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Currently working to complete the DD and memo on this opportunity but the Q4 results and impact on the share price compel me to highlight the idea ahead of publication.
Titan owns a network of agricultural and construction equipment stores in the US. In short, it’s a $720m EV tractor dealership representing brands from CNH Industrial, a c.$40bn agricultural machinery OEM listed on the NYSE. While CNH trades on a 2023E EV/EBIT of c.14x, following the recent share price collapse, Titan trades on c.4.6x 2023E EV/EBIT. Obviously the 2 businesses are different models with Titan reliant on CNH, but both are subject to the same strong underlying agricultural demand trends. As a further comparison, UK car dealerships such as Lookers and Pendragon (in arguably an even more competitive car market) trade at 8-10x 2023E EBIT.
The Q4 results ‘missed’ revenue expectations due to delayed new equipment shipments with abnormal congestion in the supply chain at the very end of the 2022 calendar year meaning they couldn’t turn around pre-sold inventory in time to bill it to customers before their January year end. When a machine comes in from the manufacturer, they need to add a number of customer-ordered customisations in their workshops before they can deliver, so equipment that arrived all at once in the last couple of weeks of Dec-22 couldn’t be booked by end Jan-23. The demand didn’t change – it just goes out of the door in the first few weeks of this fiscal year. It highlights just how great the demand currently is and now they have a backlog to catch up on during this fiscal year. While management expects sustained demand driven by strong agricultural fundamentals this year, they are limited by equipment availability, which is not a bad position to be in as supply constraints ease. The balance sheet also looks healthy with good tangible asset backing relative to the EV.
Clearly the business has cyclicality and has benefited recently from higher commodity prices driving higher net farm income and allowing equipment investment, but the current valuation now looks overdone from the ‘sell the news’ headline of the Q4 results.
Valuation assumptions: Thesis price based on 7x consensus 2023E EBIT of $157m – multiple below auto dealers and 50% discount to CNH. Risk Price of 6x $125m 2023E EBIT (20% discount to consensus). Standard Idea for Research 40% risk probability to calculate the margin of safety price prior to DD and memo completion
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