In last year’s letter I said: “It’s a good time to be a value investor, especially one unconstrained by liquidity or jurisdiction.” This remains just as, if not more true today. Despite the AI fueled frothiness, there’s a lot of value to be found if you’re willing to look in the right places.
Today, the right places to look are beaten up cyclicals, international markets, and micro caps (It’s Probably a Bubble, But There Is Plenty Else to Invest In). 90% of my portfolio is allocated to these categories.
Portfolio Update
My top 5 positions, which make up just over half of my portfolio, are Tetra Technologies, Valaris, Hemisphere Energy, Helios Towers, and Northern Ocean. All of these except for Helios are in the oil and gas industry. I’ve owned this group of businesses for an average of 2.7 years and expect to continue owning all except for Northern Ocean for the foreseeable future.
Northern Ocean recently sold one of its two harsh environment semi-submersible drilling rigs for USD $490M. Even before the sale, Northern Ocean lacked the scale needed to justify being a public company. I expect the remaining rig to be sold for a similar price within a year or two which would result in NOK 12.50/share of value compared to today’s price of NOK 8.86/share.
Tetra Technologies is the oldest holding of the bunch, having first bought shares in 2022 and most recently in 2024. The original thesis was that Tetra’s core business of Completion Fluids and Water Flowback Services was undervalued. On top of this you had a number of free bets included that if successful could each be worth multiples of the share price. Since 2022 the thesis has slowly played out with the core business doing well and the free bets getting closer to being firmly in the money. One of which, their lithium and bromine acreage, has done exceptionally well this year on the back of a surge in demand for critical minerals. A couple of years out, the business is on track to be worth ~$25/share and as more ‘free bets’ play out there is a credible path to $35+ in value.
Hemisphere energy is another long held portfolio favourite. Advantaged assets, a capable and aligned management team, and a reasonable valuation make me a happy shareholder. They continue to harvest the fruits of their ultra low decline conventional oil pools. Selectively growing production while returning the majority of cash flow to shareholders.
Valaris is the newest of the group and also the largest by cost basis. The drillship dayrate upcycle has been pushed further to the right than I originally expected, however this will prove to be a win in the long term as lower quality cold stacked rigs are scrapped and others consolidated. Management expects the industry to exit 2026 at 90%+ utilization. With no new supply in the pipeline, the future is bright for Valaris.
Helios, the African telco tower operator, continues to execute above expectations. I’ll touch on them further below.
Beaten Up Cyclicals: Magnera Corp
Magnera is my newest position and the thesis is simple. They’re in a beaten up industry trading at a trough multiple on top of trough margins. High but manageable debt adds further torque to the idea as margins and multiples return to more normalized levels.
Magnera is the global leader in non-woven materials and boy has that been a tough industry to be in. Consumer goods companies like Procter & Gamble contract them to manufacture things like tea bags and wet wipes. During COVID, the wave of demand for masks and disinfectant wipes combined with a pull forward in demand for things like diapers and toilet paper led to a huge capacity buildout, especially from low cost producers in China. It quickly became clear that the capacity expansion was well overdone, turning the industry from boom to bust. Worse yet, due to the long construction time of modern plants, the last of the new facilities are only just coming online today despite industry utilization and profitability sitting at all time lows…
Despite the ugly picture, the future is bright for Magnera. While most investors have been scared off of the name, now is the right time to be buying with shares at a steep discount to fair value. The capacity buildout headwind is now behind them, inventories have normalized, and the high debt load is sufficiently termed out. You can read my full writeup on them here.
International Markets: Helios Towers
Helios Towers is an excellent business operating in questionable jurisdictions. From a standstill in 2009, Helios has acquired a portfolio of over 14.5k mobile cell towers across Africa. Operating in Africa is both a blessing and a curse. Let’s first take a look at the risks and how Helios has navigated them over the past 17 years.
The biggest risks to Helios by a wide margin are political instability and forex risk. The forex risk is largely passed through to customers. 71% of earnings come from hard currencies and all contracts have CPI escalators as well as fuel cost pass throughs. Since inception, forex headwinds have been entirely offset by these contract protections. Customers are diversified and well positioned to weather any potential hyperinflation. In addition, the African mobile operators are strongly profitable with little leverage. Unlike forex risk, political instability is much harder to protect against. Helios largest markets are Tanzania and the DRC which account for 36% and 30% of company EBITDA respectively, with the rest coming from their 7 remaining jurisdictions. This high exposure will go down over time as further markets are acquired and expanded. Helios physical infrastructure is difficult and complex to operate and there is little incentive for rogue politicians or combatants to interfere with it. You are not going to win over the local population by messing with their internet (~99% of which comes from mobile providers). For these risks, you are compensated with tower tenancies growing 4 times faster than developed markets while paying less than half the multiple.
Cell tower roll ups have had enormous success over the decades and Helios has the potential to replicate this success. Helios strategy, which has now been thoroughly proven out, is to increase tower tenants and reliability from acquired portfolios. This would usually play out as follows: Helios acquires a large portfolio of cell towers in Tanzania from Airtel who had built and operated the towers with themselves as the sole tenant. Mobile towers are Helios bread and butter, they decrease downtime from 22min a week to under 1min. Over time, Helios introduces more tenants like Vodacom and Halotel, spreading the tower’s fixed costs over more customers and drastically increasing returns. A single site ROIC goes from 12% with 1 tenant to 34% with 3. The separation of tower assets and mobile operators turns into a win-win arrangement, I recommend Helios 2022 Investor Day Deck for more info. In addition to the attractive economics of multi-tenant cell towers, Africa has the best demographic prospects in the world with decades-long mobile growth ahead.
CEO Tom Greenwood and team have executed beautifully to date. From putting together the current portfolio and more recently to proving out the economics, I continue to be impressed. ROIC today sits at 14% and will trend towards 20%+ in the medium term as the portfolio continues to mature. Shares trade for ~15x recurring FCF and their new long term guidance calls for nearly a doubling of RFCF by 2030 while at the same time returning a cumulative 20% of the current market cap to shareholders.
Micro Caps: High Arctic Overseas Holdings
High Arctic is a micro cap among micro caps. Its market cap is $16M CAD with average daily volume of less than $5,000. Perfect hunting ground for a small time investor such as myself. They trade on the Canadian Venture Exchange, are unprofitable, and operate in Papua New Guinea. If that’s not enough to scare you away then I don’t know what is!
High Arctic operates three heli-portable drilling rigs and one workover unit in PNG, three of which are owned and one of which is operated on behalf of Santos. The owned rigs are all cold-stacked and Santos’ rig is currently suspended. They also offer various other ancillary services, like camps, fire services, equipment rentals, etc. Including the interest from High Arctic’s $14M USD cash pile, they’re operating at roughly a breakeven rate. This has been the case since 2020 when COVID brought all drilling activities in the country down to essentially zero. From 2013 - 2019, while the PNG LNG project was in full swing, High Arctic brought in average EBIT of ~$30M USD. High Arctic’s three largest customers and owners of the PNG-LNG project, Santos, Exxon, and Total, have long planned for their next major PNG project, Papua-LNG, and further down the line, P’nyang-LNG. Both of which are large 20+ year plus projects on par with the original PNG-LNG project that began operating in 2014. Historically, High Arctic has been the sole major drilling provider in PNG.
With shares trading below net cash, High Arctic can be thought of as a call option on LNG returning to Papua New Guinea that has no expiration date. When this eventually happens, shares are easily worth $10+. Whether it happens in the next 5 years or 15 will make the difference between simply an attractive return vs a home run.
Closing
Today’s environment, one of high disruption, volatility, and uncertainty, makes it ripe for value investors.
Over time the rate of technological change has only accelerated. This exponential rise means that disruptions to today’s technologies and the companies behind them can happen faster than ever, a trend that will only continue. These disruptions, especially when combined with the proliferation of algo and pod shop originated market volume, and not to mention the mega momentum trade that are today’s index funds, end up creating large and rapid market movements. Embedded within these quick moving and often severe movements lie ample room for market inefficiencies, or in other words, opportunity for the rationally minded value investor.
While my attention remains on beaten up sectors like oil and gas, if the fishing gets better in other ponds, I am happy to follow my curiosity there. Perhaps this time next year, my portfolio will be dominated by beaten up SaaS companies. Names I’ve followed from a distance such as PAR Technology seem to be getting close to good value. Until then however, its Papua New Guinea micro caps and commoditized diaper manufacturing for me.
That’s it for this year’s annual investing reflection. Below you’ll find some of my favourite resources, articles, and content from the last year.
Cheers,
Matt Lindsay
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Disclosure: This newsletter does not provide investment advice. Information presented is for informational purposes only and should not be considered a recommendation to buy or sell securities. The author may or may not own the securities discussed.
Is high arctic team scammy?