M : TSX-V : C$7.31
BUY
Target: C$9.75
COMPANY DESCRIPTION:
Mosaic Capital acquires majority stakes in small industrial companies in mature market niches. The company currently controls six industrial and one commercial real estate investment company, all located in Western Canada.
Investment recommendation
We think Mosaic is an attractive investment opportunity for investors looking for an industrial acquisition story. The company has demonstrated an ability to acquire strong cash-generation firms at attractive prices. We believe the cash flows from the existing portfolio of companies supports the current share price, and Mosaic’s considerable “dry powder” capital provides the potential for $4.50/share additional growth. The story has the potential to grow considerably beyond that point as additional capital is deployed.
We are launching coverage with a BUY rating, given the strong 35.0% one-year potential rate of return to our C$9.75 one-year target (including a 1.6% dividend yield).
Investment highlights
We believe there are four good reasons to consider investing in Mosaic:
1. Solid track record – Mosaic roughly tripled its EBITDA from 2011 to 2012 while driving return on capital from 5.7% to 12.9%. Over the same period, the company returned more than $13 million to shareholders and has a trailing payout ratio of 63%.
2. Strong portfolio of niche businesses – Mosaic’s portfolio consists of small defensible niche businesses. The low capital requirements combined with strong, stable margins deliver solid (and we think growing) free cash flow.
3. Significant dry powder – We estimate Mosaic has $35 million of available capital to deploy towards future acquisitions. We estimate that the
deployment of this capital could add $4.50/share of value.
4. Aligned management – With 53% of the common stock held by management and insiders, we think the company’s interests are strongly aligned with investors.
Valuation
Our target is based on low-single-digit organic growth and a premium 6.5x Q1/15E EV to Q2/15E – Q1/16E EBITDA multiple for potential acquired EBITDA.
We believe the bulk of the valuation upside potential lies in the deployment of Mosaic’s already-raised capital on accretive acquisitions.
