way, and activist investors had a seat at the executive board, here only partial mentions of the end state are provided. This is precisely why I invested in Pinetree, as I am aware that I lack the know-how to assess the value creative results of distressed business transformation activities. But, without trying to figure it out, I will never learn.

So, let’s follow true and hopefully bridge across the gap. My notes on Trubridge will be published in the next days. Hopefully comments collected on them guide us all close to the correct pathway in the see of possible scenarios.

Disclaimer and kind request

Before you take any actions based on this article, remember, you are trusting an experimental analysis of an anonymous person. However, if you like it, and you think it makes sense, feel free to support my writing which I do in my spare time, while working a full-time job.

If anything you pick up from my substack or Twitter account results in you earning a reasonable profit, or avoiding unreasonable loss, keep the karma going. Subscribe, even for a month. Even years after you have read something from me, based on realized experience.

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Topicus implied return

I wrote about this value shortcut for Topicus before. It is nothing more than a combination of market value adjusted ROIC+Org% measure Constellation itself uses for internal variable compensation allocation. Only adjustments I make is that I use market value of equity to substitute accounting values defining net invested capital.

Decrease in capital employed is due to special dividend Topicus paid.

Current implied yield is not unreasonable, but there will be probably be better moments to purchase more shares when either business outgrows the price or, price reduces compared to business value. At this level, you are in effect paying a market implied yield, with lower diversification of specific risk. You can find estimates of market implied yields, either on the website of Professor Damodaran, or Yardeni research.

The only change compared to previous periods, I would closely monitor in future, is how persistent goodwill impairments become. Amount of impairment shown below is not significant for Topicus, however it could mean that an average size historical acquisition was in effect liquidated. More likely, these impairments were booked across multiple acquired business. If I had to guess, these would be some of the more recent acquisitions happening during the period of post covid low interest rates, which could have inflated the net present value of goodwill during purchase price allocation.

As far as, what they are paying for their acquisitions, all is as it should be.

Looking at my DCF model, Topicus shows some evidence of undervaluation, and implies higher IRR if growth period of 5 to 7 years is assumed. Changes in EUR CAD parity, might cause a good buying opportunity for Euro investors.

—Updated after comment from Albetross capital, using data from June 24th, 2024.

CI Financial Odd-Lot

CI Financial announced yet another tender for share repurchase. Details of the tender offer can be found in the SEDAR filing.

Sedar Ci Financial Circular Eng

1.46MB ∙ PDF file

Download

Download

This time roughly 3.3% of outstanding shares will be repurchased at the price of CAD 15.50. Those who are owners on record at 28th June are also eligible to receive the dividend of CAD 0.2 per share. Tender should finalise at 8th July and settlement is expected within 10 days. Tender offer contains an odd lot provision, this offering you a profit of CAD 0.9 of capital appreciation and CAD 0.2 of dividends.

Amount is small, but coincedently, just enough to finance one of your average substack subscriptions. Standard cancellation clauses exist, but risk of it is small, as CI Financial has executed similar tenders in the past, using same legal wording.

Monster Beverage Odd Lot

This Amendment No. 2 (this “Amendment”) amends and supplements the Tender Offer Statement on Schedule TO originally filed with the Securities and Exchange Commission by Monster Beverage Corporation (the “Company,” “Monster,” “we,” “our,” or “us”) on May 8, 2024, as amended and supplemented on May 16, 2024 (as amended and supplemented, the “Schedule TO”) relating to the offer by Monster to purchase for cash shares of its common stock, $0.005 par value per share, for an aggregate purchase price of up to $3.0 billion, at a purchase price of not less than $53.00 nor greater than $60.00 per share, without interest and subject to any applicable withholding taxes. Monster’s offer was made upon the terms and subject to the conditions set forth in the Offer to Purchase, dated May 8, 2024, a copy of which was filed as Exhibit (a)(1)(A) to the Schedule TO (as it may be amended or supplemented from time to time, the “Offer to Purchase”), and in the related Letter of Transmittal, a copy of which was filed as Exhibit (a)(1)(B) to the Schedule TO (as it may be amended or supplemented from time to time, the “Letter of Transmittal”), which together constitute the tender offer (the “Offer”).

https://www.sec.gov/Archives/edgar/data/865752/000110465924058430/tm2413707-1_sctoi.htm

Similar to CI Financial, Monster Beverage is executing a repurchase of shares through modified Dutch auction (shareholders bid in a range of USD 53 to 60, Monster repurchases the declared number of shares at the minimum possible price. What is interesting is that few days ago, one of the cancellation conditions was waived (financing condition).

Odd lot clause is there, as well as the option to tender the shares without bid price. Thus ensuring you a profit of at least USD 1.1 per share, at most USD 8.1, if you tender 99 shares or less.

Disclaimer and kind request

Before you take any actions based on this article, remember, you are trusting an experimental analysis of an anonymous person. However, if you like it, and you think it makes sense, feel free to support my writing which I do in my spare time, while working a full-time job.

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Pinetree is a former resource management company with its purpose redefined in March 2016 when a group of investors acquired it from its previous owners. Now, Pinetree is an investment vehicle that invests in public market listed software companies, predominantly owned by L6 Holdings, representing interest of the Leonard family (founders and owners of Constellations Software). There is no particular geographical focus as current holdings are located in North America, Europe and Australia. Some of them can be classified as growing companies, some as special situations. Faith would have it, there are a lot of those these days. Although not disclosed officially, their investment history also shows that they closely follow (but not blindly) some of the activities of Constellation Software and its business units. Pinetree carries more than CAD 400 million of prior period losses which serve as tax shield for future capital gains only, and manages a growing portfolio of more than to CAD 40 million in securities. Ten times less than their tax shield.

Why is it interesting

I have been coming back to Pinetree many times since I discovered Constellation, and up until recently I always considered it to be too complex for my limited understanding of accounting. My initial approach to estimating its value developed into a massive exercise of complex changes I applied to its financial statements requiring a lot of work, only to throw away all that work after a brief moment of clear thinking. Now it seems quite simple actually, just I failed to see it at first. Here, you get to learn this side of it.

In short, Pinetree is a corporate entity that carries losses from legacy investments (reported deficit in the balance sheet), which are then used used to offset capital gains from sales of non legacy investments. The only taxed income is non capital gains related, which in case of Pintree is insignificant. Effectively this means that for a good many years Pinetree will pay no capital gains tax if it ever realises capital gains. Since 2016 its primary activity is investing in publicly traded companies for the purpose of realising capital appreciation of its investments. Since any capital gains are effectively tax free, it is safe to assume that Pinetree will have a meaningful portfolio turnover, at least in the part of their portfolio that is focused on investments that are temporarily undervalued or require some form of active involvement focused on business improvements. Pinetree is not fully dependent on buying and selling its investments to generate cash flows to cover its operational costs, as it has made investments in debentures and high yielding ETF that cover majority of these costs.

Pinetree benchmarks itself against TSX Composite index, which depending on selected period or starting point yields a total return of 7.5% - 11% percent (not tax free).

Now, for a good part of 2023, and in so far in 2024, Pinetree was priced below its net asset value measured through mark to market. This is perfectly reasonable, as there is no certainty if that existing unrealized capital gains will ever be realized. But remember, Pinetree is not in a business of cumulating unrealized gains. In order to justify L6 Holdings initial investment, they need to realize gains, and a quite a lot of them. It is a vessel with an ultimate goal of using its losses carry forward of more than CAD 400 million through buying and selling the stock of publicly listed companies. It goal is ultimately to realize CAD 400 million of capital gains. Ultimately its portfolio should grow towards this value. Preferably not through capital raises, but they have happened before and it is more likely that they will happen again then not.

However it chooses to grow its portfolio, its limited history shows that it does grow, even when impact of additional capital raises are eliminated.

Lastly, Pinetree is an owner operated business. Peter Tolnai and Tolnai family, Damien Leonard and Leonard family and Shezad Okai are its principal owners with varying degrees of their own wealth invested in Pinetree.

How much Pintree’s active portfolio management outperform TSX performance? How will this relative performance evolve over time? By how much could it change? How much will you pay for it? These are the questions one should answer in order to understand the potential value prospect of this investment.

Measure of performance

In order to understand Pintree performance, numbers in Financial statements need to be reshuffled a little bit. In simplest, absolute result of interest of common shareholder should be the sum of proceeds from sales of investments + dividends + net interest - taxes - operating expenses). To measure the performance of Pintree, these values should be then compared to either cost of creating the beginning of the period portfolio (how much money was actually invested), or using the market value of the beginning of the period (how much money could have potentially be invested by someone copying the Pintree actions).

In addition, analysing Pinetree, means relying on a short period of historically stable operations. In their own words, and based on data they provided, Pinetree management can only be accountable for overall performance since December 2019.

To measure the effectiveness of Pinetree current investing results, one should compare investment results net of legacy investment realized losses in relation to the cost value of the current active portfolio. By current active portfolio I consider cost value of cash and cash equivalents, cost value of debentures and cost value of non legacy public and private investment. Ultimate goal is to perform an objective like for like comparison on an as objective measure of portfolio management results. Why cost and not fair value? This is a personal preference, but I see portfolio at cost as committed own money to a conscious investment decision. Paper gains or losses are not that relevant for the long term investing horizon (if never realized) and are much more volatile.

Ownership History

The latest stage of Pinetree history starts in April 2016, when the significant management change occurred. CEO at the time, Richard Patricio, was replaced with Peter Tolnai who came to Pintree as an activist investor through open market share purchases and redemption of subscription rights to acquire additional shares. As per my count, 2507492 Ontario Ltd, or TolaiCo, paid in total slightly less than CAD 5.7 million for what was then Pinetree, resulting in Peter Tolnai having effectively 31.2% ownership. With him, Ian Howat, Craig Miller, Howard Riback came to serve as members of a board of directors, replacing all previous board members and executive staff. Of them, Ian Howat is the only one no longer connected to Pinetree after not standing for reelection in May 2023.

Soon after this change, the previously announced 100 to 1 share consolidation was completed, bringing the Pinetree share count to then 4.5 million.

In May 2017 rights offering was announced, which resulted in doubling the outstanding share count, at CAD 2.1 per share for each right, for total proceeds of CAD 9.5 million. After this, TolanaiCo owned 3,511,114 of the 9,045,198 common shares, or 38.8% of Pinetree.

On September 12th, 2017, Peter Tolnai stepped down from the role of the CEO, whilst keeping his position in the Board of Directors, and Damien Leonard, Chief Operating Officer, at the time, was introduced as his replacement. Related to this, TolnaiCo sold 31.3%, stake in Pinetree (2,831,147 shares by my calculation), himself keeping 7.8% ownership, to 1338369 Ontario Inc., also known as L6 Holdings. For those that do not know, L6 Holding owns (at least according to the latest information) 1,000,000 shares of Constellation Software and is run by children of Mark Leonard (I would guess six Leonards are involved). This would imply that L6 paid a total consideration of CAD 5.9 million (based on the CAD 2.08 price at the moment of disclosure – subsequently shares were consolidated 2 to 1).

Total cost of ownership for L6 = 5.9 million

For perspective of size of investment for L6 Holdings, this equates to 4 years of dividend income collected from Constellation, or roughly 80,000 Constellation Software shares at the time (L6 owns substantially more Constellation shares, making L6 as almost insignificant investment for them). Subsequently, to this release, L6 increased its stake to 3,007,938 shares in Pinetree, or a total investment of CAD 6 million.

Total cost for ownership for L6 = 6 million

2020 market collapse was followed with introduction of the minor share repurchase (up to 222,636 shares) under the automatic repurchase plan with a target price of 75% of the book value per share.

March 2021 saw the arrival of Shezad Okhai, former Vice President at Volaris Group, as a new Chief Investment Officer. This job transition was also accompanied by issuance of 375,000 shares, which Shezad Okhai purchased at CAD 2 (while quoted share price was close to CAD 2.05 – before the later share 2:1 consolidation). This effectively gave Shezad a 4% stake at Pinetree. Shezad himself spent 10 years prior working in the Volaris Group, a business unit of Constellation Software, first as a director in M&A, and later as Vice President. As a Director, he oversaw (according to his LinkedIn page), more than 40 acquisitions within Volaris, which according to my count has 160 business within. To put it differently, he oversaw one quarter of all historical acquisitions in Volaris.

During the same month, another rights offering was announced. These rights were fully subscribed and provided additional CAD 17.4 million of capital. Share count was increased to 18,840,396 before consolidation, of which 6,630,153 belonged to L6 Holding, representing approximately 35.2% of the issued and outstanding common shares. Upon closing, Peter Tolnai and Shezad Okhai owned 7.9% and 4.6%, respectively, of the issued and outstanding common shares. In total, investment made by L6 Holdings in Pinetree is less than 1% of the portfolio they manage, even if that portfolio consists only of Constellation Software common stock.

Total cost for ownership for L6 = 12,9 million

Once equity markets were used as intended, to infuse additional capital into Pinetree, share consolidation of 100 to 1 and share split of 1 to 50 was announced. In effect this compensated with cash more than 7000 small shareholders holding less than 100 shares prior to the split with cash. After this, share count was reduced by half. One curiosity is that after this, a new CUSIP number was assigned to the common shares of Pinetree. Technically allowing then shareholders to avoid wash sale tax rule in some tax jurisdictions, by selling their stock with a loss before the split, and buying them immediately after (this was probably not the intention).

Current value of L6 ownership (35% of market capitalization) = 18.5million

Somewhere during this period, the corporate address of Pinetree and L6 Holdings became the same.

L6 Holdings and Pinetree’s head offices are located at 49 Leuty Avenue, Toronto, Ontario, M4E 2R2.

In 2022, Pinetree acquired 2.6% stake in Sygnity, outer rim satellite of Constellation Software, where it partnered in ownership with TSS (which currently holds a 72.7% stake). Since then, significant efforts were made in Sygnity of cutting down on non recurring business and restructuring unfavourable debt inherited from previous owners, brining it to a current stage where it is ready and able to replicate the M&A growth approach TSS had applied. As of December 2023, Sygnity completed its first acquisition and announced another one for March 2024.

In 2023, Pinetree and L6 acquired acquired a total 25.5% stake in Quorum Information Technologies (10.9% and 14.54% respectively). Each of these entities invest with its own goals, however, having activist investors as owners of major stakes, if they work in interest of common shareholder, helps introducing value creating changes, As of June 2023, Damien Leonard sits on Quorum Board of Directors.

Somewhat similar happened quite recently with Bravura Solutions Limited, where Pinetree took an activist role once again. Bravura also had other activist investors appearing as significant owners at the time. One of them being owners of Topicus.com, Strikwerda family. In addition, Shezad also invested a significant portion of his wealth and then left Pinetree to act as Bravura COO for a period of one year resulting in total activist ownership of close to 40%. Currently, restructuring plan is being implemented in Bravura, and should provide stable state operating model by FY 2024 (June 2024 in Australia).

The last three examples, show a quite interesting and inexpensive form of control leverage Pinetree is able to achieve due to its ties and wilingness to dialogue with Constellation Software, its partners and other active shareholders. Instead of raising additional capital on debt or equity markets, it can partner through open dialog with others to achieve meaningfull sharehodler majority to effectuate a positive change. As long as all parties work in common interest, this construction makes sense. Since they are more likely to do so than not, chances of positive outcomes in the special situations they invest increase.

Loss carry forwards

Loss carryforwards are a hidden contingent asset of Pinetree, and there are two types of them on their balance sheet. First is the Canadian non-capital loss carry forward in total of CAD 4.7 million. This translates to CAD 1 million in tax savings at corporate income tax rate of 21.5%. These carry forwards expire over time and grant Pinetree an option to utilize them over the next 20 years. Note that Pinetree currently has no operating profit, as it has no operations. It is most likely these savings will not be used. Something which even Pinetree openly states. Note that, according to its official definition they are a merchant bank, so in theory future can bring operating profits, it would be speculative to add any value to this.

What is not mentioned in the annual or quarterly reports is the use capital loss carry forward. Thanks to the extraordinary efforts of previous management, Pinetree currently has more than CAD 400 million in losses stemming from failed investments. Using the tax rate of 26.5% on capital gains (according to Pinetree statements), this translates to CAD 108.2 million in capital gains tax savings. Roughly more than 2.5 time of the current equity portfolio size.

To put this into perspective, Pinetree current portfolio at fair value excluding cash and legacy investments (carrying zero value) is CAD 39 million. If the portfolio was to increase by 10.4 times, proceeds from sale would be capital gains tax free. While for most, having a 10 bagger means effective 7 and a half bagger (after tax), Pinetree gets it all for themselves. If they could get it, that is.

Although the most relevant for Pinetree, little details is provided in it's financial statements and MD&A regarding capital loss carry forward. For initial reader of their reports there is also a confusion caused by existence of legacy investments with zero fair value still reported in MD&A. To my best understanding these are past investments which could still result in unexpected gains that would then be recorded in income statement, but are most likely to be realized at full loss. Hence they are carried in financial statements at their fair value of zero. In addition to them, there is an earlier CAD 405 million of losses related to past investments where there is not even the slightest probability of positive cash flows. These are disclosed only as a part of reported deficit and a negative item to their equity. My initial understanding was that reported deficit includes losses on past investments without possibility of realizations, while losses on legacy investments where some theoretical probability of any cash flow would still exist, were not a part of this deficit. However, checking multiple reporting dates and disclosure proved me wrong.

Treatment of legacy investments and measure of investment effectives

Part of my initial confusion in understanding Pinetree financial statements came from misunderstanding the effect of legacy investments disposal on profit and loss. Especially those legacy investments without fair value (or fair value of zero). Year 2021 is a good example since during this year Pinetree saw a decrease in outstanding legacy positions from 11,386 to 7,619 (difference of 3,081).

MD&A for Q4 2021 explains on page 10 that this resulted in net realized loss of 3,222 and total net realized result of -1,311.

Now, going to the notes of financial statements we see that when unrealized gains and losses (including those which are created as a reversion of the loss from legacy positions) are added to this number, we are left with the reported net investment gains.

Add operating expenses and interest and dividend income to this figure and we are left with reported net income of 1,459 which directly reduces reported deficit.

Prior to this realization I was adding back the impact of the realized losses from legacy investments either to reported net income, or alternately I was adjusting the reported deficit for the remaining amount. As it turns out, neither of the adjustments in needed as the net income eliminates the impact of the legacy investment derecognition, and at the same time, deficit is not affected.

Why did I consider this as relevant at the beginning? Net income directly affects reported deficit, which is the most important asset on Pinetree balance sheet as it serves as a capital gains tax shield.

This means that comparing reported net income with either cost or fair value based value of the portfolio in order to measure the effectiveness of Pinetree investment process is possible. Over the sufficiently long period of time, net income, which also includes unrealized tax free capital gains, could serve as a proxy for realized performance (more on this later). which with addition of excluding the cost of remaining legacy positions from the total portfolio value at cost.

Note that realised loss on legacy positions can be higher or lower than the cost, and that also cost might vary as positions are recognised or derecognised. Reasons for this are unknown to me, but this can be observed throughout time. Since its of low materiality, I will not investigate this further. For those of you with accounting background, if you know the explanation, I would be curious to know.

Valuation

In order to value Pinetree, it's necessary to estimate the real future cash flow it could generate and ranges around those estimates. As it will turn out this is a very difficult task. But first, forecast merits the answer to following questions.

1. Can Pinetree continue to buy and sell software companies while earning a positive rate of return?

2. Will Pinetree ever be able to utilize the full amount of its loss carry forwards?

3. How much time will it take them to use up the full amount if its cumulative loss carry forwards (affects the present value of the hidden tax asset)? How does this translate into value?

Can Pinetree continue to buy and sell software companies while earning a positive rate of return?

Answer to first question is the matter of trust, conviction and bias. By their choice, Pinetree invests in two types of companies. One are classical special situations, investments dependant on some catalyst which could result in increase in shareholder value. Others are what I would call Constellation linked assets. Be it in form of companies like AdoptIT, Sygnity, Bravura Solutions or Topicus, or in form of Constellation Series I debentures, Pinetree is closely tied with Constellation Software and its connected counterparties. There is nothing fundamentally wrong in this, but this also does not guarantee performance. However, based on short and limited history we have (luck would have it that this period includes biggest drawdown on software companies since early 2000s), it seems Pinetree can realize gains on investments in any segment of a market cycle, at least it can during market drawdowns. Furthermore, it is reasonable to assume that the effectiveness of their special situation approach will increase as they grow their capital base and are able to diversify more while still targeting special situations. Here I would still assume that on average they will achieve the same results in their special situation investments. However diversification, or more precisely higher number of investments would result in a more continuous cash flow and greater chance of having funds ready when opportunity arises.

Additionally Constellation itself seems to be involved in more and more carvouts and special situations than before (something they hinted in 2008-2009), and it’s fair to assume that the number of public listed companies they either acquire on a stand alone basis or through spin offs and mergers will grow from something we see every once in a while, to something that occurs in a more regular frequency. Constellation targets will grow in size. Larger companies are more likely to be listed. Pinetree could latch on more easily.

Last point should also be supported by the fact that now more then ever its possible to find small and mid sized software companies that are value investments (if you need inspiration, take a look at ROE reporter from Donville Kent - one of early investors in Constellation Software). Software companies are facing a new reality for them where capital is no longer abundant and more sound cash producing business will face some form of operational challenges, thus creating opportunities for activist investors. These are the companies that have bond like earning profiles, stable operating earnings, but far from optimal capital structure. Usually, they are burdened with the high level of debt that is eating up their cash flow, and that will in a two to three years force them into restructuring once debt refinancing is needed. Then I would expect Constellation to attempt to acquire them, and Pinetree to latch on.

Other than speculating about future, we can also look at the past. Below figure shows the history of Pinetree investments that it has exited completely. Apart from Crealogix (currently being acquired by Constellation Software), Pinetree did not exit that many of their investments with a loss. They do have holdings trading below their cost, but it seems that have patience to wait their thesis out.

Given that these types of companies have experienced the biggest drawdown since year 2000, it is reasonable to assume that at least similar if not better results can be achieved in the future.

Will Pinetree ever be able to utilize the full amount of its loss carry forwards?

Yes. No. Maybe. To repeat, Pinetree can generate 405 million in capital gains before it needs to pay any taxes. I was able to track individual closed investments only from December 2020, or 3 years, and in that period total of 4.2 million was realized. It may not seem much but, taking into account the length of the holding period and size of those investments, we are observing a CAGR on closed investments of close to 40%. Keep in mind that Pinetree sometimes trims its positions, like Sygnity in Q3 2023, and that focus here is only on positions it exits completely.

Same table, shown in a graph.

This does not mean that Pintree grows its portfolio by 40% each year. In order for this to hold, Pinetree would simply have to have a 100% portfolio turnover every year. Fortunately, turnover rate can be checked, even if on the limited history we have. Defining portfolio turnover as less of purchases and sales over a period (quarter) divided with average portfolio value (again over quarter), we can observe following figures:

Above values are calculated both on the portfolio at fair value (mark to market) and by cost (my preference since it is real money committed). Careful observation would lead to a conclusion that portfolio turnover is opportunistic and follows no prescribed pattern. Higher than 0%, lower than 100%, closer to 15%. Simple math would take the above mentioned CAGR of 40%, multiply it with 15% and use some 6% as a proxy for normalized earnings. However, this is only a part of the Pinetree source of income. Pinetree also trims and adds to existing positions.

One thing is certain, Pinetree earned real cash during the one of the greatest market downturns in software industry in last quarter century. It is not that far fetched to assume that they will continue to earn in future. However, can they earn more than 405 million from this point.

How much time will it take them to use up the full amount if its cumulative loss carry forwards (affects the present value of the hidden tax asset)? How does this translate into value?

To figure out how much time they will need, agree what Pintree is and what it isn’t, and then come back to the measure of their performance and agree what Pintree is and what it isn’t.

Pinetree is not Constellation Software. It will not become mini Constellation. If you look for miniaturized versions of Constellation Software, they already exist, and are partially owned by Constellation. Pinetree will most likely never acquire companies outright, since its main reason for existence is capital gains tax shield. This shield can only be used by buying and, at some point, selling investments in publicly listed companies. Once the shield is gone, it is fair to assume that Pinetree also might end its existence and be dissolved among surviving shareholders. This implies that at this point, all cumulative unrealized gains will be realized, making use of net income as a proxy for return actually reasonable. In other words, pinetree is more bond-of-a-kind investment with limited life than going concern. Why surviving shareholders? Because it might take time.

How much time? This depends on two driving factors. First, which we cannot forecast with any degree of certainty, is whether there will be additional capital raises, like those in previous history. For sake of simplicity, let’s assume no. But to clarify the risk for the existing shareholders, if Pinetree was to raise 400 million tomorrow, invest it in a holding that doubles within 3 years and is subsequently sold, tax shield is gone.

Second driving factor is the speed by which Pinetree is able to earn out its reported deficit. To identify this, we need some measure of normalised earnings. Simplest way to normalise the earnings is to take what is considered a representative period and calculate annualised value. Taking data from December 2019 to December 2023, we can see that the cumulative reported net income is close to 10.2 million.

Within this period, Pinetree had one large capital raise (when Shezad Okhai became shareholder), and portfolio at cost increased from 6,7 million to 33,9 million (17,4 million raised as additional capital). This is relevant for two reasons. Fist, absolute values of net income are not representative due to external change in its base (inorganic portfolio growth). Normalizing relative net income yield should solve this. Second, as the portfolio grows, share of operational costs goes down. Last point is relevant, as my theory is that Pinetree will always keep certain level of cash invested in bonds, ETFs and debentures to generate passive income financing its operational cost. This operational cost historically included salaries for 2 to 3 people, and this number should more or less remain constant even if they grow in size significantly. But because of this, I will always assume that they will park aside certain level of assets and invest the rest. Since I am taking part of the assets out of equation until the terminal year, I also need to take out income and costs related to those assets from net income(interest, dividends , coupons and sales and administrative expenses), before I normalize it.

Using quarterly data, we can generate the figures below.

Over the selected period of 4,25 years, using period portfolio at cost values, cumulative realized adjusted net income implies annual rate of return of 14%, or monthly return of 3,33%. Remember, operating costs are excluded from these figures now, but so is passive income generated, and assets used to generate it (7 million at this point).

This can now serve as a basis for our simulations and attempt to determine when will the full amount of deficit be used up. Assuming 14% net income yield, we in effect assume 4,683 thousands in normalized adjusted net income as of today (compared to 5,768 thousands reported as of December 2023). Also, assume that almost all of generated income will be reinvested into future or existing holdings to generate same return on invested equity (ROIE). All but minor part needed to finance assets used for passive income generation, for which I will assume will grow at 2% per year.

From here we need to roll out our forecast into the future, up until the deficit is still negative. Value of portfolio then (without calculation you should understand that it is somewhere close to 445 million), should be discounted back for the determined period of time. As a discount rate, would use average cost of equity for software companies, or even maybe long term equity risk premium for Canada + 10 year bond rate. For cost of equity, data from professor Damodaran is a reasonable proxy.

For equity risk premium, Statista also provides information which seems to be aligned with the above, if we assume some 3,5% 10-year bond yield over a long period.

Rolling the previous net income yield assumptions, we get the following

Assuming 14% net income yield, with 98% reinvestment, it would take 19 years and 3 months for Pinetree to use up all its deficit. Surviving shareholders rejoice. Discounting the liquidation value of the portfolio back to present at 9%, this would yield a value if 84.3 million on enterprise level, or 8.98 per share using current share count.

For those wanting more details, here is the whole forecast ^🧐. Those who are paid subscribers got the excel file with many goodies, including this, shortly after article publication.

Changing the assumptions for the normalized yield, following scenario values can be produced.

We know only need to know, each exact scenario will be realised and decision is simple.

This is of course not possible, but warnings should be made. To a degree, it is reasonable to assume that the implied rate of return on TSX will be close to 9% over quarter of a century period. Much more reasonable than 14% or 17%. As it seems so far, Pinetree earns a bit more than overall index, but they are concentrated and can have years of positive results nullified with one bad concentrated investment.

One should never forget that Pinetree is not an operating business but a basket of securities that for most part have quoted value. As of today April 17, 2024, their portfolio an values of the positions are the following:

—Update - post publication I was informed that Pinetree position in Trubridge is 500k shares. Above figures look somewhat different, although similar.

I personally invested in Pinetree when it was selling 20% below its cost value per share, implying that I should earn 14%/0.8 = 17.5% CAGR over time, if 14% yield holds. Buying it at today’s prices is risky, as you are only paying for the talent of limited track record (price is above the NAV) with great expectations.

On the other side, I still hold Pinetree as I believe that they have the connections and a unique position to practice special investments in a period of time when a great deal of good companies is in peculiar situations, keeping them one step away from becoming better business.

Annex

Other resources on Pinetree:

Disclaimer and kind request

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This is an actionable idea, that can vary in the level of profitability and riskiness, depending on your own personal risk preferences. Below, I list actions I took, but not as an investment advice, but only as a personal log. Those few that are voluntary paid subscribers, if they chose to act similarly and this arbitrage plays out as it should, would get their moneys worth from their subscriptions so far.

Words of caution. I have not previously engaged in similar transactions. I have not studied the business of Cummins and Atmus in great detail. What you will find below is just a mathematical construct around announced split off, that I was analysing over the last weekend.

Split-off deal details

All details related to the transaction can be obtained through https://www.okapivote.com/CumminsAtmusExchange/, where also we should be notified of the final exchange ratio for the transaction. A link to prospectus can also be found on this page.

Under the announced split off each share of Cummins will be tendered off for the number of shares of Atmus determined as average price (VWAP) of Cummins over the 7th, 8th and 11th of March 2024, divided with average price (VWAP) of Atmus multiplied with 0.93.

Based on the so far trading in past few days, and as of today (11th March), exchange ratio should be close to 12 (Average of March 07: 12.08320; March 8 12.1263, March 11: 11.8995.

Since the prospectus prevent proration on the odd lots, this implies potential arbitrage profit of more than USD 2,000, by purchasing 99 shares of Cummins for USD 26,450, and short selling 99*12= 1,188 shares of Atmus for USD 29,200.

Tender can be cancelled if less than 50% of planned split off of 67,054,726 Atmus is subscribed. This translates to roughly 1.7% of the current Cummins float that would have to be submitted to the tender offer. This I deem unlikely. The prospectus also leaves an option of distributing Atmus shares as a for of dividend to Cummins shareholders in case that the tender fails.

Details of the tender also leave an option of recalling the shares submitted for the tender after the publication of the final exchange ratio on the March 13, 2024. Following this date, I would expect that I will receive Atmus shares within a week. This expectation is based on the analysis provided by Special Situations Investing.

Risk

Tender can be cancelled due to a variety of reasons, most important being low subscription. Sudden appreciation of Cummins, or depreciation of Atmus can also cause the situation where one would receive less than USD 100 of Atmus shares for USD 100 of Cummins shares. Although, so far, it seems that this will not be the case (these could be the famous last words).

Why the opportunity exist

With this transaction, Cummins is effectively selling Atmus to the public while avoiding tax liabilities. They are motivated by 20+% tax benefit. Odd lot proration exclusion is just a nice chance for a small retail investor.

Disclaimer and kind request

Before you take any actions based on this article, remember, you are trusting an experimental analysis of an anonymous person. However, if you like it, and you think it makes sense, feel free to support my writing which I do in my spare time, while working a full-time job.

If anything you pick up from my substack or Twitter account results in you earning a reasonable profit, keep the karma going. Subscribe, even for a month.

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Recently, I have written about what I found to be a good proxy for determining a possible IRR for investment in Topicus at current price levels. As all proxies, it is just a quick measure to signal if something is significantly mispriced or not. Personally, I am an avid believer in that value of a company is present value of its discounted cashflow’s, but building and updating these models takes times and I do it only periodically for companies I am comfortable having as my holdings.

Proxies serve a different purpose. They are just a quick measure to signal if something is significantly miss priced or not. As Topicus has released its December 2023 results, I spent a few minutes to update the information on the data I deem to be a relevant measure of the business quality, and proxy for its implied rate of return going forward.

The following figures show the development of Topicus as a business-tough income statement (in EUR). So far, revenues have grown in line with a long term compounded average, and there are no significant indications of this slowing down or that the structure of revenue sources is changing.

As for the organic revenue (better visible in the separate graph), Topicus slowed down its growth in real terms during 2022, when across its operating markets it experienced inflation of 6-8%. Interestingly enough, it achieved organic growth of 7% which translated to 4% real growth using December CPI for EU as benchmark.

For those who are long-term investors in Constellation, ROIC+Org% is a well-known metric that was once embedded into the CSU internal performance assessment scheme. It is still a good proxy for initial shareholder returns (note: those who provided initial equity). Maintaining this rate above 20% is something only a few companies can achieve without excessive leverage. In the case of Topicus, decay is visible, and some midterm level of 25% can be expected.

Topicus is currently in September 2013 of Constellation Software history, measured through total revenue. However, it spent good part of 2023 reducing it’s debt (part of it also being interest free Constellation debt) to a level Constellation did not have in a decade. It is reasonable to assume that 2024 will bring a new debt facility to be used to leverage M&A and probably increase ROIC a bit.

As for the organic revenue, my suspicion is that this is actually attributable to Topicus (Topicus.com owns Topicus and TSS). At least based on my account, TSS acquired 14 companies in the Netherlands in 2021, 2022 and 2023 that brought in 65-75 million of revenue. But figures below show a growth of 150 million in the Netherlands alone. At the same time, my data shows a total of 45 acquisitions in the rest of the world for total revenues acquired of close to 300 million. My revenue estimates are not perfect, but directionally they seem to support the assumption that Topicus actually grows their business apart from TSS acquisitions. Something Constellation has always claimed that they did better than any other business unit in the group.

Finally, using latest EUR CAD FX rate, share count and market price, coupled with December financial statements data, results in a proxy for an implied rate of return of 9.33%. Some 10% relatively less than last time, but still above what I would estimate to be a cost of capital for Topicus (you assume at least some protection to specific business risk).

The last measure I follow, albeit not so popular in the eyes of many, is the efficiency of capital allocation and capital structure development.

Understanding the importance of intangible assets in the case of Topicus is a necessary, as they are a major source of cash flow that is not observable at a first glance. Capital employed (total equity plus interest-bearing debt net of cash plus accumulated intangibles amortization), has grown to almost 1.3 billion EUR. It doubled in less than 3 years (2 years and 3 quarters to be precise).

At the same time, nothing out of the ordinary is happening with the prices paid for acquisitions. Measured through sales to capital employed ration, it is as stable as it can be.

For conclusion, Topicus is operating and growing as one would hope, but not dare to expect for many other companies out there.

Terravest source of maintenance capex and cash available for distribution

I have been reading into Terravest for more than a year, but the recent Plural Investing Group report from 2024 is making me rethink how I view their capital allocation strategy. Put shortly, I underestimated how much of capital is generated from restructuring acquired companies. Compared to CSU and Topicus, Terravest seems to be a bit more brutal towards its acquisitions, but results are interesting.

Based on TIKR data, I was able to recreate their measure of cash available for distribution (cash they can use for dividend payments, acquisitions, debt repayments, and to support their leverage).

But dig a little further, and you can see that a large part of their maintenance capex comes from gains in restructuring (sale of redundant facilities of acquired companies). During their history measured from March 2012, a total of 70 million was spent as maintenance capex, but sale of property, plant and equipment produced 49 million of funds (70% of cumulative maintenance capex).

I will share my valuation once I think it is stable enough.

Disclaimer and kind request

Before you take any actions based on this article, remember, you are trusting an experimental analysis of an anonymous person. However, if you like it, and you think it makes sense, feel free to support my writing which I do in my spare time, while working a full time job. If anything you pick up from my substack or Twitter account results in you earning a reasonable profit, keep the karma going. Subscribe, even for a month.

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But what I can quantify is that come middle of March, MBB SE will pay EUR 96 per share for those shareholders choosing to part with their common stock.

Tender offer

On January 31, 2024, MBB announced the following buyback:

Share buyback 2024

On 31 January 2024, the board of MBB SE resolved to make use of the authorization granted by the Annual General Meeting on 12 June 2023 to acquire treasury shares in accordance with Section 71 (1) No. 8 AktG and to offer shareholders the buyback of up to 571,639 treasury shares (approx. 10% of the share capital) as part of a voluntary public buyback offer addressed to all shareholders.

The share buyback will take place at an offer price of € 96.00 per share. The period for acceptance of the offer begins on 05 February 2024 and ends on 04 March 2024.

MBB is no stranger to buybacks. According to the information they provide on their investor relations page, buybacks were executed in:

1. January 2012–144,201 shares for an average price of EUR 6.93 (2.18% of outstanding shares) though the open market.

2. March 2015–13,225 shares for an average price of EUR 23.55 (0.2% of outstanding shares) through the open market.

3. April 2019–646,024 shares for a price of EUR 96 (9.79% of outstanding shares) through a tender offer up to 646,775 shares. Shareholders tendered 5,792,584 shares in total. Initial price offered was EUR 89, while tender offer was later changed to EUR 96. Below are the most important definitions of this tender offer.

   

   

   

4. March 2020 (when world was collapsing)–8,499 shares for an average price of EUR 49.91 though the open market.

5. June 2021–85,416 shares for an average price of EUR 132.56 through the open market.

6. February 2022–42,640 shares for an average price of EUR 121.65 through the open market.

7. February 2023–87,805 shares for an average price of EUR 79.74 through the open market.

Current, February 2024 buyback, resembles April 2019 tender offer with one important difference. While the April 2019 offer defined proportional rounding to the nearest round number in case of oversubscription and exclusion of fractional shares, language in the current offer is different.

As in 2019 offer, proportionality is defined as a rule of precedence in case of oversubscription (likely scenario in my opinion).

However, the section highlighted above defines additional rules for tender execution.

The mentioned authorization of the Annual General Meeting specifies the option to have preferential acceptance of small quantities of up to 100 shares, which has now been elected in the 2024 tender offer.

What this should mean is that in case one tenders his odd lot through one broker, in case of oversubscription his whole odd lot will be repurchased at EUR 96. MBB currently (February 03, 2024) trades at EUR 94.1, promising 2% over the month and a half holding period, or just above 16% on annualized level.

Personally, I will be picking up some shares through my several brokerage accounts. More importantly, I will be digging through MBB SE again.

Deadlines

The period for acceptance of the Offer begins on Monday, February 05, 2024 and ends on Monday, March 04, 2024, 24:00 CET. By Wednesday, March 6, 2024, 18:00 CET at the latest, the transfers of the MBB Shares tendered for repurchase will be executed. Settlement is expected to occur on the eight working day after this date (March 04, 2024).

Disclaimer and kind request

Before you take any actions based on this article, remember, you are trusting an experimental analysis of an anonymous person. However, if you like it, and you think it makes sense, feel free to suport my writing which I do in my spare time, while working a full time job. If anything you pick up from my substack or Twitter account results in you earning a reasonable profit, keep the karma going. Subscribe, even for a month.

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