The following segment was excerpted from this fund letter.
Portfolio Updates
Top Ten Holdings
(%) as of 6/30/24 |
|
Net Lease Office Properties (NLOP) |
9.3 |
McBride plc. (OTCPK:MCBRF) |
8.0 |
Fitlife Brands Inc. (FTLF) |
7.5 |
MRC Global Inc. (MRC) |
4.4 |
ECIP Bank Basket |
4.2 |
Scandic Hotels Group AB (OTCPK:SCAHF) |
3.6 |
Crawford United Corp. (OTCPK:CRAWA) |
3.6 |
Garrett Motion Inc. (GTX) |
3.5 |
Rand Worldwide Inc. (OTCPK:RWWI) |
3.4 |
Unidata S.p.A. |
3.3 |
Total, Top Ten |
50.9% |
Net Lease Office Properties (NLOP)
Our portfolio is largely unchanged from last quarter, with Net Lease Office Propertiesstill at the top. “NLOP” has been very active, selling five properties and surrendering two more to lenders in May and June. NLOP used its sales proceeds to reduce its term loan by $138 million and its mezzanine debt by $22 million. Since going public by spin-off last November, Net Lease Office Properties has reduced its term loan and mezzanine debt by 47% to $243 million, leaving it modestly levered and highly cash-generating as it continues to wind down. Excluding a few properties likely to be surrendered to lenders, Net Lease Office Properties now produces annualized base rents of $105 million. The market is valuing NLOP at $587 million for a cap rate (net property operating income/enterprise value) of 17.9% and $90 per square foot. It’s just plain dirt cheap, and the continuing liquidation of the Net Lease Office Properties portfolio will cause this discount to close sooner rather than later. At a still conservative 12% cap rate or $135 per square foot, NLOP would be worth $46 per share.
McBride Plc (OTCPK:MCBRF)
In my last letter, I introduced McBride Plc, a UK-based manufacturer of private label soaps and detergents for supermarkets and discounters. McBride is a turnaround story well into its recovery from losses caused by inflationary pressures and supply chain challenges. McBride shares have performed well for us, up about 30% from the level of our initial purchases. In April, the company increased its guidance for the year ending June 30, saying adjusted operating profit would be 10% ahead of market expectations and that net debt would continue to decline. This week, the company confirmed it had achieved this guidance, producing adjusted operating income of £66.4 million and bringing net debt down to £131.5 million, a reduction of £30 million since last June. Shareholders were modestly disappointed that the company did not again raise its guidance and sent shares down 10%.This is a major buying opportunity. At present, McBride has a market capitalization of £227 million and an enterprise value of £359 million, just 5.4x trailing operating income and 4.4x EBITDA. The company will continue to generate significant cash flow, causing net debt to decline and allowing McBride to resume paying dividends. The benefits of the cost-cutting measures that McBride undertook to restore profitability are not yet fully reflected in the company’s earnings, and sales volumes should remain strong as European consumers turn to store brands to economize.
Talen Energy (TLN)
Talen Energy has had quite a year, selling off non-core power generation assets, buying back huge quantities of stock, and now listing on the NASDAQ. Talen is one of those too-rare cases where everything goes according to plan. The company is now enjoying a moment in the sun thanks to its ownership of a top-tier producer of reliable, low-carbon energy, the Susquehanna Steam Electric Station. So, what’s next? Talen will continue to sell off its legacy fossil fuel-burning power generation fleet and return excess capital to shareholders through buybacks. I still think the end game for Talen is a sale of the company once its less attractive assets are divested. Susquehanna, the nation’s sixth-largest nuclear facility with 2.5 gigawatts of power production capacity, is just too much of a prize to be held by a company of Talen’s size. Our collection of various banks, mainly ECIP recipients, is quietly having a good year. 2023 was marked by endless handwringing over regional bank balance sheets and worries about fleeing depositors. But community banks really are a different kind of animal, and it was business as usual for our holdings.
United Bancorporation of Alabama (OTCQX:UBAB)
Our most successful bank investment has been United Bancorporation of Alabama, up 19% this year and 70% from our average cost. The Bank has excelled in developing specialty loan offerings and grant-subsidized business lines, resulting in record earnings and return on equity. Despite the upward move, shares trade at only 5.7x trailing earnings and 80% of adjusted tangible book value. We continue to accumulate shares in some even smaller, lesser-known community banks, especially those with significant non-banking revenue streams like merchant payment processing.
Seneca Foods (SENEA, SENEB)
Seneca Foods keeps plodding along in extremely boring fashion, fitting for a canned vegetable company. The company will benefit from some struggling, over-indebted competitors choosing to close production facilities and exit lower-margin business lines. Seneca, with its huge base of wholly owned facilities and can production lines, is less exposed to the inflationary pressures that have hurt competitors. Fiscal 2024 was a very profitable year for Seneca, but not without negatives. Heavy discounting by competitors weighed on pricing and volumes, and inventory levels stayed stubbornly high thanks to the lower volume and a large “pack” due to a very successful growing season. But there are encouraging signs. Competitor discounting has abated, and the company plans to process a lot fewer beans, carrots, corn, and the like in fiscal 2025. Combined with the end of a period of high capital expenditures, Seneca is set to produce a lot of free cash flow soon. I encourage anyone to read Seneca Foods CEO Paul Palmby’s letter to shareholders in the 2024 annual report.
Supremex (OTCPK:SUMXF)
Continuing the theme of “boring, profitable, and cheap,” Supremex continues to perform well. Unfortunately, its shares have yet to respond in kind. First quarter revenues and earnings showed improvement over the fourth quarter, with earnings rising to 14 cents per share. Management expressed optimism that the worst of the inventory cycle slump is over but cautioned investors not to expect a swift return to the record earnings of 2022. As it stands, Supremex is trading at only around 7x trough earnings and at a mid-teens free cash flow yield. Any further improvement in the demand picture could create a large upswing in profits. Management seems to believe the shares are undervalued. Supremex is repurchasing shares to the tune of 0.4%-0.6% of outstanding shares monthly, gobbling up 144,300 shares in May and another 98,100 in June.
Harbor Diversified (OTC:HRBR)
Our only substantial sale in the quarter was our entire holding in Harbor Diversified. Harbor was a special situation, a somewhat secretive holding company with substantial net cash and securities and ownership of airline Air Wisconsin, which flies regional routes for American Airlines. My thesis for owning Harbor Diversified was based on the company trading at a large discount to the value of its net cash and securities, its legal claim against former partner United Airlines, and its fleet of 64 Bombardier CRJ-200 jets. The CRJ-200 is an admittedly aging, uncomfortable, and inefficient aircraft that nevertheless retains some value. In 2022 and 2023, Harbor Diversified bought back a substantial portion of shares outstanding at a discount to net asset value as it awaited the outcome of its claim against United Airlines, which would have amounted to roughly $1 per share. I believed that after a positive legal outcome and once Air Wisconsin’s new contract with American Airlines proved to be profitable, Harbor Diversified shares would respond. Unfortunately, it all went wrong. The company’s claim against United was denied entirely in arbitration, profits from flying routes for American experienced a delayed takeoff, and what’s more, the company announced it would have to re-state prior financial statements due to improperly recording the anticipated legal award as revenue. Ugly. I sold our shares of Harbor Diversified for a small loss and re-allocated the proceeds toward better ideas. While the fund’s track record in special situations has been good, this special situation turned out to be a painfully ordinary one.
Disclosures Investment in Alluvial Fund are subject to risk, including the risk of permanent loss. Alluvial Fund’s strategy may experience greater volatility and drawdowns than market indexes. An investment in Alluvial Fund is not intended to be a complete investment program and is not intended for short-term investment. Before investing, potential limited partners should carefully evaluate their financial situation and their ability to tolerate volatility. Alluvial Capital Management, LLC believes the figures, calculations and statistics included in this letter to be correct but provides no warranty against errors in calculation or transcription. Alluvial Capital Management, LLC is a Registered Investment Advisor. This communication does not constitute a recommendation to buy, sell, or hold any investment securities. Performance Notes Net performance figures are for a typical limited partner under the standard fee arrangement. Returns for partners’ capital accounts may vary depending on individual fee arrangements. Alluvial Fund, LP has a fiscal year end of December 31, 2023 and is subject to an annual audit by Cohen & Company. Performance figures for year-to-date periods are calculated by NAV Consulting, Inc. Year-to-date figures are unaudited and are subject to change. Gross performance figures are reported net of all partnership expenses. Net performance figures for Alluvial Fund, LP are reported net of all partnership expenses, management fees, and performance incentive fees. Contact Alluvial welcomes inquiries from clients and potential clients. Please visit our website at Alluvial Capital Management, LLC, or contact Dave Waters at [email protected] or (412) 368-2321. |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Read the full article here