Calling all growth investors a 24% ROE at 5x earnings; Trius Investments

Sometimes the strangest collections of assets can yield incredible hidden value.  Little collections of assets are also interesting to research, it's like trying to put the pieces of a puzzle together.  I've found that as I leave the major exchanges, and drift down in market cap the collections of assets can become bizarre, which is the case for Trius Investments (TRU.Canada).

Trius Investments calls themselves an investment holding company, which is approximately right.  This is because at one point they  had lofty ambitions of being a hedge fund, a venture that eventually fizzled.  They currently own a garbage collection company and investment interests in drug rehab clinics.  Their garbage collection business is named Trius Disposal and operates in municipalities located throughout New Brunswick.

The company owns both the garbage trucks and the trash cans that customers use.  Customers rent the trash cans from the company, an arrangement that reminds me of how AT&T used to rent phones to customers.  Garbage cans can be rented for $5.69/mo or $64.40 a year, or they can be purchased outright for $184-240.  Considering I just purchased a trash can at Home Depot that looks similar to theirs for $24.99 I think these prices are crazy, but maybe they're just charging what the market will bear.  The company claims their competitive advantage is operating at a lower cost through the use of automated trucks.  I appreciate this narrative, but I don't understand why competing companies don't buy the same trucks.

Trius' other major asset are their investments in a number of Recovery Ways drug rehab clinics throughout the US.  Trius owns ownership interests in the buildings that the clinics rent.  The rental income has provided a significant boost to earnings and has fueled the company's growth.

Both of the company's investments are stable and non-cyclical.  Homeowners will always need their trash picked up, and drug use doesn't appear to be on the decline either.

The company's results are phenomenal.  Since 2008 they have grown book value from $1.05m to $3.9m today.  The majority of this growth is a result of their real estate investments.  The company's earnings have grown from $0.009 per share in 2008 to $.0794 per share at the end of last year.  The company trades for $.395 or about 5 times earnings.  Their financial results are shown below:


After looking at the company's results I found it hard to believe that a company with such strong earnings growth and a high ROE was trading for such a low multiple.

A common explanation for the low multiple might be that the market doesn't expect the company's earnings to hold up in the future.  This theory might even be believed when looking at first quarter results, which are trended lower than last year.  I don't believe that's the case because the company stated that their results were affected by the timing of a distribution from their real estate holdings.  Last year the distribution was received in the first quarter, and this year it was received in April.  A second plausible explanation might be that the company is small and trading is limited.  I don't believe that's a reasonable explanation either, there are many small and illiquid companies selling for fair value or above.  Simply being small doesn't guarantee an undervaluation.

I believe the reason this is trading for such a low price is because investors are worried about what management might do.  The company is run by Gordon Wheaton who founded the company in 1972. He founded Trius Inc (note the difference in name) as a three car taxi company.  The taxi company was eventually sold and Wheaton diversified into charter busses, garbage collection, a package delivery company, car care, and a truck rental business.  All of these investments are held under the Trius Inc company which is private and still held by Wheaton.

It's unclear why Wheaton decided to list his disposal business publicly.  But one thing is clear, he has profited from it.  Since 2005 he has done private placements and distributed options as prices far below the market price at the time of issuance.  By doing so he has enriched himself at the expense of shareholders.  The company doesn't pay a dividend either, so shareholders need to rely on price appreciation alone.

The CEO appears to be running the Trius Investments as his private company.  This shouldn't be a surprise considering he has a collection of small little businesses that he owns outside of Trius Investments.  It's unclear where his focus is too.  He has a Twitter account where he posts fuel prices for his service station.  I can't remember the last time I thought to check Twitter to find out who's gas prices were 1 cent cheaper, but it seems like a few people do.

I recently wrote a post on where I discussed the risks related to owning closely held companies, I kept thinking about that post as I researched Trius.  I desperately want to like Trius Investments, I have a feeling this company will continue to grow.  Yet I continued to remind myself of the lessons from the post.  Trius Investments appears to be run for the benefit of the owner and shareholders can tag along for as long as Wheaton allows it.  Sometimes it's alright to tag along if there's a chance the company could be sold for a far greater price in the future.  Instead Wheaton appears to be taking advantage of the public market to acquire more of the company for himself at below market prices.  A sale to an outside party is unlikely, what's more likely is the company goes private at a low valuation.

For investors with a strong stomach for management risk, or those who've seen something like this before and had it work out Trius Investments might be a great purchase here.  For myself I'm going to pass.

Disclosure: No position

2 comments:

  1. I lived and worked in investment field for several years in S. Korea. The country is littered with these type of companies. Stocks are super cheap but go absolutely nowhere. They are piggy banks for the owners. Good article.

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  2. Nate,

    Thank you for the good research.
    I wonder whether all this expropriating of other shareholders is legal and does comply with exchange rules. Would an activist have any chance fighting management if a large enough capitalization would render the efforts worthwhile?

    Milud

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