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Memo to: MCJ Capital Partners
From: M. Carter Johnson
Re: Q4 & Fiscal 2020 Performance Update
Date: 1/15/2021
Dear Partners & Friends,
For Q4 of 2020 our total return was +18.21% compared to +12.17% for the broader S&P Index, +15.49% for the MSCI World index, and +31.43% for the Russell 2000.
For fiscal 2020, our total return was +53.03% compared to +18.33% for the broader S&P Index, +16.58% for the MSCI World Index, and +20.22% for the Russell 2000.
Since inception (as marked February 12, 2020), our total return is +53.03% compared to +12.88% for the broader S&P Index, +13.53% for the MSCI World index, and +19.38% for the Russell 2000.
Commentary on 2020
All things considered, the marketable securities of our companies performed exceptionally well on both an absolute and relative basis over 2020. As an investor, I would strongly advise you against expecting this type of annual performance as a normal occurrence. There will be extended periods of time when our companies lag in performance, even as their intrinsic value grows. During the good and not so good times I would encourage you to focus on how well our companies are executing on both short and long term value add initiatives.
Commentary on Our Companies
As you are aware, I like to update you on our companies. If you ever have any questions why we own anything in our portfolio, feel free to reach out. The bulk of our ownership interest will always be in “good companies at fair prices,” with select fringe opportunities of catalyst driven mispriced securities sprinkled in the mix. Below I discuss Creightons, Parks! America and the Constellation Software / Topicus spinoff.
Creightons (CRL.L) – Creightons is a little business based in Peterborough, England that has the wonderful characteristics we look for in a small company. The company is managed by Chairman and CEO, William McIlroy, who we view as our “type of guy.” McIlroy has been with the company over 20 years, taking over the helm and leading the company out of troubled waters prior to his tenure. He owns a little over 25% of the outstanding shares and takes just £25,000 or 11% of his total annual compensation in a guaranteed salary, with the remainder being incentivized based on short and long-term performance goals. The company manufactures toiletries and personal care products under private label, branded, and inhouse lines. What makes Creightons interesting is the size and niche of its operations. Niche personal care products wean with consumer preferences creating a high quantity and vast fragmentation of smaller brands. Powerhouses such as Proctor and Gamble ignore these niche lines because the size of end markets are too insignificant. Creightons is just big enough to gain manufacturing and distribution efficiencies, but just small enough to significantly move the needle with these niche product lines. As a result, the company grows not only organically but also by acquiring sub £1million brands and simultaneously developing new proprietary product lines inhouse. Acquisitions are instantly accretive as the company leverages their manufacturing cost efficiencies to expand the margins of these smaller brands. Management has proven to be sound capital allocators, buying brands when it makes sense and divesting legacy brands that no longer fall in their core competency. They have also done an incredible job of leveraging R&D to develop inhouse lines to grow overseas sales (up 107% over the last four years). More recently, management has been investing (conservatively but appropriately) in capex to increase overall capacity. We believe in the next three years top line sales will exceed £100 million and operating margins will expand roughly 300 bps, leading to earnings more than doubling. In addition to the growth in earnings, we anticipate an expansion of valuation multiples (current trailing twelve month P/E of 11) as the equity reaches size that allows more institutional consideration (current market cap £41.43million).
Parks! America (PRKA) – Our thesis on Parks! America continues to work out well, with the 2020 operational performance of the company exceeding our expectations. After a tough operating environment in the first half of 2020, the Missouri and Georgia parks grew attendance sales by a combined 33.6% and 86.6% in the subsequent quarters. In addition, management has done a fantastic job integrating the new acquisition of Aggieland during such an abnormal year. Overall, excluding the Aggieland acquisition, sales finished up 35.5% year over year. Based on our analysis, we believe PRKA is still significantly undervalued. We anticipate the first half of 2021 sales to recover to Pre-Covid levels, and Aggieland to contribute an additional 20% of revenue. Should PRKA meet our low end operational expectations for 2021 and remain at its current price, it would be roughly 75% cheaper than opportunities available in private markets.
Constellation Software (CSU.TO) – You may or may not have noticed, in late December shares of Topicus were placed in your account. Our Constellation Software took a small step in what could become a repeated theme of unlocking value, by completing a spinout. The combined entity existing of Total Specific Solutions (one of Constellation’s six business groups) and the newly purchased Topicus.com now form the collective “Topicus” entity. Spinoffs are always interesting. From my perspective the spinoff is neutral with low downside and a healthy upside. My thinking is as follows:
1) Constellation Software grows through acquisitions with organic growth being secondary. Cashflow generated by the 400+ independent businesses CSU owns is used to acquire other small mission critical vertical market software providers. By our estimations, CSU’s acquisition pipeline (defined by CSU as quarterly one on one personal communication with the prospect) is approaching 50,000 targets. Should CSU manage to acquire just 1% of these targets, it would more than double the count of VMS operators in the portfolio.
2) Total Specific Solutions (TSS) has utilized acquisitions to grow but organically grows at a rate above the collective average of Constellation Software. In addition, Topicus is built primarily for organic growth. The company routinely groups employees into cells of 7 to 10 individuals and “seeds” new ideas in house. Combined, these two entities will have 69 decentralized businesses exceeding £500 million in revenue and £100 million in EBITA moving forward, all while focusing more on organic growth.
3) In conclusion, Constellation Software loses no significant advantage on the acquisition competitive advantage front as neither TSS or Topicus will jeopardize the acquisition pipeline. In addition, the spinoff gives the market the chance to recognize Topicus’ organic growth as it no longer will be hidden in the collective machine of CSU.
I believe Mark Leonard (Chairman and CEO of CSU) to be one of the most underrated capital allocators. I also believe him to be one of the most shareholder friendly leaders. From my perspective the spinoff is a fair deal for shareholders like us. The pricing of Topicus values the entity at similar comps to CSU. Should the market price organic growth higher than acquisition growth, Topicus will benefit. Shares will begin trading freely as early as February 2021.
2021 Outlook
As I’ve detailed before, our analysis makes considerations to Macro, but does not lead with it. With that being said, overall, I believe equity markets to be expensive on an absolute basis but reasonable on a relative basis. My thinking is largely based on considerations of fixed income yields. If you care to converse on the subject, I’m happy to explain my view on yields across asset classes and my current view of the equity risk premium. I’m optimistic we will continue to find attractive opportunities in the year ahead, we’ll just have to keep turning over a lot of rocks. We currently have two companies in due diligence and continue to find opportunities with more than reasonable valuations such as those awarded currently to Parks! America and Creightons at the present moment. In addition, regardless of when future inevitable market corrections occur, I sleep well knowing we own high quality companies across our portfolio.
If you know of anyone who would like to join us in owning good businesses at fair prices, and is looking for specific exposure to smaller companies, feel free to pass along my contact information. As our collective capital base grows, more active opportunities currently out of reach become that much more feasible, thus benefiting us all. If it’s a right fit, we are certainly open to gaining new partners that share a long term outlook.
As always, thank you for your trust in being a steward of your capital and a part of what we are building.
All the best,
M. Carter Johnson
The performance results shown are those of the first account under management of MCJ Capital Partners LLC (“MCJ”) and are the result of the application of MCJ’s proprietary investment process. These performance results are presented net of brokerage fees, and custodial fees. No management fee was charged in 2020. A client’s return with respect to an investment would be reduced by any fees or expenses a client may incur in the management of its investment advisory account, including if MCJ were to charge an investment advisory fee in the future. The performance results include the reinvestment of dividends and interest on cash balances where applicable.
All performance results are unaudited and are not an estimate of any specific investor’s actual performance, which may be materially different from such performance depending on numerous factors. No representations or warranties whatsoever are made by MCJ or any other person or entity as to the future profitability of an investment account or the results of making an investment. All information provided is for informational purposes only and should not be deemed as advice in relation to legal, taxation, or investment matters. Past performance is not indicative of future results.
Each of the S&P 500 Index, the MSCI Index, and the Russell 2000 Index (each, an “Index”) is an unmanaged index of securities that is used as a general measure of market performance, and its performance is not reflective of the performance of any specific investment. The Index comparisons are provided for informational purposes only and should not be used as the basis for making an investment decision. Further, the performance of an account managed by MCJ and each Index may not be comparable. There may be significant differences between an account managed by MCJ and each Index, including, but not limited to, risk profile, liquidity, volatility and asset comparison. The performance shown for each Index reflects no deduction for client withdrawals, fees or expenses. Accordingly, comparisons against the Index may be of limited use. Investments cannot be made directly into an Index. The S&P Index return was determined using the performance of Vanguard S&P 500 ETF (VOO). The MSCI Index return was determined using the performance of Vanguard Total World Stock ETF (VT). The Russell 2000 Index return was determined using the performance of Vanguard Russell 2000 ETF (VTWO).
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The information contained herein reflects the current expectations and opinions of MCJ as of the date of publication, which are subject to change without notice at any time. MCJ does not represent that any expectation or opinion will be realized. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. Neither MCJ nor any of its advisers, officers, directors, or affiliates represents that the information presented in this tear sheet is accurate, current or complete, and such information is subject to change without notice. No representations or warranties whatsoever are made by MCJ or any other person or entity as to the future profitability of an investment account or the results of making an investment.
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