ECNCF - Silver Beech Capital - ECN Capital Corp.: Triad The Crown Jewel
2023-05-03 03:30:00 ET
Summary
- ECN Capital Corp. is a small-capitalization specialty finance holding company that originates, manages, and advises credit portfolios within three distinct platforms.
- We believe ECNCF's intrinsic value is more than 70% greater than its March 31 share price.
- We believe ECN is an attractive investment.
The following segment was excerpted from this fund letter.
ECN Capital Corp. ( ECN:CA )
ECN Capital Corp. ( ECNCF ) is a small-capitalization specialty finance holding company that originates, manages, and advises credit portfolios within three distinct platforms:
- Triad, a scaled consumer lender in the manufactured housing ("MH") market;
- SourceOne & Intercoastal, consumer lenders in the recreational vehicle ("RV") and marine markets; and
- RedOak, an inventory finance lender, primarily for dealers that offer consumer access to Triad, SourceOne, and Intercoastal's credit products.
All three platforms are asset-light businesses with significant long-term growth potential. Despite being listed on the Toronto stock exchange, ECN operates exclusively in the United States. We believe ECN's intrinsic value is more than 70% greater than its March 31 share price.
ECN sits at the nexus of credit relationships between funding partners (banks, insurance companies, etc., who fund the credit on their balance sheets), dealers (who sell products like MHs, RVs, or boats in physical or online stores), and consumers (who purchase the MH, RV, or boat, financed by credit originated by an ECN platform). ECN and its counterparties are regulated by many different entities. We believe this operating complexity and regulatory compliance require specialized knowledge that creates an important economic moat.
In this letter, we focus on ECN's crown jewel, Triad, which accounted for over 90% of adjusted EBITDA in the final quarter of 2022. We estimate that Triad will account for ~75% of adjusted EBITDA in 2023. We wouldn't usually analyze companies using adjusted EBITDA but do so here considering ECN's de minimis economic depreciation, and to compare cash flows through time unburdened by interest expense (each platform utilizes different amounts of leverage depending on platform maturity and product), tax treatment, and corporate G&A expense.
ECN acquired Triad in December 2017. Triad grew originations from $525 million of MH loans in 2018 to $1.4 billion in 2022; 2.6x origination growth in four years, or a 27% compound annual growth rate ("CAGR"). We estimate the manufactured housing market grew sales volume at a 21% CAGR over the same period, meaning Triad took market share. Over the same period, Triad expanded its EBITDA from $22 million (a 44% margin) in 2018 to $91 million (a 54% margin) in 2022. This EBITDA expansion of 4.2x in four years indicates Triad's market share gains were highly profitable.
Triad's credit products are also profitable for funding partners. Our industry knowledge of leveraged loans and real estate informs our view that MH consumer credit ranks as one of the most attractive credit products for investors today. MH loans typically price ~250 basis points above traditional 30-year mortgage rates despite shorter duration. We believe the continued attractiveness of MH credit pricing is driven by (i) difficulty for entrants to deploy substantial capital into a smaller market versus traditional 30-year mortgages; and (ii), less competition due to manufactured housing's oligopolistic market structure (Berkshire Hathaway's ( BRK.B , BRK.A ) wholly-owned MH lenders 21st Mortgage and Vanderbilt have about 50% market share).
In addition to economic moats, strong continued growth, and attractive credit products that have driven the company's strong returns on capital, we believe ECN is an attractive investment because:
- Management Track Record: We have confidence in management because they have a strong track record of performing for shareholders. Since ECN's inception in September 2016, ECN shareholders have earned a ~23% total return CAGR (versus ~12% total return CAGR for the S&P 500). ECN's CEO, Steve Hudson, owns ~6% of the company's outstanding shares.
- Attractive Valuation: What valuation is appropriate for a high-growth, asset-light business with 50%+ adjusted EBITDA margins operating in an oligopolistic market with a strong management team? Taking ECN's lowest EPS guidance estimate for 2023, as of March 31, ECN trades at 12x estimated earnings, whereas the S&P 500 trades at 20x estimated earnings. We believe ECN's intrinsic value is at least 70% greater than its share price.
- Near-Term Strategic Review Process: On March 7, ECN announced a "review of strategic alternatives to maximize shareholder value" due "to interest that has been received." We would be thrilled if ECN was able to maximize value in this near-term process, however, we are also happy to own ECN for the long term based on our articulated view of the company's profitable growth and strong management.
IMPORTANT DISCLOSURESSilver Beech Capital Management, LLC ("Silver Beech") is a New York limited liability company that serves as the investment manager to Silver Beech Capital, LP (the "Fund"), a Delaware limited partnership. The principals of Silver Beech are James Hollier, who serves as the portfolio manager and managing partner of the Fund, and James Kovacs, who serves as the managing partner of the Fund. All performance results presented herein refers to the performance of an unrestricted investor in the Fund since its inception. Net performance is presented net of the highest performance allocation in effect at the time (20%) above a 6% hurdle rate, the highest actual management fees (1.0%) charged at the time, and net of other expenses, and includes the reinvestment of all dividends, interest, and capital gains. Performance for investors who subscribed on different dates, or who pay different fees would necessarily be different from the performance presented herein. The rate of return is calculated on a "time-weighted" rate of return basis, which minimizes the effect of cash flows on the investment performance of the Fund. All monthly performance data presented herein reflects unaudited data unless otherwise specified, and as such its accuracy cannot be guaranteed. Cumulative returns for the "January 1, 2021 - March 31, 2023" period include the audited returns of Silver Beech's portfolio manager prior to Fund launch. Past performance is not necessarily indicative of future results. All securities transactions involve substantial risk of loss. The material presented is compiled from sources thought to be reliable, including in certain instances, from outside sources, but accuracy and completeness cannot be guaranteed. Any opinions expressed herein reflect the judgment of Silver Beech and are subject to change. The information in this letter is for discussion purposes only. Nothing contained herein should be construed as an offer to sell, or a solicitation of an offer to buy or sell any security or investment strategy or a recommendation as to the advisability of investing in, purchasing or selling any security or investment strategy, which may only be made in the Fund's confidential offering memorandum and operative documents (collectively, the "Offering Documents"). Before making an investment decision with respect to the Fund, prospective investors are advised to read the Offering Documents carefully, which contain important information, including a description of the Fund's risks, investment program, fees, expenses, redemption and withdrawal limitations, standard of care and exculpation, etc. Prospective investors should also consult with their tax and financial advisors as well as legal counsel. The Offering Documents are the sole documents on which a potential investor is entitled to rely in evaluating an investment in the Fund. The information in this letter does not take into account the particular investment objectives, restrictions, or financial, legal or tax situation of any specific prospective investor, and an investment in the Fund may not be suitable for many prospective investors. This letter is not intended to be, nor should it be construed or used as, investment, tax, or legal advice. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Silver Beech Capital - ECN Capital Corp.: Triad, The Crown Jewel