In late December 2025, I sat down with Brandon Solano, CEO of RAVE Restaurant Group (NASDAQ: RAVE), for a wide-ranging discussion on the company’s turnaround, unit economics, and long-term scaling ambitions.

RAVE is a small-cap franchisor operating two pizza concepts: Pizza Inn, a legacy buffet-oriented brand with deep roots across the Southern United States, and Pie Five, a fast-casual concept that has faced structural headwinds in recent years. While consolidated revenue has appeared relatively flat, the underlying story is more nuanced: 22 consecutive quarters of profitability, improving franchisee economics, and a renewed push toward measured unit growth after decades of contraction.

Solano’s background is well known to investors who follow the name. Prior to joining RAVE, he held senior leadership roles at Domino’s Pizza during one of the most consequential operational turnarounds in restaurant history. That experience — particularly around product reformulation, brand repositioning, retail reimaging, and disciplined franchise system execution — has materially shaped the strategic framework now being applied at Pizza Inn.

Our conversation focused less on headline financials and more on structure: the legal and governance changes that reset control of the brand’s advertising fund, the sequencing of turnaround initiatives (food → media → retail image → replication), the tension between profitability and scale, and the open question that ultimately defines the equity story — whether Pizza Inn can meaningfully accelerate net unit growth after 24 years of decline.

What follows is a lightly edited transcript of that discussion.

Sophon Microcap Atlas is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

Franco Chomnalez:

Brandon, thanks for joining me for this interview with Sophon. For context, I’m a full-time investor with a prior background as a strategy consultant and hedge fund analyst. Today I run Sophon Capital Research with my partners Pascal Dangtran and Imren Johar to provide fundamental investors with stakeholder-led industry research.

We began looking at RAVE a few months ago after Ed Dorsey, who is a pretty well-known commentator and investor, cited it as his favorite company with a market cap below $500 million dollars, which obviously is a very strong endorsement on his part. I started looking at it and it caught my eye as an interesting and promising turnaround story.

My first question is a bit long, but here goes: You were an executive with Domino’s Pizza from 2008 to 2014. During that time, you were the Vice President of Innovation and then the Vice President of Development, roles in which you oversaw key initiatives such as the revamping of the menu and introduction of new SKUs, as well as the redesign of Domino’s retail and brand image.

I’m well aware — and I’m sure many of my subscribers are as well — that those specific changes weren’t really cosmetic adjustments or tweaks but a complete operational turnaround, and resulted in Domino’s being one of the best performing stocks of the 2010s. I looked up the performance of the stock during the exact dates of your tenure and found that it nearly 6x’d over the course of that period, slightly over six years, which results in a pretty extraordinary annual compounding rate of roughly 30%.

Obviously, that experience and aspect of your background carries a lot of weight, and the few investors I’ve interfaced with who have looked at RAVE or are involved in it always cite your involvement at Domino’s and your role as CEO of the company as the primary key element behind their investment thesis for RAVE.

What I’m most curious about today is learning how your tenure at Domino’s informs your strategy today as CEO of RAVE. At a high level, what are the lessons you are bringing to RAVE from your Domino’s experience? What are the parallels between the two, or key differences between turning around RAVE versus turning around Domino’s? Obviously they are different beasts, but I’d be curious if you could elaborate and provide insight on that.

Brandon Solano:

The outline of the strategy is very, very similar between my time at Domino’s and my time at RAVE. Obviously very different companies and very different scale, but they have some things in common.

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Similarweb (SMWB) is a misunderstood asset in the early stages of a reacceleration. With high recurring revenue, a rising share of multi-year contracts, and a pathway to 25% EBIT margins, we believe the stock is materially undervalued as the market extrapolates a past trend of decelerating growth.

SMWB is a high-GM Data-as-a-Service (DaaS) platform delivering real-time web and app traffic intelligence to enterprises. While not GAAP-profitable yet, the company is operating near breakeven with high-teens top-line growth—a profile that would typically command a 5–7x EV/Sales multiple in today’s market. Instead, SMWB trades at roughly 2.5x NTM revenue, an ~82% discount to its post-IPO high of 14.2x and well below peers.

The valuation gap reflects backward-looking and bearish sentiment. Revenue growth has decelerated from ~76% in Q3 FY21 to ~17% in Q2 FY25, but YoY growth has stabilized. Management has clearly articulated its long-term operating model: 85% gross margins and 25% non-GAAP EBIT margins, achievable at $400–450M in sales. With LTM revenue of $268M, SMWB is at the cusp of scaling, but the market seems overly focused on historical deceleration rather than the inflection underway in revenue, margins, and profitability.

We will be providing a financial model to our subscribers in a subsequent post, but we include valuation math at the end of this post to validate that Similarweb today represents a potential 3.0x+ bagger (without giving credit for increasing cash balance due to positive FCF generation)

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To reflect this brief pause and make it easier for readers to re-engage, we’ve temporarily lowered the subscription price from $149.99 to $40/month. Moving forward, you can expect more frequent, in-depth analysis, timely updates on high-conviction ideas, and the same disciplined, hedge-fund-style research you’ve come to expect from us. We appreciate your support and look forward to delivering the next wave of Alpha Ark insights.

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Summary

• We typically prioritize business and financials over the technology itself. This approach tends to be more predictable and reliable in the long-term. However, sometimes we encounter company with solutions so dominant that we cannot pass on its alpha generation potential, as is the case here.

• The company in question is the sole provider of Ultra Short Pulse lasers for anti-drone and anti-infrared missile applications, which belongs to the Direct Energy Weapon space. This rapidly growing market is expected to grow at a compound annual growth rate (CAGR) of 16%, reaching approximately $32bn by 2033.

• Its solution in combating Unmanned Aerial Vehicles (UAVs) is 12 times cheaper and lighter than the alternatives while offering a faster firing rate and many times lower power needs.

• The company has won all Research & Development contracts for USP lasers from the Department of Defense (DoD), propping its dominant position in further weapon development.

• It holds nearly 30 patents, of which about 10 are classified by the Department of Defense.

• Insiders own approximately 26% of the company.

• Following successful indoor tests, the company will conduct field tests next month, which could serve as a strong catalyst for the stock.

• We estimate that its Defense Total US Addressable Market (TAM) exceeds $16bn, while the company is currently valued at less than $0.5bn. Additionally, management is exploring potential sales to the NATO members and applications in medical, agricultural, and industrial sectors.

• We project a substantial internal rate of return (IRR) of 25%, with a total potential upside of 6x.

• This is an early-stage business that still requires further weapon testing, Department of Defense contracts, and investment in manufacturing capabilities, all of which carry substantial risks. However, its excellent product, competent management, favorable market conditions for Direct Energy Weapons, and significant upside potential may make it worth playing.

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Summary

• At first look, Rockhopper Exploration is a shell of the company, with almost no revenues and no cash flows. However, when we look deeper, we see that It is sitting on the fourth largest pre-FID deepwater oil discovery worldwide worth over $2.3bn (NAV) for just $0.4bn EV company.

• Rockhopper Explorations is set to become one of the most profitable O&G companies in the world (by margin) with ~$25/bbl total cost ($17/bbl Opex and $8/bbl maintenance Capex). The current Brent price of ~$75/bbl would yield a 67% gross margin allowing for a significant margin of safety in the highly volatile industry, which could make it trade at a premium.

• The company has 321 mmbbls in 2C resources from its main project — Sea Lion (35% working interest with the remaining 65% owned by the partnering Navitas).

• There is potential for discovering additional oil in the nearby fields that have not yet been fully surveyed. Insights from management and a history of upward 2C estimate revisions, (77% increase in the 2C resources estimate), suggest that the amount of oil in the ground may be significantly underestimated.

• It will be one of the cheapest O&G developments worldwide set to be drilled at a 0% interest rate in the first and most expensive single phase of the investment.

• Rockhopper is in the pre-final investment decision phase (pre-FID), with the final commitment expected in 2H 2025 (September deadline) and the first production in 2H 2027.

• During the 1st development phase, Rockhopper expects peak and average production of 55kbbls/day and 35kbbls/day, respectively. As next phases are competed avg. production is projected to grow 4 fold.

• The Joint Venture of Navitas and Rockhopper is expected to spend $1.50-1.75bn on the 1st investment phase and $2.25-2.50bn on phases 2 and 3. Rockhopper and Navitas will provide 35% and 65% capital respectively.However, in the first phase, RKH will spend only ~$70mm with the rest of the 1 being funded by Navitas at 0% interest loan to the partner. The outstanding amount will be gradually paid back to Navitas to reach 35% interest as production starts.

• We value the company using the Net Asset Value (NAV) and discounted cash flow (DCF) model. A steep 10% discount rate at $70/bbl crude and 77% conversion of 2C resources to 2P reserves, yields a NAV of $2.3bn on the current $0.4bn EV meaning Rockhopper trades at 17 cents on a dollar (~83% discount to NAV) with a potential 5x upside.

• Our life of the asset DCF is based on adjusted Navitas estimates, est. 8% WACC, and $70/bbl crude oil price, implies a $4.58/share price target at ~6x upside.

• The only thing we don’t like about the company is 2 years of waiting till we see a major Free Cash Flow uplift but in the case of Rockhopper we will turn a blind eye due to the following:

  • The company is profitable despite almost no core assets developed and has nearly zero debt.

  • The near-term catalyst of the Final Investment Decision (FID) is expected in 2H 2025 most likely by the end of September 2025 (current deadline).

  • Unlike startup, it is not exposed to rapidly changing technology, regulatory environment, and demand.

  • The financial situation is sound, the company has almost no debt, an experienced partner and free financing (0% thanks to Navitas).

  • There’s a huge value gap yet to be bridged providing sb — Rockhopper is sitting on $2.3bn of NAV while trading at $0.4bn EV resulting in 83% discount based on which there’s nearly 5x upside potential within 4-5 years when the market realizes the growth in RKH’s FCF.

  • There’s a high chance for further upward appraisals and more oil to be found in several other fields in the area.

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Before we begin, I would like to thank EpsilonTal for inspiring this deep dive. Through his work, we discovered an incredible opportunity in the Falkland Offshore. He is a talented and insightful creator who has been sharing his views on offshore and Israeli companies for some time, mostly on X. Give him a follow! It’s worth it.

Business Overview

Rockhopper Exploration (RKH) is a UK-based exploration and production (E&P) company with licenses in the Falkland Basin. Notably, Rockhopper holds a 35% working interest in the Sea Lion project and its associated licenses in the area. Additionally, the company operates several other fields in the South Falkland Basin and, until a few years ago, owned various assets in Italy.

The company’s current interest in Sea Lion is estimated at 321 million barrels (2C). As other fields have not yet been fully surveyed, the actual number could be significantly higher.

Now let’s take a closer look at what Rockhopper’s treasure — it’s oil field portfolio.

Closer Look at the Assets — Penguin Sea full of Oil

Most of Rockhopper's assets are situated in the North and South Falkland Basins. This distant and frigid region, with 3.5k population, 6°C (43°F) average temperature and 1mn penguins was for long thought to be bare… until 2010, when Rockhopper hit the jackpot.

Falklands Fields Map:

1. North Falkland Basin (NFB) aka Sea Lion

• History:

  • The initial exploration in this area began in 1982. Although some oil was discovered, no commercial volumes were proven at that time. In 2010, Rockhopper started operating in the area and made a significant discovery of by utilizing 3D seismic data.

  • Following several flow tests and appraisals, relatively young and small Rockhopper looked for partners to develop this increasingly promising project. In 2012, it entered into a partnership with Premier Oil, offering them a 60% working interest. Together, they conducted additional tests and a drilling campaign in 2015-2016.

  • Rockhopper grew optimistic about the prospects, but faced several delays, as Premier Oil was heavily invested in other projects at the time.

  • In 2021, Premier Oil merged with Chrysler, which streamlined their portfolio and effectively created Harbour Energy. Shortly after, the new entity announced its decision to exit the Sea Lion project to focus on "infrastructure-led, lower-risk opportunities in areas with an existing Harbour producing presence,” primarily in the North Sea. Additionally, Harbour Energy aimed to improve its balance sheet instead of spending over a billion dollars on initial production infrastructure.

  • Starting in 2021, Rockhopper began collaborating with Navitas, which agreed to finance almost all the capital required for the initial phase of development in exchange for a 65% working interest.

• Resources / Reserves: According to the latest NSAI study, this is the largest field discovered in the region with 2C resources estimated at 917 million barrels (mmbbls), of which 321 mmbbls are attributable to Rockhopper (RKH). Out of these, 727 mmbbls (255 mmbbls attributable to Rockhopper) are pending development.

  

  Resource Estimates Keep on Growing

  Estimates for the Sea Lion 2C resources have been revised upwards twice as appraisers gained a better understanding of the Rochopper’s fields. In the reports released in October 2024 and December 2024, the 2C estimates increased by 16%, rising from 791 mmbbls to 917 mmbbls, compared to the previous report in January 2024.

  For context, the last independent report from 2016 indicated a 2C estimate of 517 mmbbls. The current estimates represent a 77% increase in resource size compared to the initial estimate.

  During the conference call in March, Gideon Tadmor, CEO of Navitas Petroleum, commented on the significant increase in estimated resources for Sea Lion, which effectively doubled the net asset value (NAV) of the project. He noted that this increase occurred without a major ongoing exploration. Given this, it is possible that Sea Lion and other Falkland fields may provide even more oil than currently anticipated, especially following two major appraisals.

• Development Plan: The Sea Lion project will be executed in phases, starting with the northern and central parts of Sea Lion, followed by the southern area:

  • Phase 1: 23 wells, including 6 pre-drilled ones. Of these, 11 wells will be in the North Area and 12 in the Central Area. The total expected recovery from this phase is approximately 382 mmbbls, with Rockhopper's share estimated at 134 mmbbls.

  • Phase 2: 25 wells, with 12 located in the Northern Area and 13 in the Central Area. The anticipated extraction from Phase 2 is 251 mmbbls, of which Rockhopper is expected to receive 88 mmbbls.

  • Phase 3: 16 additional wells will be drilled, with an expected production of 95 mmbbls.

  • Production & Timeline: Initial oil production is targeted to start by the end of 2027, while Phase 1 is expected to be completed by around 2029-2030. Phase 2 will most likelybe completed by mid-2035. The peak production rate forecasted after the completion of Phases 1 and 2 is ~50,000 barrels per day (kbbl/day), with an average expected production rate of ~33 kbbls/day. As more wells are drilled in Phase 3 and beyond, production is projected to increase by 3-4 times, reaching a peak of 200 kbbls/day.

  • Logistical Problems: According to Riviera, Sea Lion and other Falkland developments, while being highly profitable, may still face significant logistical challenges: “Sea Lion is one of the most remote oil projects ever contemplated as it is in the North Falkland basin, thousands of nautical miles from major offshore logistics bases. Port Stanley in the Falkland Islands is expected to be a main local supply base for this project and its ongoing maintenance.”

  • Capital Expenditure: The total estimated capital expenditure for all phases should be close to $4bn, with the initial $1.4bn to first oil. Total phase 1 will most likely cost $1.7-1.8bn

Additional information about Phases 1 and 2 of the Sea Lion Project can be found in a detailed report by NFAI — the agency assessing the Sea Lion field. Keep In mind that our numbers will be different compared to NFAI’s because we will model all planned phases (including 3+ phase), use slightly lower oil price of $70 per barrel and employ a more realistic cash flow methodology (please see valuation section for more details).

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2. South Falklands

   Rockhopper holds three oil licenses in the South Falklands with a 100% working interest. Currently, details regarding specific resource estimates and development plans for these licenses are not available, as they have not been fully surveyed and no significant oil discoveries have been made. Given that this exploration is at an earlier stage compared to the Sea Lion project, there is potential for some of these fields to contain meaningful resources, which could provide additional advantages for Rockhopper.

3. Italy (Divested / Phased-out)

   Rockhopper used to have working interests in three Italian projects:

• Ombrina Mare: This was the company's primary asset located in the shallow waters of the central Adriatic Sea, off the coast of Abruzzo. Rockhopper acquired this license in 2014 and obtained environmental impact approvals.

• AC19: This project is situated in the northern Adriatic and contains two discovered gas fields, along with an additional adjacent prospect.

• Monte Grosso: Located in Southern Italy, this onshore project is considered Europe’s largest undrilled oil prospect. It lies on trend with producing fields such as Val d'Agri and Tempa Rossa.

• History: In 2015, Italy reintroduced a general ban on new oil and gas drilling projects within 12 miles of its coastline. This effectively hindered Rockhopper from developing its primary asset, Ombrina Mare, despite previous approvals and investments. The combination of growing regulatory uncertainty and public protests made it increasingly challenging to develop these assets. Consequently, Rockhopper decided to exit Italy and seek compensation for the damages incurred.

• Pending Compensation: In August 2022, an ICSID (International Centre for Settlement of Investment Disputes) arbitration panel unanimously ruled in favor of Rockhopper, awarding the company €190 million plus interest (at EURIBOR + 4%, compounded annually from the beginning of 2016). However, this ruling was annulled in October 2022 due to a failure by one of the arbitrators, Charles Poncet, to disclose a quashed criminal conviction from over 25 years ago in the Milan courts.

  Since then, Rockhopper has monetized its arbitration by entering into an agreement with a specialist fund to advocate on its behalf. As a result, the company received an initial payment of €19mm, expecting up to €65mm upon successful defense of the compensation claim. To safeguard itself against potential future setbacks, the company also obtained an insurance policy that guarantees a minimum payout of €31mm.

  Unfortunately, just two weeks ago, Rockhopper reported an unsuccessful defense, meaning it will only receive the €31mm from the insurance instead of the possible €65mm.

  

Navitas — A Key Partner

Navitas is a rapidly growing Israeli exploration and production (E&P) company with a proven track record and a robust balance sheet, able to handle most of the initial investment requirements. The company has experienced significant growth, increasing its resources from 201 million barrels of oil equivalent (mmboe) in 2019 to 1,124 mmboe in 2024, (459% rise). Navitas holds both majority and minority interests in several large projects located primarily in the Gulf of Mexico, the Falklands, and the State of Texas.

The company benefits from strong leadership that brings extensive experience to Rockhopper’s first major project:

• Gideon Tadmor (Chairman) — one of founders of O&G in Israel, with over 20 years of experience in leading developments worldwide. Gideon led the successful development of the Yam Tethys project, Israel’s first producing natural gas reservoir discovered in 2000.

• Amit Kornhauser (CEO) — Navitas insider since 2013, with two decades of experience in the sector and several successful tenures in Delek Energy (CFO & Controller), Aura Investments (Controller). He is largely responsible for the recent growth of Navitas and becoming a large sized player.

They will be joined by Rockhopper's CEO, Sam Moody, a co-founder of Rockhopper who has been instrumental in building and managing the company since its formation in early 2004. Sam has also worked in various roles within the financial sector, including positions at AXA Equity & Law Investment Management and St. Paul’s Investment Management.

More details on Rockhopper’s and Navitas Petroleum’s leadership are available here: RKH, NVPT.

Capex & Zero-Interest Financing

All three phases of the Sea Lion project are expected to cost approximately $4bn, with the phase 1 projected to cost between $1.50bn and $1.75bn. The remaining 2nd and 3rd phases are expected to cost between $2.25bn and $2.50bn.

In addition to this capex, NSAI report for Navitas suggest plans to spend an additional $2bn on further phases and drilling new wells to fully extract the potential resources from the field. This brings the total development cost for Sea Lion to ~$6bn over the next decade.

The costs will be split based on the working interest (35% for Rockhopper and 65% for Navitas), meaning our company of interest would be responsible for over $2bn of the total project cost, including ~$0.5bn to $0.6 billion for phase 1.

Rockhopper recognizes that it does not have the financial capacity to fund such a substantial development like Sea Lion independently. Instead of accruing significant debt while holding onto undeveloped resources, a more prudent strategy is to establish a joint venture (JV) with a larger, more experienced partner.

This is where Navitas comes into play. In exchange for a 65% working interest in the project, Navitas will provide almost all of the necessary capital at a 0% interest rate, with Rockhopper required to contribute a small equity portion based on the final cost of phase 1:

• $1.25bn Capex: ~$64m equity needed from Rockhopper

• $1.50bn Capex: ~$70m equity needed from Rockhopper

• $1.75bn Capex: ~$88m equity needed from Rockhopper

For our assumptions, we will consider a base case of ~$70 million provided by Rockhopper.

The borrowed amount will be repaid to Navitas at a maximum of 85% of Free Cash Flow per year until the full amount is returned, which should be around 2031.

In summary, with a 65% working interest, RKH gains a partner who has experience in large-scale developments, offers a relatively quick investment commitment compared to other options (shorter wait time for oil production), and provides the most affordable funding available... not bad.

Further details regarding funding will be available with the Final Investment Decision (FID), which is expected in the second half of 2025. The current deadline for the FID is set for September of this year.

Strong Production Profile & Potential Upside From New Developments

We used the latest NSAI report for Navitas as the basis for our model. Due to the underestimation of the Sea Lion Project and indications from Navitas and Rockhopper’s management that there is still more oil than documented, we applied a +10% adjustment to the volume extracted per year. On the other hand since we are talking about 2C (contingent resources) not 2P proven reserves (viable for exploration) we assume only 77% of the resources oil will be extracted (based on Navitas projections).

As a result, Rockhopper’s production is expected to grow rapidly over the next few years, starting in 2027. In the first full year of production, 2028, the company is projected to produce ~4 mmbbls. This production is expected to increase to ~9 mmbbls by 2031 and peak at ~12 mmbbls in 2034.

For some readers, the decline in production after 2034 may come as a surprise. However, it is important to note that additional investments will be necessary over the coming decades to fully tap into Rockhopper’s 321 mmbbls worth of Sea Lion resources.

If Rockhopper were to maintain its peak production rate, the 2C resources were proven to be 2P over time, Sea Lion could support continued production for 23 years beyond 2034, totaling 30 full years of oil production from Sea Lion (from 2028 to 2057).

Significant Tax Assets to Shield Rapidly Growing Income

Rockhopper has accumulated losses totaling $641mm over two decades of exploration in the Falkland Islands. These tax assets will be used to offset the increasing income expected in the coming years, significantly enhancing profits that are typically taxed at 26%. These should come in handy especially during the period when Rochopper will be repaying Navitas.

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Strong Cash Flow Coming

We base our forecast for Sea Lion's free cash flow (FCF) on the capex and production mentioned above. For realistic simplicity, we assume an average crude oil price of $70/barrel. This estimate is slightly below the current price of around $75, which has spiked due to the recent conflict between Israel and Iran.

We believe that applying any oil price forecasts for Rochopper will be unreliable, as the investment horizon for this thesis is relatively long, and we will have to wait over two years to see the first cash flows from Sea Lion.

That being said, even if we crosscheck our assumed price with the Brent Crude Futures Curve we are only $2/bbl above the implied long-term price, so let;’s round up to $70 :D

Although Sea Lion is expected to be a cash-printing project, Rockhopper will receive only ~$50mm per year until 2031 ( when additional drilling translates to production increase and Navitas is fully paid down). This will occur as additional drilling leads to an increase in production and Navitas is fully paid off. As the loan is repaid, the company will enhance its FCF yield, operating at ~45% starting in 2032. Later It is expected to grow to 60% as all 3+ phase capex is committed. 

NAV Valuation

Our valuation method of choice for Rockhopper is Net Asset Value (NAV) approach. Using the cash flow above and conservative 10% discount rate we estimate the company’s NAV at $2.3bn. It gives us $3.60/share NAV which compared to the US dollar-denominated share price of $0.63/share indicates an 82.5% discount to NAV and a 4.7x potential upside…

For easy tracking of the changes in NAV based on two main drivers — oil price and discount rate — please see the NAV/share sensitivity table below

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DCF Valuation

To cross-check NAV-based valuation was also used DCF. In essence, almost all assumptions are the same except the discount rate used. WACC (our discount rate) was estimated at nearly 8%.

Using these metrics, we calculated the Enterprise Value to be approximately $3.0bn. After subtracting $14mm of net debt (total debt minus cash) and dividing the Equity Value by the number of shares outstanding, we determined a target price of $4.58/share. The current share price of $0.63 implies a potential ~6.3x upside…

Key Risks:

• Delays of Final Investment Decision

• Delays in drilling and production timeline

• Capex spending growing beyond budget

• Low long-term crude oil prices

We had to simplify many things and if we made any mistakes, we are sorry and encourage you to correct us :) If you enjoyed this publication please like and comment! It would mean a great deal to us and help grow our research blog!

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Summary

• Bowim is one of the largest companies involved in the distribution and processing of steel products. It supplies sheet metal, pipes, profiles, and rebars primarily to construction, infrastructure, and metallurgy customers in Poland.

• These clients have faced significant volatility in recent years. After a surge in demand in 2021 and 2022, there has been a substantial correction over the last two years. It was mainly due to rising interest rates and slowing demand. Despite this, in 2025, steel product prices began to rise again, increasing by 5-10% across all categories. Interestingly, during the period of declining demand, Bowim was able to capture market share and increase its delivery volumes.

• Poland is now entering a historic phase of infrastructure spending, with ambitious targets set for advancements in energy, rail, road, air, and industrial/defense infrastructure. It is estimated that these projects will require over PLN 2 trillion in investments over the next decade (equivalent to 60% of the current GDP) and will necessitate millions of tonnes of raw steel and steel products. Simultaneously, interest rates are beginning to decline again, which should facilitate a resurgence in residential and commercial construction.

• Bowim is already a supplier for high-profile projects such as the West Warsaw Railway Station and the Olefin Plock (Petchem Project). With new projects starting every month, it has the potential to become a leading steel supplier for numerous contractors executing these contracts.

• Bowim could significantly benefit from a peace deal in Ukraine, as this may lead to a sudden increase in steel demand for rebuilding efforts in the region.

• Similar to Valaris (VAL), Bowim has impressive operating leverage, which, if timed correctly with the new cycle, can lead to substantial cash flow generation. During downturns, like in 2024, Bowim may remain barely profitable, but during mid-cycle and peak cycles, it has the potential to increase its net profit and cash flow by 5x to 10x, similar to what was seen in 2021 and 2022.

• Currently, Bowim is operating below capacity, and production volumes are expected to rise with additional contracts planned for 2025 and 2026. We anticipate continued steady growth, estimating that by 2027 the company will achieve a mid-cycle EBITDA of ~PLN 50mm vs 2024’s PLN 11mm.

• Bowim is a net-net, has almost no debt and 63% insider ownership with rather competent management and extensive buyback history (~13% of company was bought back since IPO in 2012).

• The company is currently trading at attractive ~2.2x 2025 EV/EBITDA and 1.9x 2026 EV/EBITDA and is expected to turn cash flow positive in Q2 or Q3. At the same time it’s trading at a ~25% discount to NCAV, ~50% discount to Adj. Tangible Book Value (TBV), and 70% discount to Book Value (BV)

• We value the company using the target multiple and discounted cash flow (DCF) model. Using a conservative 4x EV/EBITDA multiple on 2027 EBITDA yields an EV estimate of PLN 203mm and a common shareholders' equity value of PLN 208mm. This indicates potential upside of ~134%, with a target price of PLN 10.66/share by the end of 2027 (~50% IRR). Meanwhile our DCF yields ~306% while based on conservative assumptions (no Ukraine peace deal, low/mid cycle pricing). It implies PLN 19.14/share price target at ~3x upside.

• Overall we see Bowim as a downbeat stock, that despite being a low-margin business in a highly commoditized industry can benefit immensely from a new steel cycle and a potential Ukraine Peace Deal lottery ticket.

• In the worst case scenario (prolonged correction, delayed investments, no peace deal) we think Bowim could reach Its NCAV at 30% and at best well over 300%. This risk/reward makes it an investment case worth playing.

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Business Overview

Bowim S.A. is one of the largest distributors and processors of steel components in Poland, serving the construction, manufacturing, and machinery industries, primarily within the country. Its product offerings include sheet metal (44% of projected 2024 revenue), pipes (19%), rebars (14%), profiles (11%), and prefabricated reinforcements (13%), with other products accounting for 5%. Established in 1995, Bowim has developed into a significant player in its sector and became publicly listed in 2012. Over its 12-year history, the company has experienced two unprofitable years: in 2012 and the previous year.

Approximately 80% of Bowim's revenue comes from the distribution and customization of nearly ready-to-use steel products, while the remaining 20% is generated from its own rebar production. Due to the dramatic increases in energy and material costs since 2020, Bowim's relatively small production segment has had a lower gross margin compared to its distribution and customization. However, as these costs have stabilized since 2023, and It implemented several cost-cutting measures, Bowim is now successfully increasing the profitability of its own production.

Initially, the company began as a steel product distribution business, but after acquiring Beststal in 2007 (rebars, prefabricated reinforcements) and Passat-Stall in 2010 (sheet metal, profiles), It was able to vertically integrate and capture more of the value chain.

After researching Bowim investments and strategic moves over the years, we believe that it is highly opportunistic in its acquisitions and conservative with Capex. This is a good sign of financial discipline in highly volatile and low-margin business like steel products.

Facilities & Distribution Network

The company has HQ in Sosnowiec and 3 other plants in Gliwice, Rzeszow and Plock. Additionally Bowim operates 9 distribution centers spread across the country to provide the best reach to its customers. Two of these (in Warsaw and Jarlo) have the ability to customize some steel elements like rebars.

End Markets - Major Construction & Infrastructure Exposure

Bowim's end-markets are mostly concentrated in construction and infrastructure, with steel structures representing the largest component at 27% of revenues. These are primarily utilized in large-scale infrastructure, commercial, and industrial construction projects. General construction accounts for 20%, mainly encompassing residential and commercial builds. The Commerce sector, at 17%, involves smaller-scale applications and redistribution, such as sales to construction supply stores. Additionally, Bowim serves the metallurgy industry (15%), largely for automotive and metal product manufacturing. The remaining segments include the machinery industry (8%), energy (4%), and various other sectors (9%).

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Steel Market in Poland

Poland, historically a steel manufacturing powerhouse since the 1950s, maintained self-sufficiency or net exporter status until 2006. Post-2006, with growing energy costs, climate tax a notable reversal occurred, transforming Poland into an increasingly significant importer of steel, increasingly reliant on distribution rather than production.

In 2023, Poland's crude steel production stood at ~6mm tonnes, ranking it as the 23rd largest producer globally. This figure represents a 13% decrease compared to 2022's production of over 7mm tonnes. However, there has been a 2024 volume upturn, with production increasing by 10.1% YoY in 2024 to reach over 7mm tonnes, and a further 3.9% year-on-year increase in January-April 2025, reaching 2.5mm tonnes.

Poland ranks as 18th largest steel consumer taking over 13mm tonnes. To bridge the gap between consumption and production It imported an estimated 6mm tonnes of steel, reflecting this growing reliance on foreign supply and efficient distribution network.

The primary driver of steel consumption within Poland is the construction and infrastructure sector, accounting for a dominant 52% of the total demand. Following construction, the mechanical equipment industry represents the second-largest consumer, utilizing 16%. The automotive industry consumes 12% of the nation's steel supply. Finally, the metal product manufacturing accounts for 5% of the total steel consumption, with its widespread application across many industrial applications.

Residential and Industrial Slowdown …

The Polish construction sector is a significant contributor to the nation's GDP at around 10% in 2022 and at the same time the biggest end-market for Bowim’s steel products. While the It saw robust growth with a 7.7% CAGR between 2020 and 2023, in 2024 experienced a real-terms contraction of roughly 5.7%, putting a stop to extreme period of post-covid growth.

This dip is attributed to elevated interest rates, and a subdued demand. However, according to Poland Construction Industry Databook a strong recovery is anticipated from 2025 onwards, with an average annual growth rate of 3.6% projected until 2028, and a 4.1% CAGR from 2025-2029. This resurgence will be fueled by substantial investments across all segments but especially infrastructure and Industrial construction.

In the last years, residential construction was the biggest driver of growth, but with ~20% YOY reduction in building permits issued in April 2025, it is steadily losing its role. In the meantime Industrial construction (incl. warehousing) although slightly slowed down due to interest rates, still shows some strength, particularly driven by e-commerce sector, with total industrial stock reaching almost 35.3 million sqm in Q1 2025.

However, speculative construction accounted for only 41% of the pipeline, the lowest share since mid-2020. While new commercial leases and expansions declined by 20% year-on-year, lease renewals accounted for a record high of 56% of total take-up, suggesting a preference for retaining existing locations amidst economic uncertainties. However, again declining interest rates could reverse the trend for industrial and residential construction.

… To be Fully Offset by Strong Infrastructure Tailwinds

Poland is initiating an unprecedented wave of infrastructure spending, setting ambitious targets across energy, rail, road, air, and industrial/defense infrastructure. It is estimated that these projects will require almost PLN 2 trillion in investments over the next decade (~56% of its current GDP), and will demand millions of tonnes of raw steel and steel products.

In 2025, the government plans to allocate a record PLN 700 billion (€160 billion) to infrastructure and industry investments, marking the highest amount in the nation's history. This substantial capital injection is complemented by nearly €60 billion from the EU's National Recovery Plan, of which approximately 40% will be spent on infrastructure and government-related construction. This record spending will primarily focus on the defense sector, logistics (warehousing and central hubs), smart cities, and road, rail, and air infrastructure.

However, 2025 is not a one-off year; multiple major projects are currently under construction and are happening simultaneously:

• Energy infrastructure (PLN 600bn to be spent from 2023 to 2030, according to EY estimates) - Poland’s energy infrastructure is extremely outdated and still largely reliant on black coal and lignite. This sector requires record investments in combined cycle gas turbine (CCGT) natural gas plants, offshore wind turbines, and nuclear power plants. Additionally, some projects expected to be finalized in the mid-2030s will likely require an additional PLN 500bn in investments.

• Electricity transmission upgrades (PLN 65bn, over the next decade) - Similar to power plants, the electricity transmission system is aging and requires expansion to accommodate the needs of new power plants. Investments will focus on modernizing transmission networks, biogas installations, heating systems, and advanced energy storage facilities, reflecting a strategic shift towards a more diversified and secure energy future.

• The railway modernization and expansion (PLN 180bn from 2024 to 2032) - This new central airport project will integrate rail and road connections to major neighboring cities and aims to serve up to 34 million passengers annually. The CPK investments also include significant local projects, such as a 4.6-kilometer tunnel in neighboring Łódź to connect the rail station with the airport terminal.

• Central Communication Port CPK (PLN 132bn from 2024 till 2032) - It is a new central airport project combined with railway and road integration to major neighboring cities which aims to have a passenger capacity of 34mm people annually. CPK investments also includes major local projects like 4.6 kilometer tunnel in neighboring Lodz to integrate rails station with the airport terminal.

• Polish Defense Industry Buildup (PLN 1,900bn to be spent over the next decade, with approximately PLN 800bn likely spent domestically, including on production capacity buildup) - In response to the escalation of the Russo-Ukrainian war, Poland is increasing its defense spending. The defense budget for 2026 is estimated to be around PLN 200bn, which will cover not only the purchase of equipment from abroad and domestically but also the establishment of domestic production capacities and servicing centers for new equipment.

Although it is impossible to predict precisely how these massive projects will translate into steel product consumption, demand could reach new records in the coming years offsetting potential weakness in commercial and residential construction.

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Bottoming Prices - New Cycle On The Horizon?

In the last five years, steel product prices have experienced significant volatility. After reaching their lowest point in 2020, prices surged to record highs in 2022 following the outbreak of the Russo-Ukrainian war. During that period, some products increased in price by as much as 500%, with the steel price rising nearly 300%. As 2022 progressed, they began to decrease as local producers diversified and alleviated supply chain strains.

The years 2023 and 2024 marked a period of correction and normalization, with prices returning to trends seen at the end of 2021 and the beginning of 2022. The average steel price dropped from PLN 8,400 to PLN 3,150, (63% decrease). Interestingly, despite the decline in demand and prices, Bowim managed to grow its sales volume by 7% in 2024, successfully gaining an edge over its competition, which is a positive sign of its position.

So, if steel products are declining, why consider buying a low-margin steel product distributor and manufacturer? Well, they are no longer in decline. Price data for 2024 and 2025 indicate that we have reached a local bottom at the end of 2024. The average steel price has already increased from PLN 3,100 to PLN 3,200 and some products appreciated up to 10%. While this alone is not a definitive indicator of a new cycle, huge infrastructure spending and declining interest rates lead us to believe that we are on the verge of one.

What can happen this cycle?

It’s impossible to predict where the steel product prices will go and when the peak may occur. However, considering the increasing spending on infrastructure projects and Poland's growing dependence on imports, we believe it's possible to reach at least 90% of the 2022 prices within two years, compared to over 60% currently. If a peace deal in Ukraine is signed, we might even see prices rise to 110%, potentially breaking new records.

What it would translate to? At these record prices Bowim generated almost PLN 120mm in Free Cash Flow and over PLN150mm EBITDA in 2022 and appreciated to ~PLN 15/share achieving ~1,200% since 2020’s bottom and ~500% since the end of 2020.

At 80% of 2022 average prices, we are talking about 33% appreciation from the current product prices which would result in ~PLN45mm in FCF and ~PLN61mm EBITDA. This seems realistic and to give you a point reference, this company’s market cap is just PLN 81mm and EV PLN 87mm… that’s what we call cheap

Extremely High Insider Ownership & History of Buybacks

Bowim has very high insider ownership standing at 63%. It is composed of three main management members - Adam Kidala (21%), Jacek Rozek (21%), and Jerzy Wodarczyk (21%). This effectively aligns the management closely with other shareholders and is a big plus.

The company has 13% of stock in its treasury - the result of over a decade of buybacks halted last year due to worsening profitability. For a long time the company was having buyback yield of above 10%. With improving market conditions we could see the buybacks spike again adding to the upside.

We believe the management is rather competent, with two-three decades of management and industry expertise. They successfully navigated their low-margin, commoditized business, engaging in opportunistic M&A like acquisition of Passat-Stal in and Betstal (proved accretive deals). Effectively, they vertically integrated their business and lowered cost base. Additionally, management keeps assets fairly modernized with stable Capex spread across many years.

Margin of Safety

Bowim is clearly not a monopoly, nor is it a business that is nearly impossible to replicate. It operates with low margins, primarily depending on distribution and, to a lesser extent, its own production. At first glance, this may seem like a risky investment. However, what provides a margin of safety is its extremely low price. Bowim is one of the cheapest businesses we've seen, with very low multiples and a net-net status (current assets - total liabilities > market cap).

It currently trades at a price-to-earnings (P/E) ratio of 7.5x for 2025E and 6.3x for 2026E. The Enterprise Value to EBITDA (EV/EBITDA) ratio stands at 2.2x for 2025E and 1.9x for 2026E. Additionally, Bowim has a price-to-free cash flow (P/FCF) of 3.0x for 2025E and 2.6x for 2026E.

The company has almost no debt and holds PLN 5mm in net cash. Bowim trades at a Price-to-Book (P/B) ratio of 0.30x and after applying conservative adjustments, we believe it trades at approximately 0.49x P/Adjusted Tangible Book Value (TBV).

Most importantly, Bowim is classified as a net-net, trading at 24% discount to its Net Current Asset Value (NCAV), calculated as Current Assets minus Total Liabilities. It essentially means that if company would be taken off the exchange and liquidated, even without fixed assets like its plants Bowim would still provide ~32% upside.

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DCF Valuation

DCF is not our preferred valuation, the simple multiple is, but we think it can also shed some light on the company’s prospects. For the exit multiple, we assumed a 4x EV/EBITDA, which is below the industry average of 5x. We used a discount rate of 8.6% for the weighted average cost of capital (WACC), derived from the capital structure and current Polish interest rates.

Using a conservative mid-cycle cash flow forecast, we estimated the Enterprise Value (EV) to be approximately PLN 369mm. After adding about PLN 5mm of net cash (total debt after asset sale minus cash) and dividing the Equity Value by the number of shares outstanding, we determined a target price of PLN 19.15 per share. The current share price of PLN 4.71 implies an upside potential of ~300%…

Multiples Valuation

Our preferred way to value the business is through good old multiple slap. In case of cyclicals like Bowim the best results are yielded by the mid cycle EBITDA, which we conservatively estimate based on ~65% 2022 peak product prices. This would generate Bowim ~PLN 50mm EBITDA.

With almost zero debt and a conservative multiple of 4x (below industry’s 5x) we can estimate EV of PLN 203mm and equity value of PLN 208mm implying a share price of PLN 10.66 and implying 134% upside by the end of 2027 (~50% IRR).

Please note that this doesn't include the additional EBITDA spike that can come from peak pricing or extra demand from Ukraine rebuilding efforts. It is likely that Bowim could reach $70mm EBITDA in 2027, if peace is signed and therefore have a 2.1x upside just based on multiples.

Key Risks:

• Delayed infrastructure investments

• Delayed or slow residential construction recovery

• stickier inflation combined slower interest rate cuts

• Prolonged war in Ukraine

This is a fairly simple business which despite being a low-margin and cyclical, can benefit from high operating leverage and potentially gain lots from a possible Ukraine peace deal. What provides a great margin of safety is Bowim’s low multiples and NCAV higher than the market cap. We will be adding Bowim to our portfolio as one of our minor positions. 

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Summary:

• The company in question is one of the world’s largest suppliers of natural gas. Over the past few years, it has developed a portfolio of highly profitable assets, generating EBITDA and FCFF margins of over 40% and 25%, respectively.

• Currently, the stock is extremely undervalued, trading at approximately 7x 2027E P/E and ~4x 2027E P/FCF ratio.

• Recently, insiders have been buying shares in bulk, acquiring an additional 5% of the company, while institutional investors are also increasing their stakes.

• We have identified five major catalysts that are expected to occur within the next 3 to 12 months, which could be significantly transformative. These events may result in an increase of $0.6bn in core EBITDA and over $0.4bn in additional cash flow, along with a similar amount from one-offs.

• Although the stock has been under pressure due to extra debt and equity issuance, the situation is improving. With nearly a 90% reduction in capex this year, the company is expected to deleverage quickly and has a few additional cards at its disposal to make it happen.

• Our valuation suggests a potential upside of ~5x based on steadily increasing EBITDA, Capex reduction, and deleveraging, indicating a high likelihood of a rerating in the coming months.

• Moreover, a plethora of major catalysts combined with double-digit short interest creates an ideal setup for a potential short squeeze in the upcoming months.

• In summary, we have a highly profitable and fast growing business, rapidly improving cash flow, huge insider buying, many major upcoming catalysts, and short squeeze setup — all for a stock at 7x P/E — not bad

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Summary

• Edit: Since publishing, the company lost major clients which will drastically lower its revenue in the upcoming quarters. It has increased the risk beyond what we can tolerate. We believe Superuor Industries play is not viable anymore.

• Superior is one of the world’s largest manufacturers of lightweight aluminum wheels, producing nearly 14mm units per year. Its largest customers include General Motors (24% of revenue), Ford (16%), Volkswagen Group (12%), and Toyota (12%), with the remainder coming from companies such as BMW, Honda, Mercedes, Stellantis, and others.

• The automotive industry has experienced significant volatility in recent years. It was nearly brought to a halt during the COVID outbreak, followed by a demand peak just 1-2 years later. Now it is again facing a bear market and keeps on struggling with the consumer demand. This decline, coupled with high debt from the Uniwheel acquisition, rising interest rates, and looming tariff risks, has led to a substantial drop in Superior Industries' stock price. Nevertheless, with recent cost-cutting measures, the relocation of European operations to Poland, and a potentially net positive impact of tariffs, the company is well positioned to return to profitability by mid-2025.

• Superior Industries carries a substantial debt load of $483mm, primarily due by 4Q 2028, with an interest rate of over 12%. Additionally, it has $300mm in preferred stock with interest rates ranging from 4.5% to 9%, which will become repayable in September 2025.

• This debt is weighted against an adjusted EBITDA of $146mm, resulting in a Net Debt / EBITDA of 3.4x. The company has a debt ceiling of 3.75x ND/EBITDA until 1Q 2025, after which it drops to 3.5x. It also has a liquidity covenant of $37.5mm, which is currently met threefold.

• By relocating production to lower-cost regions such as Mexico and Poland, the company can effectively compete against more expensive local players. Additionally, Chinese and Moroccan competitors are facing increasing tariffs from the EU and Mexico, which further strengthens Superior Industries' position.

• The stock market has exaggerated the impact of U.S. tariffs. The assumption that these would significantly disrupt the company's Mexico operations were simply incorrect. Superior has revealed that less than 25% of its production in Mexico is affected by the tariffs, as clients typically pick up their orders and assemble cars in Mexico instead of the U.S. Therefore, rather than suffering due to the recent tariffs, Superior Industries may actually benefit from diminished competition from China and Morocco.

• Since 2019, the value-added sales (revenue - aluminum costs) per wheel have increased by 34%, enhancing the company's core profitability. This growth has been partly driven by larger and more premium wheels, as well as high-end electric vehicle wheels that require more integrated production and trust of the premium clients like Mercedes and Lucid.

• However, the total number of units produced has declined from approximately 19mm in 2019 to around 14mm in 2024. This decrease is primarily due to lower-end production being pushed out by competitive pressures from Asia, which offers narrower profit margins. Nonetheless, nearly all medium- and high-end market players are now customers of Superior, recognizing it as a preferred and reliable alternative to Chinese manufacturers.

• Currently, Superior is operating below capacity, and production volumes are expected to rise with additional contracts planned for 2025. We anticipate continued growth, estimating that by 2028 the company will achieve an EBITDA of approximately $249mm, with $289mm in debt and roughly $392mm in preferred stock remaining.

• The company is currently trading at attractive ~5.6x 2025 EV/EBITDA and 4.5x 2026 EV/EBITDA and turned cash flow positive last quarter.

• We value the company using the target multiple and discounted cash flow (DCF) model. Using a realistic 6x EV/EBITDA multiple on 2028 EBITDA yields an EV estimate of $1.5bn and a common shareholders' equity value of $0.9bn. This indicates potential upside of ~13x, with a target price of $29.91/share by the end of 2028 (366% IRR). Meanwhile our DCF yields a similar results while based on conservative assumptions. It implies $27.54/share price target at ~12x upside.

• Overall we see Superior as a downbeat stock that despite commoditized industry and potential bankruptcy risks has a tremendous upside potential that makes its risk/reward great. We believe even small exposure to this name could yield a very attractive return for the whole portfolio.

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Business Overview

Superior Industries International (SUP) is one of the world’s largest suppliers of lightweight aluminum wheels, with a production output of circa 14mm units anticipated in 2024. Its customer base includes a wide range of automotive manufacturers, such as BMW, Ford, General Motors, Honda, Mazda, Mercedes-Benz Group, Renault, Stellantis, Toyota, VW Group, and many others. SUP primarily serves two segments of the automotive industry: Electric Vehicles (EVs) and Internal Combustion Engine (ICE) vehicles.

The four largest customers of SUP account for 66% of its revenue: General Motors contributes 24%, Ford 18%, Volkswagen Group 12%, and Toyota 12%, with other customers making up the remaining 36% of Revenue. The remainder is composed mostly of BMW, Honda, Mercedes, and Stellantis.

In 2024, North America accounted for ~56% of SUP's value-added sales, with the rest is generated in Europe. Value-added sales represent net sales adjusted for the cost of aluminum, which is passed through to customers.

SUP manufactures ~14mm units per year, predominantly selling in the North American and Western & Central European markets. According to IHS, last year, there were 29.8mm cars produced in these regions, resulting in approximately 119.2mm wheels sold (4x). Of these, around 55% are aluminum wheels, equating to roughly 65.6mm units. This indicates that SUP owns ~45% of the lightweight wheel market in North America and Western & Central Europe. While these figures may seem impressive, it’s important to note that the market is highly commoditized and has been historically highly cyclical.

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The Bitter Fruit of Volatile Macro

The company's challenges began in 2017 when it acquired Uniwheels, the third-largest supplier of lightweight wheels to the European automotive market, for $712mm. This transformative acquisition positioned Superior Industries as a market leader not only in North America but also in Europe and seemed like a good move.

However, It was primarily financed through debt and preferred equity, resulting in a complicated financing structure and high leverage. Following the merger, the business underperformed and integration was slow, leading to escalating problems.

When the pandemic hit, the decline in volumes had a severe impact on this over-leveraged business, causing revenues to plummet. The decline in profits was only exacerbated by interest payments.

After a brief post-pandemic recovery, macroeconomic conditions became increasingly unfavorable, and over the last two years, the balance sheet has further deteriorated. Since 2017, it's fair to say that Superior Industries has been a rollercoaster ride for its shareholders, with constant ups and downs. However, there is hope...

To rescue itself from the brink of collapse and cut costs, the company has been relocating its German operations to Poland, with the full impact of this expected to be realized by 2025. It has also introduced an extensive cost-cutting program, and we are already seeing improvements.

Since the implementation of these measures, Superior Industries has been gradually increasing its profitability each quarter, improving from a loss of -$1.50 EPS in 1Q 2024 to -$0.70 EPS in 4Q 2024. We expect this trend to continue, with EPS turning positive by 2Q 2025 and reaching $0.20-$0.30 per share in the fourth quarter. We will delve more into the turnaround prospects later in the article.

Tariff Risk Overblown by the Market

Tariffs have become a hot topic since the US election. They can both benefit and pose risks to international companies like Superior. In this case, they were seen as a negative Concerned investors have driven the stock price down since 2H 2024. However, we believe this reaction is completely out of proportion, as Superior should rather gain from most of the tariffs losing on US one but less than was initially expected. These are the major trade restrictions imposed or pending:

1. Increased EU tariffs on Chinese wheels from Morocco (net positive) - EU Commission plans on introducing additional tariff on aluminum wheels from China imported through Morocco effectively increasing it from over 22% to almost 50%. According to the management this should make Poland’s production even more attractive for OEMs since China and Morocco are the main exporters of aluminum wheels to the EU.

2. Increased US tariffs on China (net positive) - in North America, 50% of wheels are imported from China, which currently faces a tariff of about 45% vs 25% previously. If these were to grow further, it would provide Superior with only additional opportunity to take NA sales from China

3. Potential 25% tariffs on Chinese imports to Mexico (net positive) - although unlikely if implemented, this may positively affect Superior through limiting Chinese imports to the Mexico-based car factories.

4. US Tariffs on imports from Mexico (net negative) - 25% tariffs on Mexico imports could potentially impact some of the Superior’s wheels directly delivered to the US. However these compose less than 25% of the total Mexico production and the impact on Superior is rather overblown. It was visible during the last earnings call when the management explained impact of the tariffs and the stock jumped 28% in a day, although it could also be the strong results that had some impact.

5. EU tariffs on US imports and vice versa (net positive) - any tariffs on EU or US imports implemented from the other side would damage the value preposition of localized wheel manufacturers and benefit diversified producers like Superior that can produce locally and omit paying a tariff.

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Car Wheel Macro Improving

Automotive is currently facing significant challenges, including high dealer inventories, issues with vehicle affordability due to relatively high interest rates, and shutdowns by key customers, particularly Volkswagen. Since nearly all of Superior's sales are to major car manufacturers, the company is heavily reliant on the overall car market.

Car sales have been relatively low in both the US and EU, resulting in declining sales for Superior. However, we anticipate a reversal of this trend in the next 2 years as mentioned din our General Motors writeup:

Main reasons for this are due to decreasing interest rates and quickly aging vehicle fleet. For example the average car in the US was 11-12 years old between 2012 and 2020. However after the Covid Average age started growing rapidly and now approaches 13 years.

The US car inventory which has grown since late 2021 is now dropping fast and should result in a growing order book for late 2025 and 2026.

That said, IHS forecasts predict further 4% decline this year , but this is already a smaller correction than last year and we think that depending on overall economic situation, the actual sales drop could be even less than that.

Does Aluminum Price Play a Role?

Fluctuations in aluminum prices may seem like they could significantly impact businesses that use aluminum as a primary material, but this is not necessarily the case. While changes in aluminum prices can have an indirect effect on the company, the impact is not as detrimental as it may appear. Here’s why:

First, products are typically priced based on an aluminum-plus basis, which allows the company to pass on changes in aluminum prices to its clients. As a result, even if aluminum prices increase, the company's profit margins tend to remain stable.

However, there may be indirect effects to consider. When aluminum prices rise, aluminum wheels become more expensive, making steel ones a more attractive alternative, and vice versa. Some also might think that the overall cost of cars would increase due to the rising price of wheels, but although possible it is early the case as wheels represent only a small portion of the total car value.

Second, aluminum and steel prices have historically shown a strong correlation, meaning significant discrepancies between them are rare. Even if there were a shift toward the use of one or another, the price difference would need to be both substantial and persistent, which is uncommon.

Additionally, there is a long-standing trend in which consumers and automobile manufacturers are increasingly favoring aluminum and lightweight wheels. This trend further reduces the likelihood of a short-term shift toward steel due to cost considerations.

The company's localized production in Mexico and Poland helps mitigate material cost risk by allowing it to manufacture products using local aluminum prices in North America and Poland, facilitating sales across neighboring countries.

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Customer Preferences Evolve and SUP with Them

The company is well-positioned to capitalize on changing consumer preferences, particularly the increasing demand for aluminum wheels, which continue to capture market share from steel wheels each year. Additionally, there is a noticeable trend towards premium and larger diameter products. Superior, with its integrated production line and manufacturing capabilities for high-end brands like Mercedes-Benz and Lucid, is well-suited to take advantage of this shift.

This was emphasized during the last earnings call:

“Yes. So a couple of things. Let me get to your 19-inch wheel question. So the content adders in our business started with sizing of wheels and now they’re evolving very quickly to other technology, including light-weighting and finishing. So to your question on 19-inch wheels, Gary, actually, I mean, for the next call, we may just change the line of demarcation here because 19-inch wheels now is small wheels. So now we’re – the majority of our wheels are quickly becoming 20 inches or larger. So if you look at the growth in 20-inch wheels year-on-year, you’ll see a big, big movement. If you look at 22-inch wheels, you’ll see almost a doubling in the last three years.

So that trend of sizing continues. If you talk to me four years ago, would I be launching a 24-inch wheel on – for the top two OEMs in North America this year, it would be hard to believe. And we’re doing that also on other side of the ocean. So what are customers asking for? So still, the trend for larger wheels is accelerating. But now lightweighting is such a big deal, Gary, it was probably 10% of our business not too long ago. Now it’s less than 20%, but it’s accelerating very fast. It’s a big deal.” - 3Q24 Earnings

Optimizing Operations

To cut the cost and improve its margins Superior has been relocating its operations to low-cost and consumer-close destinations, specifically Mexico and Poland. Currently, the company has 30% of its production capacity in North America and 25% in low-cost European countries, namely Poland.

The subsequent shift from western Germany to eastern Poland occurred at the cost of ~$40mm but we already see a major cash flow improvement set to fully materialize in 2025. Superior Industries has mentioned $23-25mm Adj. EBITDA improvement expected from the move, ~$10mm Capex reduction. As a result, the company should be bent positive this year from the move to Poland.

Additionally, the current production capacity is significantly underutilized, with the production of c. 14mm units in 2024. We estimate the total capacity could be around 18mm.

The company has set an annual adjusted EBITDA goal of 2025 USD 160-180 million, with a forecast of sale c. 15mm units, while the total capacity is approximately 19 million units annually.

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Other Turnaround Measures

Due to restructuring that began in 2024, the company has incurred costs of approximately $10mm. This has led to a reduction in its global headcount in selling, general, and administrative (SG&A) roles, as well as manufacturing overhead. As a result, the company expects to achieve annual savings of $10 to $15mm, starting from the first half of 2025, with a payback period of less than a year.

Additionally, Superior has signed several new contracts set to commence in 2025, which are projected to generate up to 1 million additional wheels annually, bringing the total to 14.9 million wheels for that year. These contracts include:

• A Japanese customer for the North American market, which will require 250k wheels annually starting mid-2025.

• The European aftermarket, which will need 200k wheels annually.

• Volvo orders for the European market, expected to provide 1.7mm wheels over the next 3 to 5 years, increasing from approximately 350k to 550k wheels annually.

The decision of many car manufacturers to reduce their reliance on China also presents new opportunities for business deals. During the recent earnings call, management highlighted a recent development:

"We have a recent agreement from a couple of weeks ago with a customer that is entirely dependent on imports from China, who wants us to start production in a couple of months." - Q4 2024 Earnings

This trend is part of a larger movement among businesses aiming to shift portions of their supply chains away from China, which is currently facing tariffs from both the US and the EU, making it a higher-risk location. As a result, Superior is well-positioned to benefit from this shift, given its capacity and scale to fill the manufacturing gap.

Chinese imports to the US and EU

China is the leading manufacturer and exporter of aluminum wheels. The implementation of an additional 20% tariff allows Superior to compete more effectively with relatively cheaper imports. The surge in exports following the election results indicates that these tariffs were anticipated and have impacted Chinese competitors.

According to SMM, the top five target countries for Chinese aluminum wheel exports in December were the United States, Japan, Mexico, South Korea, and Thailand. Exports to these five countries accounted for 29%, 19%, 11%, 9%, and 5% of the total aluminum wheel exports, respectively. North American countries increased their imports by 15-30% compared to November, driven by a “rush to import” in order to get goods to American shores before the tariffs were enforced.

Management — Up for the Task?

The management team has extensive experience, with several decades spent in various roles within automotive engineering, manufacturing, and management. The team consists of Abulaban Majdi (CEO), Dorah Michael (COO), and Dan Lee (CFO). You can learn more about them here. The company's track record is fairly strong, and despite a slower-than-expected integration with Uniwheels, it has been highly effective in implementing cost-cutting measures, saving millions in EBITDA annually.

While we generally dislike making excuses for the leadership team, we believe that many of the company’s challenges stem from poor timing and unfavorable macroeconomic conditions. Based on earnings calls and other events, the management appears well-spoken and competent. What is even more important is that, the leadership is aligned with shareholders, with ~35% insider ownership.

Adding Liquidity

The main problem the company is facing It’s its debt combined with narrow or negative margins. It has ~$500mm term facility due in 2028 along with $300mm preferred equity maturing in 2025. This poses a significant risk of default and illiquidity.

Debt Wall

Superior has two covenants:

1. Net Debt to EBITDA ceiling at 3.75x until the end of Q1 2025. After that the ratio drops to 3.5x and remains at that level. Over the last year the level was between 3x and 3.7x, currently being at a 3.38x level an our projection is that it will decline reaching 1x by end of 2028.

1. Minimum contractural liquidity of $37.5m in which included is USD 60m Revolving credit facility. As of 2024Y superior has USD 40.1m in cash plus USD 42.5m of unused revolving facility gives the Company c. USD 45m of available liquidity. Which we expect will grow at a USD 10-15m range barring debt repayments (which are more than likely given the terms)

This thesis is primarily based on whether the Superior will be able to repay its debt. To analyze this, we have created several sensitivity tables to stress-test our model. These illustrate how many times a covenant is breached during the projection period from 2025 to 2028.

Specifically, if the company experiences a shortfall in the required liquidity or violates the ND/EBITDA ceiling, the sensitivity table will indicate that one covenant has been breached. If both the ND/EBITDA and liquidity requirements are violated within a single quarter, the table will show two covenants breached. Additionally, if the liquidity floor or leverage ceiling is breached multiple times, the table will reflect a number greater than two.

According to our analysis, for this thesis to hold water, there would need to be a significant increase in the SOFR rate or an unprecedented decline in business performance—both of which seem unlikely given the current macroeconomic environment and the cost-cutting measures that have been implemented.

Pay-Down Priority

In 2017 Superior issued $150mm of preferred shares with 9% interest rate payable either in cash or in kind. It can be redeemed starting from mid-September 2025 at two times initial and PIK’ed before that date. Interest is calculated from the notional which means it is preferential for the company to take its time with regards to repayment.

The new term loan docs prioritize the pay down of the term loan over the preferred, given 7.05(b)(9) mandates that cash payment to the preferred stock can only be made when the net leverage ratio is no greater than 2 to 1. So, with current leverage a bit over 3 to 1, preferred dividends will be PIK’ed. Which allows the Company to focus repaying the new refinanced 520m USD facility which is expensive at with a current interest of ~12% that can decrease to 10% if SOFR reaches 2.5%.

Regarding the potential conversion of preferred shares to common shares, we believe this option is unlikely to be executed within this year or the next two years, at a minimum. The conversion price is set at $28.16, which is ~13x the current share price, and the preferred shares accrue a 9% dividend. This situation implies that if Superior Industries starts to recover, converting at the current price would likely be one of the worst investment decisions in history.

Instead, it makes more sense to wait and observe as long as the business is improving. This way, we can consider converting at a higher price while still earning a significant 9% dividend. However, we acknowledge there is a risk of dilution in the future, which could add around 5.6mm common shares. Interestingly, this dilutes our upside potential from 12-13x (as discussed below) to approximately 9x, which is still an very attractive return.

In summary, if the business cannot pay down its debt and continues to decline, the shares may ultimately be converted, but at that point, our thesis would have already failed. Nevertheless, it is difficult to foresee Superior Industries breaking its covenants in the near future.

Multiples valuation

Our preferred way of evaluating SUP is multiple as we believe debt pay down should allow it to rerate and expanding EBITDA allow for a better valuation. Less than three years into the future (2028), we expect the company to have ~$289mm debt left ($238mm ND) to refinance along with ~$392mm of preferrers on a ~$249mm EBITDA. A relatively realistic 6x multiple in line with other market leaders in automotive supply chain gives us EV of $1,494mm and common shareholders equity value of USD 864mm implying a share price of $29.91 and ~13x today’s valuation.

DCF Results

We expect revenues to increase from $1,260mm in 2024 to $1,485 million in 2028. Additionally, the share of value-added sales is projected to grow from 54% to 63%. Coupled with further cost optimization, which we believe aligns with the company's credible projections, we anticipate an adjusted EBITDA margin on value-added sales to rise to ~25% by 2028, up from today’s margin of ~21%.

With a weighted average cost of capital (WACC) set at 8.1%, primarily due to our relatively inexpensive preferred shares, and a terminal growth rate of 0%, we calculate the enterprise value to be $1,588 million (11x the 2024 EBITDA). After accounting for debt and preferred shares totaling $784mm, this results in an equity value of $803mm, which is ~12x today’s valuation.

Risks

• If market capitalization falls below USD 50mm for more than 50 consecutive days preferred shares holder has the ability to redeem all the > USD 300mm

• Increased tariffs, especially targeting Mexico and not China

• Preferred shares being exchanged for basic shares + debt would significantly dilute current shareholders

• Further market downturn causing decreased revenues

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Summary:

• El Al is the national carrier of Israel and is the most commonly used carrier for flights to and from the country. The airline operates a fleet of 44 planes, including Boeing 737s, 787 Dreamliners, and 777s, serving 36 destinations across Europe, the Middle East, the Americas, Africa, and the Far East. El Al carries over 6mm passengers annually, generating the majority of its revenue (~93%) from passenger services, with the remainder coming from cargo.

• The Israeli air travel market is concentrated around Ben Gurion Airport (TLV), where El Al holds ~46% market share (9M2024), up from ~23% a year ago (9M2023). This increase over the past two years is attributed to other airlines withdrawing from the region following the events of October 7, 2023. While the share is expected to decline as competitors resume operations in throughout 2025, we believe El Al’s ability to retain customers through loyalty programs is now utilized by half of their passengers.

• El Al has benefited from other airlines withdrawing, achieving as much as 81% market share in some months during 2023. This allowed it to dictate prices and more than double its free cash flow (FCF) margins, reaching nearly 23% and becoming the most profitable airline int the world. However, these elevated margins steadily normalise as competitors return and El Al invests in fleet modernization. Despite this, we believe they should stay elevated due to the fleet improvements, growing customer loyality and market leader position. After realizing its fleet modernization, we expect El Al's FCF margin to stabilize at ~16%. Meanwhile, United and Delta airlines are operating at ~5% and ~7% FCF margins, respectively…

• Global air travel demand is projected to continue growing and is already significantly higher than pre-pandemic levels. Although local air travel in Israel experienced a 37% YoY decline in 2024, due to the war, a rapid recovery is expected in 2025, with us projecting exceeding the pre-war levels by 2026. Many tour operators report a nearly record pipeline of tourists waiting to travel to Israel.

• A global aircraft shortage is affecting the supply side, which could lead to higher ticket prices due to limited global passenger capacity. In 2024, aircraft deliveries are expected to reach nearly 1.3k, representing a 30% shortfall of initial estimates and being 28% below the peak delivery level from 2018. COVID-19 and delays from Beoing and Airbus have increased the average age of the global fleet to 14.8 years, exceeding the 13.5-year average of the past 34 years.

• El Al has been gradually issuing shares for the past three years to help deleverage and modernize its fleet. This practice is expected to cease as El Al's net debt is minimal (~$0.2bn), and the company has sufficient capital for the near term. Outisde of that, Capex will likely be funded through debt and cash flows, minimizing or eliminating further dilution.

• The company aims to increase its maximum passenger capacity from 6.3mm currently to 8.8mm annually by 2031. Plans include replacing 24 aircraft (primarily 737s) and adding or restoring 14 more (mostly 737s and 787s). If fully executed, El Al will have a fleet of 58 aircraft. This new fleet will enhance passenger comfort, reduce jet fuel consumption, and lower the fleet's emissions.

• El Al's management is well-aligned with shareholders, with ~47% insider ownership led by the Rozenberg family. Their leadership and focus on shareholder interests have enabled the company to navigate the challenges of the COVID-19 pandemic and the war period effectively, achieving a rapid deleverage (ND/EBITDA of 0.2x for 2024, compared to 8.1x in 2022).

• A primary concern for El Al is the limited capital distribution due to agreements made during the COVID-19 era, which were essential for the airline's survival. However, as El Al begins to achieve record profitability, these limitations are becoming increasingly burdensome for investors. Negotiations with the state are underway to lower or erase these restrictions, potentially by the end of February, allowing for share buybacks and dividends. This, combined with the capital distribution announcement, could serve as a strong catalyst for the stock. Now let’s see how attractively valued is El Al.

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Update Teaser:

• InPost (INPST.AS) - Focus on international expansion despite growing competition

• Alico (ALCO) - Capital allocation plan on the horizon

• Sky Harbour (SKYH) - Reasons behind BOC cutting Its stake, NYSE uplisting

• Carnival Corporation (CCL) - Substantial savings from debt refinancing, new ship joins Cunard

• Valeura Energy (VLE) - Operational and financial updates for 4Q24 and 2025 guidance

• General Motors (GM) - Strong earnings, cautious guidance, and glooming tariffs

Read more

Summary:

• Valaris is the world's largest offshore drilling contractor by fleet size, servicing major energy companies such as Chevron, BP, Shell, Petrobras, Equinor, and Exxon. The company owns 53 vessels, which include 18 floaters (deep-water units) and 35 jackups (shallow-water units). The former can be further divided into 13 drillships and 5 semisubmersibles.

• The offshore industry has faced a decade-long bear market that led to the bankruptcy of many operators, including Valaris. This decline was primarily driven by increasing competition from shale (fracking) and the Deepwater Horizon accident, which tarnished the industry’s reputation.

• However, with their debt wiped out years ago, new, better management, significant share buybacks, and a growing competitive edge over shale, Valaris is becoming increasingly attractive. This is especially true given the strong industry tailwinds and downside protection from lower dependency on high oil prices, as well as the fact that the company's asset value is a few times greater than its market cap and EV.

• In the last decade, the global offshore fleet has decreased from approximately 300 to around 150 vessels. Excluding ships that have been out of service for an extended period, the effective operational fleet may now be estimated at as low as 120-130 units.

• Despite a 2-3x increase in drilling volume per ship due to technological improvements, the 50-60% reduction in fleet size significantly limits supply. Vessels still need to navigate across oceans to reach drilling sites, and their operations are becoming more concentrated, which restricts overall flexibility.

• Thanks to technological advancements, the global offshore breakevens are now around $40/bbl, which is $10-20 lower than most alternatives, except for the Persian Gulf onshore projects. In the United States, this disparity is even bigger, as shale, which constitutes two-thirds of U.S. output, operates at approximately $60/bbl, while most legacy sources function in the mid-$60s/bbl.

• Offshore projects currently offer internal rates of return (IRRs) that are roughly 40-80% higher than traditional onshore and shale alternatives. Consequently, greenfield investments in offshore projects are now approximately 50% higher than onshore.

• Since 2022, day rates for drillships have surged from about $250k to $500k — an impressive 100% increase over two years. Day rates for benign environment jackups rose from roughly $90k to $170k and for harsh environment jackups from about $100k to $140k, representing increases of approximately 90% and 40%, respectively.

• During the last cycle, day rates peaked at about $800k for drillships and between $225k and $275k for jackups. We believe that in the current cycle, we could see day rates reach approximately $900k for floaters (drillships and semisubmersibles) and $275k for jackups.

• Replacing offshore fleets is challenging, with shipbuilding times ranging from 2 to 4 years, depending on the vessel type. Given the strong industry tailwinds, Valaris's assets are becoming even more appealing. The current replacement value is ~6x to ~8x larger than the enterprise value (EV) and market capitalization, respectively, which means that Valaris effectively trades at 16 cents on the dollar based on EV. When considering this discount and lower crude oil prices needed for offshore viability, we believe Valaris offers significant downside protection.

• The company is currently trading at an attractive P/FCFF of 10x for 2025E and 4x for 2026E. Its EV/EBITDA ratios for the same years are approximately 5x and 3x, respectively. Valaris also has a buyback yield of 5%, and great investors like John Fredriksen and Harris Kupperman have been purchasing the stock, with many others building positions in the broader industry, as well.

• Due to the extreme cyclicality of Valaris, we prefer to value the business using net asset value (NAV) to EV. By applying a peak cycle multiple of 1.5x and estimating the fleet value at a 30% discount to replacement value, we estimate the company's target EV at $27 billion, implying a potential upside of ~7x. Downside and Upside cases with 1.25x and 1.75x multiples imply a potential upside of 5x and 9x, respectively.

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Before we begin I would like to thank Value Degen and Deepwater Insights for inspiring this deep dive on Valaris. Through their work, we discovered this incredible industry and the companty itself. These are wonderful creators that have been sharing their views on offshore for some time. Give them a follow! It’s worth it.

Business Overview

Valaris is the world's largest offshore driller by fleet size, operating a total of 53 vessels. The company provides exploration and production (E&P) services to global energy leaders such as BP, Shell, Chevron, Petrobras, and Exxon. These majors contract Valaris' fleet to conduct work on the ocean floor in offshore oil-rich regions, including the Gulf of Mexico, Persian Gulf, North Sea, and Gulf of Guinea.

Valaris owns 35 jackups - self-lifting platforms designed for shallow-water operations, which can reach depths of up to 500 feet. Additionally, the company has 18 floaters, ideal for deep-water drilling. These consist of 5 semi-submersibles and, their crown jewel, 13 drillships. While semi-submersibles are better suited for longer-term exploration, they are less mobile. In contrast, drillships are entirely self-dependent and do not require barges for towing, offering greater operational flexibility.

Although jackups are more numerous, they are less profitable. According to Deepwater insight, only ~35% of mid-cycle EBITDA comes from jackups, whereas floaters contribute ~66% in total (55% from drillships and 11% from semi-submersibles).

Closer Look At the Fleet

Valaris owns 35 jackups (33 modern and 2 legacy). It leases 9 of them to ARO, a joint venture with Saudi Aramco in which it holds a 50% stake. This whole fleet can be divided into two main subcategories: 12 harsh environments (HE) and 23 benign environments (BE) units. Currently, 10 out of the 12 HEs are operational and located in the North Sea (excluding Norway), where Valaris controls ~60% of the market. The remaining 2 HE units are stacked and awaiting activation.

Out of the 23 benign environment units, 13 are active. These units are deployed globally, with the majority situated in the Middle East, (22% market share in Saudi Arabia and 19% in the rest of the Persian Gulf).

Shell, Harbour Energy, and BP are the top clients in this segment, holding backlog shares of 23%, 15%, and 13%, respectively.

In terms of floaters, Valaris owns 18, which are divided into 13 drillships and 5 bengin environment semi-submersibles. Floaters are usually much larger, more versatile, and capable of deeper drilling compared to jack-ups, with drillships operating in depths of 10,000 to 12,000 ft and semi-submersibles between 6,000 to 10,000 ft. The key difference is that semi-submersibles must be towed to the operational site and have lower speed and flexibility. On the upside, their design makes them well-suited for stationary exploration.

Currently, 10 out of the 13 drillships are operational, primarily working in the Golden Triangle region, which includes Guyana and Suriname (28% market share), West Africa (16% market share), and the Gulf of Mexico (19% market share). The main clients in this segment are Petrobras, Equinox, and Azule Energy, with backlog shares of 33%, 25%, and 12%, respectively.

In terms of semisubmersibles, 3 out of 5 are active, with 2 operating in Gulf of Mexico and 1 in Australia.

Areas such as Canada and Norway, which feature deeper waters and harsher conditions — including frequent storms and high waves — are beyond the operational reach of jack-ups, benign-condition semi-submersibles, and lighter drillships. Transocean (RIG) and Odfjell are the two main players in this niche market with the first controlling most of it.

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Driller Dilemma

We faced a real dilemma when selecting our offshore driller to write about. Ultimately, it came down to two great companies: Transocean (RIG) and Valaris (VAL). Both are cheaper than their competitors (when looking at underlying assets) and are sizable enough to benefit from the economies of scale and consolidation present in this industry.

Transocean has a more modern fleet, with most of it composed of high spec 7th generation (7G) or even the first 8G drillships and large semisubmersibles. Its fleet is well suited for harsh conditions where It is a dominant player. This allows Transocean to enjoy the highest utilization rates and build up a strong backlog.

On the other hand, jack-ups segments is more more competitive, leading to narrower profit margins. Many players are slowly shifting towards semisubs and drillships selling or scraping their jacklup fleets. So, given Transocean's advantageous market position and assets, why wouldn’t we choose it?

Debt and Buyback Problem

Firstly, RIG is struggling with significant debt. The company owes approximately $7bn, which when adjusted for cash results in a net debt of ~$6.5bn. With a Last Twelve Months (LTM) EBITDA of $0.9bn, this translates to a high ND/EBITDA ratio of around 7.2x.

Even if EBITDA were to double or triple, RIG's ND/EBITDA would still be at 3.6x and 2.4x, respectively. Because of this, it would take a considerable amount of time for Transocean to initiate share buybacks or dividends. In contrast, VAL has an LTM ND/EBITDA of 2.0x and has been actively buying back shares since 2021, reducing its share count by approximately 5%. The company continues this practice with a current buyback yield of ~5%. With growing EBITDA and cash flow this offshore cycle the company could significantly increase its capital distribution to shareholders.

Without delving too deeply into specifics, Valaris is also slightly cheaper when considering the asset value (replacement and present values). To our knowledge, it also has a more competent management team that prioritizes shareholder returns (i.e. buybacks), as evidenced by its share price performance over the last five years.

Share performance of offshore drillers

Seadrill Acquisition

Lastly, there have been rumors for several months about a potential acquisition of Seadrill. Initially, it was unclear who the acquirer would be, but recent reports from Bloomberg and Reuters indicate that Transocean is in talks with Seadrill’s management.

Before these news, we would say It was 60%-40% probability of Trasnocean and Valaris being a buyer. However, at this point most evidence points to Transocean. The industry is trading at a steep disocunt to its assets so any acquisition would likely have to occur at a premium to the share price. Seadrill is no exception. Given that RIG lacks sufficient cash and cannot increase its debt too much, it would likely have to rely on stock that is currently trading very poorly.

As a result, It most likely will be a stock deal, very dilutive stock deal for Transocean shareholders. Value Degen has written a great article about this topic, and we recommend visiting his blog to get a better grasp of the situation. He estimates that a 15% premium for Seadrill could lead to a 47% dilution for Transocean shareholders (Ouch). Therefore, we prefer to pass on this possibility and opt for Valaris as a safer exposure to offshore tailwinds we discuss in the next section.

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Offshore Drilling Macro

The Oil & Gas (O&G) industry is highly cyclical, influenced by the demand and supply balance of crude oil and natural gas. However, exploration and production services (E&P) such as offshore are like O&G on leverege with cycles of its own.

Among the various types of E&P services and drilling, the most critical for our thesis are shale, conventional, deepwater, and shelf (shallow) drilling. The first two refer to onshore operations, while the latter two to offshore.

Before 2010, at the onset of the fracking revolution, offshore production accounted for 30% of the U.S. oil supply and 31% of the global supply. It was also responsible for 20-25% of worldwide natural gas supply and 10-15% in the U.S. However, the introduction of fracking technology significantly lowered onshore breakeven costs, enabling shale production to take market share away from offshore drillers and conventional drilling.

This advancement allowed the U.S. to surpass Saudi Arabia in oil production and gain a substantial lead over Russia in natural gas production, with shale now accounting for ~2/3 of U.S. oil and gas production.

While shale was beginning to rise, the Deepwater Horizon accident in 2014 acted as a pivotal event, ultimately affecting the entire offshore industry. This catastrophic disaster resulted in the loss of 11 dead and 17 injured, along with an estimated oil spill of 3.2mm barrels. Coinciding with the rising Environmental, Social, and Governance (ESG) movement, the incident severely tarnished the image and credibility of offshore drillers, diverting investment towards shale.

The number of offshore vessels decreased from nearly 300 to around 150 today. The actual operational capacity could be even lower, as many units have been cold-stacked for extended periods, leading to rust and the degradation of unused equipment. We estimate that the effective global fleet count could be as low as 120-130 units.

Offshore Back in Favor

You may be wondering: if shale is so dominant, why invest in a declining industry like offshore? The truth is, It is not dying anymore, and many things have changed since 2014. We believe investments will be increasingly shifting back towards this sector. This trend is already underway, as most low-cost shale fields have either been developed or are planned for the upcoming few years. Consequently, the value proposition for shale is no longer as attractive but we will delve into the unit economics later.

Offshore drillers have been active, leading to significant changes in the industry, including lower breakeven points and improved returns. New methodologies and technological advancements allow the most advanced ships to drill 2-3x more wells than they did in 2010. From the changes implemented, it seems the most significant impact came from:

• Floating Production Storage and Offloading (FPSO) systems. In the past, laying undersea pipelines, which involved high installation costs (such as underwater welding), created a sunk cost in case production ceased. With FPSO vessels, the infrastructure can be largely reused. FPSOs allow oil to be temporarily stored until a transfer tanker can transport it onshore,

• blowout preventers are now installed on ships, significantly reducing the risk of accidents like the Deepwater Horizon explosion. When there are two or more installed, It enables drillers to use Managed Pressure Drilling (MPD), which speeds up the drilling process and allows for more precision,

• further advancements in seismic and electromagnetic surveys have allowed for better mapping and more precise drilling. Artificial intelligence is beginning to assist in exploration and production phases, improving the likelihood of hitting crude reservoirs sooner and enhancing production efficiency,

• drilling automation has led to headcount reductions and a more streamlined drilling process,

Moreover, the narrative of peak oil demand prophecized for 2020s or 2030s, has largely been debunked. Many forecasts, even from International Energy Agency (IEA), have been proven to include incorrect assumptions, such as underestimating consumption from the emerging middle class in Latin America, Asia, and Africa, as well as energy demand from new technologies like AI. That’s why we believe O&G will continue to play an important role in the economy. We think, this paradigm shift is especially impacful in offshore due to by years of supply reduction (less drillships).

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Improving Economics

The financial metrics we’re about to discuss vary widely depending on specific projects and data sources. In some cases, breakevens can swing as much as 35% above or below the average due to project characteristics. Thus, even if one technology currently appears superior on average, it doesn't necessarily mean that the entire method will be obsolete.

Diving into specifics, both shelf and deepwater drilling costs have dropped ~40% since 2014, now standing at around $37/bbl and $43/bbl, respectively. Meanwhile, global shale (often called tight oil) breakevens has also dropped to ~$45/bbl.

Normal onshore production from the Middle East remains the least expensive option, but the gap to offshore has largely narrowed. When factoring in shipping costs—especially to locations far from the Middle East — offshore production becomes newar the same or even cheaper. Additionally, Middle Eastern shelf drilling costs are even lower than the global average, making it worthwhile depending on the project (the best example is ARO).

When we look at the United States, the gap between breakevens only grow. Shale, which accounts for roughly 64% of U.S. production, operates at around $60/bbl. Other onshore sources function in the mid-$60s/bbl, reaching as high as $70/bbl. Such fields are only turning a marginal profit at the current West Texas Intermediate (WTI) price of $72/bbl.

United States Onshore Breakevens

Due to lower breakevens, we believe that offshore production not only is now nore competetive but It also offers better protection from crude oil price fluctuations.

Brent crude has been trading in a range of $70-90/bbl for the last since 2023. If prices were to drop below $70/bbl, driulling day rates might decline, but we believe the impact would be minimal. Only about 9% and 16% of P50 reserves (with a 50% probability of hitting oil) have breakevens at or above $70/bbl and $60/bbl, respectively. With that dropp the bulk of projects would still be highly profitable, with the most having breakevens in the $20-50/bbl range.

Not Only Better Breakeven…

Breakevens are not the only metric to consider. There are additional reasons for an offshore resurgence, including much higher internal rates of return (IRR). Offshore deepwater and shelf projects offer IRRs that are approximately 40% and 80% higher than those of onshore traditional and shale drilling alternatives. The main factors contributing to this include higher production rates — allowing faster and greater revenue generation — and lower maintenance costs, as FPSOs can operate fields once drilled.

The main drawback of offshore drilling remains the high upfront costs, which posed challenges in the past. However, as the O&G sector has consolidated over the past 20 years, offshore drilling is now positioned to be even more attractive to major companies like Shell, Chevron, BP, and others.

Lastly, offshore drilling has a much lower emission profile compared to onshore alternatives — about twice as low compared to conventional onshore and shale. While ESG concerns have been temporarily sidelined to meet growing energy demand, they still play a significant role, particuraly in Europe. Recent statements from Rystad Energy researchers have underlined this point:

“Offshore oil and gas production isn’t going anywhere, and the sector matters now possibly more than ever. As one of the lower carbon-intensive methods of extracting hydrocarbons, offshore operators and service companies should expect a windfall in the coming years as global superpowers try to reduce their carbon footprint while advancing the energy transition” - Audun Martinsen, Head of Supply Chain Research, Rystad Energy

Demand Picks Up

We see deman picking up with contracts values growing each year since 2021. According to IEA this is driven primarily by new projects in Guyana, Brazil, and the Middle East, according IEA. There are also numerous new explorations taking place in Namibia, India, and the Eastern Mediterranean. Additionally, we are witnessing infill drilling (additional drilling on more mature fields) in West Africa and Southeast Asia for clients like Valeura Energy.

And, the money divereting to offshore. Since 2018, greenfield investments in offshore projects have surpassed those of onshore, initially by a small margin and now by approximately 50%. Greenfield investments are a strong indicator of the shifting paradigm in the industry.

The total investment spending has also surged, with greenfield, brownfield, and other projects showing rapid growth. Since 2021, offshore capital expenditures (capex) have increased from around $130bn to $200bn, reflecting a 54% increase and a compound annual growth rate (CAGR) of about 15%.

Rates Grow Again

The rising demand and limited available capacity have led to higher utilization rates of existing vessels. It's important to note that while there is a 2-3x increase in drilling volume per ship to offset the decline in fleet size, this is not a complete solution. Ships must still navigate across seas to reach drill sites, and their activities becoming more concentrated limits marginal flexibility (i.e., the ability to shift capacities to different contracts). As a result, clients alreadyc have to compete for resources, which is causing day rates to increase rapidly.

Since 2022, drillship day rates have surged from ~$250,000 to $500,000 — an impressive 100% increase over two years. Similar to oil fields, ships have varying specifications, and contract types differ significantly. That’s why there is a considerable disparity within the group. The most advanced 7th generation (7G) or 8th generation (8G) vessels command the highest day rates, while the 6G fleet, which is nearing Its obsolescence, tends to fill in at the lower end of the scale. Nevertheless, the overall trend remains highly positive for Valaris and the broader industry.

Since 2022, day rates for benign and harsh environment jackups have risen from ~$90,000 and ~$100,000 to ~$170,000 and ~$140,000, respectively — representing increases of roughly 90% and 40%. While this growth is not as significant as that of the drillship rates, it is still very high.

Where Will This Cycle Peak?

In the last cycle, day rates peaked at ~$800,000 for drillships, ~$225,000 for benign environment (BE) jackups, and ~$275,000 for harsh environment (HE) jackups. Considering the prevailing inflation during that period, the rising demand for energy amidst limited supply, and the shrinking number of drilling vessels, it is reasonable to expect these levels could be surpassed.

So, how high can we go? It's difficult to pinpoint exact figures, but we believe rates could reach ~$900,000 to ~$1,000,000 for drillships and ~$250,000 to ~$350,000 for jackups, depending on the type. That might be too conservative or optimistic depending on who you ask but we believe these figures are reasonable and, most importantly, directionally accurate.

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Current Backlog

Since the end of 2022, Valaris's backlog has grown from $2.5bn to $4.3bn in 2Q24, before slightly retracing to $4.1bn in 3Q24. This, combined with slight dip in day rates in 2H24, has led some to speculate that the cycle has peaked. The drop in oil prices from $80/bbl to $70/bbl also has had a visible impact. Consequently, Valaris's stock has declined by nearly 50%, mirroring the downturn in the overall sector.

Despite this, with such strong tailwinds, a significant supply-demand imbalance, and healthy oil prices amidst growing energy demand, we maintain an optimistic outlook. We believe this steep decline in stock price presents a favorable opportunity to build a position.

What also instills confidence is the fact that notable value investors like Kuppy from Praetorian Capital and renowned shipping investor John Fredriksen are heavily investing in the stock. John has publicly disclosed the purchase of 724k shares in the second half of 2024, increasing his already substantial position to over 9% of the company. The Maersk family is also showing interest in the industry, acquiring 19% of Noble (~3mm shares). Furthermore, industry share buybacks have also accelerated, with companies repurchasing significant amounts of stock.

In the wave of offshore bankrupcies druing the last decade, Valaris also suffered. The company has seen new management come in, and it now carries almost no debt — though this has resulted in relatively low insider ownership of less than 1%.

Now, let’s explore what Valaris could be worth and the downside protection it offers.

Will Older Drillships become obsolete?

Historically, offshore vessels could operate for many decades. However, advancements in technology and the constant push for increased drilling depth, speed, and safety generally render them obsolete within 10-15 years.

We are currently witnessing the emergence of the 8th generation (8G) vessels, with only three 8Gs existing globally at this point. Under normal circumstances, the introduction of new 8G builds would eventually replace the older 7th generation fleet of 57 vessels. However, due to the current lack of new ship builds, this transition may be delayed.

In 4Q 2024 of the investor letter, Praetorian Capital suggests that for new 8G vessels to be constructed, the industry will likely need day rates of $1mm for drillships along with long-term contracts to justify such investments of well over $1bn per drillships. Given the current value proposition of the global fleet (moslty composed of 7G and 6G vessels) compared to other extraction methods, the prospects remain quite promising even without the most modern 8Gs.

Asset Valuation

Valaris is experiencing strong tailwinds and smart money buying, but what is the company's true worth? Currently, Valaris has a market capitalization of $3.4bn and net debt of $0.8bn, leading to an enterprise value (EV) of $4.2bn. What does this price represent? The company owns 12 high-spec 7G drillships, one more advanced 6G drillship, 5 semisubmersibles, and 35 jackups (nine of which are leased to a joint venture, with Valaris holding a 50% share). Additionally the company has a small support fleet.

According to our research, high-spec 7Gs could be priced at over $1bn if ordered today. Semisubmersibles vary in cost depending on their type but can be 10-35% cheaper; for our calculations, we assume $0.9mm per floater. Modern jackups are generally much cheaper, and purchasing them today would likely cost between $250mm and $300mm, so we will use a midpoint of $275mm. Additionally, we estimate the replacement cost of other support vessels at $90mm.

Based on these figures, the total replacement value of Valaris's fleet stands at ~$26.6bn, which is 6.3x its EV or 7.7x its market cap. This suggests that Valaris effectively trades at 16 cents on the dollar of its EV and 13 cents on the dollar of its market capitalization.

While this is based on replacement costs, it's important to recognize that the actual value of these assets may be somewhat lower due to wear and tear. However, the argument can be made that the extended waiting time to replace this assets (3+ years) with storng tailwinds would make the actual asset value ikely close to the replacement cost (at leas mid and peak cycle). Even assuming 30% discount to the replacement value, directionally nothing would change for VAL. Under this scenario, the company's assets could be valued at about 4.6x its EV and 5.3x its market cap.

Cyclical businesses typically trade on EV to net asset value (NAV) multiples. If we apply a multiple of 1.25x to 1.5x (the historical peak cycle) on the estimated asset value (30% discount to replacement value), we could see the company's EV range between $21bn and $36bn, implying potential upsides of ~5x to ~9x.

Due to the extreme cyclicality, NAV multiple is most likely the best way to put a target valuation on offshore. We Now, let’s now explore how cashflows can behave during the cycle.

Cash Flow Generation

Before moving on, once again we want to highlight that projecting actual day rates has almost 0% chance of accuracy. What matters is the overall direction and seeing the cash flow generation potential of the business.

As mentioned in the macro section, we believe that drillship rates could reach ~$900k to $1,000k, while jackup rates could range from ~$250k to ~$350k, depending on the type. For context, during the peak of the last cycle in 2014, rates reached ~$800k for drillships and between $225k and $275k for jackups.

In our model, we forecast that by 2028, rates could peak at around $900k for floaters (drillships and semisubs) and $275k for jackups.

Based on these prices and using mostly current metrics and ratios to forecast other items, we ended up with the following cash flow forecast.

In analyzing Valaris's financial statements, we discovered that the company has accumulated significant net operating losses (NOLs) totaling around $0.9bn due to the downturn in the last decade. These NOLs could be utilized in the future to substantially reduce effective taxes and enhance cash flow generation.

Cyclical companies like Valaris typically exhibit significant operating leverage. With the anticipated increase in rates, we expect Valaris to expand its free cash flow margins from ~3% in 2024 to ~27% by 2028 (at the peak of the cycle). Combined with the growing revenue this would mean FCFF from $70mm in 2024E to $2,430mm peak cycle.

Below, we provide a sensitivity table illustrating how cash flow may vary in 2028 under different rate scenarios. Under all of these, the company represents a substantial upside potential.

Free Cash Flow Sensitivity to Drillship and Jackup Rates

Trading at 16 cents on a dollar (replacement value), with extremely strong indsutry tailwinds and high operating leverege we think that Valaris could represent a great investment opportunity.

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Disclaimer

The information contained on this website is not and should not be construed as investment advice and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time. The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

The information contained on this website has been prepared based on publicly available information and proprietary research. The author does not guarantee the accuracy or completeness of the information provided in this document. All statements and expressions herein are the sole opinion of the author and are subject to change without notice.

Any projections, market outlooks or estimates herein are forward looking statements and are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur. Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein. Except where otherwise indicated, the information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and the author undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional materials.

The author, the author’s affiliates, and clients of the author’s affiliates may currently have long or short positions in the securities of certain of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). to the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.

Neither the author nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein. In addition, nothing presented herein shall constitute an offer to sell or the solicitation of any offer to buy any security.

External links, if any, may redirect you to a privately-owned web page or site (“site”) created, operated, and maintained by a third party, which may not be affiliated with Alpha Ark. The views and opinions expressed on the site, other than those presented by Alpha Ark, are solely those of the author of the site and should not be attributed to Alpha Ark. We have not verified the information and opinions found on the site, nor do we make any representations as to its accuracy and completeness as to the third-party information. Further, Alpha Ark does not endorse any of the third-party’s products and services or its privacy and security policies, which may differ from ours. We recommend that you review the third-party’s policies, terms, and conditions to fully understand what information may be collected and maintained as a result of your visit to this website.

Summary:

• Valeura Energy is one of our top picks for the year. It is a fast-growing upstream Oil&Gas company that has become Thailand's second-largest crude oil producer within just three years.

• Since the end of 2023, its production has increased by approximately 42%, rising from 20.4 to 28.5 mmbbls/d. The company continues to expand staying extremely profitable with ~28% free cash flow to the firm (FCFF) margin.

• Recently, Valeura released its operational and financial updates for 4Q24. These results were largely in line with our expectations for the year. The company has generated impressive cash flow, increasing its cash position to $259mm, and remained debt-free.

• Additionally, Valeura provided guidance for 2025 that, although slightly conservative, still indicates strong fundamentals for the equity story. We expect total crude oil production to reach approximately 9.3 mmbbls for 2025, representing a 12% year-over-year (YoY) increase. We anticipate EBITDA and Free Cash Flow to Firm (FCFF) will grow to $347mm and $172mm, respectively.

• Recent sanctions against Russia’s “shadow fleet” and a harsh winter in Europe and the United States have put pressure on crude oil prices. As a result, Brent oil has risen by 8% compared to our initial projections for 2025.

• Despite a 20% appreciation in the stock since our initial publication, it remains extremely undervalued, trading at 0.9x EV/EBITDA, 1.8x EV/FCF, and 3.3x P/FCFF for 2025. In contrast, industry peers trade at ~3x higher multiples, implying ~181% upside for Valeura.

• In our discounted cash flow (DCF) model, we have revised our long-term production and capital expenditure (capex) forecasts to be more precise and conservative. This adjustment is the primary reason our intrinsic value estimate has declined by ~19% to $16.22 despite the increase in short-term oil prices. Nevertheless, Valeura continues to appear extremely undervalued, with an upside of ~196%.

• We believe the reserves update scheduled for February could significantly boost the stock. Given the recent spike in production from the Jasmine field, indications of higher reserves from Wassana, and drilling at Manora, investors could be positively surprised.

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Where are we now?

It has been more than a month since we published our deep dive on Valeura Energy (VLE.TO). Since then, the stock has appreciated ~20%. The company released its operations update for 2024 and provided guidance for 2025. Furthermore, there have been significant macroeconomic changes that have led to a rise in the Brent curve in the near term. We have also taken a deeper look at Valeura, gaining additional insights into this equity story and the company’s prospects.

This guidance is solid, and while we believe some areas may be conservative, we feel this cautious approach is warranted, especially given the rapidly increasing rates in the E&P sector.

2024 Operational and Financial Update

On January 8th, the company released Its operational and financial update for 2024. We summarized key points below:

• Oil production during the quarter averaged 26.1 kbbls/d (36% YoY) and full-year production averaged 22.8 kbbls/d (43% YoY)

• 2.95 mmbbls of oil sold in Q4 2024, with 8.35 mmbbls for the full year 2024

• Valeura generated US$226mm revenue for the quarter and US$679mm for the whole year

• The company didn’t pay any taxes during the 4Q24 due to the outstanding NOLs

• Thanks to no taxes paid for the quarter and record-high production It generated US$259mm in cash and ended the year debt-free

• The company bought back 348k shares in Q4

These results are largely in line with our estimates. Although we overshot on some metrics and Valeura outperformed on others, the overall net impact on cash flow is positive.

Based on these figures, we expect Valeura to generate a free cash flow to the firm (FCFF) yield of over 28% last year. With an operating expense (Opex) of just US$26/bbl for the 2024 year and similar levels next year, It is on track to continue generating cash at similar levels. We believe this profitability offers solid downside protection in case of adverse macroeconomic conditions.

2025 Guidance

Now let’s discuss some of the key points from the yearly guidance:

1. Valeura expects full-year oil production of 23–25.5kbbls/d (1-12% YoY)

   In our initial write-up, we projected slightly higher production for the year. However, companies generally underestimate key metrics to manage expectations and then later raise guidance. Thus, in our updated valuation, we will adjust our expectations to the top of the guided range.

2. Capex of US$125–150mm

   In our initial analysis, we estimated capex based on previous high efficiency, but rising oil prices and increased demand for exploration and production (E&P) services may lead capex to align with the company’s estimates. We conservatively assume the mid-range for our projections of maintenance and growth capex going forward.

3. Adjusted Opex of US$215 – 245 million

   Depending on total yearly production, this implies an Opex range of US$25.6 - US$26.3/bbl. We’re still waiting for 2024 actuals, but we can use last year's guidance provided with 3Q24 results to compare to our 2025 projections. Valeura expected US$205-235mm Opex last year, implying US$24.6 - US$28.1/bbl. In our model, we use US$26/bbl for 2024 and assume a slight cost reduction this year.

This is strong guidance, even though we believe in some areas it could be rather conservative. Nontheless we think there’s room for a positive suprise for investors.

Macro Becomes Even More Favorable

Since we released our thesis, several new developments have driven short-term Brent futures higher, which is the main benchmark for Valeura’s realized price:

1. The US government imposed sanctions on Gazprom Neft and Surgutneftegas, primarily targeting the "shadow fleet"—aging tankers used to transport Russian crude to India and China. Since the onset of the Russo-Ukrainian war in 2022, this has become a critical method for shipping Russian oil. Goldman Sachs estimates that the vessels affected by these sanctions transported 1.7 mmbbls/d in 2024, accounting for roughly 25% of Russia's exports.

   Goldman Sachs has recently raised its projections, with a Brent range target of $70-$85 per barrel, and an average of ~$76 for 2025. Since then, futures have grown to ~$77 per barrel for this year.

   

2. Harsh weather conditions in Europe and the United States are driving winter oil demand higher, with several blizzards affecting both continents. An arctic cold front is expected next year, likely leading to further temperature drops.

According to JP Morgan, for every degree Fahrenheit, the temperature falls below its 10-year average in the USA, Europe, and Japan, and heating oil and propane demand increases by 113 kbbls/d. The first factor (sanctions) is expected to tighten supply, while the second (low winter temperatures) is likely to boost demand expectations. These two trends are partially countered by the signing of a ceasefire in Gaza, which could lower shipping costs for tanker operators because of halt of the Houthi attacks.

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Valuation Update

With the 2024 update discussed, 2025 guidance covered, and bitting into recent macro developments let us now see what changes in our valuation. We will go through our DCF and Peers Multiples calculations that we used in the original wirte-up.

Higher Crude Oil Price

Our model is based solely on the futures market. Since the publication of our original write-up, Brent prices in the short and mid-term have noticeably increased, rising by 8%, 4%, and 2% in 2025, 2026, and 2027, respectively.

Beyond 2027, there are minimal differences in the Brent curve, with 2028 and 2029 futures being 1% higher than initially expected. The long-term price stabilizes at $68.10/bbl by 2030.

Production Forecast

We made some noticeable changes to our production forecast to make it more precise and realistic. Previously, for simplification, we assumed a relatively stable production profile, with the understanding that some reserves would be depleted and gradually replaced. However, to provide a clearer perspective, we decided to illustrate what the actual replacement scenario could look like.

In February, Valeura will provide an oil reserves update, but for now, we have to use 2023 numbers as a reference. At the end of 2023, the company had ~37.9 mmbbls 2P (Prooved & Probable) and 46.5 mmbbls 3P (Proved, Probable, and Possible) reserves. By subtracting 2024’s production, we end up with 29.6mm and 38.2mm of 2P and 3P reserves, respectively. At the current annualized production these reserves would be enough for 3.5 and 4.5 years of operations respectively.

However, we already know that Wassana and Jasmine's fields have significantly larger reserves based on initial assessments of the Wassana field and last year’s drilling results at Jasmine. Additionally, management believes the life cycle of the Manora field could be extended further.

Given this information, we believe that even with a slow increase in production, the company could extract a few more operational years from its fields. Excluding the highly reserve-rich Wassana, we estimate these fields could continue operating at full capacity for an additional 2.5 years (as far as 2029).

Production Forecast by Field (kbbls/y)

Based on our analysis, we project production to increase from 2025's forecast of 9.5mmbbls/y (the top of the guided range) to approximately 10mmbbls/y by 2027. After that, production is expected to decline to around 7mmbbls/y by 2032, before climbing again to about 8mmbbls/y due to new production outside of the existing fields.

Despite the company having nearly a 2x Reserve Replacement Rate (RRR) and targeting over 1x RRR in the future, a decline in total production is still anticipated, which we consider rather conservative. Particularly when we take into account how Valeura’s team has demonstrated their ability to prolong field life and increase production several times (most notably in the Manora and Jasmine fields).

Yearly Production Forecast Breakdown (kbbls/y)

When preparing this write-up, we asked ourselves: What if the company is unable to discover new sources of oil and has to rely solely on the existing fields? Using the production forecast above and assuming no new production fields, the company still presents approximately a 127% upside, targeting nearly CAD$18 per share. That’s what we call a great margin of safety!

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Margin Forecast

IIn our model, we assumed that contracting margins are primarily driven by declining crude oil prices and increasing operating expenses (OPEX) starting in 2027. Royalties are projected to grow from 12.0% in 2024 to 13.5% in 2026, stabilizing afterward.

As a result, we forecast a margin decline from ~$41.4/bbl in 2025 to ~$31.9/bbl in the terminal year. This translates to a decrease in gross profit margins from oil production, falling from 53.7% in 2024 to 46.8% in the terminal year.

Gross Profit Per Barrel Breakdown ($)

Capex Forecast

For growth stories like Valeura, capital expenditures are a crucial cost of doing business. In our initial publication, we assumed historical capex expenses based on an estimated historical split between maintenance and growth capex. However, based on the 2025 capex guidance of $125-150mm and the anticipated production growth this year, we believe the actual capex spending per barrel for new and existing production could be higher, particularly regarding maintenance capex.

We assumed a 70-30 split between maintenance and growth capex for 2025, using the midpoint of the capex guidance of $137.5mm (compared to our previous estimate of $101mm). Based on this, we project $96 million and $41mm in maintenance and growth capex for 2025, respectively. For 2025, we expect maintenance capex of $11.6/bbl and growth capex of $41.7/bbl. In our base case, from 2026 onward, we expect capex per barrel to grow at 2% year-over-year.

Capex Breakdown ($mm)

By factoring in our need for new production to replace existing fields and forecasting growth in maintenance capex spending per barrel of new and existing production, we estimate approximately $129mm in capex peaking at $167mm in 2030, followed by a decline to $152mm in the terminal year.

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Results

We anticipate declining gross profit margins, falling from 64.2% in 2024 to 54.1% in the terminal year. However, due to the fluctuating capex spending, the free cash flow margin is more volatile. We expect it to grow from 28.2% in 2024 to 25.3% in 2029, then contract to just 7.7% in the terminal year (primarily due to capex).

Free Cash Flows ($k)

For exit multiple, we assumed 5.6x EV/EBITDA, in line with the upstream businesses. For discounting cash flows we used the current WACC of 9.25%. Based on these metrics we arrived at the Enterprise Value of ~$1.4bn. After adding ~$259.4mm of cash on the books and dividing it by the number of shares outstanding we arrive at US$16.22/share target price (CA$23.44/share). The current share price of US$5.47 (CA$7.92/share) implies ~196% upside…

Despite slighly higher crude oil prices our intrinsic upside is lower than what we projected in our initial deep dive primarily due to:

• ~20% appreciation of the share price

• lower production assumptions

• higher share of growth capex which is nearly 4x higher per bbl of new production than matinenace capex per existing barrel of production

• higher WACC

DCF Summary ($k)

Scenario Analysis

To flex our assumptions we run a sensitivity analysis. We prepared Bull and Bear cases by tweaking key metrics in the projection period. These include:

• Avg. Brent price

• Avg. GP margin per bbl

• Avg. growth capex per bbl change

• Avg. maintenance capex per bbl change

With these assumptions, we were able to estimate Valeura’s share price under different scenarios. It ranged from US$12.96 in the bear case to $18.95 in our bull case. This range could be thought of as our intrinsic value estimate.

Multiples

Similarly to our DCF, multiples scream “undervalued!” as the company is trading at 2025E's 0.9x EV/EBITDA, 1.8x EV/FCF, and 3.3x P/FCFF. For comparison, we can use Asia and Australia-focused E&P players like Beach Energy and Woodside Energy.

Our preferred multiple is EV/EBITDA because it is the most popular and universally applied across the Oil & Gas Industry. Beach Energy and Woodside Energy have NTM EV/EBITDA of 3.7x and 3.9x, respectively. These mean that Valeura is nearly 4x cheaper. The market cap weighted average EV/EBITDA multiple is 3.9x (due to the relatively large size of Woodside Energy), suggesting a share price of US$15.39/share and ~181% upside.

We think this combined with DCF upside is exceptional and could outweigh potential risks associated with the upstream business.

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Disclaimer

The information contained on this website is not and should not be construed as investment advice and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time. The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

The information contained on this website has been prepared based on publicly available information and proprietary research. The author does not guarantee the accuracy or completeness of the information provided in this document. All statements and expressions herein are the sole opinion of the author and are subject to change without notice.

Any projections, market outlooks or estimates herein are forward looking statements and are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur. Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein. Except where otherwise indicated, the information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and the author undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional materials.

The author, the author’s affiliates, and clients of the author’s affiliates may currently have long or short positions in the securities of certain of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). to the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.

Neither the author nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein. In addition, nothing presented herein shall constitute an offer to sell or the solicitation of any offer to buy any security.

External links, if any, may redirect you to a privately-owned web page or site (“site”) created, operated, and maintained by a third party, which may not be affiliated with Alpha Ark. The views and opinions expressed on the site, other than those presented by Alpha Ark, are solely those of the author of the site and should not be attributed to Alpha Ark. We have not verified the information and opinions found on the site, nor do we make any representations as to its accuracy and completeness as to the third-party information. Further, Alpha Ark does not endorse any of the third-party’s products and services or its privacy and security policies, which may differ from ours. We recommend that you review the third-party’s policies, terms, and conditions to fully understand what information may be collected and maintained as a result of your visit to this website.

Summary:

• InPost presents a unique European equity story characterized by high growth, strong cash flow, and a wide moat. The company has developed a logistics system that is difficult to replicate, offering delivery times that are approximately 20-50% shorter at ~30-40% lower price points, outpacing Amazon, UPS, FedEx, and DHL.

• InPost provides typical Door-to-Door (D2D) and Out-Of-Home (OOH) delivery services. It operates a network of ~44k parcel lockers (APMs) and ~35k pickup points (PUDOs) throughout Western and Central Europe. It has ~19m APM users throughout the continent.

• The European delivery market differs significantly from that of the United States. Packages are not left on doorsteps due to cultural differences and theft concerns, and there are no package rooms in apartment buildings. Additionally, population centers in Europe are denser and more pedestrian-friendly, making it a favorable environment for Out-of-Home (OOH) delivery services. These also allow couriers to achieve higher efficiency by dropping off multiple packages in a single location.

• Currently, InPost has ~ 56% and ~3% share of the total number of Polish APMs and PUDOs, respectively. In Western Europe, where it is less established, it owns ~20% of the OOH market and ~10% of the total delivery market.

• The parcel lockers provide a first-mover advantage, particularly in tourist-oriented cities with strict urban planning, which are increasingly reluctant to have multiple lockers located nearby. We believe that InPost, as the largest and fastest-growing player in this sector, will build a strong and sustainable moat through its APM network. Furthermore, there is potential for additional cash flow through APM sharing.

• The company has demonstrated its ability to replicate its success in Poland and internationally, growing both organically and through acquisitions (such as Menzies and Mondial Relay).

• In 2024 we project that InPost will grow its Out-of-Home Points (OHPs) by 17% and 55%YoY in Mondial Relay (France, Iberia, and Benelux) and Other International segments (UK and Italy), respectively.

• At the same time, InPost is enhancing its international delivery network by constructing new logistical centers and is rapidly improving its margins (2024E 21pp and a 3pp margin expansion in the Other International and Mondial Relay segments, respectively).

• Now, let’s discuss how attractively valued is InPost.

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Summary:

• Alico, Inc. is a Florida-based agribusiness company with a long history in citrus production, responsible for ~19% of Florida’s output. However, facing significant environmental challenges, the company has decided to liquidate its land holdings. It expects from $650mm to $750mm in PV of proceeds over the next years which is about 3x its current market cap.

• It owns ~53.3k acres of land primarily used for orange tree groves across eight Central and South Florida counties. For a long time, these assets have formed the basis of many investors' investment theses. Recent appraisals with a ~33% higher valuation than previously estimated and the company's clear approach to asset sale, indicate that the upside potential may now be fully unlocked.

• The local citrus industry has seen approximately a 50% decline in production over the last decade, which has also negatively impacted Alico's revenues and profitability. This decline can be attributed to devastating hurricanes, such as Ian and Milton, severe freezes, and an increase in citrus greening disease, pushing the industry to the brink.

• In response, the company has implemented measures to improve efficiency, including increasing tree density and utilizing antibiotics to combat diseases. However, these efforts were insufficient to prevent a ~50% decrease in revenue over the last three years, and high volatility in margins.

• Alico plans to gradually sell its land over the next six-plus years. It projects to receive $650mm to $750mm in PV of proceeds from land sales, resulting in an estimated equity value (after subtracting net debt) of $611mm. This translates to an intrinsic value per share of $80.03, implying a potential upside of ~155%.

• Our valuation, based on the midpoint of the company's projected land sale proceeds, does not include the potential value of ~48.7k acres of oil, gas, and minerals rights. We are solely focusing on the company’s main assets.

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Update Teaser:

• Valeura Energy (VLE) - Macro update on the steepening of the Brent futures curve

• Sky Harbour (SKYH) - Raising capital and accelerating the project timeline

• Carnival Corporation (CCL) - 75% beat on earnings, conflicting with conservative expectations for 2025

• General Motors (GM) - Limiting Cruise cash burn at the cost of growth; Changes in EV battery strategy

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Summary:

• Sky Harbour is a rapidly growing aviation infrastructure company that constructs and operates jet hangars for private and business clients with small to mid-sized aircraft, typically under a 28-foot tail height. The company focuses on development in high-growth markets characterized by significant aircraft populations and a scarcity of hangar space.

• To establish its facilities, Sky Harbour leases land from airports, navigating a multi-year approval and negotiation process with airport authorities and municipalities. Their fully enclosed hangars offer protection and security for aircraft, supplemented by a wide range of amenities, such as lounges, restrooms, low-cost fuel, towing, and maintenance services.

• Sky Harbour has an aggressive growth strategy aimed at becoming a nationwide provider of premium home base solutions within the next 3 to 6 years. The company plans to operate approximately 21 campuses in the most vibrant metropolitan areas within the next 3 years at the remaining cost of ~$630mm (as of 3Q 2024). The mid-term goal is to reach 50 campuses in subsequent years. We project the additional 30 campuses to cost ~$1,406mm.

• We expect, the company to achieve a ~15% net operating income (NOI) yield on its near-term property portfolio. This is based on 14 percentage points (pp) of company guidance, plus an additional 1 pp from lease costs optimization. This return is relatively high compared to single-family homes, with ~5-6%, and multifamily, which average ~7-8%. Other real estate types, including commercial and industrial properties, typically offer returns ranging from 5% to 9%.

• Sky Harbour does not have any direct and scaled competitors. The nearest competition, Fixed-Base Operators (FBOs), has significant weaknesses compared to Sky Harbour. The company offers long-term leases, superior amenities, and a wider range of services. In contrast, FBOs typically provide shared terminals and lack enclosed hangars, as well as storage for aircraft exceeding 24 feet in tail height, which is the fastest-growing jet category. FBOs often depend on fuel sales and cater primarily to lower-end customers seeking more temporary storage solutions.

• The company aims to leverage the increasing constraints on hangar supply, driven by the growing demand for larger aircraft and the limited availability of developable land at key airports. The business jet market is experiencing significant growth. Between 2010 and 2020, the cumulative square footage of the U.S. business aviation fleet increased by 42%, with a 70% increase in the square footage of larger private jets. This creates a supply-demand imbalance in the hangar market, making Sky Harbour an attractive option as the sole scaled provider of these solutions.

• Now, let’s take a look at how attractively valued is Sky Harbour.

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Summary:

• Carnival Corporation is the world’s largest leisure travel company, operating a fleet of 95 ships with a total passenger capacity of ~270k and a market share of ~37%.

• The COVID-19 pandemic severely impacted the company; due to lockdowns, business operations nearly came to a halt, resulting in $25.8bn in losses from 2020 to 2023. Consequently, Carnival's debt increased significantly, rising from $11.5bn in 2019 to $35.9bn in 2022. However, with the revival of the industry and strong operating cash flow, Carnival is now in the process of paying down this debt.

• By the end of 2023, the company's Net Debt/EBITDA ratio stood at ~6.8x. However, given the consistent outperformance of their guidance throughout the year—having been raised three times—we expect the ND/EBITDA to decrease to ~4.3x by the end of the year. We project that this ratio will drop below 3.0x by 2027, achieving a more reasonable leverage. Furthermore, credit agencies have raised their ratings in the fall due to outstanding performance.

• We expect 2024E earnings per share (EPS) will reach $1.24, a significant improvement from last year’s -$0.06. Additionally, we forecast approximately $1.3bn in free cash flow vs -$0.8bn last year. All major key performance indicators (KPIs) are trending upwards, with 2024 utilization projected at 106% vs 100% in 2023.

• The company is implementing several measures to increase its profitability. Most notably, it is adopting a better pricing strategy that emphasizes higher ticket prices and lower onboard costs to enhance customer satisfaction. Additionally, the company is transitioning to larger and more efficient ships.

• We believe that the combination of growing profitability, low capital expenditures, and declining debt could position Carnival as a strong cash-generating business in the coming years.

• Carnival could benefit from a limited supply of ships. The cruise market has experienced disruptions in ship orders due to the pandemic, which has led to restricted supply growth. As a result, current demand is exceeding pre-COVID levels. Based on existing ship orders, demand is projected to surpass supply by 2026. This situation is expected to lead to increased price growth.

• The stock appears to be deeply undervalued. For 2025, we estimate an EV/EBITDA ratio of 8.7x based on our conservative forecasts. When we examine the consensus-based next twelve months (NTM) EV/EBITDA, Carnival Corporation is trading at 9.5x, compared to its peers’ mean of 13.6x, indicating ~105% upside potential.

• Our base case Discounted Cash Flow (DCF) valuation suggests a potential upside of ~109%. We consider this conservative, as the overall results are below consensus estimates. We are using current key performance indicators (KPIs) and the guided passenger capacity. After 2027 (beyond the guidance period), we project capacity to grow at 1.5%, which is below the overall market's projected growth rate of ~5.0%. Despite the limited supply favoring price increases, we assume a normal price expansion of 3-4%. Additionally, we expect margins to remain relatively stable, with a 1 percentage point increase in Gross Profit Margin over the next two years.

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Business Overview

Carnival Corporation & plc is the world’s largest leisure travel company, operating a fleet of 95 ships with a total passenger capacity of approximately 270,000. These ships provide a wide range of amenities, including dining, entertainment, spas, casinos, shopping, and more. Carnival operates globally under nine distinct brands:

1. Carnival Cruise Line (27 ships): The company’s largest brand, offering affordable leisure travel primarily in the North American region.

2. Princess Cruises (16 ships): Focuses on mid-priced cruise experiences, particularly in Alaska, the Caribbean, and Europe.

3. Holland America Line (11 ships): Specializes in premium sightseeing cruises throughout Latin America and Europe.

4. AIDA Cruises (11 ships): The largest cruise line in Germany, concentrating on the European market.

5. Seabourn (7 ships): Provides ultra-luxury cruises worldwide, featuring exclusive amenities and personalized service.

6. Costa Cruises (9 ships): Italy's leading cruise line, recognized for its Mediterranean and North Sea voyages.

7. Cunard (4 ships): Offers luxurious global cruising experiences with an emphasis on “old money” elegance.

8. P&O Cruises UK (7 ships): The UK’s premier cruise line, targeting destinations in Europe and the Caribbean.

9. P&O Cruises Australia (3 ships): Australia’s top cruise line, focusing on travel in Oceania.

The company effectively owns ~37% of the overall cruise market. It is followed by RCI’s 23.9% and Norwegian Cruise Line’s 14.1%.

Covid Aftermath

The company was severely affected by the COVID-19 pandemic. Due to lockdowns, business operations nearly came to a complete halt, resulting in a significant decline in revenue, which fell from $20.8bn in 2019 to $5.6bn in 2020 and further down to $1.9bn in 2021. Earnings per share (EPS) also plummeted, dropping from $4.3 in 2019 to -$13.2 in 2020 and -$8.5 in 2021. The combined net loss for years 2020-2022 amounted to staggering $25.8bn.

To cover these losses, the company had to incur substantial debt, which rose dramatically from $11.5bn in 2019 to $34.6bn in 2021 and reached $35.9bn in 2022. However, starting in 2023, the company began to pay it down as it gradually regained stability and generated positive operating cash flow.

Indebtedness ($bn)

At the end of 2023, the company had a Net Debt/EBITDA ratio of ~6.8x. This is significantly higher than the commonly accepted ceiling of 3.0-3.5x. However, due to the consistent outperformance in guidance throughout the year, this ratio is expected to decrease considerably.

Based on consensus estimates and our forecasts, the Net Debt/EBITDA ratio is projected to drop to ~4.3x by the end of the current year. We think the company should go below 3.0x by 2027, reaching a reasonable leverage. Currently, the company has a BB rating from Fitch and a B1 from Moody’s (upgrades from previously lower ratings). As the situation improves, we expect more upgrades that should reach investment-grade ratings.

Credit Ratings

Business Operations

The company is undergoing a turnaround and is successfully improving its performance, reaching or even surpassing pre-COVID levels. Carnival has a passenger capacity of approximately 270,000, with 9M24 achieving a utilization rate of 106%. This results in an effective passenger capacity of 286,000.

Some may wonder how utilization can exceed 100%. The explanation is straightforward: cruise lines do not include the additional space occupied by children when calculating capacity. For instance, a typical two-person cabin occupied by two parents and a child results in a utilization rate of 150% (3/2).

The company does ~47 cruises per ship, with an average of ~8 days per cruise. These metrics improved extensively compared to previous COVID-impacted years. In 2021 and 2022, Carnival had an avg. cruises per ship of ~8 and ~40, respectively. Average cruise length was at ~43 and ~9 days in 2021 and 2022, respectively.

KPIs

Over the past four years, the average ticket price has increased from $833 in 2021 to an estimated $1,227 in 2024, reflecting a compound annual growth rate (CAGR) of ~14%. In contrast, average spending per ticket has decreased from $757 to $629, with a CAGR of -6%. These trends may indicate shifts in customer behavior; however, we believe there is a more strategic approach at play aimed at enhancing customer satisfaction.

Prior to the pandemic, the company made a strategic decision to use larger ships to improve operational efficiency and increase profitability. This approach takes advantage of economies of scale and network effects, allowing for a more cost-effective and enjoyable cruising experience for passengers. This trend is also among other cruise lines.

The company can enhance its pricing strategy and improve its pricing power by cutting cruise expenses and including more activities in ticket prices. This approach could boost on-the-spot sales, even if customers don’t take full advantage of all the available options. Ultimately, this strategy may lead to a better customer experience and higher profit margins due to improved pricing.

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Cruise Market

The company is the largest player in the market, controlling approximately 37% of total revenue. Its main competitors are Royal Caribbean and Norwegian Cruise Lines, which hold about 24% and 14% of the market, respectively. Together, this trio accounts for roughly 75% of total cruise travel and is projected to generate ~$50bn in revenue in 2024, based on Cruise Market Watch numbers.

The cruise industry has experienced significant growth since carrying ~3.7 million passengers in 1990. By 2024, this number peaked at ~30 million, reflecting a compound annual growth rate (CAGR) of ~7%. However, the COVID-19 pandemic had a profound impact, causing passenger numbers to plummet to just ~3.3 million in 2021. The lasting effects of the pandemic are still apparent, particularly in the financial health of businesses like Carnival Corporation, which faced increased debt levels.

Despite this setback, the industry has shown a strong recovery and is projected to achieve ~4% year-over-year growth in 2024, reaching new all-time highs. This recovery indicates a promising outlook for the cruise line industry in the coming years. As the population expands and the number of retirees and middle-aged individuals rises, cruise lines are poised to experience substantial growth in passenger volume over the next few decades.

Fincantieri, a major publicly traded Italian shipbuilding company, expects a cruise passenger growth rate of 5.4% until 2030. The company estimates 39.5mm yearly passengers carried by 2027 (2023-27 CAGR of ~5.7%) and approximately 46.0mm in 2030 (2027-30 CAGR of ~5.0%).

Limited Ship Supply

Fincantieri, in its investor materials, also discussed the expected imbalance between the supply and demand for cruise ships. The shipbuilder noted that the average age of Tier 1 cruise fleets ranges from 11 to 15 years, with many vessels exceeding 15 years. This aging fleet and expected growth in demand creates a need for new ships as the older vessels become less viable. However, the normal flow of orders was disrupted during the pandemic, as cruise lines focused on conserving cash.

Fincantieri anticipates that the gap between supply and demand for leisure ships will become apparent starting in 2026. They have already observed a resurgence of new orders and ongoing negotiations beginning in 2024. Addressing this imbalance could take some time, as smaller to medium-sized ships can be built in 1 to 3 years, while larger vessels may take up to 5 years to complete. Consequently, cruise lines are likely to benefit by rising prices extnesively.

Expected Demand-Supply Balance

Valuation

To value the business, we used Discounted Cash Flow Analysis (DCF) and Comparable Company Analysis (CCA). We think these tools should allow us to estimate the company's intrinsic value.

Main Assumptions

To build our model, we used already discussed key metrics. Passenger capacity for 2024-2026 is based on the company guidance. After 2026, we assume 1.5% passenger capacity growth, substantially below the 5.0% expected by Fincantieri in that period. This assumption implies that Carnival would lose market share. It is possible for a few years but with the 3.5pp spread in all years after 2026 is rather unlikely. Nonetheless, we prefer to make our models more conservative to stress test the overall result.

For 2024 we expect a 106% utilization rate. For the future years, it could grow due to the expected tight market but we conservatively assume 105% going forward. Some carriers like Royal Caribbean had ~109% for the last 9 months of 2024. so we are substantially lower in our forecasts.

We project that each ship will operate 47 cruises per year starting in 2024, with an average cruise length of approximately 8 days. We anticipate that growth rates for ticket prices and onboard spending will slow from 9.0% and 4.5% expected for 2024 to 4% and 3%, respectively, by 2026, and will remain at these levels throughout the forecast period. Although high demand and limited supply of ships may lead to faster overall pricing growth, we prefer to keep our projections more aligned with the long-term inflation rate.

KPIs

Based on our assumptions, we project revenues of ~$25.0bn in 2024 and ~$26.3bn in 2025, compared to a consensus of $25.0bn and $26.1 billion, respectively. This aligns with this year's street forecasts and is slightly above for 2026. After 2026, we expect revenue growth to stabilize at 5.2% per year.

Our earnings per share (EPS) forecast for 2024 is $1.24, and for 2025, it is $1.61. When we compare these figures to the consensus estimates of $1.34 for 2024 and $1.72 for 2025, we see that our forecasts are lower.

We predict that the gross profit margin for this year will be slightly below 53%, expanding to just below 54% by the end of 2026. In the subsequent years, we assume at the same levels.

Cash Flow

Based on the assumptions outlined above, and with capital expenditures (capex) closely aligned with the expected increase in passenger capacity, we have forecasted Free Cash Flows (FCF). We anticipate that FCF will reach ~$1.3bn this year, growing to $2.4bn next year and ~$3.0bn by 2026. The overall FCF margin is projected to increase from 5.3% in 2024 to 12.4% in 2026 before declining to 8.4% starting in 2027.

DCF Results

For the exit multiple, we assumed a 12x EV/EBITDA, which is below the peers' median of ~14x, and the entertainment industry multiple of ~16x, based on Damodaran’s database. However, we believe this multiple better reflects the realities of asset-heavy cruise lines and provides us with an additional margin of safety in our calculations.

We used a 5.9% WACC for discounting cash flows, derived from the 3Q2024 capital structure. Based on these metrics, we calculated the Enterprise Value to be ~$95.8bn. After subtracting ~$27.3bn of net debt (total debt minus cash), and dividing the Equity Value by the number of shares outstanding, we arrived at a target price of $54.08/share. The current share price of $25.90 implies an upside of ~109%.

Comparable Company Analysis

After conducting industry research, we selected four primary peers for Carnival Corporation: Norwegian Cruise Lines, Royal Caribbean Cruises, Viking Holdings, and OneSpaWorld. Carnival's next twelve months (NTM) EV/EBITDA and P/E ratios are 9.5x and 15.6x, respectively. In comparison, the mean values excluding Carnival (CCL) are 13.6x for NTM EV/EBITDA and 18.2x for NTM P/E. This suggests an upside potential of ~105% and ~13%, respectively.

By averaging the price targets derived from the EV/EBITDA and P/E methods, we arrive at a target price of $41.22/share, indicating ~59% upside potential.

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Summary

• Valeura Energy is a fast-growing upstream Oil & Gas company that became Thailand's second-largest crude oil producer. From the end of 2023 to now, its production grew ~42% from 20.4mmbbls/d to 28.5mmbbls/d.

• It continues to expand its portfolio in Southeast Asia, adding ~2x more oil reserves than it is pumping out of the ocean floor. The company is also exploring other opportunities, most notably in Turkey (potentially its first onshore asset).

• The business is becoming extremely profitable. We expect it to generate ~ a 28% free cash flow yield for 2024 (~3x from last year's 10%) and grow its clean EPS (adjusted for inflationary adjustment and M&A-related one-offs) 10x to $0.84/share. We are slightly above the consensus of $0.79/share, mainly due to the recent increase in production from the Jasmine field that could not yet be included in analysts' forecasts.

• After asset consolidation, the company has $397mm in accumulated tax losses that will offset the existing 50% tax for upstream producers that it is subject to. Although it is hard to say how much of the tax expense will be covered by that benefit yearly, we think it could be substantial at 50-100%. Assuming 50%, the company's tax should decline from 50% to 25% in the 2024E-2030E period.

• Valeura has no debt and ~$133mm cash compared to mkt. cap of ~480mm.

• The company initiated a buyback program for 7.4m shares (~7.1% shares outstanding).

• Valeura has a healthy insider ownership at ~ 19%.

• The company is operating in an increasingly attractive local environment—it is growing in a declining market with increasingly valuable assets. Thailand's production went from ~275mbbl/d at its peak in 2016 to just ~145mbbl/d now (a 47% decline). Meanwhile, crude oil consumption grew ~2% from 1,197mbbl/d (8x oil production). This, combined with stagnant/slowly growing oil consumption in Thailand, results in a growing reliance on imports, which strengthens Valeura's position.

• We believe the main risk is a decline in crude oil prices. However, it is largely mitigated by extended OPEC+ production cuts and flattening the Brent curve. Moreover, due to Valeura’s strong production growth, earnings and cash flow expansion shouldn’t be at risk.

• The stock is deeply undervalued at 2024E's 1.7x EV/EBITDA and 3.6x EV/FCF. Compared to its peers’ multiples, Valeura is trading 2.0-2.2x lower, suggesting a significant upside of ~124%.

• Moreover, our base and bear case DCF valuation indicates ~334% and ~293% upside, respectively. The kicker? We don't assume any major portfolio expansions but just the maintenance of the existing fields. The only exception is Manora, which we assume will face declining production since 2029, going to zero by the end of 2031.

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Company Overview

Valeura originates as a crude Exploration & Production business from Turkey. Through its two major and accretive acquisitions in 2022 and 2023, the company transformed with a new beginning in Thailand. Its market cap exploded from ~$40mm in mid-2022 through ~$200mm by mid-2023 to ~$480mm now. It continues to grow, with daily production expanding from the end of 2023's ~20.4mmbbl/d to ~28.5mmbbl/d (up ~40%). Despite rapid growth, the company is disciplined with its investments, meeting spending guidelines or undercutting them (H1 2024's Nong Yao field development was completed 25% was under budget, achieving a 60% production jump).

Valeura Energy Fact Sheet

This year, the company merged the production assets, restructuring its organization. Valeura plans to take advantage of the losses existing in the acquired entities. These total ~$397mm that could be subtracted from the taxes in the upcoming years. As the upstream company, Valeura is subject to a substantial income tax of 50% and a small SBR windfall profit tax. Existing tax assets could offset the first. We assume it could cover ~50%, meaning ~25% tax rate for the next 5 years.

Production Assets Overview

Through acquisitions and redevelopment, as well as further exploration, Valeura built a solid portfolio of four crude oil-producing assets:

1. Jasmine / Ban Yen (100% working interest)

   • Production of 10.0 mbbls/d attributable to the company (after completion of an infill drilling campaign, i.e., additional wells were built between existing wells).

   • Ratree exploration well is planned for 2025.

2. Nong Yao (90% working interest)

   • Production of 11.4 mbbls/d attributable to the company.

   • 1H2024 development increased production >60%.

3. Manora (70% working interest)

   • Production of 2.4 mbbls/d attributable to the company.

   • The field is relatively advanced in its lifecycle. 2022 & 2023 infill wells have extended economic life from 2022 to 2027.

   • Following the Jasmine expansion, the company’s contracted drilling rig has been moved to the Manora field, where it has started operations on a five-well infill drilling program (these could potentially extend asset life further).

4. Wassana (100% working interest)

   • 5 horizontal well programme in Q1 2024 increased production ~50%

   • Reserves increased from 4.0 to 12.9 mmbbls since acquisition

   • Work underway for redevelopment to extend field life beyond 2030

   • Further potential developments to north and south of Wassana

Fields Overview

Margins Overview

In 2023, Valeura's operating costs (Opex) were approximately $30.8 per barrel, and royalties were about $11.4 per barrel. With an average realized crude oil price of $84.3, this resulted in a gross profit of roughly $42.1 per barrel, or a 50% margin. Including other revenue sources, the total gross profit margin for 2023 climbed to approximately 59%. Despite declining crude oil prices, Valeura significantly increased its margins through cost optimization and economies of scale.

Based on company guidance and year-to-date performance, we anticipate Opex and royalties for 2024 to be around $26.3 and $10.0 per barrel, respectively. This represents a 14% year-over-year reduction in Opex and a 12% decline in royalties. Assuming a realized crude oil price of $83.0, the gross profit per barrel could reach approximately $46.8, with a 56% margin. This would translate to a 6 pp expansion in the gross profit margin. Incorporating other revenue sources extrapolated for the full year, we expect a 64.5% gross profit margin in 2024, a 5.5 pp year-over-year increase.

Value Creation

in November, Valeura announced a substantial share buyback of 7.4m shares (~7.1% shares outstanding). For us, it means two things. First, The company understands value creation dynamics and chooses the tool that is taxed once, unlike dividends (company's and shareholders' income). Secondly, it is a sign that despite >100% share price appreciation, the intrinsic value of the business is higher.

We note that many businesses, often overvalued, still engage in buybacks. However, they usually use cash terms when defining these programs, dedicating a strict budget. These often are not enough for even a few percent of shares outstanding. In this case, we are faced with a very different nature of the buyback program mentioned in the company announcement:

"Valeura believes that the prevailing market price of the Shares may not, from time to time, reflect the Company’s intrinsic value and future prospects, and that the purchase of Shares represents an appropriate use of the Company’s financial resources to enhance shareholder value." - Valeura Energy

Adding to the buybacks, we are optimistic about the current management's ability to execute. They are experienced professionals who have already proved their abilities by conducting multiple successful acquisitions, field redevelopments, and exploration campaigns, often under budget.

The current CEO, Dr. Sean Guest, is a Ph.D. in Geology and spent the last 30 years in the industry. More importantly, he has already successfully led two Oil&Gas companies - Pexco Energy and Bukit Energy that operated mostly in Asia, Australia & Oceania. Before that, he worked most notably in Shell, where he got his first extensive experience in exploration.

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Macro Environment

As an upstream company, Valeura’s performance is largely dependent on the market price of the commodity it sells—crude oil. Two blends work as a benchmark for the company’s realized prices—Dubai and Brent. The latter was historically closer to the average realized prices. When discussing the crude oil price going forward, Brent will be the one we’re referring to.

Brent Price ($/bbl)

Brent declined from ~$119/bbl at the height of the Energy Crisis in Europe (2022) to just ~$71/bbl (~40% decline). there are multiple reasons but the main ones are a) establishing a new hydrocarbon supply chain in Europe (switch from Russia to the United States and the Middle East) and b) economic tremors in China and other emerging economies. Out of these, the latter remains but the downside is largely mitigated thanks to the following:

• In 2022 OPEC+ cut production by ~5.9mmbbls/d (about 5.7% of global demand) to support the crude oil price. These reductions included:

  • ~2.0 mmbbls/d from the whole group

  • ~1.7mmblls/d of the first stage of volunatry cuts from eight countries

  • ~2.2mmbbls/d of the second stage of voluntary cuts from the same members

• Last week, the cartel agreed to extend its ~2.0 mmbbls/d and ~1.7 mmbbls/d cuts until the end of 2026. The remaining ~2.2mmbbls/d will be gradually unwinded for 18 months, beginning from April 2025 (until September 2026). The group had previously planned to release these capacities over 12 months but chose a more defensive approach.

• The flattening of the Brent curve continues. It signals a limited expected price decline. As a result, the overall expected volatility is also reduced which is a good sign allowing for more business predictability - something incredibly rare for this type of business.

From the company's perspective what also mitigates price risk is a fast-growing production that should allow the company to continue expanding earnings and cash flow, even with limited price declines. In this case, the equity story itself would continue to improve.

Regional Macro

Thailand’s macro environment presents more opportunities than risks for the company. Since 2016, the country’s crude oil production declined from ~275 kbbls/d to just ~145 kbbls/d by the end of 2023 (-47%).

Thailand Crude Oil Production (kbbls/d)

At the same time, Thailand’s crude oil consumption barely grew, rising by 2% from 1,197 kbbls/d to 1,221 last year. In 2016, consumption was ~4.4x bigger than local production, prompting imports of ~922 kbbls/d. Over these few years, mismatch grew almost two times to consumption, outweighing local production by ~8.4x. In 2023, it meant importing a whopping ~1,076 kbbls/d.

Thailand Crude Oil Consumption (kbbls/d)

This drastic change made local producers even more valuable, primarily due to the lower cost of transport. That is why we think Valeura’s production will have fertile ground in Thailand’s growing economy.

Even if the company were to expand and sell more products outside of other Asian economies, it is expected to find similarly favorable dynamics. According to the IEA report “Southeast Asia Energy Outlook 2024,” import dependency could grow from 2023’s ~66% to 2035’s ~81% for the region (for both projection scenarios):

• The Stated Policies Scenario (STEPS) assumes that national energy and climate targets are not fully met i.e. decarbonization and diversification of energy sources take longer than expected (the more probable scenario).

• The Announced Pledges Scenario (APS) assumes that all the national energy and climate targets made by governments are met in full and on time, including long-term net zero goals (the less probable scenario).

Changes in oil supply by country and scenario (mmbbls/d)

In a more probable STEPS scenario, IEA expects that this growing dependency on production from outside of Southeast Asia will lead to crude oil imports growing from ~2.3 mmbbls/d in 2023 to ~3.8 mmbbls/d by 2035. The trend is expected to continue after 2035 at a slower rate til 2050, requiring ~4 mmbbls/d worth of imports.

Change in net trade by type and scenario (mmbbls/d)

Considering the company’s 2x Reserve Replacement Ratio, we think the business is on track to go from the second largest to the largest crude oil producer in Thailand in the next few years. Additionally, It can become one of the biggest in Southeast Asia benefiting from manufacturing buildup in the region. We also believe, that growing operations could allow for more efficiency in asset acquisitions, and drilling, and, potentially grow business profitability.

DCF Valuation

To value the business we used Discounted Cash Flow model and analyzed LTM and forward multiples. We think these tools should allow us to roughly estimate the intrinsic value of the company.

Production Forecast

We build the model bottom-up based on the Management Analysis Reports available. To estimate revenue we build a production forecast for each field. Our main assumptions are the following:

• Jasmine / Ban Yen would deliver 1% more than the current daily production throughout 2025, resulting in a 26.5% production change YoY. For 2026 we assume a 5% YoY change in yearly output and in later years 3%.

• Nong Yao would be expanded to deliver 15% more output next year. For 2026 we expect 5% production change and in the next years 3%.

• Manora field is relatively advanced in its lifecycle. 2022 & 2023 infill wells have extended economic life from 2022 to 2027. Now it is undergoing similar redevelopment. We assume limited success from that investment with full-capacity operations extended to 2029. For 2025, we assume a 10% production increase. For 2026 we assume 5% and for the 2027-2029 period, 3% change in the asset output. After 2029 we expect production to decline and to reach zero by the end of 2032.

• Wassana asset is a fast-growing field with major reserve discoveries. Currently, there’s work underway for redevelopment to extend Its life beyond 2030. There could be further potential developments to the north and south of Wassana. The investment outcome is hard to predict and we prefer to stress test our model under a fairly conservative scenario so we assume ~20%, 10%, and 5% production change for 2025, 2026, and 2027, respectively. From 2028 on we incorporate a 3% growth factor.

• Other Assets are not assumed. It effectively means we don’t include any potential production from Turkey or any acquisitions. Overall, we think this is very unlikely based on the growth strategy of the company and its history. However instead of guessing production additions we prefer to leave them at zero and judge the base case as fairly defensive with potential upside.

Production Forecast (kbbl/y)

Yearly Production Breakdown (kbbls/y)

To forecast Valeura’s revenue we assume a $83/bbl realized oil price for 2024 vs YTD realized price of ~$84/bbl. For the rest of the projection period, we use Brent futures. These prices multiplied by our forecasted production make our revenue.

Margin Forecast

In our model, we assumed contracting margins primarily driven by declining crude oil prices and increasing operating expenses (OPEX) beginning next year. Royalties are projected to grow from 12% in 2024 to 14% by 2026, stabilizing thereafter. As a result, we forecast a margin decline from ~$39.2 per barrel in 2025 to ~$30.5 per barrel in the terminal year. This translates to a decrease in gross profit margins from 56.5% in 2024 to 46.6% in the terminal year.

Gross Profit Per Barrel Breakdown ($)

Capex Forecast

For growth stories like Valeura, capital expenditures are a crucial cost of doing business. Based on the 2024 guidance, we estimated capex per bbl of new production at ~$43.6 for the year. However new production, primarily from Wassana and Jasmine, is not fully included in the full-year numbers (they were completed only later in 2024). That’s why we adjusted it by 15% for 2025, resulting in ~$37.1 capex per barrel. From 2026 onwards, our capex per barrel grows at 3% YoY.

By combining our declining production additions with forecasted cost per bbl, we estimate ~$101mm capex next year, declining to $70mm by the end of 2027. Then it gradually grows to $92mm in terminal year.

Capex Breakdown ($mm)

Results

We assume declining Gross Profit Margins coming down from 56.5% in 2024E to 46.6% in the terminal year. However, due to the fluctuating capex spending Free Cash Flow margin is more volatile. It intiially grows from 2024’s 27.5% to 32.1% in 2026 and then declines to just 16.2% in the terminal year.

Free Cash Flows ($k)

For exit multiple we assumed 5x EV/EBITDA, in line with the upstream businesses. For discounting cash flows we used the WACC of 9.12%. Based on these metrics we arrived at the Enterprise Value of ~$2.0bn. After adding ~$133.1mm of cash on the books and dividing it by the number of shares outstanding we arrive at $19.95/share target price. The current share price of $4.59 (USD) implies ~334% upside…

DCF Summary ($k)

Scenario Analysis

To flex our assumptions we run sensitivity analysis. We prepared Bull and Bear cases by tweaking key metrics in the projection period. These include:

• Avg. brent price

• Avg. GP margin per bbl

• Avg. growth capex per bbl change

• Avg. maintenance capex per bbl change

With these assumptions we were able to estimate Valeura’s share price under different scenarios. It ranged from $18.06 in bear case to $21.77 in our bull case. This range could be thought of as our intrinsic value estimate.

Mutliples

Siimmilarly to our DCF, multiples scream “undervalued!” as the company is trading at 2024E's 1.7x EV/EBITDA, 3.6x EV/FCF and 2.8x P/FCF. For comparison, we can use Asia and Australia focused E&P players like Beach Energy and Woodside Energy.

Our preffered multiple is EV/EBITDA becuase it is the most popular and universally applied. Beach Energy and Woodside Energy have NTM EV/EBITDA of 3.4x and 3.8x, respecitvely. These mean that Valeura is 2.0x cheaper than Beach Energy and 2.2x cheaper than Woodside Energy. Market cap weighted average EV/EBITDA multiple is 3.8x (due to relatively large size of Woodside Energy), suggesting ~124% upside.

We think this undervaluation combined with DCF upsdie is exceptional and could outweigh potential risks :)

Key Risks:

• Crude oil prices decline and volatility

• Capex inflation

• Declining Reserves Replacement Ratio

Thank you for spending time on our lenghty deep dive analysis. Let us know what do you think about this company in comments.

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Disclaimer

The information contained on this website is not and should not be construed as investment advice and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time. The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

The information contained on this website has been prepared based on publicly available information and proprietary research. The author does not guarantee the accuracy or completeness of the information provided in this document. All statements and expressions herein are the sole opinion of the author and are subject to change without notice.

Any projections, market outlooks or estimates herein are forward looking statements and are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur. Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein. Except where otherwise indicated, the information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and the author undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional materials.

The author, the author’s affiliates, and clients of the author’s affiliates may currently have long or short positions in the securities of certain of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). to the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.

Neither the author nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein. In addition, nothing presented herein shall constitute an offer to sell or the solicitation of any offer to buy any security.

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Summary

• The company has resolved long-standing worries about its market share loss by defending the current ~16% share and staying the biggest automotive player in North America.

• Its recent gains in EV market share (now ~10%) give hopes for market gains in the upcoming years. We think that GM's electric trucks are still the niche with above-average guardrails in the EV space. Although EVs are a low-margin product, this positioning should result in more pricing power and higher margins in the product line.

• GM proved that despite expanding to the low-margin EV space, it could keep its profitability by implementing major cost-cutting programs like this year's $2bn fixed cost reduction.

• GM has substantially improved governance and capital allocation visible in recent buybacks (19% of float), and growing dividends (33% increase this year) could offer a chance for possible rerating.

• Internal Combustion Engine (ICE) cars could stay with us for longer as the incoming administration wants to cancel or limit EV incentives and allow ICEs to be freely offered for longer.

• Under Trump's administration, GM, as a US manufacturer, could be partially protected from the Chinese competition, and the company largely depended on local suppliers is not exposed to the risk of a potential trade war.

• General Motors is the most undervalued automotive company in North America, with the strongest fundamentals in many years and a value trap stigma that is slowly changing. This long-maintained staple is visible in trading multiples. Despite ~58% YTD share price gain, GM trades at ~5.9x Forward PE and ~6.5x Forward EBITDA compared to the industry's ~6.6x Forward PE and ~10.1x Forward EBITDA.

• Our SOTP valuation indicates a ~124% upside from the current share price. We think that this valuation offers a substantial moat and protects from worse-than-expected performance.

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GM's Stock Price, TTM Net Sales, and PE Ratio over the last 5 years

I started researching GM around this time last year. It stood out as a stock trading at ~5x PE with ~$55bn in cash and at ~$45bn market cap, all of that with ~16% US market share. Why was it trading so low then? For many years, GM was considered cheap. Since 2015, with a few exemptions, it has been trading at a PE range of 3 to 6. For many years (even before 2015), it was considered a value trap. These are the main reasons why:

• GM was operating in a highly commoditized market with narrow margins and without any sustainable success in increasing them

• the company was losing market share to its competitors, especially Toyota, Honda, Hyundai, and Tesla. According to various agencies, two decades ago, GM had ~28% of the market which declined to 17.7% in 2015

• Highly bureaucratic culture with 37 layers of management in 2015

• GM faced increased regulatory challenges resulting in $4.5bn in recall costs in 2014

• Management struggled with capital allocation and operations optimization

• EVs were gaining traction, and the future of Internal Combustion Engine cars was looking bleak as eco-friendly states and federal governments started planning the transition to emission-free cars

Winds of change

In 2014, GM appointed a new CEO - Mary Barra, and she slowly started destroying GM's sluggishness. With such a big and inefficient organization and Mary never working in this position, It took a long to see changes, but eventually, they came:

• GM started defending its share better, slowing down the loss and gaining ~2pp by 2018. Since then its market share fluctuated at ~16%. In 2023, its share went up from 16.3% to 16.5%, and this year stabilized at 16.4%.

• GM invested $0.5bn in Lyft and bought Cruise in 2016 for $1bn, resulting in a 30% increase in autonomous driving patents filed.

• The company achieved a 12% reduction in operating expenses by cutting $5.5bn costs in 3 years

• GM beat Wall Street earnings forecasts in 34 of the last 35 quarters, per FactSet

The recent year brought more good news for GM:

• In November 2023, the company announced a long-awaited buyback of $10bn that was enlarged by an additional $6bn in early 2024. As a result, diluted share count dropped by 19% YoY.

• It also announced a 33% dividend increase starting in 2024, now offering ~1% dividend yield.

• The company rolled out multiple EV models at the end of 2023 and continued into 2024, gathering surprisingly good reviews. As a result, GM grew its EV market share from 6.5% in 1Q24 to 9.8% by 3Q24. It's a good sign that GM eventually can become a significant player in the EV space.

• GM is on track to achieve $2bn in fixed cost reduction this year and growing its Net Income margins YOY despite selling more low-margin EVs (the company expects to significantly reduce battery pack cost in the next two years, improving the product line's profitability).

We think that share buybacks and dividend raises, combined with selective investments in EVs and autonomous driving, show improvement in capital allocation. These steps, combined with cost reduction plans at GM, should translate to growing shareholder returns. Another positive sign is EV lineup strength, resulting in market share gain. We see it as a sign of growing competitiveness that gives us hopes for keeping and slightly expanding its place among automotive companies in the US. Another plus for GM could be Donald J. Trump's reelection. The president-elect is favorable to ICEs and wants to limit EV incentives. Moreover, he is keen on protecting US manufacturing, reducing worries about Chinese competition. Despite limited pricing power and union issues, these factors make us bullish on the stock.

Valuation

We analyzed GM through the scope of multiple valuation methods - almost all of them showed significant mispricing. Overall, our preferred approach is a Sum of The Parts valuation as it gives us a detailed view of the individual segments.

SOTP

GM could be divided into three main segments: 1) Automotive (car manufacturing), 2) GM Financial (leasing and car loans), and 3) Cruise (autonomous driving startup). Usually, we like to run a Discounted Cash Flow (DCF) valuation of individual segments, but due to the specificity of some of them, we limit the DCF method to the Automotive Segment. For GM Financial, we use a Book Value method as it is an effective tool for analyzing financials and is relatively simple. We value Cruise using this year's share valuation that was disclosed to the public.

GM Revenue Breakdown (2022-LTM, $bn)

GM EBIT Breakdown (2022-LTM, $bn)

Automotive

We used conservative assumptions in automotive segment cash flow projections with a lower range of this year's guidance and limited growth and margin expansion in the upcoming years:

• We expect this year's revenue to grow by 8% YoY and then gradually decline to 3% growth by 2027 and continue at this level.

• We assume a limited margin decline with EBITDA Margin growing from 2024E's 12.4% to 11.5% by 2033E.

• We forecast capex by assuming the same revenue share as last year at 6.8% in the forecast period.

• In terms of Net Working Capital (NWC), our 2024E forecasted days receivables, days payables, and days inventory in the projection period.

Automotive Segment Financials ($mm)

In our Automotive Valuation, we used a Weighted Average Cost of Capital (WACC) of ~8.2%. It was calculated by allocating 70% of equity value to the segment and all of the Automotive debt. We note the whole company (WholeCo) WACC would be lower at ~6.8% as it would include an additional ~$105bn of GM Financial debt at a lower cost than the equity.

Based on that WACC, we estimate the PV of Free Cash Flows to the Firm at ~$32.4bn. For Terminal Value (TV) we use the Exit multiple Method with the EV/EBITDA of 7.5x. As a result, we estimate the PV of TV at ~$90.1bn That brings the Automotive segment valuation to ~$114.7bn compared to GM's market cap of just $62.7mm.

GM Financial

The loans and leasing segment is tied to the automotive side as it provides financing to GM's customers. This segment is behaving largely as a bank or a leasing company, and our preferred approach is to look at its book value. This should yield a more realistic valuation compared to the classic DCF, as financial institutions tend to trade at a discount due to financial risk, including interest rate fluctuations and customer default risk.

Last quarter, GM Financial had ~$136bn in total assets and ~$120bn in liabilities, resulting in a book value of ~$16bn (~26% of the current market cap).

Cruise

Cruise is an interesting business that could potentially be a gateway to a true robotaxi service. However, there is more development needed. With recent National Highway Traffic Safety Administration (NHTSA) probes into Cruise and the company admitting a false report to the agency, we believe it is too early to forecast any autonomous taxi cash flows. Safety compliance was a major disruption to Cruise's operations as the company had to recall 1,200 vehicles to close the investigation in August. Having said that, GM is on the way to set matters straight and Cruise is back on the road. Going forward, the mother company limited Cruise's yearly cash burn to ~$1.7bn and wants to expand to new cities as cheaply as possible.

We base our Cruise valuation on the internal valuations of its shares. Based on February reports its value was slashed by ~60% since 2022, from $29.0 to $11.8. Given ~1bn shares outstanding, the company could be currently valued at ~$12.2bn valuation. The Detroit manufacturer is the biggest shareholder with a ~80% stake that should be worth ~$9.8bn.

SOTP Valuation Results

With car manufacturing worth ~$114.7bn, GM Financial at $16.0bn book value, and Cruise stake at the valuation of $9.8bn, the General Motors fair value is ~$140.5bn. Based on the market cap of $62.7bn, there's ~124% upside potential.

Current price

Despite ~58% YTD share price gain, GM trades at ~5.9x Forward PE and ~6.5x Forward EBITDA compared to the industry's ~6.6x Forward PE and ~10.1x Forward EBITDA. Our SOTP valuation indicates a ~124% upside from the current share price. We think that this valuation offers a substantial moat and protects from worse-than-expected performance.

GM stock performance

Thank you for reading! If you find it interesting, please share it and leave a comment. We are happy to answer any questions regarding this investment thesis and our work!

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Disclaimer

The information contained on this website is not and should not be construed as investment advice and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time. The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

The information contained on this website has been prepared based on publicly available information and proprietary research. The author does not guarantee the accuracy or completeness of the information provided in this document. All statements and expressions herein are the sole opinion of the author and are subject to change without notice.

Any projections, market outlooks or estimates herein are forward looking statements and are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur. Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein. Except where otherwise indicated, the information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and the author undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional materials.

The author, the author’s affiliates, and clients of the author’s affiliates may currently have long or short positions in the securities of certain of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). to the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.

Neither the author nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein. In addition, nothing presented herein shall constitute an offer to sell or the solicitation of any offer to buy any security.

External links, if any, may redirect you to a privately-owned web page or site (“site”) created, operated, and maintained by a third party, which may not be affiliated with Alpha Ark. The views and opinions expressed on the site, other than those presented by Alpha Ark, are solely those of the author of the site and should not be attributed to Alpha Ark. We have not verified the information and opinions found on the site, nor do we make any representations as to its accuracy and completeness as to the third-party information. Further, Alpha Ark does not endorse any of the third-party’s products and services or its privacy and security policies, which may differ from ours. We recommend that you review the third-party’s policies, terms, and conditions to fully understand what information may be collected and maintained as a result of your visit to this website.