Make money doing the work you believe in
I believe TerraVest can still earn ROIICs of 15%+ as it expands. Here's how:
Phase one of the company's history involved buying mom & pop tank and trailer companies at 10-11x FCF, and reducing procurement (steel) costs and implementing a profit focused mindset to cut the multiple to 5-6x FCF.
That generated ROIICs of 20%+ for a decade.
The Entrans deal, which resulted in the company’s reinvestment rate soaring to 262% across 2020-25, marked the beginning of phase two.
Phase 2:
This will increasingly involve buying larger companies more adjacent to these industries where the multiples paid are higher and synergies less substantial.
But TerraVest is also expanding into industries with higher organic growth, like datacenters and water storage.
ROIIC tends to reduce at this point, and was just 9% from 2020-25 by my calculation (below), weighted down by the Entrans acquisition (US$546mm at 7x EBITDA at the time, probably 12x EBITDA now).
Entrans is in a cyclical slowdown so I don’t think 9% ROIIC will be normal going forwards, but expect something close to 15%.
ROIIC algorithm:
If we assume acquisitions going forward average 6x EBITDA (Entrans was 7x but KBK was 5.6x) that implies about 11x FCF using the company’s cash conversion from the last two years.
Assuming lower synergies than in the past but a higher growth rate, I could see an ROIIC algorithm of 9% FCF yield + 2% synergies + 5% organic growth = 16% ROIIC.
For more details, take a look at my article on TerraVest's next chapter, which looks at the company's:
1. M&A runway
2. Clue on new markets from Q1
3. Competition with Mattr
4. Conditions in Q2
5. A scenario for a 21% IRR from here
