Ok here's the thread for $TREC for those who are too busy to read stuff on Substack (but you should!). I like this one a lot, and Trecora has an added benefit of being significantly less risky that other ideas I've posted so far to date. Protecting the downside is important...
Trecora Resources (NYSE: $TREC) is a producer of hexanes and pentanes. They are input materials for various larger processes, including the manufacturing of foams, polyethylene, etc. Also used as an agent in Canadian O&G, to separate asphaltenes from the tar
It's a duopoly market, with TREC having 60% market share - only Phillips 66 has the capability of producing at the same purity levels as $TREC - which is important, as customers can get hurt badly if there are impurities in the products they use for their own processing needs
The Company went through a lot of operational issues in the past - as capacity expansions at both of their plants faced several issues and delays. Pretty standard stuff for industrials/chemicals, but the end result was that it set the Company back about 2 years.
But no matter, all of that is behind them now, and a new management team is executing to grow EBITDA from $31mm in 2019 (pre-COVID) to $40mm in 2022, and if achieved, the business trades for 4.8x EV/EBITDA and 12% FCF yield on an unlevered capital structure
That is pretty cheap! Specialty chems typically trade at double digit EBITDA multiples. Trecora probably deserves a few turns of discount, but 5+ turns is too much in my opinion. Especially if they can execute and grow EBITDA. No more growth capex needed, too.
There's a new management team in place, with a pretty impressive CEO who has spent more than his annual salary and bonus to buy shares in the open market. He sees something that the market does not...
Also an active share buyback plan in place that could potentially take out 10% of the float in the next year or two. Not too shabby for technicals. The Company is certainly putting their money where their mouth is...
Finally, there is an activist involved, who were buying shares as recently as middle of July above $8/share. They now own 11% of the Company. What do they want to do? Well they probably figured out $TREC is too cheap and they want to sell this asset for a big premium
Yes larger players in the chemicals industry may be interested, but not immediately obvious who should be the acquiror. 60% market share already so it'd have to be someone who wants to fold in pentanes and hexanes into their product suite. Again, not obvious
However, I think this is a total slam-dunk for Private Equity buyers. I can already think of a dozen middle-market firms that would salivate at this kind of asset (subject to good execution going forward, of course).
Why? Because we have a market leader, organic growth potential, good FCF yields, cheap financing available (debt is free these days...) and you can easily make 20%+ IRRs for a 5 year hold with very conservative assumptions. 30%+ IRR not impossible in a blue sky scenario.
So this plays out in one of two ways - the mgmt. team executes and stock trades up to low to mid teens for a 50-70% gain in the next year or so. Otherwise, if they fail, the activist gains even more power as fatigued shareholders will rally to their lead
At this point, it is game over. The activist will put the asset up for sale to get their basis back (and hopefully make some money on top). For investors contemplating $TREC today, the risk/reward is phenomenal in my opinion. Pretty hard to see how you lose money here imo...
So I made this into a big position. Let's see how this plays out. As always, no investment advice here, DYODD! And please sign up to my Substack for more interesting ideas like this, no paywall here.
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