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Operational execution continues to improve.

Management are increasingly thoughtful about capital allocation as well mitigating any potential operating hurdles.

Critically, yesterday’s results gave the market its first taste of the hugely embedded operating leverage in Select’s business and its capacity to take advantage of the structural LT supply-demand imbalance that is poised to see almond prices go higher for longer given the SGMA backdrop in California.

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For new subscribers who missed my original Select Harvests write-up, you can find it here:

The Numbers

In FY25, SHV’s almond volumes were 24,903 MT, down from 29,527MT in FY24.

The production decrease occurred across the board in Australia and was largely due to weather conditions and frost.

Despite this, the realized almond price for full year FY25 was $10.18/KG, up 32.3% YoY from $7.69/KG in FY24.

Production costs were $7.82/KG, significantly higher than the $6.60/KG achieved in FY24 due to the lower crop size in FY25. Normalized for 29,000MT production, SHV’s costs would have been $6.71/KG for FY25.

Source: Company Announcements

Revenues increased 35% YoY to $398.3M in FY25.

EBITDA increased 81.5% YoY to $82.4M in FY25, a product of the increased almond price and operating leverage despite reduced production.

NPAT increased from $0.9M in FY24 to $31.8M in FY25.

Source: Company Announcements

Operating cashflow came in at $118.6M. $21M was related to a Working Capital unwind from FY24.

Hence Underlying Operating Cashflow was a whopping $97.6M.

Source: Company Announcements

Significant Cost Advantage over California

Moreover, Select retain their significant cost of production advantage over California as can be seen below.

It’s important to note that the above chart represents the cost to produce greenfield almonds in the Sacramento Valley and not the San Joaquin Valley (SJV) which is where the vast bulk of production in California occurs.

A recent UC Davis study noted that the total cost of a greenfield almond orchard investment in the SJV is US$4/lb in today’s environment. (Source: UC Davis).

This is the equivalent of AU$13.51/KG - a far cry from SHV’s AU$6.71/KG cost of production normalized to 29,000 MT and much more expensive than the Sacramento Valley.

Balance Sheet Fortress + Capital Returns

With the halving of net debt down to $79.1M and significant reduction in gearing down to 15.1%, Select are well positioned to build a fortress Balance Sheet over the coming years.

Management have implicitly flagged this is their goal, outlining their first and foremost priority is to reduce debt further before then returning capital to shareholders via dividends and buybacks.

Given no issues with the FY26 crop, I expect Select to fully pay off their debt by year-end FY26 and to unlock the capital returns kicker of dividends and/or buybacks. This serves as another impending catalyst on the horizon for a re-rating with the likelihood that Aussie yield lovers will return to the stock in droves upon the re-instatement of dividends.

The outlined long-term capital return framework below is highly sensible and shareholder friendly.

Increasing Input Costs in FY26 - Largely Absorbed by Continued Efficiencies

Management noted their expectation of certain uncontrollable cost increases in water, bees, fertilizer and energy to the tune of $20M.

However, they expect to largely offset this via incremental investments made in capacity, yield recovery, shakers and their Project Management Office (PMO) initiatives.

Varroa Mite Risk Mitigation

The Varroa Mite issue affecting bees across Australia is a clear short-term risk for Select.

In saying that, management appear very thoughtful on dealing with the issue and have so far entirely executed on this front.

Their calculated go-forward plan is to source bees from Western Australia (where Varroa Mite is non-existent).

Increased Processing Capacity

From FY26, Select will have an increased processing capacity of 50,000MT from 40,000MT in FY25.

With ~20MT capacity to process external product at $1/KG, Select’s processing business could hypothetically do $20M in EBITDA over the medium term and serves as a nice diversifying and repeat revenue stream.

Macro Outlook

Management didn’t hide their confidence around the favourable macro environment and expectation for further almond price increases into the future.

The industry now widely expects a 2.6-2.7B pound 2025 crop in California, a significant reduction from the Objective Estimate of 3B pounds.

Recall the significance of the carry-in and the emotive role it plays on the almond price.

The industry targets a carry-out as a % of yearly shipments of 20%.

Management noted their expectation of a 300-something carry-out from the California 2025 crop which implies a 2.6B pound crop assuming shipments are flat YoY.

Putting this in its proper context, assuming California again ships 2.65B pounds from the 2025 crop, this would imply a 13.61% stock to shipments ratio.

As can be seen below, this would be very low historically.

It would undoubtedly signal to the broader market highly stressed levels of global supply, putting significant further upwards pressure on price:

New Plantings

Management specifically outlined hearing anecdotal whispers of only ~3,000 acres for new plantings in California throughout the 2025 crop year.

This extrapolation was likely grasped from data provided by the nurseries themselves.

If the number of new plantings eventuates in such a lowly manner, this would undoubtedly serve as another highly bullish signal for the rest of the market to wake up to the broader LT supply-demand dynamics.

Perpetual Overhang

In his 1934 value investing classic Security Analysis, Benjamin Graham famously said: “In the short run, the market is a voting machine but in the long run it is a weighing machine.”

Situations of persistent non-fundamentals-based selling can be a fertile hunting ground for attractive investments, and I believe we are witnessing this phenomenon with SHV.

On the 24^th of November, Perpetual Asset Management filed they had done a block trade and reduced their exposure by approximately 6.5m shares.

Then yesterday an ‘unknown entity’ dumped ~3m shares into the market which I believe was likely Perpetual.

Again today, the volume traded was outsized with ~4.7m shares trading hands – a significant chunk of which was likely Perpetual.

Average Daily Traded Volume over the last 3 months has been 381K shares.

Here is some additional perspective:

This selling is indiscriminate and clearly non-fundamentals based.

They likely have somewhere between ~6-7m shares left to go.

In the short-term, my view is this indiscriminate selling pressure presents investors with a narrow window to buy shares at a clear discount to intrinsic value.

Once this overhang is gone, I believe the stock will likely re-rate significantly.

Financials and Valuation – The Takeaway

The significant step change in profitability and cashflow generation should awaken the market to Select’s embedded operating leverage.

These results were achieved with an average price of $10.18/KG and significantly muted production.

It’s important to note that on a normalized basis for production of 29,000MT, Select would have generated $118M in EBITDA this year, against an EV of just $668.7M. This puts them on a normalized LTM EV/EBITDA multiple of just 5.6x.

Despite management flagging that it’s too early to forecast the FY26 crop, they crucially indicated that they have not encountered any frost issues that were seen in the FY25 crop.

They also outlined that they have nothing negative to report on the FY26 crop to date.

Recall also that the 2026 crop will be the first full year of Select’s improved horticultural approach.

On top of this, the California crop is tracking 7-8% below receipts from this time last year and well below the Objective Estimate of 3B pounds.

Given these significant supply constraints, I believe Select are well positioned to realize an even greater almond price in FY26 than FY25.

With the latest Stratamarkets report indicating an AU$ equivalent almond price of AU$10.91/KG and the reality that Aussie almonds generate a significant tariff premium over Californian almonds, Select could easily achieve an average almond price of at least AU$11/KG or higher for FY26.

Assuming they have no production mishaps and a conservative AU$7.10/KG cost of production, Select would have a net cash balance sheet next year and generate $135M in EBITDA.

As you can see below from my model, this would put them at just 4.3x next year’s EV/EBITDA and 5.8x P/E.

With the backdrop of SGMA’s impact on global almond supply as well as anecdotal whispers of next to no new Californian supply being planted in 2025, it is clear to me that this is simply far too cheap.

If Select can execute operationally in FY26, Californian supply remains constrained and we do indeed get confirmation of no new plantings from the nursery reports in April, it is my view that the broader market and many institutions will awaken to the highly attractive medium to long-term IRR opportunity that Select presents investors.

In this scenario, once the Perpetual overhang is gone, I would not be surprised to see the stock re-rate in line with 8x NTM EV/EBITDA, or ~$8 per share.

Currently, the market refuses to price in Select’s capacity to generate meaningful Free Cash Flows into the future. This is evidenced by the discount of SHV’s stock price to the market value of its NTA.

Despite already generating meaningful Free Cash Flows in FY2, the stock still trades at just 0.8x the market value of NTA.

Concluding thoughts

All the data we have seen so far reaffirms the supply constrained backdrop coming out of California as global long-term annual demand remains at a 5-7% CAGR.

At 4.2x NTM EV/EBITDA and 5.8x NTM P/E with a net cash Balance Sheet coming out of FY26, Select are on the cusp of achieving significant earnings and free cash flows that the market has simply yet to price in.

Given continual supply constraints in California and Select’s continued operational execution into FY26, I believe the stock will re-rate significantly from today’s levels.

Disclaimer

Tenva Capital, its associates and/or entities controlled by its associates hold shares in the company referred to in this post.

The information contained in this article is not investment advice and is of general nature only. All communications made by Tenva Capital and/or its associates are for informational and/or entertainment purposes only. This article has been prepared without taking into account your particular circumstances, nor your investment objectives and needs. This article does not constitute personal investment advice and you should not rely on it as such. This article does not contain all of the information that may be required to evaluate an investment in any of the securities featured within. Before making any investment decision, you should do your own work and/or consult a licensed financial, legal or tax professional, along with considering any relevant Product Disclosure Statement.

Forward-looking statements are based on current information available to the author, expectations, estimates, projections and assumptions as to future matters. Forward-looking statements are subject to risks, uncertainties and other known and unknown factors and variables, which may affect the accuracy of any forward-looking statement. No guarantee is made in relation to future performance, results or other events.

Tenva Capital and its associates make no representation and give no warranties regarding the accuracy, reliability, completeness or suitability of the information contained in this document. Tenva Capital and its associates will not be responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of this post or any communications made by Tenva Capital and/or its associates.

Tenva Capital Pty Ltd (ABN: 37 685 431 690) is a Corporate Authorized Representative (AR: 001314552) of New Horizons Financial Services Pty Ltd (ABN: 63 638 4701 117) which holds an Australian Financial Services License (AFSL: 522392).

I have a new idea in store for you today with highly compelling near-term upside potential.

The stock is dirt cheap with material impending catalysts on the horizon that I believe will lead to a nice re-rating.

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Thesis Overview

Challenger Gold (CEL:ASX) is on the cusp of a critical transition from a dual-asset explorer to a de-risked, fully funded, near-term gold producer.

From January 2026, the company will commence production via the Toll Milling of 3% of its high-grade Hualilan flagship asset in San Juan, Argentina.

At US$4000/oz gold, Challenger should generate ~75% of today’s market cap alone in Free Cash Flows over the next 3 years.

Critically, this will enable a large bulk of the financing for the remaining 97% standalone Hualilan project which I believe the market is ascribing very little if any value to today.

Moreover, the market seems to be completely ignoring Challenger’s active engagement in monetizing its’ Ecuador assets.

These represent a massive, yet-to-be-realized source of value backed by CMOC’s recent takeover of Lumina Gold’s adjacent Cangrejos project – with look through valuation that implies AU$170M – 54% of today’s market cap - for CEL’s attributable resources.

Despite being on the cusp of production from January 2026, Challenger today trades at a meagre 2.6x NTM EV/EBITDA, assuming US$4000/oz gold.

At US$3000/oz gold, Challenger is still far too cheap at 4.2x NTM EV/EBITDA.

Upon the commencement of robust Free Cash Flow generation from January 2026, I believe the market will rapidly wake up to the Challenger Gold story with the stock quickly re-rating to at least 0.4x P/NPV, implying 46% near-term upside from the last traded price of $0.13.

Let’s dig in.

Core Thesis Drivers

• De-Risked Pathway to Near-Term Cash Flow: Challenger has executed a strategic Toll Milling Agreement for its Hualilan project, positioning the company to become a producer in early 2026 with minimal upfront capital. This initial stage is forecast to generate approximately AU$238M in after-tax cash flow, providing substantial non-dilutive funding for the project’s larger, standalone development.

• World-Class, High-Grade Resource: The Hualilan project hosts a globally significant Mineral Resource Estimate (MRE) of 2.8 million ounces of gold equivalent (AuEq). Crucially, this resource contains a substantial high-grade core of 8.1 million tonnes at an impressive 5.0 g/t AuEq, which underpins the robust economics of both the initial toll milling phase and the long-term standalone operation.

• Significant Latent and Strategic Value: The El Guayabo Project in Ecuador represents a profoundly compelling source of value, with a maiden MRE of 9.1 million ounces AuEq, of which 6.9M AuEq are attributable to CEL. A clear monetization strategy, underscored by a direct corporate precedent in the adjacent Cangrejos project, positions El Guayabo and Colordo V as tangible, non-dilutive funding instruments for Hualilan’s full-scale development.

• Exceptional Leadership in a Highly Favourable Jurisdiction: The Board provides unparalleled in-country expertise, featuring a former Secretary of Mining for the San Juan province, a former Australian Ambassador to Argentina, and one of the Argentina’s most prominent businessmen, Mr. Eduardo Elsztain, who is also a major shareholder of the company. This team offers exceptional social and political de-risking in Argentina, a jurisdiction rapidly undergoing significant pro-mining reforms that reduce taxes, remove currency controls, and guarantee fiscal stability.

• Clear, Self-Funded Growth Trajectory: Challenger’s two-pronged growth strategy is clear and logical. First, leverage the cash flow from the toll milling operation to finance and construct a major standalone mine at Hualilan. Second, systematically explore the district-scale potential at Hualilan, where the current resource remains open and represents only a fraction of the prospective geology under the company’s control.

• Recent Unexpected AU$30M Equity Raise to Ensure Full Funding as well as Recent Gold Price Scare resulted in a temporary price dislocation from underlying value for CEL.

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Capital Structure

The Flagship Asset - Hualilan

The 100%-owned Hualilan Gold Project is CEL’s strategic centrepiece and engine for near-term cash flow and long-term value creation.

Hualilan is one of Argentina’s oldest gold mining sites. The geology is backed by extensive historical data as well as 240,000 meters of diamond core drilling.

The project has fantastic infrastructure including transportation access via a double lane sealed highway as well as pre-existing energy and water infrastructure.

Hualilan is only 1.5 hours by road from San Juan City, Argentina’s main mining hub, which provides access to a deep pool of experienced local mine workers and high-quality service providers.

Hualilan has a JORC compliant MRE of 2.8Moz AuEq with 60.6Mt @ 1.4 g/t AuEq.

More than 75% of the 2.8Moz AuEq resource falls within the Indicated Category.

The resource starts from surface, remains open in multiple directions, and is characterized by a significant high-grade core (9.9Mt @5.0g/t AuEq for 1.6Moz AuEq).

Intersections outside the current resource include 13.0m at 15.5 g/t AuEq (600 metres south of the MRE) and 4.0m at 5.8 g/t AuEq (600 metres below the MRE with the hole ending in mineralisation).

Challenger controls a district scale footprint of 600 square kilometres surrounding Hualilan that contains approximately 30 kilometres of untested strike.

The location of the project has low environmental sensitivity, and the company has purchased 20,000 hectares’ surrounding the project with all mine infrastructure to be located on Challenger owned land.

Hualian’s dual revenue model

Post FID, junior mining companies are often faced with daunting up-front CAPEX bills in order to bring their flagship assets to production. Much of the time these are funded with massively dilutive equity raises.

To avoid this, Challenger is strategically employing a shareholder friendly hybrid revenue model designed to solve this classic CAPEX funding dilemma.

This involves:

Toll Milling – From January 2026, Challenger will monetize a high-grade, close to surface portion of the resource. This makes up only 3% of the total resource at Hualilan yet assuming a US$4000/oz gold price should deliver them approximately 75% of today’s market cap over the next 3 years with imminent Free Cash Flow generation from January 2026.

Development of the Standalone Hualilan project – Challenger will utilize the robust Free Cash Flows generated from the toll milling to significantly de-risk the targeted production of the standalone Hualilan project whilst financing the vast bulk of the up-front CAPEX requirements in a non-dilutive fashion.

Phase 1 – Toll Milling

Challenger has secured a de-risked, low-capital intensity pathway to production via a toll milling agreement with ASX-listed Austral Gold to use its nearby Casposo processing plant. This strategy allows the company to monetize high-grade, near-surface oxide material with minimal upfront investment.

A 2025 Pre-Feasibility Study (PFS) on this phase confirms its compelling economics assuming just a $US2500/oz gold price:

• Forecast EBITDA: US$195 million.

• After-tax Cash Flow: US$130 million.

• Forecast All-In-Sustaining-Cost (AISC): ~US$1,454/oz AuEq, which while higher than a standalone operation, provides a robust margin at current gold prices and serves as a strategic bridge to the far lower-cost Stage 2.

• Rapid Payback: < 3 months from the commencement of mining.

• Resource Utilized: Uses only 3% of the total Hualilan MRE.

Crucially, this first stage of production is fully permitted. The company is on track to commence processing in January 2026, marking its transition to a cash-generating producer.

Utilizing the data from Challenger’s PFS, my estimates imply an NPV5 of AU$206M at a US$4000/oz gold price.

Why Casposo?

Casposo was previously on care and maintenance because it was losing money due to lower than budgeted realization of metal prices and worse-than-expected production (lower grades and less tonnage).

This meant that Austral had a fully permitted asset in their Casposo mill but were faced with the absence of economic ore to feed it and therefore had no incentive to restart the mill.

Enter Challenger Gold.

The toll milling agreement with Challenger provided the economic incentive and the cash flow for Austral to refurbish and restart their idle plant, whilst enabling CEL to commence production of high-grade gold and silver at Hualilan in a capital-light manner, and without needing to finance a much larger project initially envisaged in the 2023 Scoping study to achieve first cashflow.

Importantly for Challenger the Casposo mill is a known entity with historical production of over 323,000 ounces of gold and 13.2 million ounces of silver.

During previous operations Casposo achieved average annual production of 40,000 ounces of gold and 1.6 million ounces of silver at recoveries of 90% for gold and 79% for silver.

The mill is located 170km from Hualilan via established roads and infrastructure.

The agreement ensures toll processing of 150,000 tonnes per annum of Hualilan material over three years, with total secured capacity of 450,000 tonnes for Challanger’s ore.

Key operational contracts have been executed with ORICA and THOR S.A. for explosives and drill and blast respectively.

This allows the company to commence open pit mining from early December 2025 with first gold production from the toll milling project in January 2026.

Source: CEL announcements

Challenger plans to mine the Cerro Norte, Sanchez and Magnata pits whilst leaving the Sentazon pit as a reserve source for optionality.

Casposo will run campaigns that batch treat Challenger’s ore in 75,000 tonnes over rolling 3 month on - 3 month off periods commencing from January 2026. The off months for Challenger allow Austral’s lower-grade stockpiles to also be processed.

The tolling arrangement will provide valuable data insights on mining and metallurgy to be utilized in the upcoming and refreshed 2026 PFS and Bankable Feasibility Study (BFS) for the standalone large-scale Hualilan operation.

Phase 2: Standalone Hualilan

Prior to the toll milling strategic shift, Challenger conducted a 2023 Scoping study on the entire Hualilan project which indicated an NPV5 of US$409M (AU$630M) at a conservative US$1,750/oz gold price.

Since then, the company has announced it will conduct an updated PFS for the standalone Hualilan project that reflects its newfound toll milling cash generative strategy.

The company has identified clear opportunities to enhance these robust economics, including heap leaching lower-grade material and producing gold-silver doré on-site, which will be incorporated in the forthcoming PFS in Q1 2026.

For now, the best approach to value standalone Hualilan is to conduct an NPV under the pretence of the 2023 Scoping study and subtracting the Toll Milling NPV.

In this manner, at just US$2500/oz of gold, standalone Hualilan’s NPV5 is $886M.

Hualilan’s District-Scale Potential

Beyond the defined resource, Hualilan presents significant exploration upside. Challenger controls a district-scale tenement package of over 600 square KMs, covering 18 KMs of the prospective Hualilan geological trend.

The current 2.8 Moz MRE is defined over just 2.5km of this trend, implying that less than 15% of the primary prospective strike has been systematically drill-tested. This presents a clear and substantial pathway for multi-generational resource growth.

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Challenger’s Strategic Asset Base in Ecuador

The El Guayabo project in southern Ecuador is a bulk-tonnage gold-copper system that represents a substantial source of latent value.

Strategically located 5km along strike from the Tier-1 Cangrejos project that was acquired by CMOC Group in April 2025, El Guayabo shares a similar geological setting and scale, positioning it as a globally significant asset.

Challenger’s strategy for its Ecuadorian assets is clear: monetize the project’s value through a strategic sale or spin-off, with the proceeds intended to fund the full-scale, standalone development of Hualilan.

The recent acquisition of the adjacent Cangrejos project by CMOC at US$25/ resource oz provides a direct strategic precedent that establishes an implied valuation benchmark of AU$170M for Challenger’s Ecuadorian asset base. It also identifies a logical corporate acquirer, significantly de-risking this monetization pathway.

Despite this, there remains large jurisdictional risk in Ecuador and as such I assume 0.4x this look-through valuation at AU$68M in the name of ensuring a wide margin of safety.

Valuation

Given the various projects are all at different phases of their life cycles, a Sum of The Parts (SOTP) valuation makes the most sense for Challenger.

For standalone Hualilan, I assume US$2500/oz gold price.

For the Toll Milling at Hualilan, I assume US$4000/oz gold price.

For the Ecuadorian assets I assume a gargantuan margin of safety at 0.4x the look-through valuation of CMOC’s recent purchase of Lumina’s adjacent Cangrejos project.

My view is that upon Challenger executing the toll milling, the stock should rapidly re-rate in line with at least 0.4x EV/NPV ($0.19 per share) to reflect the de-risking of both the toll milling project and the capacity to finance the larger standalone project.

0.4x NPV is highly conservative when compared with global peers rapidly fast tracking and de-risking the financing of taking their flagship assets to production.

Moreover, at US$4000/oz gold, the company should generate ~AU$120M in EBITDA in FY26, implying a meagre 2.6x NTM EV/EBITDA multiple!

Even at US$3000/oz gold, the toll milling should generate ~AU$75M in EBITDA in FY26, implying a still very cheap 4.2x NTM EV/EBITDA multiple.

With gold producers currently trading at around 8-12x EV/EBITDA - noting that growing gold producers trade at the top of this range - there is a plethora of latent value still to be unlocked in the CEL share price from today’s levels.

Step-change in Argentina’s Operating Environment

Operating success in the mining sector is intrinsically linked to geopolitical stability and strong community support.

Challenger is exceptionally well-positioned on both fronts in Argentina, operating in a rapidly improving political landscape under the Millei government and benefiting from a deeply embedded social license.

Argentina’s Pro-Mining Transformation

Recent political and economic reforms in Argentina have created a significantly more attractive environment for investment in the mining sector. The new government has legislated the Regime for Large Investments (RIGI), which provides a stable and competitive framework for projects like Hualilan.

Key benefits include:

• Tax Reduction: The corporate tax rate is reduced from 35% to 25%.

• Currency Freedom: The requirement to convert US dollar sales revenue into Argentine Pesos has been removed.

• Dividend Repatriation: The regime allows for unlimited repatriation of dividends.

• CAPEX Savings: Projects are exempt from import taxes on capital goods, lowering development costs.

• Guaranteed Stability: The framework guarantees legal and fiscal stability over the life of the project.

  ---

Board and Management Team

CEL’s leadership team represents a key competitive advantage, blending proven mine-finders with executives who possess deep and influential political and commercial experience within Argentina.

• Eduardo Elsztain (Non-Executive Chairman): One of Argentina’s most prominent and influential businessmen, providing unparalleled commercial and political connectivity. Mr Elsztain owns 12.8% of the company. Mr Elstain’s March 2025 appointment as Non-Executive Chairman served as a significant de-risking event for Challenger given that he is also a director and major shareholder of Challenger’s toll milling partner Austral Gold.

• Sergio Rotondo (Executive Vice Chairman): Founder of Golden Mining SA - the original owner of Hualilan. Mr Rotondo possesses deep in-country development and operational relationships.

• Kris Knauer (Managing Director): Geologist and experienced CEO with a track record of value creation, including building and selling Citadel Resource Group for $1 billion.

• Sonia Delgado (Executive Director): Former Secretary of Mining for the San Juan province, providing direct regulatory and permitting expertise that has proven critical.

• Brett Hackett (Non-Executive Director): Served as the Australian Ambassador to Argentina (2018-2023), offering important diplomatic and commercial connections.

Critically, the Board and management are significant shareholders, collectively holding approximately 24% of the company, and as such are highly aligned with ensuring realization of value for shareholders.

Institutional Alignment

It’s important to note that the shareholder register has matured and attracted significant institutional dollars in recent times.

Renowned Australian funds management business L1 Capital as well as London-based hedge fund and asset management firm Helikon Investments each respectively own 8.8% of the company.

Other large undisclosed North American, European and Asian long-only gold funds also recently joined the register.

Catalyst-Rich Pathway Forwards

Investors can anticipate a steady stream of news flow over the coming year, with several key catalysts on the horizon:

• Q1 2026: Commencement of Toll Milling processing and generation of first cash flow.

• Q1 2026: Release of the updated Hualilan Pre-Feasibility Study (PFS) for the large-scale standalone operation.

• H1 2026: Ongoing progress updates on the strategic monetization of the El Guayabo and Colorado V Projects in Ecuador.

• 2026: Commencement of the Bankable Feasibility Study (BFS) for the Hualilan standalone project, funded by toll milling cash flow.

• 2027: FID target for the large-scale standalone Hualilan project

Source: Company Announcements

Risks

• Further delays with the ramp of Casposo.

• Problems with Casposo’s capacity to recover gold and silver at historic recoveries.

• Any sudden or sustained drops in the gold price.

• Inability to sell the Ecuadorian assets would mean there is an equity funding gap of between US$50-70M to ensure standalone Hualilan gets to production.

• CAPEX blow outs in toll milling and/or the upcoming studies.

  ---

Conclusion

Challenger Gold is today significantly undervalued.

At US$4000/oz gold, Challenger should generate ~75% of today’s market cap alone in Free Cash Flows over the next 3 years.

Challenger trades at a meagre 2.6x NTM EV/EBITDA, assuming US$4000/oz gold. At US$3000/oz gold, Challenger is still extraordinarily cheap at 4.2x NTM EV/EBITDA.

Upon the commencement of significant Free Cash Flow generation from January 2026, I believe the market will rapidly re-rate Challenger in line with at least 0.4x EV/NPV at $0.19 per share, implying at least 46% near-term upside from the last traded price of $0.13.

Thanks for reading! Let me know if you have any thoughts, pushback or questions in the comments below.

Also, if you have any suggestions on other names I should look into, drop me a line at info@tenvacapital.com or @TenvaCapital on X.

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Disclaimer

Tenva Capital, its associates and/or entities controlled by its associates hold shares in the company referred to in this post.

The information contained in this article is not investment advice and is of general nature only. All communications made by Tenva Capital and/or its associates are for informational and/or entertainment purposes only. This article has been prepared without taking into account your particular circumstances, nor your investment objectives and needs. This article does not constitute personal investment advice and you should not rely on it as such. This article does not contain all of the information that may be required to evaluate an investment in any of the securities featured within. Before making any investment decision, you should do your own work and/or consult a licensed financial, legal or tax professional, along with considering any relevant Product Disclosure Statement.

Forward-looking statements are based on current information available to the author, expectations, estimates, projections and assumptions as to future matters. Forward-looking statements are subject to risks, uncertainties and other known and unknown factors and variables, which may affect the accuracy of any forward-looking statement. No guarantee is made in relation to future performance, results or other events.

Tenva Capital and its associates make no representation and give no warranties regarding the accuracy, reliability, completeness or suitability of the information contained in this document. Tenva Capital and its associates will not be responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of this post or any communications made by Tenva Capital and/or its associates.

Tenva Capital Pty Ltd (ABN: 37 685 431 690) is a Corporate Authorized Representative (AR: 001314552) of New Horizons Financial Services Pty Ltd (ABN: 63 638 4701 117) which holds an Australian Financial Services License (AFSL: 522392).

The company is set up nicely to beat its $18M Statutory NPAT target for FY26.

Despite the stock being up ~58% since written-up in April, the company still trades at a meagre 5.4x FY26 P/E multiple, as they continue to take share in a recovering market.

Below I will unpack some fresh insights and ascertain the likelihood of achieving FY26 guidance >$18M.

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For new subscribers who missed my original Sanuwave Health write-up, you can find it here:

Impairment Gains

In my original write-up, I highlighted the likelihood we should see material impairment gains shine through in FY25 and FY26.

Whilst we did see $4.8M of impairment gains in FY25 which were mostly from accounts with no further carrying value – a significant uplift when compared with years past – I was expecting more than delivered in 2H FY25.

Given these lower impairment gains, it seems highly probable that Pioneer is booking this outperformance of their “Actual M.M/ROI” over their “U/W M.M/ROI” towards the latter end of their collection curve; recalling that the Actual M.M./ROI represents historic collections as well as future ERC.

The CFO’s comments on yesterday’s call that the company doesn’t expect material growth in impairment gains in the short-term further supports this notion.

However, it’s important to remember that the Actual M.M/ROI which has been reported well in excess of the U/W M.M since FY23 will have to come through impairment gains on the Income Statement eventually.

The back-ending of these gains along the latter part of the collection curve is something to stay aware of and keep a firm eye on moving forwards.

PDP Investment surprise

Given the company had guided to >$90M in PDP investment, I was no doubt surprised to see a lighter $69.1M number come through for FY25.

However, reading between the lines, it appears the company purposely held off on making other investments in 2H to ensure they had capacity for Westpac upon their re-entry to market.

This was all but confirmed by Mr John who reiterated that Pioneer have already “substantially done” their FY26 $80M PDP investment guidance in just the first two months of the Financial Year combined with the announcement that Pioneer are now the only company to have PDP agreements with all Big 4 Australian banks.

Strong Collections / Growing ERC

Cashflows never lie and Pioneer once again demonstrated their capacity to collect consistently on its PDP investments with steady collections of $142M in a year PDP investments reduced by 26.5% YoY from $94M in FY24 down to $69.1M in FY25.

Despite this, Estimated Remaining Collections increased 9% to ~$702M.

Attractive Purchasing

More good news came through via the announcement that Pioneer had booked a 2.2x U/W M.M/ROI in FY25 – higher than historic - due to securing “a number of meaningful forward flow agreements at significant discounts to the last prices (Pioneer) were paying.”

Given these pricing levels continue, this crucially means the company needn’t rely on impairment gains for revenues to inflect in FY26, given Pioneer executes on its $80M PDP investment guidance throughout the year.

$18M NPAT Guidance

I don’t believe the market has fully digested Mr John’s assertion that $80M of PDP investment guided for FY26 has been “substantially done already.”

This information is important in ascertaining the likelihood Pioneer can achieve a statutory NPAT of >$18M in FY26.

The images below highlight the gross uplift in interest income within the first 12 months of investment on $69M of PDP investments versus $80M invested at the same 2.2x FY25 booked U/W M.M. given hypothetical 36% collection within 12 months (in line with historic collection patterns).

Crucially, this alone leads to an incremental $8M of interest income (63M-55M) that would flow straight to the bottom line.

Note that this is without consideration of any potential impairment gains.

In saying this, timing is of the essence for the majority of this $8M excess to fall within FY26.

As such, the 1H26 earnings result– specifically the size of the PDP investments made within the half - will tell the story as to the likelihood Pioneer will indeed reach or exceed its $18M Statutory NPAT guidance.

Summary

Pioneer appears on track to beat and potentially exceed its $18M Statutory NPAT guidance for FY26.

Moreover, its newfound agreement with Westpac upon their re-entry to market serves as further evidence of Pioneer’s capacity to take market share as they continue to enhance efficiencies via a lowered CTS.

Longer-term, a recovering PDP market combined with increasing market share leaves the company in prime position to continue along this outsized earnings cadence into FY26 and beyond.

At 5.4x NTM P/E, I remain long and believe this name still has plenty left to run.

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Disclaimer

Tenva Capital, its associates and/or entities controlled by its associates hold shares in the company referred to in this post.

The information contained in this article is not investment advice and is of general nature only. All communications made by Tenva Capital and/or its associates are for informational and/or entertainment purposes only. This article has been prepared without taking into account your particular circumstances, nor your investment objectives and needs. This article does not constitute personal investment advice and you should not rely on it as such. This article does not contain all of the information that may be required to evaluate an investment in any of the securities featured within. Before making any investment decision, you should do your own work and/or consult a licensed financial, legal or tax professional, along with considering any relevant Product Disclosure Statement.

Forward-looking statements are based on current information available to the author, expectations, estimates, projections and assumptions as to future matters. Forward-looking statements are subject to risks, uncertainties and other known and unknown factors and variables, which may affect the accuracy of any forward-looking statement. No guarantee is made in relation to future performance, results or other events.

Tenva Capital and its associates make no representation and give no warranties regarding the accuracy, reliability, completeness or suitability of the information contained in this document. Tenva Capital and its associates will not be responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of this post or any communications made by Tenva Capital and/or its associates.

Tenva Capital Pty Ltd (ABN: 37 685 431 690) is a Corporate Authorized Representative (AR: 001314552) of New Horizons Financial Services Pty Ltd (ABN: 63 638 4701 117) which holds an Australian Financial Services License (AFSL: 522392).

I was reminded of this prescient notion at Sanuwave’s Q2 earnings call on Friday.

The numbers were clearly fantastic with the stock responding accordingly.

However, the standout for mine were these touched upon qualitative insights and what they could mean for the company over the next 12-24 months.

Let’s dig in and review.

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For new subscribers who missed my original Sanuwave Health write-up, you can find it here:

Results Recap - The Numbers

Revenues were up 42% YoY to $10.2M in line with guidance of a 40-50% YoY increase.

For the full 1H25, revenues were up 51% YoY.

UltraMIST systems sold in Q2 were 116, a 61% YoY increase and an 18% sequential increase from Q1.

Sanuwave now have a total of 1,261 UltraMIST systems in the field, of which 38% have been sold just in the last 12 months.

Applicator/Consumables revenue came in at $6.4M, growing 37% YoY with 10% sequential growth from Q1.

Customer concentration is at mouth-watering levels; with only 1 customer today exceeding 5% of revenues and barely doing so.

Gross Margins came in strong at 78.3%, up 530 basis points from Q2 FY24.

Opex and Net Income comps are noisy as Q2 FY24 had no non-cash stock-based compensation expenses and had a one-off historical accrual of $579K.

Hence, Statutory Opex looks more bloated without putting these one-offs into context.

Q2 FY24 Net Income also had a onetime non-cash gain of $5.3M related to the payoff of legacy debt.

Source: 10Q.

Hence, in terms of assessing progress, adjusted EBITDA is what really tells the story here.

Q2FY25 Adjusted EBITDA came in at $3.37M, a whopping 131% higher YoY.

Source: 10Q.

With guidance reaffirmed for $48-50M in FY25 Revenues, we are more than on-track to reach $12M Adjusted EBIT this year as Sanuwave continues to power ahead with its fantastic growth execution.

The Qualitative

Growth amidst Disruption

A key takeaway for me was how well the company was able to execute despite how disruptive 1H25 really was.

The monumental YoY revenue growth of 50.6% came as Sanuwave only recently achieved full national sales coverage for the first time with 12 sales reps.

Additionally, the company only added its full-time national and key accounts manager to focus specifically on larger accounts in the 2^nd week of July.

This is a lot of disruptive change from Sanuwave’s 9 sales reps leading into 2025 – many of whom were different than the 12 of today.

This essentially represents an entirely different organizational unit from that of just 18 months ago when the company had only 2 sales reps.

The bottom line: Sanuwave’s new and refreshed sales team has yet to ramp.

Larger Accounts Potential

Sanuwave’s newly established “elephant hunter” for larger accounts is barely a month into his newfound role.

This role is fundamentally dedicated to pursuing accounts with “several hundred locations” across the U.S.

Critically however, FY25 guidance does not include any wins on this larger accounts front.

This, despite the reality Mr Frank noted on the call that Sanuwave had been “recently added to the approved vendor list on one of the largest hospital chains and networks in the U.S.”

The Adoption Threshold

With the potential to throw these much larger accounts into the mix, there remains monumental potential for gaining share in this $45B wound care market – noting Sanuwave have yet to penetrate just 1% of this.

Moreover, Sanuwave are on the cusp of engaging their first ever targeted outbound marketing campaign, with the expectation for launch in October 2025.

Refinancing of Debt

Pleasingly, it seems all but confirmed that Sanuwave will not tap equity markets to clean up their $26.7M in debt which currently falls due in September 2025 and will instead roll this out on seemingly much greater terms.

Implications

Guidance for Q3 revenues is $12-12.7M. For the full year of FY25, guidance is $48-50M.

If we take the Q3 midpoint at $12.35M then Q4 revenues should fall between $16.1-18.1M.

Recall that 50% of any incremental revenue growth is expected to trickle down to EBIT moving forwards, that there are over $200M in NOL’s and very minimal incremental capex requirements. Thus, upon debt paydown over the next 12-18 months, EBITDA will convert to FCF at an extremely high rate, assuming CAPEX of ~$0.8M annually.

Interestingly, the company’s peers trade at premium multiples despite their far inferior growth profiles:

Assuming the market gains confidence Sanuwave will grow its’ top line at 35-45% in FY26, we can assess a few scenarios:

At a highly conservative 20x FY26 EV/EBITDA multiple, Sanuwave would trade at $47.39 (noting this multiple is lower than peers with far inferior growth profiles).

At 25x FY26 EV/EBITDA, Sanuwave would trade at $59.75

At 30x FY26 EV/EBITDA, Sanuwave would trade at $72.11.

Note this scenario assumes 8.9m shares outstanding to account for dilution from SBC as well as no change in current net debt of $18.3M.

As SNWV continues to execute on its incremental growth trajectory in 2H25 and beyond, I expect the market will re-rate FY26 earnings in line with a minimum 20x FY26 EV/EBITDA multiple – commensurate with Sanuwave’s astronomical growth profile that is backstopped by more proven execution to date.

Disclaimer

Tenva Capital, its associates and/or entities controlled by its associates hold shares in the company referred to in this post.

The information contained in this article is not investment advice and is of general nature only. All communications made by Tenva Capital and/or its associates are for informational and/or entertainment purposes only. This article has been prepared without taking into account your particular circumstances, nor your investment objectives and needs. This article does not constitute personal investment advice and you should not rely on it as such. This article does not contain all of the information that may be required to evaluate an investment in any of the securities featured within. Before making any investment decision, you should do your own work and/or consult a licensed financial, legal or tax professional, along with considering any relevant Product Disclosure Statement.

Forward-looking statements are based on current information available to the author, expectations, estimates, projections and assumptions as to future matters. Forward-looking statements are subject to risks, uncertainties and other known and unknown factors and variables, which may affect the accuracy of any forward-looking statement. No guarantee is made in relation to future performance, results or other events.

Tenva Capital and its associates make no representation and give no warranties regarding the accuracy, reliability, completeness or suitability of the information contained in this document. Tenva Capital and its associates will not be responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of this post or any communications made by Tenva Capital and/or its associates.

Tenva Capital Pty Ltd (ABN: 37 685 431 690) is a Corporate Authorized Representative (AR: 001314552) of New Horizons Financial Services Pty Ltd (ABN: 63 638 4701 117) which holds an Australian Financial Services License (AFSL: 522392).

I have a highly compelling idea in store for you today with immense upside potential. Despite its’ highly attractive long-term IRR profile, no one seems to be talking about this stock… at least as of yet.

Thesis Overview

76% of global almond supply is produced in California.

Almonds are one of the world’s most water intensive crops and their production relies heavily on groundwater pumping in California.

Between 68-80% of Californian almond acreage is located in regions with critically over-drafted basins.

California’s Sustainable Groundwater Management Act (SGMA) is a state-mandated groundwater pumping reduction program that will materially hamper the capacity of many producers in accessing much needed water for crop growth.

As such, the ramping of SGMA will have a substantial long-term impact on global almond supply.

Producers outside the U.S. are most likely to reap the benefits.

Select Harvests (SHV:ASX) is the only publicly listed pure play almond producer in the world.

As the almond price responds to this impending structural supply-demand imbalance, I believe Select will generate over 40% of today’s market cap in annual free cash flows.

Let’s dig in.

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Industry Dynamics

Almond Orchard Lifespan

The farming of almonds is an incredibly long-duration undertaking.

Almond orchards are usually productive for up to 25-30 years.

Almond trees begin partially bearing fruit after 3 years and only reach full bearing after 7-8 years.

Orchards are usually at their most productive between years 7-15.

Generally, from year 15 onwards, yields and profitability of an orchard decline with age.

Almond production occurs over a seasonal annual cycle.

Annual almond lifecycle

Winter Dormancy

Tree dormancy occurs during winter.

The cool temperatures during this period are necessary for the trees to eventually exit dormancy and bloom successfully.

The blooming process occurs in Spring but is enabled by the cold temperatures experienced during the dormancy period.

Pollination

At bloom time, beehives are tactically dropped into the orchards to pollinate the crop.

The bees also assist in moving pollen between the different tree varieties grown within the orchard.

Poor beehive health can have a dramatic impact on yields for any given crop year.

Heavy rain during bloom – which falls between July and September in Australia - can also negatively affect tree and flower health.

Due to early seasonal bloom compared with other crops, almond trees are susceptible to late season frost.

Maturation

After bloom, almond kernels mature and eventually grow to full size with the shell hardening around the kernel – both of which are protected by a fuzzy outer hull.

As the weather begins heating up and spring rain comes to a halt, farmers commence tactful irrigation of the crop via modern line irrigation methods.

Not long after this the hull splits open, exposing the almond shell.

Harvest Season

Machines are then used to physically shake the trees amongst the orchards. The almonds fall to the ground where they are gathered and taken through a processing facility for further refining and removal of debris.

Crack-out

The crack-out rate is a common industry term which represents the percentage of edible kernel weight obtained after removing the almond shell. This is measured as a ratio of kernel weight to total in-shell weight.

A higher crack-out rate indicates a larger, meatier kernel relative to the shell. This is desirable for profitability and quality.

Only 20-30% of almond flowers actually crack-out and develop into nuts.

Water Intensity

An acre-foot is the amount of water needed to fill one acre of land with one foot of water.

Almond orchards require 3-4 acre-feet per acre of water irrigation annually.

This is highly water intensive.

For context, to produce a single almond requires approximately 8 litres of water on average.

Even a single year of water stress can have a material impact on future yields.

To avoid prolonged negative effects from even just one year of water stress requires skilled farmer timing via a methodically crafted deficit irrigation program.

In the case this is done correctly, recovery is possible given normal water supply the following year.

However, multi-year reductions in irrigation significantly amplifies the possibility of long-term orchard damage, potentially leading to substantial yield declines as well as tree weakening and potential removal.

Therefore, a steady, ongoing, long-duration water supply is of critical importance for any farmer that embarks on the 20+ year duration project of farming almonds.

On top of this, almond orchards also require year-round nutrient management and pest monitoring.

Global Almond Supply

As touched on above, almond orchards need warm summers and cool winters to effectively bear fruit.

They are therefore most productive in a Mediterranean climate.

For this reason, global almond production is highly concentrated in certain regions across the globe.

California is the most prominent region for production providing 76% of the world’s almond supply.

The 2^nd and 3^rd largest producers are Australia and Spain, each with 7% of global supply.

Hence, California is the key driver of almond prices and overarching industry dynamics.

Californian Acreage

From 1980-1995, Californian acreage remained largely stagnant.

However, from 1995, acreage grew consistently for two and a half decades.

Very strong almond prices from 2010-2015 drove significant investment in new supply.

As a result, bearing acreage growth really took off post-2016, reflecting the ramp up of this supply’s productivity.

This flurry of supply resulted in significantly depressed prices from 2020.

As a result, operators reduced new plantings, increased the removal of non-performing acreage and lowered their emphasis on enhancing yields through costly nutrient management, instead prioritizing a more defensive cash management stance.

In 2022, the industry had its first decline in total acreage for more than 20 years.

Global Almond Demand

From 2004-2024, global almond consumption grew from 0.6M Metric Tonnes to 1.6M Metric Tonnes; representing a 20-year CAGR of 5.4%.

China and India powered approximately 29% of this 20-year consumption growth, as North America & Europe made up 37%.

In the past 5 years, China, India & the Middle East contributed to 75% of global consumption growth whilst consumption in developed markets largely stagnated.

Production, Price Dynamics & Historic Yields

Global almond production has historically grown in line with demand, at approximately 5% per annum.

Source: Somar Global Partners.

However, after a large run from 2016-2021, production in California reduced 3.5% in the last 5 years, offset by growth in Australia and the EU.

Over the past 15 years, Californian yields per acre in Pounds averaged 2,160.

Almond production = bearing acreage * yield per acre.

Source: Spectrum Data Analytics.

The yield weakness of the past 3 years can be attributed to less investment in nutrient management arising from cashflow constraints due to depressed prices and increased operating costs.

In general, any yield improvements tend to lag price increases. This is because it typically takes years for investments in productivity enhancements to be realized.

Pricing

The almond price is inherently cyclical and dictated by overarching supply-demand dynamics.

The strong prices from 2010-2015 saw increased orchard plantings which all came online during the 2015-2020 period. As these came online, prices were increasingly more depressed.

In isolation, recent price action looks to simply imply a reversion to the mean.

Notably, there’s been an approximate 10-year time frame between each cycle peak.

This intuitively makes sense given it takes ~5 years to start meaningfully producing volume for perennial crops like almonds.

Importance of ‘Carry-in’

The carry-in volume is the volume of almonds that were unsold in the prior year and are thus carried into the next year - usually sold at a slight discount given their older status.

The saleable supply in any given crop year is the combination of this carry-in volume plus the net saleable new crop.

The emotive role of the crop carry-in on price is important to consider and understand.

If the carry-in is low, this may raise prices heading into a new crop year, as there is less perceived supply in circulation.

If the carry-in is too high, then the subsequent crop year may experience an over-supply problem ultimately leading to depressed prices.

Since the turn of the century, average carry-in as a percentage of Saleable Supply has been 18.1%.

Shipping issues throughout the latter part of the COVID pandemic led to record high carry-in volumes. This put a huge strain on pricing and grower returns.

Another way of looking at carry-in is by taking it as a % of prior year shipments. The industry targets approximately 20%.

The 2024 crop was the first time excess COVID inventories were cleared with the industry returning to levels slightly below target.

The difficulties of this COVID era for Californian growers cannot be overstated. Reports indicate almond farmers have incurred significant negative annual returns since 2020 with many under serious financial strain, amplified by recent land value declines.

As a result of these record-high carry-in numbers, buyer behaviour shifted to ‘hand-to-mouth’ purchasing.

Californian Acreage Age Profile

Even though orchards can bear fruit for up to 30 years, the average age of removal in California is currently 21.7 years.

The earlier than necessary removal is due to escalating operating costs and increased water stress as we will shortly get to.

Approximately ~15% of bearing acreage – roughly 200,000 acres – will surpass this average removal age within the next 5 years.

At the end of a tree’s life, yields materially decline and therefore experience a reduction in cash generation. This is of course absent any significant uplift in prices, in the case of which removal may be postponed.

56% of California’s almond acreage is less than 10 years old, the result of significant planting after the last market peak in 2014/2015.

Sources: Somar Capital Partners, LandIQ, California Almond Board.

SGMA – The Game Changer

Herein lies the crux of this thesis.

The supply of water for farming almonds has historically relied heavily on the use of both surface and groundwater.

In Californian drought years, 70-80% of an almond farmers’ water supply has historically been procured from groundwater. In normal years groundwater pumping is usually around 30-40%.

Prior to 2014, Californian farmers had completely unrestricted access to groundwater aquifers.

However, long-term excessive pumping has put the aquifers into significant over-draft. This means they are being emptied at a rate much faster than their capacity to be recharged.

This overuse of the State’s groundwater resources has resulted in land subsidence and deterioration in water quality in many areas throughout the State.

The Sustainable Groundwater Management Act (SGMA) was enacted in 2014 by Californian Governor Jerry Brown to halt over-draft and bring basins into ‘balanced levels of pumping and recharge’ by 2040.

SGMA requires existing local agencies to form Groundwater Sustainability Agencies (GSAs) in critical, high and medium priority basins and to develop and implement Groundwater Sustainability Plans (GSPs).

GSAs are therefore held responsible by the State for achieving long-term ‘sustainable management of their groundwater basins’ and must achieve sustainable groundwater management within 20 years of implementing their GSPs.

These GSPs must avoid the following issues from groundwater use within the GSA:

1. Significant and unreasonable declines in groundwater levels

2. Reductions in groundwater storage

3. Intrusion of seawater

4. Degradation of water quality

5. Subsidence of land

6. Depletions of interconnected surface waters

Groundwater basins experiencing the most severe over-draft are labelled critically over-drafted basins. These basins must achieve groundwater sustainability by 2040.

GSAs in critically over-drafted basins were required to submit GSPs by January of 2020. Implementation followed submission, with annual reporting and five-year updates mandated.

As of 2025, 23 GSPs (corresponding to 6 basin areas) have been deemed inadequate, leading to state intervention or probation by the State Water Resources Control Board to ensure compliance. 9 are still under review. Source: AllenMatkins.

The overwhelming concentration of critically over-drafted basins within the San Joaquin Valley (SJV) directly correlates with California's most productive agricultural regions, including the vast majority of almond acres.

21 basins are classified as critically over-drafted with ~84% of this acreage located in the San Joaquin Valley. (Source: California Department of Water Resources).

Notably, it is estimated that between 68-80% of California’s almond acreage is situated within these critically over-drafted regions. (Sources: Almond Board of California & AcreTrader).

This means that 52-61% of the world’s global almond supply is grown in Californian regions with critically over-drafted groundwater basins.

Californian growers heavily rely on groundwater access to adequately maintain their almond crop yet are faced with state mandated pumping reductions all the way through until 2040 in which ‘sustainability’ must then be achieved.

The implications of this on future almond supply will be drastic.

White Lands

Land atop basins with no access to surface water and sole reliance on groundwater for irrigation are known as ‘white lands.’

Approximately 143,000 almond acres are atop these white lands with critically over-drafted basins.

To achieve sustainability in these basins, the stone-cold reality is this: groundwater pumping must be reduced to a range of 0.25-0.8 acre-feet (AF) per acre per year depending on the specific location within the San Joaquin Valley. (Source: AgIS Capital).

Recall that almonds require a sustainable annual water supply of 3-4 AF per acre annually.

If we assume a reduction to 0.55 AF per-acre, then logically approximately 7 of 8 of these acres will be extracted by the time SGMA is fully enacted in 2040. This alone represents 9% of the world’s global acreage. And this is just the ‘white lands.’

Access to Both Surface and Groundwater

Turning our attention to areas in the SJV which use both surface and groundwater, the Public Policy Institute of California (PPIC) estimates the very best-case scenario is that 500,000 acres of farmland will need to be fallowed by 2040 to be SGMA compliant. However, this scenario assumes one million acre-feet of new water supplies. (Source: PPIC).

The only problem is that ‘new supplies’ are expected to come from recharge technology. Yet, contested water rights mean there are few incentives for farmers to front millions of dollars to make this investment. This is because the water that sinks below one person’s farm becomes available for others to pump. Without a detailed accounting and crediting system, farmers have no way of knowing they will recoup their investment, let alone see any return.

“When someone recharges, they’re mainly benefitting their neighbors. The recharge is local, but the benefits are regional” - Graham Fogg, a UC Davis professor emeritus of hydrogeology.

The PPIC study goes on to estimate that up to 900,000 acres of irrigated farmland may need to be removed by 2040 in a ‘worst-case scenario’.

Source: PPIC

Given 700,000 acres of irrigated farmland are fallowed by 2040 and that half of this will be almond acres – a reasonable inference given their prevalence and water intensity - then this implies 350,000 bearing acres of almonds will be removed from the SJV.

This scenario represents an additional 207,000 acres or 15% of global almond acreage that will be taken out of the ground, on top of the expected acreage removals in white land regions.

Thus, inclusive of the removal of the white land acres, we could see ~24% of global almond acreage effectively removed by 2040, whilst demand for this healthy, plant-based, protein-rich food keeps surging.

Almond Agricultural Water Share

Another telling data point is in assessing the water supply used by almonds in Californian agriculture as is and then extrapolating the % of water supply that will be needed to meet future demand. The results of which are simply staggering:

The % of water intensity used by almonds to meet historic demand would need to double to ~70% of just today’s Californian agricultural water availability, noting this doesn’t even consider the vast water reductions mandated by SGMA to bring aquifers back into balance!

Psychological Effect of SGMA

Notably, we haven’t even considered the psychological effect that SGMA is bound to have on prospective almond growers.

A greenfield almond orchard investment in 2025 would have the following characteristics:

1. Material capital outflows for the first 5 years. The orchard would produce its first fruit in 2028.

2. Significant operating losses would be carried for each of the first 5 years with the prospect for annual breakeven only in 2029/2030 in the best case.

3. From years 2030-2040, the orchard would be in ‘cash generation’ mode.

4. Real economic return to the farmer would only occur post 2040. Critically, this means all capital outlay has been returned, and the farmer would only be earning a real return post 2040.

Thus, it seems highly unlikely many Californian farmers will jump at the prospect of embarking on a 20+ year almond orchard investment when the farmer would only see a real economic return after ~15 years given the mandated environment of heavy reductions in groundwater pumping – a mechanism growers heavily rely upon for the maintenance and survival of their crops over the long-term.

When there are simple alternatives in terms of crop rotation, I find it difficult to fathom that many Californian farmers would embark on this journey with full awareness of the material capital impairment risks posed by this known lack of steady water supply to maintain a healthy almond orchard long-term.

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Cost of a Greenfield Almond Orchard in Today’s Environment

It’s important to note that nearly 70% of Californian almond farms are 100 acres or less. (Source: USDA 2017 Census of Agriculture).

Hence, the recent UC Davis study examining the sample cost of establishing a greenfield almond orchard on 100 acres in the San Joaquin Valley is incredibly useful to consider. (Source: UC Davis).

Notably, the study assumes adequate water supply throughout the life of the orchard, meaning no water premium has been considered.

Despite this, the study noted that the total cost of a greenfield almond orchard investment is $4 USD/lb in today’s environment, significantly above current prices of $2.64 USD/lb (Source: Stratamarkets). To reiterate, this is absent any water premium.

Today’s all-in cost of almond production at $4 USD/lb is 54% higher than in 2019 when the price was $2.60 per pound in the Northern SJV.

Cash costs accounted for 32.5% of this increase while the remainder is attributable to higher non-cash costs such as capital recovery costs for farming equipment, largely driven by higher interest rates.

The last bull cycle saw a $4 USD/lb top before quickly falling off a cliff as orchards planted between 2010-2014 started bearing fruit.

The bottom line here is this: Pricing will need to go significantly beyond $4USD per pound (equivalent of $13.73 AUD/KG) before we see any meaningful Californian supply response in this SGMA environment.

Structurally Broken Supply

After 30+ years of almond acreage growth, water scarcity, increased breakeven costs and suppressed almond prices have reduced total almond acreage in California since 2021.

Even if prices increase from today’s levels, the associated lack of clarity surrounding long-term water access, its effect on land values combined with the hefty up-front capital investment required for a greenfield project renders any significant new orchard developments highly unlikely into the foreseeable future.

Proof in the Pudding

New plantings are already in systematic decline as removed acres have also begun to tick up.

Source: Company Announcements.

Source: Somar Capital Partners.

California Almonds Summary

Given the above almond industry dynamics in California, I believe it’s highly likely we see a meaningful long-term decline in global almond acreage and volumes.

Inevitably, this will put significant upwards pressure on global almond prices.

I believe producers outside California are best positioned to take advantage of this dynamic and generate material free cash flows.

Select Harvests (SHV:ASX)

Company Background

Select Harvests is the only pure-play listed almond producer anywhere in the world.

Select trades under the ticker SHV on the ASX.

The company started out as a small-time grower near Mildura, Australia in the 1970’s yet has become a significant operation overtime.

Today, the company runs the 2^nd largest almond production by acreage in the country and the 5^th largest in the world with 22,643 planted acres across three primary locations.

Operating at three distinct locations limits exposure to the weather, spread of disease as well as insect infestation whilst bolstering the availability of labour.

The company owns and operates a 40,000-tonne processing facility, with expansion to 50,000-tonnes soon to be complete. The facility is used for both its own as well as third-party processing and production.

SHV owns a large portfolio of water rights which include both permanent entitlements as well as medium term leases.

The company strategically paid down debt via a $80M capital raise in November 2024 and is now adequately capitalized to take advantage of the impending market opportunity.

In 2022, new CEO David Surveyor joined the group. Mr Surveyor was formerly CEO of Alliance Group - a red meat co-operative in New Zealand with annual turnover of NZ$2.2B.

In FY23, management instituted a project management office (PMO) to enhance orchard efficiency, yields and cash generation.

The company has $43.9M of tax losses, meaning SHV will not be subject to tax payable on their next ~$146M in profits generated.

Strategy

Sales are primarily exports to China, India & the Middle East.

In 2024, 65% of the group’s exports were direct to China.

In recent years, Select have increased their focus on key markets in China and India, whereby Australia has a significant tariff advantage over the U.S given respective trade agreements with both countries.

In FY24, Select increased sales to China by 30%. These sales made up 65% of the groups’ exports.

As part of the PMO and under new leadership, the company has evolved its’ farming strategy and from August 2024 has increased fertilizer applications under a refreshed horticultural program.

Productivity

Select targets approximately 29,000 Metric Tonnes (MT) of almond crop production per annum.

In 2025, the crop will come in lighter at ~25,250MT due to lower crack-out percentages and a weaker bloom than previous years.

This weaker crop position is consistent across all Australian growers. (Source: Australian Almond Board).

Source: Company Announcements.

It’s important to note that the FY25 crop was grown under the old horticultural strategy and the company expects FY26 to be the first year where we should see the newer horticultural practice benefits translating to a stronger crop yield.

The delay in the effects on yields of the new horticultural practice is due to almonds’ two-year reproductive cycle.

Cost of Production

On top of the tariff advantage Australia boasts, Select are lower cost producers than Californian producers on a normalized production basis.

Source: Company Announcements.

In saying this, the salient reality is that production costs exhibit operating leverage and therefore depend on the amount of saleable crop produced for any given year. Given the weaker crop in 2025, production costs are expected to come in at $7.77 AUD/KG.

Source: Company Announcements.

Orchard Age Profile

Select’s average weighted orchard life is 13.5 years.

As of December 2024, 100% of SHV’s current planted acreage is cash generative.

92% of planted orchards are within the economically mature sweet spot of low CAPEX & high cash generation.

11% of planted orchards will be considered for replanting over the next 5 years. This decision may be delayed by higher commodity prices.

The company has 10 years before ~40% of its orchards will be considered for replanting.

In mitigating any volatility from this, a targeted and balanced replanting schedule is likely to be initiated by management over the next decade.

Source: Company Website.

Australia’s Water Rights System

Water rights are ‘unbundled’ or separated from land ownership in Australia, allowing them to be traded and owned independently.

The heart of almond growing in Australia occurs in the Murray-Darling Basin (MDB). This is governed by a nationally coordinated framework under the Murray-Darling Basin Plan.

Types of Water Rights

The strongest water rights are known as Permanent Water Entitlements. These provide an ongoing right to a share of available water for any given year but are tied to specific zones within the MDB.

A recent strategic decision was made by management to increase Selects’ permanent water entitlements. Select will also rebalance its’ water portfolio to more closely align water entitlement locations with farm locations.

Leased Water Rights occur when an entitlement holder leases their water entitlement to another party for an agreed period.

Temporary Allocations are annual volumes that are assigned to entitlements but vary based on seasonal availability due to rainfall and dam storage. These are often traded on spot markets to meet shortfalls and are subject to the same location-based rules as permanent entitlements.

Select have a balanced portfolio of permanent, leased and temporary spot market water allocations.

Government Buybacks

The Australian government's water buyback program in the MDB refers to a system whereby the federal government purchases permanent water entitlements from irrigators.

Buybacks reduce the total volume of water available for irrigation and other productive uses by permanently transferring purchased entitlements to the Commonwealth Environmental Water Holder (CEWH), who use these for ecological benefits rather than agriculture.

Australia’s system is market-driven, voluntary and ensures adequate compensation for entitlement sellers, thereby minimizing market disruption.

When comparing this to SGMA, Australia’s buyback system is far less disruptive to farmers.

California’s SGMA is mandated by law, decentralized and causes significant disruption through direct pumping restrictions and fees. Its’ long-term implementation brings about a sense of major uncertainty for farmers. Notably, SGMA has also already contributed to quite significant land value plunges that are as high as 25-50% in some areas of the SJV. (Source: farmprogress.com).

Almond Price Impact on SHV Share Price

Despite a strong correlation between almond prices and equity values, there are periods of significant disconnect which can and do occur.

Somar Capital ran a fantastic long-term analysis on this – showcasing that between Oct 2011-Oct 2012 the almond price surged by ~60% with very little response in SHV’s share price.

However, over the ensuing 6-months, SHV’s share price experienced a meaningful 140% re-rating to effectively re-establish this correlation.

Source: Somar Capital Partners, Tenva Capital 2025 adjustment to reflect impact of Objective Estimate on prices.

The recently depressed SHV share price suggests that a similar disconnect between the almond price and SHV’s equity value has occurred.

July 2025 Objective Estimate

Each year the USDA National Agricultural Statistics Service (NASS) conducts what is termed an ‘Objective Estimate’ to garner the size of the incoming crop in California.

This is done via sample collections from orchards and taking a view on yields.

In July 2025, the industry was absolutely rocked by what proved to be a much larger objective estimate than anticipated at 3B lbs.

Consider that if the 3B lbs proves out with a 550M lb carry-in to the 25’ year, then net saleable supply would be 3.55B lbs for the ’25 crop year. Given 2.7M lbs in total shipments, this could feasibly lead to the highest carry-in on record heading into the ’26 crop year of 850M lbs; a highly bearish signal for near-term price and Californian growers.

As such, this news resulted in the single greatest weekly Stratamarkets almond price reduction on record – a $0.45 USD/lb weekly reduction. At this point, prices had fallen $0.87 USD/lb from the peak price in May of $3.34 USD/lb down to $2.47 USD/lb.

Prices have since found a floor and have started to creep back up again with the latest Stratamarkets update detailing a price of $2.64 USD/lb.

Immediately after the July Objective Estimate, SHV’s share price took a beating, with slight recovery in recent days.

However, there remains industry scepticism over the procedural methods for how NASS arrived at a 3B lb Objective Estimate.

For example, in this Australian Almond Board Webinar, Professor Abe Padilla argues that NASS simply took a 15-year average of yields to land at a 2160 lbs/acre figure, instead of considering the cash-strapped conditions farmers have been dealing with over the past 4-5 years in California. Mr Padilla - alongside other industry experts - argue that lower fertilizer applications as a result of these harsh economic conditions means it will be very difficult for yields to meaningfully recover from the last 3 years’ average. (Source: Almond Board of Australia).

Source: Spectrum Data Analytics.

Admittedly, I hold no strong views as to whether the 3B lb estimate will prove accurate.

However, I believe the fallout from this estimate is largely priced in and therefore that its optics have created the conditions for a highly attractive entry point into Select’s equity.

In the chance the 3B lb estimate does prove correct, I believe this will only serve to further bolster the long-term thesis.

The higher carry-in into the 26’ crop would further depress prices and result in another year of horrendous economic conditions for Californian farmers.

These conditions would only serve to accelerate the removal of almond acres and solidify the trend of a lack of new plantings into an environment with unknown access to critical water resources.

Hence, in the long run it would only perpetuate the cycle of almond prices being bid up, enabling Select to earn material profits.

SHV Valuation

Free Cash Flow potential

Today, SHV’s market cap is $529M.

Assuming SHV reach their normalized 29,000 MT target in the coming years due to enhancements in its horticultural program, its’ cost of production would be $6.77 AUD/KG.

Capex in FY24 was ~$22M and in FY23 it was ~$27.6M. Let’s conservatively bake-in $30M in annual capex on a normalized basis.

The below Free Cash Flow sensitivity analysis is telling:

In yellow is the previous cycle high prices.

In red is the minimum of where I believe prices need to go for greenfield investment to even be considered in California. This is the equivalent of $4.40 USD/lb.

Under this scenario, assuming a $6.75 AUD/KG cost of production, SHV will generate $217.5M in annual free cash flows. This is a 41.3% FCF yield to today’s market cap or a 2.4x P/FCF multiple.

Whilst it’s impossible to predict exactly when this price response will happen, I ultimately believe the market is completely asleep at the wheel here, fixated on short-term irrelevant data points like the Objective Estimate which inevitably has no relevance to the long-term overarching thesis.

In a world where SHV does ~$217.5M annual Free Cash Flows, slapping a conservative 8x multiple on this – i.e. in line with previous cycle highs - would see the stock would trade at $12.24 per share – 229% higher than the last traded price of $3.72.

While we may not reach this price for years, the only thing that really matters here is that new supply is already meaningfully being hampered.

Thus, so long as this supply-demand imbalance continues, we should still see positive pricing pressure long-term.

Granted, the 3B lb Objective Estimate poses a very real risk for lower almond prices in the short-term.

Despite this, I am more than happy to hold through this fallout – however it may look - and have treated the lower prices it has induced as a buying opportunity into what is a wonderful long-term set-up.

For further context, Selects’ FY25 crop was already 75% covered prior to the objective estimate release. As such the pain felt by any market volatility will be minimal compared to Californian growers due to annual crop timing differences.

Market Value of NTA

Today, SHV trades conservatively below the market value of its Net Tangible Assets of $4.75 per share. As such, limited free cash flow generation is being priced in by the market. This inevitably highlights the wide margin of safety at today’s share price of $3.72.

EV/Acre

EV/Acre has averaged ~$38k over the last 10 years.

During the last cycle high, EV/Acre peaked at ~$75k.

Given 22,643 planted acres, if we trade at the same ~$75K EV/Acre level in the next upswing then the stock would trade at $10.38 per share. This represents 179% upside from the last traded price of $3.72.

Risks

Agricultural assets are prone to environmental factors and risks that are completely outside of the company’s control which could have a material negative impact on annual crop yields and orchard health.

Conclusion

If you’re able to hold a 3-5+ year view, then whichever way you look at it, an investment in Select Harvests today poses a highly attractive IRR profile with a wide margin of safety attached.

As demand growth for almonds remains steady, SGMA groundwater pumping restrictions will result in structurally diminished global almond supply.

I believe this dynamic will materially boost the price of almonds, resulting in Select generating over 40% of today’s market cap in annual Free Cash Flows.

Despite this, today’s market remains solely focussed on short-term noise which is completely irrelevant to the overarching long-term thesis.

Thanks for reading! Let me know if you have any thoughts, pushback or questions in the comments below.

Also, if you have any suggestions on other names I should look into, drop me a line at info@tenvacapital.com or @TenvaCapital on X.

This is a reader-supported publication so if you enjoyed this write-up, please consider subscribing below, sharing this with a colleague or friend and hitting the like button. Your support is always appreciated!

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Tenva Capital, its associates and/or entities controlled by its associates hold shares in the company referred to in this post.

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This write-up will be more brief than usual as this is a rapidly evolving situation with contracts that could inevitably land any day now.

The company I touch on today is a very low-quality microcap with extremely high working capital requirements. It also has a very lumpy and unpredictable contract stream and one of the ugliest long-term charts I think I’ve ever seen.

If I haven’t scared you off yet, feel free to keep reading!

Thesis Overview

Matrix Composites & Engineering (MCE:ASX) is a small-cap ASX listed microcap.

At a high-level, Matrix designs and manufactures specialized syntactic foam buoyancy systems tailored to specific subsea applications.

Matrix’s Henderson facility in Western Australia is the largest and most sophisticated composite syntactic foam manufacturing plant in the world.

The facility is currently majorly underutilized with capacity to generate $200M in annual revenues, despite MCE only generating $84M in FY24 and expected to do roughly the same in FY25.

The stock has been smashed off the back of delayed contracts being pushed out to FY26.

The company has recently surpassed a critical inflection point in their subsea umbilicals, risers and flowlines (SURF) buoyancy offering which should result in meaningful revenue growth, flexed operating leverage and a doubling of EBITDA in FY26 to $20M.

At $20M FY26 EBITDA, today’s share price of $0.21 implies an EV/EBITDA multiple of merely ~1.9x on a growing earnings base.

The company also has extremely attractive long-term opportunities with the impending major growth in offshore wind markets. This opportunity is historically unparalleled and would completely change the nature of what is today a highly cyclical, low-quality business.

Lastly, a premium bid for the company tabled by much larger competitor AIS was just recently knocked back by MCE’s board due to disagreements around valuation and a large capital raise insisted on by AIS.

However, AIS are now set to IPO on the ASX themselves in August, and I believe there are meaningful incentives for them to re-bid and ultimately merge with Matrix within the next 12-18 months.

Upon the market gaining comfort around the FY26 earnings inflection and absent any consummated merger, I believe the stock will re-rate in line with its historical 4-5x EV/EBITDA multiple implying between 88-130% upside from the last traded price of $0.21.

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Capital Structure

MCE IPO’d on the ASX in 2009.

The company raised $15M at a $64M market cap or $1 per share.

Funds from IPO were predominantly used to invest in and develop its gargantuan Henderson facility in WA – which later became fully operational in 2011.

Despite a great first couple of years, the stock has pretty much been on a one-way downward trajectory ever since.

Today, Matrix has an EV of $38.7M and net cash of $8.3M.

Average daily traded volume over the last 3 months is approximately $60k AUD.

The facility

Matrix’s Henderson facility is the largest and most sophisticated composite syntactic foam manufacturing plant in the world.

The facility spans an 80,000 m² site, with a 22,000 m² operational area dedicated to production.

The plant became operational in 2011.

The decision to locate in Henderson, a key industrial hub near Fremantle, was strategic, leveraging the infrastructure of the Australian Marine Complex and proximity to maritime and defence industries.

The plant was designed with cutting-edge manufacturing concepts, including lean production and one-piece flow principles, emphasizing efficiency and waste reduction.

These highly automated state-of-the-art processes were integrated from the get go.

The technology at Henderson enabled Matrix to produce high-quality products at extremely competitive prices with much shorter lead times, ultimately setting a global benchmark for syntactic foam composite manufacturing.

Matrix has since continued to reinvest in and upkeep this world-class, state-of-the-art facility, despite its heavy underutilization in recent times, which we will soon touch on.

Earnings profile

Most of MCE’s revenues are generated by providing specialized syntactic foam buoyancy solution technologies to the oil and gas subsea market.

Its subsea segment made up 88% of its FY24 revenues.

70% of revenues were generated via subsea buoyancy work specific to the oil and gas sector.

Matrix has two other smaller segments: Corrosion Technologies and Advanced Materials which made up 7% and 6% of FY24 revenues respectively.

In the specialized syntactic foam buoyancy space, there are only 3 key players: Matrix (an Australian headquartered company) as well as AIS and Balmoral Comtec (both private UK headquartered companies).

Brief euphoria into a nightmare downturn

From 2009-2011, Matrix enjoyed soaring revenues and earnings.

The share price followed suit, reaching as high as $8.78 in 2011.

However, the good times were short-lived.

In 2012, the order book precipitously declined as the company failed to secure meaningful work with the backdrop of a very strong AUD.

Matrix then briefly got itself back on track in FY14 and 15.

However, the oil crash of 2014-2016 preceded a prolonged, nightmare of an 8-year downturn from FY16-FY23, as can be seen below.

Catch-22

For the first few years after its IPO, Matrix successfully positioned itself as a leading player in providing subsea buoyancy solutions for oil and gas explorers. In 2011, Matrix delivered record production of its riser buoyancy modules – a tool supporting the drilling process by managing the weight and stability of the pipe in deepwater environments.

Matrix developed its Henderson facility to continue its focus on dominating the O&G drilling space.

And up until 2011, dominate it did.

Its syntactic foam competitors were ultimately pushed into providing buoyancy solutions tailored to oil and gas producers. In particular, their focus was on ancillary products for the subsea umbilical risers and flowlines (SURF) domain.

What presented as an initial blessing for Matrix in its early years inevitably turned into their worst nightmare upon the oil crash of 2014-2016 and subsequent prolonged downturn.

Ultimately, there was far less O&G exploration which meant far less buoyancy solutions were required.

This left Matrix in a particularly dire situation as can be seen in the above image of their revenues and operating income throughout FY16-23.

On the other hand, the SURF segment was supported by long-term production from established fields; a more resilient end-market as producers sought to maximize output from existing assets.

As such, AIS and Balmoral had an easier go of it than Matrix during the downturn.

Recent times

Matrix had made the major capital investment into their Henderson facility but the downturn meant it was highly underutilized.

They therefore commenced a multi-year process in pivoting the facility such that they had capacity to service the SURF buoyancy market.

Their first meaningful breakthrough occurred in 2023 and it has only continued to grow since.

Matrix have taken SURF revenues from almost $0 in FY20 to $60M in FY25.

The company has secured over $120M in SURF projects in just the last 2.5 years alone.

They have now deployed more than 1000 Distributed Buoyancy Modules (DBMs) in ultra deep water and have approximately 35% SURF market share for syntactic buoyancy solutions.

As such, Matrix have recently surpassed a critical turning point whereby they have demonstrated widespread proof of concept to prospective clients.

Having reached this critical turning point, Matrix now presents as the clearcut lowest cost buoyancy solutions supplier given its monumental incremental capacity alongside its highly automated, lean manufacturing principles adopted at the Henderson plant. This capacity is simply unmatched by AIS and Balmoral.

Given this ability to manufacture products in the most efficient, low-cost and scaled manner, Matrix are now being contemplated for even larger SURF contracts.

On their progress in SURF, CEO Aaron Begley had this to say at the FY24 earnings call:

As such, I expect Matrix to continue its SURF market penetration and continue to gain further share.

It’s also worth noting that strong industry spend is expected until at least the end of the decade.

The stock has been smashed due to delayed SURF (and O&G) contracts that were expected to land in FY25. Yet, so far they haven’t.

For context, at the FY24 earnings call CEO Aaron Begley mentioned that of their $300M competitive bids submitted in the SURF market that “four key projects with a value of $100 million (are expected) to be awarded over the next six to eight months, including two by the end of this calendar year.”

However, only 1 SURF project landed in FY25 valued at $21-23M. The remaining ~$77-79M in quotes have been pushed back.

Yet the company has sustained no material project losses and still has their $300M of competitive quotations in the SURF market.

As such, these ~$80M SURF contracts which Matrix expected to land in FY25 should inevitably land in FY26, absent any stuff-ups on the operational front.

Matrix have the ability to meet this increased capacity due to their largescale Henderson facility - a key competitive advantage which results in majorly embedded operating leverage.

As a reminder, Matrix doesn’t need to make any incremental capital investments to generate up to at least $200M in buoyancy product revenues at Henderson.

Because of this delay, FY25 revenues and earnings are expected to be largely flat YoY but if you look ahead 12 months things start to look really attractive.

Note the dynamics of scaled COGS and flat OPEX as underlined above and you start to wrap your head around how attractive the operating leverage dynamics truly are.

Having delivered 30% incremental gross margins in FY24, I am comfortable in underwriting 35% incremental gross margins moving forward as MCE continue to leverage their automation and lean manufacturing principles.

I.e. in the event MCE plays catch up on its FY25 SURF delays and delivers just $11-13M in new SURF contracts on top of these delayed ones, then the company should generate $90M in SURF revenues for FY26. Assuming flat drilling revenues of $11M and flat $10M revenues for advanced composites and Corrosion technologies, then we’re already looking at $110M in FY26 revenues.

Note this implies 0 growth in offshore drilling buoyancy solutions and 0 growth in advanced materials and corrosion technologies.

At 35% incremental gross margins and flat opex, we are staring down the barrel of $20M EBITDA in FY26.

At the last traded price of $0.21, an investment in Matrix today is being made at ~1.9x FY26 EV/EBITDA.

Dirt. Cheap.

As you can see, consensus forecasts have most certainly not priced this dynamic in.

Heaven forbid MCE’s other segments also begin to show any signs of growth…

A quick note on O&G Drilling

Global offshore O&G markets demonstrated strong growth across most major basins in 2024 across the globe.

In 2025 however, offshore spending was limited due predominantly to rising spending costs and supply chain challenges resulting in longer than expected lead times.

However, there is clear visibility into a meaningful rebound in deepwater global offshore capex spend in 2026 and 2027.

For context, only 13% of Matrix’s FY24 revenues – roughly $11M – were derived from buoyancy in O&G offshore mining.

Given the imminent step-change in CAPEX spend, I expect Matrix to meaningfully grow its revenues in this segment over the next 2 years.

However, as touched on above, we don’t need this uptick to win from here.

The major long-term opportunity – Offshore Wind

The quote below sums up the astronomical long-term opportunity for buoyancy solutions in deepwater offshore wind.

Lets unpack this by comparing it to the O&G drilling market:

The entire buoyancy drilling market is $2B with a global fleet of approximately 200 rigs and drillships.

This $2B represents the installed base and replacement demand.

Assuming a 10-year life cycle, this gives us an annual buoyancy market of approximately ~$200M.

Now turning our attention back to offshore wind: 150 mooring lines and 150 buoyancy modules.

Assuming, one module and one mooring line cost $50,000 each (conservative estimate based on industry trends) and not accounting for any of the additional distributed buoyancy for supporting cables we land at $15M generated for just one project ($100,000*150) – or approximately 7.5% of annual demand for buoyancy solutions in the entire global offshore O&G drilling market.

7.5% for just one deepwater offshore wind project!

Syntactic foam solutions completely dominate the deepwater and ultra-deepwater buoyancy space due to its durability, high pressure resistance and cost effectiveness.

As such, this is an extraordinarily unprecedented opportunity for the specialized syntactic foam players.

As a reminder, there are only 3 key players that produce syntactic foam buoyancy solutions at scale around the world.

The below provides a glimpse into the expected new floating wind installations out to 2033:

Source: GWEC Market Intelligence, June 2024

You don’t need to be a rocket scientist to understand just how quickly capacity in this space will be reached – a supply/demand imbalance that bodes perfectly well for the only 3 scaled syntactic foam buoyancy specialists across the globe to dictate pricing in a very favourable manner.

Another critical aspect to understand is that despite the fact offshore wind projects are set up to last 20-30 years, the buoyancy solutions have much shorter lifespans and need to be replaced every 10 years.

Therefore, if you sign a contract with an offshore wind installation partner, you now have the possibility of a visible and repeat revenue stream 10 years out.

The terminal value equation therefore becomes that much more attractive in what is today a mediocre, cyclical, lumpy-contract-stream business where you essentially start from $0 each year.

The merger?

With this highly attractive growth opportunity on the horizon, it makes sense for AIS – a much larger UK-based competitor- to merge with Matrix.

This is after all a dream opportunity to potentially corner a market with immense growth prospects over the next 10 years.

On top of this – the Henderson facility and its current underutilization can be tapped into straight away by AIS.

A recent reverse takeover offer tabled by AIS was rejected by the Matrix board – who cited valuation and contingent capital injection as the main reasons for rejection.

Crucially however, AIS are now about to raise the capital themselves via an IPO on the ASX.

https://www.afr.com/street-talk/global-protection-products-manufacturer-taps-brokers-for-500m-ipo-20250622-p5m9br

Syntactic foam buoyancy solutions are highly specialized offerings.

It would take an immense amount of capital for any new entrant to prove themselves to clients in a manner where they could genuinely scale and erode share of the 3 key players.

The capacity to dictate price and fundamentally dominate an emerging industry bound to have highly favourable supply/demand dynamics in the deepwater offshore wind industry is majorly propelled in the event of a merger between AIS and Matrix.

The ability to position yourself as the only large-scale player in APAC markets providing syntactic foam deepwater buoyancy solutions is another big factor.

Consider that AIS have done previous work with Woodside and are manufacturing these solutions from the UK when they could be doing so next door at the Henderson facility in Western Australia.

As such, there are numerous powerful incentives to merge.

And whilst the thesis doesn’t hinge on this, I would be very surprised if we don’t see AIS come back for another bite of the cherry within the next 12-18 months, offering a nice control premium to Matrix shareholders in the process.

Defence optionality

Herein also lies attractive optionality in the currently minute Advanced Materials segment.

Matrix were one of 10 Australian suppliers shortlisted for the Anduril Ghost Shark Unmanned Undersea Vehicle (UUV) program in 2024. Matrix is also exploring potential scale and mass manufacture opportunities with other UUV players.

Whilst this may go nowhere, it is another angle that could lead to high quality, repeat revenue opportunities.

In saying that, for the sake of this thesis, I assume nothing from this angle and will leave it at that for now.

Other key Investors

The CEOs father Mr Maxwell Begley owns ~6% of the company.

Esteemed value investors Samuel Terry Asset Management have a much higher cost base than the last traded price and have been invested since 2019. They own ~12% of the company.

A convertible note is due in December with Collins Street Asset Management with a strike price of $0.3. I expect them to work with the company on this given the working capital constraints of the business and if needed expect them to extend the term. As of 1H25, $7.35M was left outstanding.

Risks

• Inability to manage working capital appropriately such that the company misses out on key contracts in SURF and O&G drilling buoyancy end-markets.

• Potential to tap equity markets in the event Matrix are unable to strike a deal with Collins Street Asset Management or in the event they are unable to tap debt markets (I view this as highly unlikely given Matrix’s cash generative nature).

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Conclusion

Matrix trades at ~1.9x FY26 EV/EBITDA with near term inflections in their SURF and offshore O&G buoyancy end-markets as well as major long-term growth optionality in deepwater offshore wind buoyancy solutions.

Upon the market gaining comfort around the FY26 earnings inflection, I believe the stock will re-rate in line with its historical 4-5x EV/EBITDA multiple implying between 88-130% upside from the last traded price of $0.21.

There is also a non-zero chance Matrix merges with AIS within the next 12-18 months at a material premium to the last traded price of $0.21.

With profound operating leverage at its Henderson plant and deepwater O&G CAPEX expected to pick up again from 2026 onwards, Matrix today serves as one compelling pitch indeed.

Thanks for reading! Let me know if you have any thoughts, pushback or questions in the comments below.

Also, if you have any suggestions on other names I should look into, drop me a line at info@tenvacapital.com or @TenvaCapital on X.

This is a reader-supported publication so if you enjoyed this write-up, please consider subscribing below, sharing this with a colleague or friend and hitting the like button. Your support is always appreciated!

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Thesis Overview

I believe WM Technology (MAPS: NASDAQ) is trading as a widely misunderstood stock.

In December 2024, a non-binding proposal for a potential take-private was tabled by its original founders at $1.70 per share.

The stock today trades at $1.02 – implying little to no chance of a deal going through.

However, a number of meaningful incentives exist for MAPS’ original founders to stall but ultimately consummate a deal.

I believe a drawn-out timeline to closing a deal is fundamentally part of the playbook to purposely manufacture a sense of investor hopelessness and desperation such that upon any definitive bid the chances of deal acceptance by the special committee and shareholders on the cheapest possible terms is maximized without triggering an SEC investigation into potential misconduct.

Weedmaps is the largest online marketplace in the U.S. connecting consumers with licensed cannabis businesses.

WM has stabilized its business despite the major industry woes which continue to plague its clients. I believe today’s entry price of $1.02 – implying an FY25 EV/EBITDA multiple of 2.6x – is far too cheap.

In the event of a deal break, any sign of business growth should at a minimum see the stock retrace in line with a 4-5x EBITDA multiple, as was the case in early December 2024, prior to the announcement of any potential take-private deal.

As such, an investment in MAPS today offers significant upside potential in the form of a definitive take-private deal within the next 6-12 months at $1.70 or higher, whilst also offering an attractive margin of safety for investors.

Historic Trading Dynamics

WM Technology listed publicly on June 16, 2021, after the $1.5B merger with special purpose acquisition company (SPAC) Silver Spike Acquisition Corp. Following the merger, the stock began trading under the MAPS ticker.

MAPS traded as a typical cannabis darling stock during the pandemic. However, mass cannabis oversupply inevitably led to significant price deflation. Following this, post-pandemic normalization saw the crash of any stock even slightly associated with the cannabis industry with both margins and profitability taking a major hit across the board. MAPS - despite representing an indirect offshoot of the cannabis industry - was not spared.

Since trading under the MAPS ticker (post the June 2021 merger), the stock has traded as high as $22 (June 2021) and as low as $0.60 (April 2023).

Average Daily Traded Volume over the last 3 months is approximately ~$850K USD.

Capital Structure

MAPS has a complex cap table due to listing with an Up-C structure.

The company has a markedly clean Balance Sheet with $53M in net cash.

The pro-forma diluted share count is 168.2m shares outstanding.

(Note: there are another 19.5m warrants with a strike of $11 that I exclude from the calculation as they are far too out of the money).

Original founders Doug Francis and Justin Hartfield hold a combined economic interest of approximately 39.5% in the company through their Class A Common Stock and partnership units exchangeable for Class A Common Stock.

Mr Francis, who is also WM’s CEO, controls ~22% of the entity whilst Mr Hartfield controls ~17.4%.

Source: WM Technology 2025 Definitive Proxy Statement

Backdrop

It’s important to now consider and understand the industry backdrop from a legal and recent trends perspective before we dive into company specifics.

Legal backdrop

At a federal level, cannabis is deemed a Schedule I controlled substance under the Controlled Substances Act (CSA) in the U.S.

In practice, this means cannabis is considered among the category of substances most dangerous for human consumption, with a high potential for abuse and zero accepted medical use under U.S. federal law.

Despite recent bi-partisan messaging regarding a reclassification of cannabis to a Schedule III controlled substance, bureaucratic slow-walking ultimately seems to have stalled this process into the foreseeable future.

Despite this, most states across the U.S. have legalized recreational and/or medicinal cannabis use.

As such, in practice, the federal government does not enforce the CSA in these states.

State-legal businesses must get licensed and operate in accordance with their respective state laws.

MAPS only allows licensed operators to advertise products on its Weedmaps platform.

Schedule 280E

Despite this workaround, the tangible economic reality of a Schedule I classification is extremely grim for all state-licensed operators.

IRS Section 280E is a critical provision in the U.S. Internal Revenue Code which prohibits businesses engaged in the ‘trafficking’ of Schedule I or II controlled substances from deducting ordinary business expenses except for their Cost of Goods Sold.

In effect, this means state-legal operators must pay taxes on their gross profit rather than net profit before tax.

This leads to punitive effective tax rates, oftentimes between 70-90% of pre-tax income.

A reclassification of cannabis to Schedule III on the other hand would ultimately invalidate Section 280E.

Recent Industry trends

States with mature legal markets saw a large temporary spike in cannabis demand during the COVID-19 pandemic.

This was predominantly due to a combination of stay-at-home measures and widespread government economic stimulus, which meant that on average, consumers purchased a lot more cannabis than in previous times. For example, in 2020, U.S. cannabis sales surged to $18 billion, a 67% increase over 2019.

This combined with hype of a Schedule III reclassification under the Biden administration resulted in widescale production ramps as well as a rise in new market entrants to meet what industry participants anticipated would be a sustained demand spike.

Yet things quickly turned sour for the industry post-pandemic as cannabis demand waned. Suppliers had overproduced and ultimately were left with far too much product.

As a result, prices took a significant hit. The average retail price dropped 32% from 2021 across U.S. markets, as of late 2024.

As can be expected, revenues, margins and profitability of licensed cannabis operators have therefore taken a major beating in the last few years.

Moreover, the 280E tax burden - alongside other punitive state taxes - have further contributed to the dire situation for state-licensed operators who must also attempt to somehow outcompete the much cheaper black market.

Unsurprisingly, mass consolidation of the industry has taken place, and this process continues to play out today.

All in all, increased competition, excess supply, price deflation and increased costs have left the licensed cannabis industry on its knees. Most listed cannabis stocks have thus suffered majorly impaired equity values since their pandemic peaks.

Weedmaps – The platform

WM technology (MAPS: NASDAQ) operates a leading online cannabis marketplace in the U.S. called Weedmaps.

The platform is simple to understand.

Weedmaps provides a marketplace for licensed cannabis businesses across the U.S. to list, sell and advertise their cannabis products to consumers.

Unlike the clients they serve, Weedmaps does not touch the product in any way, shape or form, and as such, is not subject to the punitive restrictions of Section 280E.

Weedmaps clients are the cannabis businesses who pay a monthly subscription fee to list and advertise their products on the platform.

Founded in 2008, WM has cemented its position overtime as the largest and most recognizable online and legal two-sided cannabis marketplace at scale within the U.S. The platform enables American consumers to discover, learn about and ultimately purchase cannabis-related products in a seamless fashion.

Moreover, businesses can increase their brand awareness via featured deal listings and other ad solutions. These platform offerings provide clients with discount and promotion pricing tools as well as other premium ad solutions.

WM restricts the number of featured listings to a fixed monthly number in each region. As such, it runs a competitive auction process whereby cannabis businesses bid for this premium advertising space each month.

Approximately 70% of WM’s revenues are derived from featured and deal listings, whilst the remaining 30% is derived from flat-rate subscription fees.

As of Q1 FY25, there were 5,179 Average Monthly Paying Clients who inevitably list and advertise their products on the platform. Average Monthly Revenues per Paying Client was $2,871 in Q1 FY25.

Founded in 2008, WM Technology listed publicly on June 16, 2021, after the $1.5B merger with special purpose acquisition company (SPAC) Silver Spike Acquisition Corp during the COVID SPAC craze.

The company has taken advantage of the first-mover ‘winner takes most’ dynamic of a typical two-sided marketplace.

The nature of this powerful virtuous cycle means that as more consumers browse the platform, the offering for WM’s clients becomes more attractive. As WM’s clients grow, the platform becomes more content-rich with increased products, featured listings and discounts that fundamentally better the offering for prospective Weedmaps consumers.

In 2024, WM clocked $184.5M in sales, whereas it’s closest competitor, Leafly, did $34.6M. Leafly has subsequently been relegated from the NASDAQ to the OTC markets.

The pertinent reality for Weedmaps is that traditional digital advertising players have posed limited competition to date due to the scheduled nature of the substance at the federal level. In future, these brands are highly unlikely to venture near any advertising of Scheduled substances - whether that be Schedule I or Schedule III - which ultimately further embeds the moat Weedmaps already has operating in the licensed cannabis space.

The lack of standardization means a significant variation in product quality and safety profile of cannabis products exists. As such, a platform which enables informed purchasing decisions via up-to-date product descriptions and reviews ultimately fulfils a pivotal need for cannabis consumers from both an information and health and safety standpoint.

SEC Issue and Management

Weedmaps was recently caught up in a scandal whereby previous management falsely inflated its Monthly Active Users (MAUs) by counting non-engaged visitors redirected from pop-up ads, skewing performance metrics and indicating platform user growth to the market that was highly misleading.

In the second quarter of 2022, an internal complaint regarding the calculation, reporting and definition of their MAUs was received by WM’s BoD. A special committee was formed to conduct an internal investigation.

It was at this point where original founder Doug Francis stepped back in and returned to Weedmaps in an operating role as the Executive Chair.

In 2008, Mr Francis co-founded Legacy WMH, the predecessor company to WM Technology. He served as the Company’s President from 2009-2016 and as CEO from 2016-2019. Mr Francis was appointed Chairman in 2019, serving in that role until 2021 when he became a member of the WM BoD.

In August 2022, the company’s BoD - now led by Mr Francis – voluntarily reported the internal complaint and subsequent internal investigation to the SEC. Following this, the SEC commenced their own formal investigation into the matter.

Not long after, the CEO at the time Chris Beals stepped down in November 2022, whereby Mr Francis officially commenced as temporary CEO. On June 30, 2023, the CFO at the time Arden Lee also resigned.

Upon charges laid by the SEC in September 2024 for making negligent misrepresentations regarding the MAUs of Weedmaps, both Mr Beals and Mr Lee each paid a $175,000 fine and accepted three-year bans from serving as public company officers. The company paid a $1.5M fine which was received by the SEC in October 2024 and thus settled the matter in its entirety.

Sources:

• https://www.sec.gov/enforcement-litigation/litigation-releases/lr-26127

• https://www.sec.gov/files/litigation/admin/2024/33-11309.pdf

As of Q3 FY22, the company elected to no longer report its MAUs.

Mr. Francis officially became the permanent CEO in November 2024 – citing “the great long-term opportunities that would come with federal legalization” as the reason for shifting from a temporary operating role to a permanent one. Today, Mr Francis is also chairman of the board.

Reading between the lines, it appears Mr Francis stepped back into an operating role at Weedmaps to rehabilitate the reputation of the company he founded in 2008, has long been involved with ever since and has a ~22% economic interest in (with more potentially on the way as we will soon get to).

Financials

Despite the shambolic nature of the manipulated MAUs, the company crucially disclosed that the issue has had no impact on any GAAP or non-GAAP financial metric reported.

From late 2022, the number of Weedmaps paying clients began to steadily decline due to a combination of forces driving industry consolidation and Weedmaps choosing to clean up its client-base, prioritizing cashflow collection from delinquent clients and the removal of businesses from its platform that were unable to pay its dues.

Average Monthly Paying Customers fell from 5,689 in Q4 FY22 to as low as 4,937 by Q1 FY24.

Average Monthly Revenue per Paying Client fell from a peak of $3,810 in Q1 FY22 to as low $2,997 in Q1 FY24, before recovering for the rest of the year on a sequential basis.

Crucially, the number of Average Monthly Paying Clients began to sequentially tick up again from Q1 FY24 for the remainder of the year.

Despite weaker Average Monthly Client Revenues in Q1 FY25, this was more than offset by the increase in Average Monthly Paying Clients to deliver higher Revenues and Adj. EBITDA on a YoY basis.

Therefore, despite the beaten down share price, MAPS is today operating as efficiently as it has since it publicly listed, exhibiting expanding YoY EBITDA margins on what looks to now be a stabilized revenue base.

The company continues to beat heavily sandbagged guidance and has recently been doing >$10M Adj. EBITDA quarters.

WM has no debt and has consecutively added to its cash stack for the last 7 quarters. As of Q1 FY25, MAPS had $53M in cash.

Moreover, Adj. EBITDA on a yearly basis has continued to sequentially increase since FY22 and the company continues to generate significant underlying Free Cash Flows.

WM looks on track to generate around $45M in Adj. EBITDA for 2025, with a strong Q1 result of $10.1M that it should build on for the rest of year.

Despite all this, Weedmaps today trades at disturbingly cheap levels of 2.6x EV/EBITDA or 4.7x EV/FCF (~6.8x post the tax true-up to original founders).

Despite harsh industry conditions, this is far too cheap for any SaaS company that is not in terminal decline, let alone one that spits out annual Free Cash Flows to the tune of greater than 20% of the present EV.

The bid

There are indeed other factors at play here, however.

On December 18 2024, Mr Francis, alongside co-founder Justin Hartman, launched a non-binding proposal for a take-private at $1.70 per share.

Recall that combined, these founders have an economic interest of 39.5% of the company.

It’s important to understand a few key dynamics before we can fully digest the circumstances of the offer and what this subsequently means for the MAPS stock into the future.

Equity Compensation Package

As touched on earlier, Doug Francis first stepped back into the arena as Executive Chairman at Weedmaps in mid-2022, taking on the role of temporary CEO in November 2022. It was then announced he would transition to a permanent CEO role in November 2024.

Interestingly though, in November 2024, Mr Francis was granted what could in no uncertain terms be classified as an extremely bullish Equity Compensation Plan.

The potential reward granted was ~8.7m shares, or approximately 5.2% of the company. Half of this grant was tied to achieving a 30 day VWAP in excess of highly bullish strikes of $3.25 and $5.

Source: Form 4 - Douglas Francis - 12 November 2024

Reading between the lines by framing this compensation package within the context of MAPS’ corporate governance policies, one is left to ponder whether there were indeed ulterior motives at the time of this grant?

After all, the firm has extremely friendly Change-in-Control (CiC) provisions which mean these shares would all vest up-front for Mr Francis in the event of any CiC.

Below is an excerpt from the company’s 2021 Equity Incentive Plan which outlines this:

Source: WM Technology 2021 Equity Incentive Plan

Moreover, Mr Francis and Mr Hartfield changed their 13D filing status in May of 2024 - prior to the said equity compensation grant to Mr Francis – which explicitly stated they were now evaluating a potential transaction for the company:

Source: Schedule 13D Update - May 31 2024

Then in December 2024, an amended 13D was filed which disclosed a confidentiality agreement had been struck between the original founders and the company on October 29 – crucially prior to the equity compensation grant – which stipulated “a possible negotiated transaction with or involving WM Technology.”

Source: Updated 13D - December 18 2024

Confidentiality Agreement

/Nongaap Investing wrote a brilliant piece in Dec ‘24 putting these pieces together in-depth and I highly recommend giving it a read:

Nongaap Investing

MAPS: Half-Baked Governance

Read more

a year ago · 24 likes · 1 comment · Mike

To summarize this chain of events:

A May 2024 13D filing indicated Mr Francis and Mr Hartfield were looking into a potential transaction for WM.

Mr Franics then became permanent CEO in November 2024 and promptly gets issued an incredibly bullish compensation package with extremely friendly CiC terms that would ensure all these shares vest up-front, upon any potential CiC transaction.

After this, we learn that a confidentiality agreement was struck in October – critically taking place prior to Mr Francis’ equity compensation grant and his appointment as permanent CEO - regarding a “possible negotiated transaction.”

To spell out the obvious, it seems abundantly clear that Mr Francis was highly conflicted upon commencing his role as permanent CEO such that his equity grant - which makes up 5.2% of current shares outstanding - comes across as a clearly pre-meditated attempt to expropriate shareholder value from minorities, given we now know that a potential transaction was being discussed prior to the commencement of his new role and prior to this highly contentious equity grant.

Highlighting Weedmaps’ latent embedded value

It is now time to turn our attention to how incredibly valuable a take-private transaction would inevitably be for Mr Francis and Mr Hartman in the long run.

To illustrate, let’s consider the scenario where at some point in the future a reclassification of cannabis to Schedule III occurs. The tax savings from clients no longer needing to abide by 280E would undoubtedly free up a plethora of incremental marketing dollars that could now be allocated towards further advertising on the platform. After all, Weedmaps essentially monopolises the U.S. online licensed cannabis marketplace.

It would also enable Weedmaps to charge a take-rate on the Gross Merchandise Value (GMV). Note, management have completely acknowledged this is their long-term opportunity upon a rescheduling. From their most recent 10Q:

A back of the napkin estimate of GMV can be conducted.

The last time Weedmaps reported their MAUs was in Q2 FY22. At this time, 17.4 million MAUs were recorded. As per the Q2 FY22 results release, we know that 65% of this figure was distorted and represented non-engaged visitors redirected from pop-up ads. Hence, only 6.09 million true MAUs.

Let’s assume this has fallen to only 4 million MAUs today – in line with the cannabis industry downturn. Conservatively assuming just a $50 spend per user per month would imply $200M in monthly GMV or $2.4B in GMV per year. Assuming Weedmaps clipped just a 2% take-rate would land us at an additional $48M in revenues that would fall straight to the bottom line.

This hypothetical exercise does not imply any incremental marketing dollars being allocated towards increased listings on the Weedmaps platform which would undoubtedly be meaningful.

Clearly, this a majorly accretive long-term opportunity for the Weedmaps brand, and whoever happens to own it.

Considering WM did $42.9M in EBITDA just last year in FY24, and given all of the above, I believe an annual EBITDA figure of $100M would be a conservative starting point for how to think about MAPS’ earnings power if a reclassification to Schedule III were to take place.

A conservative 8x EBITDA multiple on this earnings power would equate to an equity value of ~$5.07 per share.

However, even at just a $2 share price, Mr Francis’ recent equity compensation package is worth an extra $17.4M in his pocket, rather than that of minority shareholders, upon any CiC transaction.

Avoiding an SEC Investigation

It would be well within the SEC’s jurisdiction to thoroughly investigate the particularly sly set of circumstances surrounding the conflicted nature of the CEO appointment and equity compensation grant.

The SEC has only recently concluded an enforcement action with respect to the conduct of WM and previous executives. This is something Mr Francis (and Mr Hartfield) would clearly want to avoid being caught up in themselves in the event of another potential investigation.

But most importantly, I believe they have the strongest incentive to avoid any issues with the SEC due to how incredibly valuable the company would be worth to them long-term, as stipulated above, if they are able to successfully consummate a take-private transaction whilst the company still generates trough level earnings and free cash flows.

Moreover, shareholders are rightly extremely frustrated with the conduct regarding the circumstances of this equity grant. As such, I am increasingly unsure whether Mr Francis and Mr Hartfield would get the votes they require in a ‘majority of minority’ vote scenario given they do indeed lob a definitive take-private bid of just $1.70 per share.

As such, what is the best way to navigate this slippery slope of a situation?

How do they ensure the special committee approves a deal, that shareholders vote to accept this said deal, that the SEC stays off their back and most importantly that they get to retain all the significant long-term upside to themselves?

Well, I for one can think of only one way.

That is to bump your eventual definitive bid in excess of the non-binding proposal of $1.70 per share, which would ultimately go completely against the grain of investor expectations manufactured by the dragged-out deal timeline.

This would inevitably weaken any possibility of an SEC investigation into a potential manipulated equity compensation grant– as the founders could therefore argue that they had a genuine belief of attaining these strikes in due course - whilst also ensuring shareholders vote to accept the proposal as the special committee has requested a ‘majority of minority’ shareholder vote would be needed for any deal to close.

Deal timeline

Upon launching their non-indicative take-private bid for $1.70 per share, founders Doug Francis and Justin Hartman went out of their way to indicate that they “expect to be in a position to execute a definitive agreement in 3-4 weeks.”

Source: WM Technology Press Release

Yet here we are 6 months later, and still no definitive take-private offer has been tabled.

Drawing out the deal process well in advance of the initial indicated timeline does indeed serve the founders in a multitude of ways.

Firstly, it contributes to optics of a deal-break. This inevitably contributes to a manufactured sense of hopelessness and desperation amongst remaining shareholders, which predictably has a negative impact on the share price, the likes of which we’ve seen recently, as investors have dumped the stock upon suspecting a deal-break.

This manufactured negative investor psychology, which has shares currently trading at $1.02, ensures it is eminently more probable that a deal gets accepted by the special committee and shareholders, if and when it is eventually tabled, as opposed to had the stock still been trading in the $1.30-$1.40s region that it was in the first few months following the non-binding take-private announcement on December 18 2024.

It is not at all within the interests of the founders to have issues with either the special committee or shareholders with regards to any potential definitive take-private offer for the company. This is because of the chain of events that led to Mr Francis becoming permanent CEO and being granted his extremely CiC friendly equity compensation package that, if pursued, would probably result in grounds for another SEC enforcement matter.

As such, for a deal to be accepted by shareholders – a bumped bid that is closer in line with the strike prices of Mr Francis’ equity compensation package would be the only acceptable means to ultimately ensure the avoidance an SEC investigation, whilst also ensuring a deal gets accepted by shareholders.

In summary, I believe a purposely drawn-out timeline for closing this deal has fundamentally been part of the playbook all along in order to manufacture a sense of investor hopelessness and desperation which negatively affects the stock and subsequently increases the chances of deal acceptance on any future definitive offer by the special committee and shareholders on terms that will ultimately avoid an SEC investigation, yet will be acceptable to shareholders, such that the deal inevitably closes.

As such, my view is that the market has got this wrong and I believe a deal will be tabled in the next 6-12 months, most likely at terms higher than a $1.70 share price.

I believe any definitive bid 25% or more than the initial non-binding take-private bid of $1.70, would most likely be high enough to satisfy deal acceptance from both the special committee and frustrated minorities in a ‘majority of minorities’ vote scenario.

Prior Trading Dynamics

To understand the margin of safety embedded in MAPS at today’s share price of $1.02, it’s important to consider fundamentals and understand how the stock traded prior to the announcement of the non-binding take-private proposal.

In Q3 FY24, MAPS announced a third consecutive quarter of growth and stabilization in key metrics.

As such, the stock traded at a low of $0.72 in November 2024 straight through $1.40 in early December, just a month later, before re-tracing back down to $1.11 by December 16, in what was a difficult month for small caps across the board.

Upon the announcement of the non-binding take-private on the 18^th of December the stock traded as high as $1.63, before settling between a $1.30-$1.40 trading range for the next 3 months.

After this, investor fatigue sunk in, given most expected a definitive deal to have already been finalized. As such the stock has recently retraced back down to the $1-$1.10 range, with last close at $1.02.

Should a deal no longer be pursued, Mr Francis and Mr Hartfield would have to file an updated 13D – of which to date, there has been no update filed.

On the downside, in the instance that I am wrong about the nature of this take-private deal, I am comfortable with the margin of safety at a share price of $1.02, which ultimately implies a 2.6x EV/EBITDA multiple – far too cheap for any stock not in terminal decline.

MAPS will also be entering new Hemp markets in the back half of FY25. This incremental investment which has mostly already been made has yet to hit the income statement and should ultimately serve as another potential earnings booster for the company.

As a result of the above, I believe there is a hugely baked in margin of safety with the stock trading at today’s levels of $1.02. Given the cheapness of the stock today, versus where MAPS traded independent of any potential take-private deal, I don’t believe any deal break price would land much lower than 10% from today’s levels. I believe the fatigue in the share price mostly stems from the actions of the board/management and the lengthy drawn-out deal process that most had expected to be finalized by now.

Risks

• A key risk in the short-term is any scenario whereby a full deal-break occurs. The stock would most likely trade lower. However, as stated above, I believe we are already trading at levels today that indicate close to 0 chance of a deal going through and as such don’t believe the stock would trade much lower than 10% below the last traded price of $1.02, absent any unfavourable news with regards to the fundamentals of the company.

• The founders’ inability to obtain financing to put forward a definitive bid presents as another key risk factor. However, the initial confidence in their capacity to obtain financing indicated in the non-binding take-private proposal letter whereby Mr Francis and Mr Hartman stated “We expect to be in a position to execute a definitive agreement in 3-4 weeks” gives me confidence that this is unlikely to be the case. In saying that, the macro environment has most certainly changed a lot since December 2024 and continues to evolve in unprecedented ways. As such, this remains a real risk, especially given the somewhat controversial nature of cannabis.

• Successful shareholder class action lawsuits with regards to the former manipulation of the MAUs which could eat into the company’s net cash position.

• Over a longer time horizon, in the event of a deal break, one could make the argument that Mr Francis and Mr Hartman would be more aligned with keeping the stock price depressed such that they can later attempt to take it private on the cheap again. There are 2 key facets which make this situation unlikely in my mind:

  1. Evidence that the industry has already bounced from trough levels and is slowly undergoing a recovery such that even if they wanted to do this, they would miss the boat.

  2. The former SEC case means this company and its office holders are already subject to heavier scrutinization than a typical company and antics which go against the fiduciary duty of the board and management would clearly increase the chances of another SEC enforcement action – an overhang which makes it highly unlikely that the original founders would try something like this on.

  ---

Summary

The chances of a definitive take-private offer are being miscalculated by the market. There are meaningful incentives for a purposely delayed deal process that will ultimately enable the founders to take the company private on the cheap whilst avoiding an SEC investigation.

I believe the stock is today trading at dirt-cheap levels. An EV/EBITDA of 2.6x is far too cheap for any company not in terminal decline, let alone a SaaS company generating substantial Free Cash Flows.

In the event of a deal-break, further evidence of stabilization or growth in earnings should see the stock trade in line with at least a 4-5x EBITDA multiple at minimum over the medium term.

Thanks for reading! Let me know if you have any thoughts, pushback or questions in the comments below.

Also, if you have any suggestions on other names I should look into, drop me a line at info@tenvacapital.com or @TenvaCapital on X.

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Here are a few updates on some recent names:

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Sanuwave Health (SNWV: NASDAQ)

Since publishing the idea, SNWV traded as high as $35.58, yet most recently sold off to as low as $24.90, closing yesterday at $26.24 as at the 2nd of June 2025.

I believe a lot of the recent stock price volatility is down to the ‘weaker hands’ of former warrant and convertible note holders who only recently converted their investments to common stock in October ‘24. For a lot of them, this conversion was likely viewed as ‘found money,’ so to speak. As such, they are probably outsized contributors to the recent selling. However, with a tight register of only 8.5m shares and a free float that is considerably smaller, I believe the nature of the register is set up nicely to enable a decent long-term run as the company continues to execute into FY25 and ‘26 and all the weak hands move on in the much nearer term.

To recap the crux of my thesis: Sanuwave started 2024 with 2 sales personnel and ended the year with 9. They expect to grow this to a team of 12-13 in 2025 which will enable the company to have full nationwide sales coverage for the first time. This team is also now incrementally more senior and experienced than in prior years. Despite the undercooked sales force throughout the bulk of 2024, the company still grew revenues 50% YoY (for the second year in a row), whilst also delivering 73% incremental EBITDA margins. On top of this, UltraMIST is about to achieve just 1% U.S. wound care market penetration. In other words, the bottom-line earnings growth runway is incredibly long and far-reaching, and I don’t believe we are trading anywhere near the right price given this extant runway and the operating leverage that will continue to drive earnings power rapidly from here.

At today’s levels, Sanuwave trades at just 10.5x my conservative estimate of FY26 EV/EBIT (which only assumes the same absolute $ revenue growth achieved in 2024, despite the massively bolstered sales team today). Given ~50% incremental EBIT margins moving forward, I believe Sanuwave should and will command a premium market multiple of at least 20x FY26 EBIT, a multiple which adequately reflects its premium growth profile and embedded operating leverage. I suspect this is a “show me story” and believe continued execution into FY25 will wake the market up to the company’s profound organic growth prospects. As such, I added to my position yesterday.

For those that missed my initial write up on Sanuwave, you can access it here: https://www.tenvacapital.com/p/sanuwave-health-snwvnasdaq

Pioneer Credit (PNC:ASX)

Pioneer is up ~29% since my published write-up. Despite this, I feel the market has yet to wake up to the sustained multi-year earnings growth runway PNC are about to enjoy and as such believe we have a long way to go before we approach fair value. The market seems to be asleep at the wheel when it comes to digesting the transformation of Pioneer. I believe this is primarily due to the phenomenon of it being too small for most institutional players to touch, yet too complicated for most retail investors to understand. Hence, it has fallen in the gaps and trades today much like an orphaned equity. In underwriting Financials Companies like this, cash flows are everything. As such, the achievement of Net IRRs in excess of 15% on the cash collections of all yearly PDP vintages since inception gives me great confidence in managements’ underwriting skills. This, combined with the step-change in the industry landscape that Pioneer are in the throws of taking advantage of, should also result in turbo-charged bottom line earnings growth which I believe will serve as a catalyst for a much larger re-rating.

I recently attended a Webinar with Bravure Group – Australia’s leading advisors to the nation’s largest blue-chip financial institutions on debt collections, recovery and insolvency. The presentation was extremely insightful, and I look forward to sharing my key takeaways with you all in another note in the coming weeks. The picture painted by Bravure on the industry recovery and structure was incredibly encouraging. A particular stand out for me was their emphasis on how difficult it is for an incumbent to get on the purchasing panel of Australia’s big 4 banks and subsequently how entrenched the big 2 PDP players in this space - Pioneer and Credit Corp – truly are.

Access to my initial Pioneer Credit write-up can be found here: https://www.tenvacapital.com/p/diamond-in-the-rough

Lastly, I am working on a new idea and hopefully should get this out to you all within the next 1-2 weeks.

Hope you all have a great week!

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Disclaimer

Tenva Capital, its associates and/or entities controlled by its associates hold shares in the companies referred to in this post.

The information contained in this article is not investment advice and is of general nature only. All communications made by Tenva Capital and/or its associates are for informational and/or entertainment purposes only. This article has been prepared without taking into account your particular circumstances, nor your investment objectives and needs. This article does not constitute personal investment advice and you should not rely on it as such. This article does not contain all of the information that may be required to evaluate an investment in any of the securities featured within. Before making any investment decision, you should do your own work and/or consult a licensed financial, legal or tax professional, along with considering any relevant Product Disclosure Statement.

Forward-looking statements are based on current information available to the author, expectations, estimates, projections and assumptions as to future matters. Forward-looking statements are subject to risks, uncertainties and other known and unknown factors and variables, which may affect the accuracy of any forward-looking statement. No guarantee is made in relation to future performance, results or other events.

Tenva Capital and its associates make no representation and give no warranties regarding the accuracy, reliability, completeness or suitability of the information contained in this document. Tenva Capital and its associates will not be responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of this post or any communications made by Tenva Capital and/or its associates.

Tenva Capital Pty Ltd (ABN: 37 685 431 690) is a Corporate Authorized Representative (AR: 001314552) of New Horizons Financial Services Pty Ltd (ABN: 63 638 4701 117) which holds an Australian Financial Services License (AFSL: 522392).

Below I present you a new under-the-radar investing idea with immense upside potential.

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Thesis overview

Sanuwave Health is a profitable American medical device company growing 50% year-over-year.

Previously plagued by a burdensome capital structure and too many shares outstanding, the company recently recapitalized and conducted an extremely favourable reverse stock split.

The company markets UltraMIST in the wound care space, a medical device making waves for favourably aligning the interest of patients, physicians and payors.

Despite its’ gargantuan long-term growth runway, Sanuwave today trades at only ~13x FY26 EV/EBIT.

With a recent uplisting to the NASDAQ from OTC markets, Sanuwave is ripe for discovery to enable a re-rating which appropriately reflects its incredible profitable growth profile.

Background

Up until very recently, Sanuwave’s capital structure was outright disastrous.

Listed on the OTC markets, the company had 1 billion shares outstanding and another 2 billion impending from warrants and convertibles. On top of this, the company had a large chunk of debt in forbearance.

However, in October 2024, this was cleaned up and the company suddenly became highly investable.

Sanuwave successfully executed a 1-375 reverse stock split. Warrants and convertible notes were converted into common stock and the company was able to raise money without a bank from its CEO and other institutional players.

Post this set of transactions, the company paid down some of its debt and regained compliance with the covenants of its remaining loans.

Today, Sanuwave has a highly simplified capital structure with 8.5M shares outstanding and a $26M Senior Secured Note due in September 2025. The company expects to imminently recapitalize this remaining portion of its debt and aims to pay it down entirely within the next 12-18 months.

In March 2025, the company uplisted to the NASDAQ Global Exchange and trades under the ticker SNWV.

Sanuwave markets a product called UltraMIST, a non-contact ultrasound device it acquired in 2020 which is used in the treatment of late-stage wounds.

Average Daily Traded Volume over the last 3 months is ~$1.5M USD. As such, this is liquid enough for private investors and small funds.

People

Sanuwave’s CEO is Morgan Frank, a capital markets expert and founder of life sciences investment firm – Manchester Management.

To protect his investment in Sanuwave, Mr Frank became Chairman in 2022 and stepped in as CEO in 2023 as the company was on the verge of bankruptcy. He negotiated extensions on the debt and replaced all the C-suite and a large portion of the company’s employees.

As of Q1 25’, Mr Frank’s entities control ~13% of the company’s shares outstanding.

Despite his initial plan of only serving as a transitional CEO, today Mr Frank intends on staying on as CEO into the foreseeable future.

UltraMIST – What is it?

UltraMIST is a low frequency, non-contact and non-thermal ultrasound system used in the treatment of complex and non-healing wounds.

The device never touches the wound surface and treatment is pain free for patients.

UltraMIST is clinically proven to reduce wound size, speed the healing process, aid in killing bacteria and biofilms and promote blood flow and revascularization to the wound site.

UltraMIST is FDA cleared and has nationwide Schedule 1 ‘Centers for Medicare and Medicaid Services’ (CMS) reimbursement under a unique and specific code set 97610.

The company operates under a classic razor-razorblade model whereby they sell an UltraMIST system and consumable applicators which are needed for each procedure. One consumable applicator is used per procedure.

Sanuwave sells UltraMIST into hospitals, physicians offices, wound care centres, mobile wound care providers, nursing homes and skilled nursing facilities.

A procedure takes between 3-20 minutes and averages 6 minutes.

The device is highly portable and only weighs 7 pounds / ~3 kilograms.

UltraMIST is FDA approved for the treatment of:

• Diabetic foot ulcers

• Pressure Ulcers

• Venous Leg Ulcers

• Deep Tissue Pressure Injuries

UltraMIST works via a process called mechanotransduction. This is the cellular process of converting mechanical stimuli, like pressure or tension, into biochemical signals that affect cell behaviour and function. This process plays a crucial role in various biological processes, including tissue repair, development, and disease.

For a greater understanding of its mechanism of action, see the below from the company’s most recent investor slide deck:

Market Opportunity

In the United States alone, the wound care industry is a $45B market.

Annual treatment costs for Venous Leg Ulcers, Diabetic Foot Ulcers and Pressure Ulcers are $18B, $15B and $12B respectively.

Despite Sanuwave rapidly growing at 50% for each of the past 2 years, the company has yet to even penetrate just 1% of this massive global market.

Sanuwave operates in a rare industry environment whereby their product can rapidly penetrate this enormous market with an incredible amount of white space to be tapped into.

Unit Economics

Anytime a company sells a medical device, they have 3 primary constituents – the patient, the physician and the payor.

Clearly the needs of the patient are a pre-requisite. However, if the device’s use only makes commercial sense for one of the 2 other players, the ability to scale becomes increasingly difficult if not outright impossible.

The magic occurs when all 3 constituents are completely aligned, as is the case with UltraMIST.

Lets go through this one by one.

The patient

The patients only goal is to get better and get their life back.

By the time someone is being treated with UltraMIST, they have a complex non-healing wound.

The example above is of CEO Morgan Frank’s uncle who had a systemic Staph infection and was admitted to hospital in the ICU with a Wagner Stage 4 wound (Wagner Stage 4 means you don’t have any skin left and can see the underlying bone, muscle and tendon). These are extremely serious wounds and oftentimes require immediate surgery with the potential for loss of limb and loss of life.

The patient was at a top hospital in Florida and being treated under the old school standard of care. That is, the removal of a necrotic mass from the back of his hand, dipping a bunch of gauze in antiseptic, putting it in that hole in his hand, covering it with a dressing and wrapping it up. The treatment plan was to give it 3-4 months and hope the swelling will come down such that surgery could be performed on the wound and the patient would hopefully get most of his hand function back.

The image on the far left is what the original wound looked like once the necrotic mass was removed.

Instead, the patient was brought home and treated with UltraMIST in the comfort of his own home.

Remarkably, the wound was healed entirely with exclusive UltraMIST treatments within just 6 weeks. The treatments were entirely pain free and the patient is rapidly regaining full use of his hand.

The other 3 photos show the patients’ progression throughout his UltraMIST treatment plan.

Mr Frank touches on this situation aptly:

This treatment is incredibly attractive for patients.

The historic standard of care for treating a wound like this is to take a sharp and forcefully scrape the edges of the wound until all the dead tissue has been removed – an extremely unpleasant and painful reality for patients.

UltraMIST, on the other hand, offers the patient a pain free alternative which doesn’t require any surgery and makes the patient feel better immediately after each treatment.

Physician Economics

UltraMIST is backed by strong IP, boasting a broad portfolio of over 140 patents and is the only system backed by clinical evidence for non-contact ultrasound in wound care.

The wound care space has an ugly history of fraud, particularly in the skin substitutes, grafts and hyperbaric treatment realms.

As such, payors are increasingly focused on ensuring they only fund evidence-based treatments.

CMS has reduced or terminated reimbursement for numerous controversial modalities, whilst upping reimbursement for energy-based treatments backed by clinical evidence, such as UltraMIST.

UltraMIST is reimbursed under the limited CPT code 97610: “low frequency, non-contact, non-thermal ultrasound, including topical application(s), when performed, wound assessment, and instruction(s) for ongoing care, per day.”

The reason this code is extremely limited is because almost all ultrasound devices are contact and no device apart from UltraMIST has done non-contact clinical studies which show efficacy. In fact, the code itself cites “MIST therapy,” which was the precursor device to UltraMIST.

Today, physicians using UltraMIST get reimbursed between $400-$700 by CMS with 100% Medicare reimbursement. Note that the average reimbursement is $420. (The $700 reimbursement is just a California outlier).

Since Sanuwave acquired UltraMIST in 2020, CMS reimbursement for UltraMIST has increased from $120 to $180 to the average of $420 that we now see today.

UltraMIST systems are sold to the medical facility for a list price of $35,000.

The average procedure takes 6 minutes. Procedures can be done by a nurse practitioner or physical therapist. One can be taught via telephone instruction how to use the device within 30 minutes.

The medical provider purchases a consumable applicator for $100 (list price) from Sanuwave for each UltraMIST procedure conducted.

As such, only 85 procedures are needed to achieve payback on the purchase of an UltraMIST device (420*85 = ~$35,700). These are highly attractive economics for the physician. To put this in its proper context, payback becomes a matter of weeks for mobile providers who see 10-15 patients per day.

Payor Economics

The primary concerns for a payor offering reimbursement for any medical product in the wound care space are simply:

1. Does this work?

2. Do we save money on this and is the treatment less expensive than other treatment alternatives?

With regards to UltraMIST, we have answers to these questions thanks to an intensive study performed in the ICU at Mayo Clinic comparing UltraMIST against the standard of care (SOC) for patients with deep tissue injuries.

The results were staggering.

Recall a Wagner stage 4 means no skin is left and one can visualize the underlying bone, muscle and tendon.

Well, 70% of wounds treated under SOC progressed beyond a Wagner Stage 4. On the other hand, 80% of patients treated with UltraMIST saw their wounds resolve at a Wagner Stage 2 or less. (Wagner Stage 2 is a partial thickness wound such as a bed sore).

80% bed sores versus 70% visible bone.

This is inevitably how UltraMIST became the standard of care at the Mayo Clinic ICU.

Wounds develop exponentially such that treating a wound early is easy and cheap whereas treating a late-stage wound is hard and expensive. In this way, the payors’ concern of spending less is highly aligned with ensuring the patient gets treated early and subsequently recovers quicker, avoiding the complexities associated with late-stage wounds. The mobile and highly portable nature of an UltraMIST device ensures patients can be treated earlier, the payor spends less overall and optimal patient outcomes are achieved.

As can be seen in the below image, the cost of treating a Wagner Stage 2 wound or below is a maximum of $8000 on average whereas once a wound reaches a Wagner Stage 4, the cost is considerably higher with an average minimum spend of $129,000.

This is why a pain free treatment solution such as UltraMIST which offers immediate relief and can help to avoid surgeries is not only incredibly important for the patient, but equally so for the payor.

Sanuwave Economics

The piece on the right of the image below is the wand of the UltraMIST system and the piece on the left is the single use disposable applicator.

Sanuwave sells each UltraMIST system for $35,000 at list price.

Sanuwave also sells a single use applicator for $100 at list price.

The company has disclosed they sometimes offer discounting on these list prices, but a lot less than it used to.

Gross margins currently sit in the high seventies, with room to boost this even higher due to manufacturing changes which I touch on further below.

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Manufacturing

Sanuwave dual sources their UltraMIST devices from 2 domestic manufacturers. One is based in Salt Lake, the other in Minneapolis.

A third provider makes the applicators which is also based in Minneapolis. The company is in the process of standing up a second domestic source on their applicators.

Almost all components that go into manufacturing are domestic too.

As such, the company doesn’t expect any material affect on its supply costs or availability due to the unfolding tariff and trade situation.

Additionally, Sanuwave is in the process of making a small change to the assembly process of the applicators such that it removes some complicated UV cure adhesive steps and replaces this with processes that are faster and easier to automate. Importantly, the company expects this will result in lower defects, easier assembly and lower cost for their applicators. Sanuwave expects to be live with the new model in Q4 FY25. The company believes this will push gross margins on the applicators above 80%, putting further upwards pressure on total company margins as Sanuwave continues to sell exponentially more applicators against a growing installed base of UltraMIST systems.

Production Capacity

As of March 2025, the company had capacity for 10,500 applicators per week. The company expects this to grow to 24,000 by December 2025.

On the systems side, the company currently produces approximately 25 systems per week. On this Mr Frank notes the following:

Rapid Growth

UltraMIST has been rapidly penetrating the wound care market. As of the end of Q4 2024, there were 1,047 systems in the field of which 135 were only sold in Q4 and 374 sold just in 2024 alone (71% growth YoY).

In other words, as at year end 2024, 36% of all UltraMIST systems were sold in the prior 12 months and yet the company has not even hit 1% total market penetration.

There remains a plethora of white space here for the company to continue to grow into.

Financials

Today gross margins are in the high seventies. Further upwards margin pressure will arise with the new mould for applicators in Q4 25’ which should push gross margins into the eighties.

Revenues have grown 50% YoY for the last 2 years and the company is executing on its mantra of ‘rapid profitable growth.’

In FY24, the company did $32.6M in revenues. In Q4 alone, the company did $10.6M in revenues.

Sanuwave has guided for another impressive 50% increase in revenues for 2025 at $48-50M.

Operating leverage is huge. The company expects 50% of incremental revenue growth to trickle down to EBIT moving forwards.

Operating Income for Q4 24’ was $2.5M at a 24% margin.

Since the recap, the company still has $26M in debt but expects to have fully paid this off over the next 12-18 months.

The company has NOL’s in excess of $200M.

Valuation

Given, the operating leverage dynamics, I expect operating margins to continue to expand.

$50M revenues for FY25 at a 25% margin lands us at $12.5M EBIT for FY25.

If we assume the same absolute $ growth continues into FY26 then revenues for FY26 would be $67.4M with EBIT coming in at $21.2M. This is a forecast I deem as conservative given the recent changes in the sales team dynamic which I touch on further below.

Given debt paydown occurs over the next 12-18 months, Sanuwave is today trading at a meagre 12.7x FY26 EV/EBIT.

This rapid growth profile should command a premium multiple of at least 20x EV/EBIT in my view. As the company continues to execute on its guidance, I suspect the market will rapidly re-rate this to a multiple that appropriately values Sanuwave’s incredible growth prospects.

At 20x FY26 EV/EBIT, and assuming debt paydown, Sanuwave stock is worth $50, a 58% premium over the prevailing share price of $31.55.

Continued execution into FY27 at the same absolute $ growth rate valued at 20x EV/EBIT implies a $70 stock price.

If Sanuwave continues to execute over the medium to long term at the same 40-50% revenue growth rate it has executed in line with over the last 2 years with 50% of this incremental growth trickling down to the bottom line, there is no reason its stock shouldn’t command an even greater multiple than 20x EV/EBIT.

At today’s price of $31.55, I believe Sanuwave is trading far below its intrinsic value. Given Sanuwave only uplisted to the NASDAQ in March and has yet to report an official quarter of earnings whilst being listed on a major public exchange, I suspect investor awareness has yet to properly sink in. I believe continued execution will serve as the catalyst for a re-rating from today’s levels as investors digest the extremely rare organic growth opportunity facing Sanuwave today.

Sales Team Dynamics

It is even more impressive to consider than Sanuwave only started 2024 with 2 salespeople and ended it with 9. That is, Sanuwave executed 50% revenue growth with an undercooked sales team for a large chunk of 2024.

CEO Morgan Frank has since brought on a new calibre of highly experienced sales personnel.

Board member Jeff Blizzard was formerly head of sales at Abiomed and the company recently brought in Tim Wern as Head of Sales. Tim was Jeff’s number 2 at Abiomed. Jeff and Tim took Abiomed from $15M to $400M in Sales before selling the company to J&J for $16.6B.

The company plans on bringing on another 3-4 highly experienced sales personnel.

With the former Abiomed band back together, Sanuwave is now focussing its efforts on making more ‘consultative sales.’ This means selling to customers who can be long term partners and buy more devices.

Mr Frank puts it best:

Given the former debt and cap table issues, Sanuwave was laser-focussed on proving to their customers that they could get their cashflow generation to the point where their customers could clearly see they will be around to sell them applicators and devices in multiple years’ time. Sanuwave only recently turned this corner in October 2024 and as such, I expect even greater opportunities to partner with larger customers are now on the horizon that weren’t realistic prior to sorting out their cap table.

Why did this take so long to get moving?

Despite being FDA approved since the early 2000’s, UltraMIST has never taken off until recently.

Sceptics would rightly ask why it has taken this long for the product to gain traction.

UltraMIST was created by Celleration. The company was made up of brilliant engineers, but they did not prioritize marketing the product and developing customer relationships. They were not well capitalized, ran into trouble on that front and were forced to sell to another thinly capitalized company called Alliqua Biomedical.

Alliqua were then also forced to sell due to their financial woes and as such sold the product to Celularity. However, Celularity’s focus was not on UltraMIST. They were a company focussed on cellular research and were spending hundreds of millions of dollars on that front. UltraMIST was treated as an outside the box, non-core product.

Hence, by the time it was sold to Sanuwave in 2020, UltraMIST had only ever passed through thinly capitalized or unfocussed companies that never invested the necessary time and resources into the products’ development.

Risks

• A big risk is the CMS reimbursement being cut. To be frank, this is a risk that will never go away and as such, investors should position themselves accordingly. In saying that, the CMS are increasing their focus on evidence-based medicines and Sanuwave continues to prioritize further clinical studies surrounding the effectiveness of UltraMIST as a standalone and complimentary wound care treatment.

• On the competition front, there is only one other player using the same reimbursement code as Sanuwave called Arabella, with a far inferior product and annual sales of under $2M.

• Debt: The refinancing of Sanuwave’s remaining $26M of debt serves as another key risk. The noteholders have been very accommodating to date via several modifications and extensions. Now that Sanuwave can pay the debt back via their normal course of operations, the noteholders have expressed a willingness to be flexible and work with Sanuwave. On top of this Sanuwave has entered into an IP option agreement on a former product which could bring in some up-front cash which the company indicates it would use to immediately pay down debt.

• Manufacturing delays could materially harm the company especially with a growth profile as rapid as Sanuwave’s. However, Mr Frank is laser-focused on ensuring everything is domestically dual sourced and that Sanuwave doesn’t bite off more than it can chew in terms of contracting beyond its manufacturing capacity.

  ---

Summary

Sanuwave is a rapidly growing medical device company operating in the U.S. wound care space.

Today Sanuwave trades at a ~13x FY26 EV/EBIT multiple.

I believe that continued earnings execution combined with increased investor awareness will lead to a re-rating in line with an appropriate multiple that reflects their long runway for organic profitable growth.

Thanks for reading! Let me know if you have any thoughts, pushback or questions in the comments below.

Also, if you have any suggestions on other names I should look into, drop me a line at info@tenvacapital.com or @TenvaCapital on X.

This is a reader-supported publication so if you enjoyed this write-up, please consider subscribing below, sharing this with a colleague or friend and hitting the like button. Your support is always appreciated! Thanks for reading!

Lastly, I would like to thank to Ian Cassel for making me aware of this business. He and his team over at MicroCapClub.com offer fantastic resources for investors!

Disclaimer

Tenva Capital, its associates and/or entities controlled by its associates hold shares in the company referred to in this post.

The information contained in this article is not investment advice and is of general nature only. All communications made by Tenva Capital and/or its associates are for informational and/or entertainment purposes only. This article has been prepared without taking into account your particular circumstances, nor your investment objectives and needs. This article does not constitute personal investment advice and you should not rely on it as such. This article does not contain all of the information that may be required to evaluate an investment in any of the securities featured within. Before making any investment decision, you should do your own work and/or consult a licensed financial, legal or tax professional, along with considering any relevant Product Disclosure Statement.

Forward-looking statements are based on current information available to the author, expectations, estimates, projections and assumptions as to future matters. Forward-looking statements are subject to risks, uncertainties and other known and unknown factors and variables, which may affect the accuracy of any forward-looking statement. No guarantee is made in relation to future performance, results or other events.

Tenva Capital and its associates make no representation and give no warranties regarding the accuracy, reliability, completeness or suitability of the information contained in this document. Tenva Capital and its associates will not be responsible or liable, directly or indirectly, in any way for any loss or damage of any kind incurred as a result of, or in connection with, your use of, or reliance on, any of the contents of this post or any communications made by Tenva Capital and/or its associates.

Tenva Capital Pty Ltd (ABN: 37 685 431 690) is a Corporate Authorized Representative (AR: 001314552) of New Horizons Financial Services Pty Ltd (ABN: 63 638 4701 117) which holds an Australian Financial Services License (AFSL: 522392).

“Buffett just got lucky he came up prior to the advent of modern technology. It’s impossible to find those sorts of bargains in today’s world. Efficient Market Hypothesis theory baby. There really is no point in being an active inves… ”

Let me stop Mr.Doomsday right there.

In every generation, you’ll find these exact same individuals who spout their “what’s the point” diatribe. The “it’s all over” nonsense.

And in every generation… they are plain and simple proven wrong.

A major purpose of this publication is to showcase who, how and when individuals from all over the world, from all walks of life have been able to find and exploit value situations gifted by Mr. Market on a silver platter.

These situations are sometimes hiding in the backwaters of public markets. Whilst other times, they are hiding in plain sight for all to see.

The only pertinent question to ask is who was willing to do the looking?

The good news is that today, I tell you of the escapades of one such brilliant investor.

His pseudonym is .

Lets Dig in.

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Intro

(CSC) has time and again uncovered and exploited incredibly attractive value situations across the spectrum of global markets. I have been a subscriber of his for years and have gained immense value out of his work. (If you haven’t yet subscribed to his publication, you can do so here: https://www.clarksquarecapital.com/)

Below, we’ll delve into an incredibly attractive investment opportunity CSC identified involving L’Occitane.

Brief background

L’Occitane is a global manufacturer and retailer of beauty and personal care products focussing on natural and organic ingredients.

The company traded under the ticker 973 on the Hong Kong stock exchange.

L’Occitane’s major brands at the time included:

• L’Occitane en Provence (LEP)

• Sol de Janeiro (acquired in 2021)

• Elemis (acquired in 2019)

It’s important to consider a few key dynamics unique to L’Occitane’s equity before we move ahead.

A happy hunting ground for the astute investor

L’Occitane was a European company trading on the Hong Kong stock exchange. This meant that a lot of European fund managers were restricted in their capacity to buy L’Occitane due to EU regulations.

A low free float

The chairman Reinold Geiger owned 70% of the company. Despite having an EV of 3.8B EUR, only 30% of shares were in the free float. Average daily traded volume was ~1.85B EUR. Therefore, a lot of the bigger players were kept out of the arena.

Poor Corporate Disclosures

Earnings transcripts weren’t available on any news service. Hence, those unwilling to go fishing for these - via L’Occitane’s website or contacting IR - were unable to retrieve key qualitative insights into some recent ugly earnings prints.

The situation

Allow me to take you back to November 2023.

Two major events just took place leading to a significant mispricing in L’Occitane’s equity.

The event set-up

In early August 2023, rumours were swirling that L’Occitane’s chairman was ready to take the remainder of the company off the board at $35HKD per share, representing a large 37% premium to the previous closing price: https://www.bloomberg.com/news/articles/2023-08-09/l-occitane-boss-is-said-in-advanced-talks-on-6-5-billion-buyout).

However, 3 days later the company confirmed Geiger was only interested in taking the company private for “no less than $26 HKD per share.”

Then by September 2023, it was announced Geiger was no longer interested in proceeding with the deal whatsoever.

This preceded a mass selling onslaught with the exit of event investors who’d only taken positions anticipating a premium take-private bid from the chairman. As such, the stock was dumped, collapsing by over 30% down to $19.74HKD per share.

These deal break scenarios are often an extremely fertile hunting ground for fundamentally oriented investors willing to adopt a longer-term investment horizon. CSC knew this perfectly well.

Next, L’Occitane had recently announced a gargantuan marketing spend in FY24 of 100M EUR, mostly to be directed towards its’ core LEP segment. This meant operating margins were being guided down by 400 basis points from FY23's level, to just 12% in FY24. To illustrate the significance of this, consider that FY23 EBIT was 337M EUR at a 16% margin. Hence, this proposed spend represented close to a third of just the previous years’ operating earnings!

While most investors feared this huge incremental spend was now a permanently baked in cost of operating, CSC recognized the major likelihood this spend would only prove one-off in nature.

There were a few notable reasons for this inference:

Firstly, core LEP had been performing well. It wasn’t as if this proposed spend was off the back of any earnings weakness. In fact, when peeking under the hood, core LEP still grew in FY23.

Secondly, the timing of the announcement was peculiar. Lowering margins to just 12% in FY24 whilst still maintaining a medium-term target at 16% sent a strong signal to the astute investor that this move was more about resetting investor expectations to enable a potential takeover at a lower price.

Combined, CSC was taking a well-informed bet that margins would likely rebound from these trough FY24 levels in the medium-term.

In sum, these events set the scene for ’s November 2023 L’Occitane write-up.

While most investors were myopically focused on the enormous increase in L’Occitane’s FY24 OPEX, CSC was focussed on top line growth and a medium-term margin rebound.

The growth kickers

Sol De Janeiro (SDJ) was the hidden crown jewel asset for L’Occitane.

SDJ had grown quarterly sales by 6x in just 1.5 years.

In its most recent print (Q2 FY24), SDJ did over 600M EUR annualized in sales, a far cry from levels it achieved just 12 months prior!

While it was difficult to forecast SDJ’s future growth with clarity, the runway was abundantly clear when you consider the following:

1. Prior to FY24, SDJ had no presence in travel retail. However, SDJ had recently launched into this market in both Europe and North America. Travel retail represents a key channel for any Beauty and Personal Care business. Even better, SDJ planned further expansion into the greatest travel retail market in the world, the Asia-Pacific region, in the back half of FY24.

2. SDJ was rapidly improving its product mix. When acquired by L’Occitane in 2021, 50% of SDJ’s sales were derived from a single product, its’ bum bum cream. However, by Q2 FY24, this mix had improved substantially, with its recently introduced fragrance mists already becoming the brands’ top seller, providing much needed product diversification.

3. In the U.S., SDJ’s exclusivity contract with Sephora was about to end, presenting an opportunity for the company to partner with a much larger network of retailers.

The greatest margin of safety oftentimes may be found in a rock-solid earnings trajectory. You didn’t have to be a rocket scientist to have understood the likely path of SDJ’s future earnings and margins as they went about scaling their cost base.

What about the other major brands?

In FY23, both Elemis and L’Occitane en Provence (LEP) had experienced temporary issues.

Elemis

Elemis had recently lowered promotional product placement within its e-commerce channel in a bid to transition towards more premium offerings. This transition had weighed on growth in prior quarters.

However, management were guiding for growth to trend towards a mid-teens constant currency rate in the medium term.

Core L’Occitane en Provence (LEP)

LEP divested its Russian operations in June 2022 due to the war. The top line was negatively impacted as a result. However, these negative YoY earnings prints were on the cusp of being lapped from Q3 FY24.

Also, their Chinese and APAC markets had come in soft in prior quarters. Yet evidence of a turnaround had begun with the most recent quarter of Q2 FY24, showcasing double digit growth in its Chinese business.

Management reaffirmed their guidance of medium-term, mid-single digit (MSD) growth.

Elemis and LEP Takeaways

There were undoubtedly more question marks on the trajectories of Elemis and LEP when compared with the robust growth profile of SDJ.

However, despite Elemis’ recent issues, its operating earnings remained steady, depicting the segments’ resilience. Earnings were higher margin, and the rollout of its premium offerings represented a decent call option on the resumption of strong growth.

The fate of LEP was even lesser known than that of Elemis. Sales had been growing but margins were compressed. Who really knew what was to come?

As investors we must consistently focus on what truly matters.

Are we able to separate the signal from the noise?

In this vein, LEP’s uncertain earnings trajectory was clearly buffered by the higher margin, faster growth profiles of SDJ and Elemis. The kicker here was that the bulk of the exorbitant 100M EUR marketing spend was being directed towards LEP, offering a potential catalyst for reinvigorating the sales machine beyond the MSD guided growth.

In other words, recognizing the trajectory of L’Occitane’s overall growth didn’t require any specialized or intimate knowledge. Any Joe Blow from down the street could have seen it had they undertaken the all-important process of separating signal from noise; a process CSC flawlessly executed as you will see below.

Valuation

A backdrop

Historically, L’Occitane’s all time low P/E multiple was 12x. On average however, it traded at around a 20x P/E.

At the time, beauty peers were regularly trading above 30x EPS or at 20x EV/EBIT.

M&A transactions also validated these premium multiples with Naturium and Aesop both recently taken off the board for >20x EBITDA.

How L’Occitane was trading

Despite the historic 12x floor multiple, at the time of CSC’s write-up L’Occitane was trading at just 10x FY25 P/E. This was an insanely low multiple relative to both peers and its own history.

Even on FY24’s projected trough EPS of $1.37HKD– a figure severely dampened by the one-off marketing spend – L’Occitane was trading at just a 14x P/E multiple; insanely cheap and offering an extremely attractive entry point.

The reality is CSC didn’t reinvent the wheel on this one. He just used common sense. A 20x P/E on FY25 expected earnings was CSC’s target multiple, resulting in a $40HKD price target. Noting the expected earnings growth for FY26, rolling this multiple would have implied a $50HKD share price.

The likely path and the big risk

One couldn’t ignore the possibility of another opportunistic bid from the Chairman. After all, the equity was trading at all time low multiples. Management had just tanked the stock price down to ~$20HKD by announcing an exorbitant one-off marketing spend, conveniently timed just after Geiger extracted his original low-ball interest at “no more than $26HKD per share.”

At the time, a valid thesis may have been that Geiger’s intention was to embark on a long-winded campaign to reset market expectations and exacerbate investor fatigue such that he could later take the company private at an extremely attractive price that would now very likely go unchallenged.

The (great?) take-private

Lo and behold, by late April 2024, this is exactly how it played out. Geiger took the company off the board entirely. Most would argue he got an insanely good deal, paying just $34HKD per share.

As for CSC, he sold his shares at a price of $33HKD straight after the market opened following the deal announcement, not wanting to risk any further deal breaks. With months until the take-private would go on to officially close, CSC clearly took the most prudent path.

This take-private transaction would no doubt have frustrated many investors who felt the company was materially undervalued by Geiger’s offer. However, this reality didn’t stop from returning 67% on his investment over just a 5-month time-horizon.

CSC’s execution depicts the importance of staying focussed on what truly matters. As investors, we are all sometimes guilty of succumbing to the emotive pulls of the panic master’s seemingly more concerned with the trivial and inconsequential unknowns rather than the all-important separation of signal from noise. CSC ignored the panic and focussed on the opportunity created by Mr. Market’s pessimism. He was able to pounce when most were fearful. And in the end, his 67% 5-month return was the only thing left to do the talking.

If you’re interested in checking out Clark Square Capital’s original L’Occitane write-up, click here:

Clark Square Capital's Ultimate Value

L'Occitane International S.A. (HK: 973)

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2 years ago · 32 likes · 10 comments · Clark Square Capital

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Thesis Overview

Having emerged from an extended period of difficulties, Pioneer Credit is today on the cusp of a major step-change in their earnings profile; with bottom line earnings expected to grow at triple digit rates over the next 2 years as the industry undergoes a sustained multi-year expansion.

Cumbersome regulatory and compliance hurdles have led to major consolidation of the industry. As such, the business today faces less competition than ever before in a market that is rapidly growing supply.

Pioneer Credit is the largest Australian player that does not directly compete with its suppliers; enabling them to become a partner of choice and to rapidly take market share from competitors.

The business is building a nice moat around them in the Australian retail debt purchasing space, as compliance and regulatory hurdles have made it next to impossible for any new competitors to emerge at scale.

This step-change in industry dynamics and impending earnings growth has seemingly gone unnoticed by the market to date; with the company trading at an astounding 3x normalized P/E multiple and 0.3x conservative wind-up liquidation value.

With multiple near-term catalysts on the horizon, I believe Mr Market is offering investors a rare opportunity to purchase shares in a company on the cusp of a major step change in their earnings, at a deeply discounted multiple; all whilst boasting a gargantuan margin of safety between today’s market price and the company’s intrinsic value.

Let’s dig in.

Historic Trading Dynamics

In 2014, Pioneer Credit listed on the Australian Stock Exchange (ASX) under the ticker PNC with a valuation of $60M. By 2017, PNC’s market cap soared above $100M and the company’s equity was mostly valued between $150-200M throughout 2017 to 2019.

However, in mid-2019, a string of issues hit the company that would depress its equity price for the next few years.

Accounting issues, financial covenant breaches, a long-term trading suspension and a messy but failed takeover attempt by their financiers precipitated a horrible time for shareholders. By April 2020, the stock was 92% down from levels traded at 7 months earlier; with a market cap of just $12.5M at the lows.

Capital Structure

Today, Pioneer Credit has a market cap of $60.9M; with its stock trading at $0.38 per share. Liquidity is thin, with average daily volume of approximately $85K AUD. There are 160.3M shares outstanding.

PNC has a highly leveraged capital structure; a function of its operating model.

As at 1H FY25, the company had $290M in borrowings.

The company’s debt facilities comprise of:

• $34M mid-term notes: Bank Bill Swap Rate (BBSW) + 10.5% interest payable; December 2028 maturity

• $272.5M Syndicate facility: BBSW + 5.5% interest payable; June 2028 maturity

Covenants for the debt facilities are closely tied to the carrying value of the company’s Purchased Debt Portfolios (PDPs) held on the Balance Sheet.

Background

Pioneer Credit (ASX: PNC) is an Australian retail debt recovery specialist business.

Pioneer purchases baskets of unpaid retail debts called Purchased Debt Portfolios (PDPs) from Australia’s big 4 banks, other financial institutions and nonbank lenders. These are bad debts which Pioneer purchases at a fraction of their face value. Pioneer then attempts to recover on these debts and has achieved a net IRR of above 15% on every PDP vintage they have invested in since inception.

Free cashflows are then recycled into the purchasing of more PDPs, and the cycle repeats.

In essence, PNC are investors who underwrite impaired debts and profit from recovering these debts at higher prices less the cost to collect.

Managing Director Keith John has been in the debt collection and purchasing industry since 1988. In the 1990’s, Mr John established Pioneer Credit Management Services in Perth, Western Australia. The company began as a private receivables management firm, focusing on debt collection services and purchasing PDPs at a discount from banks and financial institutions.

In the early 2000s, Pioneer Credit Management Services was acquired by Receivables Management Group (RMG), a fledgling national operator aiming to consolidate the Australian debt collection industry.

In 2003, Mr John restarted independently as Pioneer Credit before selling up in 2006 to Credit Corp Group Limited (ASX: CCP), the largest debt collection company in Australia.

In 2009, today’s Pioneer Credit was born with Mr John starting over once again. The business was privately operated for its first 5 years, before listing on the ASX to raise further capital to fuel its growth. The listing provided PNC with the financial resources to expand its PDP acquisitions and compete with larger players like CCP.

Since inception in 2009, PNC’s raison d’être has always been to selectively invest in retail PDP portfolios. Pioneer does not offer any further credit to its customers; a key differentiator for its suppliers who have a strong preference to sell to players they don’t compete with. Today, Keith John is PNC’s Managing Director who also owns 11% of the company.

A troubled history

Pioneer has experienced 2 major industry setbacks since listing on the ASX in 2014.

These now resolved, rear-view mirror setbacks saw the company on the receiving end of multiple negative reports in the press.

I believe the negative sentiment surrounding these historic yet resolved issues is still largely baked into today’s lowly share price; sentiment that I posit is on the verge of a turnaround with imminent events set to catalyse a re-rating.

In 2019, the Australian government slapped down its final report on its Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

The findings exposed widespread incompetence, misconduct, regulatory and compliance failings as well as mistreatment of customers across the banking industry, a key focus of which was on unethical debt collection practices. The big 4 Australian banks – who happen to be PNC’s largest PDPs suppliers - faced intense regulatory scrutiny and public backlash as a result.

The banks became hesitant to sell more impaired retail debt, turning their attention to remediating customers, enhancing compliance and ensuring they responded to tightening regulatory scrutiny around lending and debt collection procedures.

This inevitably resulted in a slowdown of PDP sales, including to Pioneer Credit, affecting their capacity to make meaningful PDP investments and subsequently hurting their bottom line.

This pain was compounded by the effects of the COVID pandemic; a time where generous debt relief programs and massive fiscal stimulus heavily affected both debtor and supplier behaviour, further deteriorating Pioneer’s capacity to conduct business.

Around the same time, PNC started to deal with what at first seemed a relatively innocuous accounting issue over how they reported their PDPs. PNC was reporting its PDPs at fair value, but was required to transition to amortized cost as per IFRS 9.

The issue quickly spiralled out of control for the group. Shares were suspended for months as they got their accounts in order, covenant breaches on their debt facilities were struck, a going concern warning was issued and back and forth legal spats with their financiers The Carlyle Group unfolded as they attempted a messy yet failed takeover.

In surviving this nightmare chain of events for PNC’s shareholders, management was left with little choice but to take on highly punitive financing arrangements with their new set of financiers.

Today, PNC allege they were wrongly advised by their auditors at the time, PwC. As such, in October 2023, the group filed a claim against PwC in the supreme court for damages of up to $32M (including interest accrued).

Unsurprisingly, the share price was completely and utterly beaten down throughout this period:

Today’s environment – a step change

Despite this string of issues, PNC was able to survive. In July 2024, management refinanced their debt facilities on much more favourable terms; 300 bps lower than the previous facility and expected to save $8M a year.

On top of this, massive increases in regulatory and compliance standards due to the fallout from the 2019 Royal Commission findings have notably changed the nature and make-up of the retail debt purchasing industry in Australia. Today, this change represents a huge tailwind for PNC.

Specifically, the industry has undergone mass consolidation; with many of PNC’s competitors simply unable to survive the industry downturn and the huge yet costly uplift in regulatory and compliance standards.

As such, many of PNC’s former competitors exited the industry, entered administration or were acquired by larger firms that could better handle the costly increased compliance burden.

Hence, there are only 2 publicly listed players still standing today in the Australian PDP arena: Pioneer Credit, with 25% market share and rapidly growing, and the larger, more US focussed Credit Corp (ASX: CCP).

To make matters better for PNC’s impending prospects, today we are seeing rapidly increasing PDP supply as banks re-enter the market post the Royal Commission fallout, since adapting to the step-change in compliance standards.

The industry grew from $325M in FY24 to $400M in FY25, as a result of a large supplier re-entering the market. It is expected that this pattern will continue further over the coming years. As MD Keith John noted on the 1H25 earnings call:

“Demand from vendors to partner with Pioneer has exceeded our capacity to absorb the volume of customer accounts available for acquisition… This supply dynamic has continued to improve in Pioneer’s favour during 1HY25 as other participants in the market have pulled back from investing in PDPs with the restriction of credit to some, and a significant competitor entering Administration.”

Hence, as a result of a severe downturn, the industry backdrop today has never looked better. There are fewer players than ever before in a now rapidly growing market. Despite, low consumer confidence in Australia, there is full employment, which is the most important metric in determining the impending health and viability of any debt collection company. To quote Mr John again:

“This environment is as good as I've seen it in my years in this business. And again, just like our vendors, I mean, I think the most important thing is not to take these things for granted. It's not to make assumptions and make easy choices but remaining incredibly disciplined (and) working exceptionally hard.”

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Does PNC have an artificially created moat?

In today’s ‘post Royal Commission’ stringent regulatory/compliance environment, consider how incredibly challenging, if not impossible it is for new entrants in the impaired retail debt collection space to form and nurture meaningful relationships with the major suppliers of PDP’s – the big 4 Australian banks.

Today, any bank sales of PDP’s rely heavily on a deep sense of trust and goodwill with its customers. It’s important to remember the banks have recently been through the ringer regarding their former compliance missteps and subsequent regulatory scrutiny. As such, their major priority today is to ensure the ethical treatment of their customers and to have confidence in the compliance procedures of any firm they offload PDPs to; such that they can maximize their chances of avoiding the wrath of the federal regulator; and the inevitable costly undertaking associated.

Relationships between purchasers and sellers of sensitive products like PDP’s are simply not built overnight, and in reality, take years to form.

As the major suppliers of retail PDPs, in what world would the big 4 banks risk forming a new relationship with some unproven operator in today’s highly scrutinized regulatory environment?

As such, it’s not difficult to see how an artificial moat is being built around the lone survivors in this space; given the all but shut-off barriers to entry.

And yet, the market is completely asleep at the wheel when it comes to this major-step change in the operating environment. But we will get to that more later in the write-up.

PDP Economics

A typical PDP portfolio is acquired at cents in the dollar. For PNC, a standard PDP vintage has a front-loaded 10-year collection curve, with the bulk collected within the first 4 years. PNC sets itself a Net IRR hurdle of 15% for every vintage it invests in, one that it has always achieved in excess of.

The Money Multiple on any PDP investment is a byproduct of the Net IRR hurdle rate (which must be set at inception upon investing), and has historically fallen between 2.2-2.6x Pioneer’s cost base for any yearly PDP vintage.

PNC aims to recover its cost base within the first 18 months of investing and to deliver a 2x money multiple - and therefore the bulk of its Estimated Remaining Collections (ERC) on any vintage - within the first 4 years, with the remainder collected over a 6-year tail.

The bulk of Pioneer’s ERC comes from impaired retail Credit Card and Personal Loan debts. These investments usually fluctuate between 70-80% of Pioneer’s total ERC.

Evidence of Pioneers’ underwriting talent and recent conservative bookings

As previously discussed, FY19 - FY21 were the toughest years of Pioneer’s history to date. Despite the tremendously difficult period, PNC was still able to consistently collect ~$100M in cash each year, as can be seen in the chart below. The fact that their cash collections did not drop off throughout this period clearly highlights their solid cash collection procedures and underwriting skills.

On top of this, the chart below clearly depicts evidence of disciplined PDP investing in bad markets. Whilst lower PDP investments negatively affect reported earnings, it also ensures that you don’t blow up in bad markets. Throughout this period, it is clear PNC did not overpay for higher risk portfolios (which cannot be said about many of its competitors); with management instead biding their time in FY20 and 21; waiting for supply to come back online. Whilst this disciplined approach negatively affected their bottom line, it inevitably ensured their survival in a tumultuous time for the company as well as the industry.

On top of this, Pioneer Credit have consistently outperformed their booked forecasts on PDP vintages.

Under the amortized cost accounting method an Expected Interest Rate (EIR)/gross IRR on each vintage must be set at inception upon investing. This rate translates to a forecasted money multiple that the company expects to achieve on its investments, shown below as the “U/W M.M”. This should be compared against the actual Money Multiples PNC has been able to achieve on its PDP investments (“M.M”). As can be seen below, it is abundantly clear how much PNC has been outperforming their initial booked rates.

On the cusp of an inflection point

Since 2022, Pioneer Credit’s yearly PDP investments and cash collections have stepped up in a big way.

Moreover, PNC has recently executed a significant recap, on much better terms via a $272.5M facility with Nomura which is a material 300bps lower than the previous facility and will result in $8M savings per year from FY25 onwards. Crucially, the facility is termed out until December 2028.

In FY24, PNC took an impairment of $18M on their PDP portfolio, whilst assuring investors this was strictly precautionary:

The company also has significant NOL’s and was able to recognize a deferred tax asset (DTA) of $21.4M in FY24, with management estimating that an additional $13M should be available for use in upcoming periods. In reality, Pioneer shouldn’t have to pay taxes for at least the next few years due to the significance of their NOLs.

Below are the FY24 results:

Excluding the reported DTA, PNC’s Normalized NPAT in FY24 was -$2.5M. (-13.6+6+2.2+2.9). This does not include the expected $8M in annual interest savings on the refinanced debt package.

Now here is where things get interesting:

Management has no Short-Term Incentive (STI) program. However, they do have a multi-million-dollar Long-Term Incentive (LTI) package aligned with achieving underlying NPAT of at least $9M in FY25 and a Statutory NPAT of at least $18M in FY26, a far cry away from results of previous years.

The LTI package stipulates that hurdles must be achieved each year from FY22-FY25. Upon achievement of these hurdles, management will only see their performance rights vest if they achieve an FY26 NPAT in excess of $18M.

If PNC does not achieve its FY26 NPAT target, management will receive $0 in LTI compensation from FY22-FY26.

Below are the number of rights granted just for FY24 (only subject to vest upon achieving the FY26 hurdle):

MD Keith John has explicitly stated on numerous occasions that these targets do not include any benefit from any future DTA recognition, any impairment gain from the FY24 precautionary impairment or any favourable outcome in the pending PWC litigation procedure.

In other words, there will be no financial engineering associated with hitting these targets.

These targets will be achieved primarily via increased revenue growth associated with the much-improved operating environment.

On the FY24 earnings call, MD Keith Join pointed out that for a 2.4x money multiple, the breakeven PDP investment needed to capture flat interest income year on year would be ~$56M for FY25.

As such, any additional investment on top of this no growth $56M base throughout FY25 is gravy in the form of future revenue growth.

And indeed, the company has guided to at least $90M PDP investment over the course of FY25.

Given a $6.5M FY24 normalized NPAT incorporating the $8M in interest savings, it doesn’t take a rocket scientist to see where they make up the extra $2.5M on normalized earnings to achieve an FY25 NPAT of at least $9M; given the growth FY25 PDP investments.

As for FY26 guidance, here is the bridge provided by management:

Given the nature of Pioneer’s outsized PDP investments since FY22, and how much greater these vintages are performing in reality when compared to the rates they were booked at, this is a readily achievable target.

For the sake of understanding how readily achievable the guided uplift in Pioneer’s bottom line truly is; it’s markedly important to understand how amortized cost accounting works before we proceed with understanding revenue dynamics and their subsequent effect on the bottom line. If you already understand this, feel free to skip to the next section:

Under IFRS 9, which Pioneer follows, PDPs are to be carried on the Balance Sheet at amortized cost. This means that:

• For any new vintage of PDPs invested in, Pioneer must record these at COST on the Balance Sheet (i.e Not at fair value).

• An Effective Interest Rate (EIR)/gross IRR must be set ONLY at inception upon investing in any PDP and the average EIR of Pioneer’s entire book of PDPs is then multiplied by the carrying value of PDPs on the Balance sheet as at the beginning of the period to calculate Interest Income at amortized cost (the revenue item that gets booked on the Income Statement). This line item is only reflective of Pioneer’s investing assumptions upon inception; rather than the economic reality of how the PDPs are performing. This then gets added to the carrying value of the PDP on the Balance Sheet.

• Any cash collections on PDPs reduce the carrying value of the PDPs on the Balance Sheet.

• If Pioneer believes there is a reasonable probability that their PDP portfolio has become irrecoverable, they must take an impairment charge (expense on Income Statement) and write down the carrying value of the PDPs on the Balance Sheet, recording the impairment expense on the Income Statement.

• If Pioneer ends up collecting more than the EIR/gross IRR set at inception for any given PDP, this is recorded as an ‘impairment gain’ (revenue item) on the Income Statement, but crucially the carrying value is NOT marked up on the Balance sheet.

• Only the combination of the ‘interest income at amortized cost’ and the ‘impairment gain/loss’ account reflects the economic reality of how Pioneer’s PDPs are performing relative to how they were booked at inception.

As such, it is important to understand that the nature of amortized cost accounting means that PNC’s earnings stream is directly tied to any strengthening or weakening in PDP investment, even if cash collection procedures remain completely on track.

Amortized cost accounting means that as long as our ‘interest income charged to amortized cost + the cost of PDPs throughout the period’ is greater than ‘cash collections received + any impairments of our PDPs’ then we have a growing carrying value period-on-period from which interest income at amortized cost is calculated and is subsequently growing from, creating optics of tremendous operating leverage and growth in the bottom line.

Notably, Pioneer have been setting conservative EIRs on their PDP investments at inception. Yet in reality Pioneer has been collecting a materially higher multiple on their investments; therefore boosting their actual gross IRR achieved on the collection of its PDPs.

This dynamic is even more amplified when considering the last 4 years of PDP vintages, as can be seen below from FY21 onwards:

I stress that there are 2 revenue items to watch out for here which capture these differing realities:

The first is ‘interest income at amortized cost’ – which is purely tied to the EIR set at inception. This rate set at inception translates to the ‘U/W M.M’ shown above.

The difference between this EIR set at inception and the Gross IRR achieved in reality (which translates to the ‘M.M’ above) is captured via the other revenue item: ‘impairment gain,’ such that ‘interest income at amortized cost + impairment gain’ represents Pioneer’s total income revenue for any given period.

Here is the average cash collection curve on Pioneer’s PDP investments in recent times:

It’s important to now consider how slight tweaks in the money multiple lead to a huge step-change in the gross IRR. Highlighting this notion below, we have an example of 2 PDP portfolios with similar cash collection characteristics to Pioneer’s. The tables show the differing gross and net IRRs achieved on PDP investment with a 1.8x money multiple versus a 2.4x money multiple, given Pioneer’s front-loaded collection characteristics.

Other assumptions baked into these PDP portfolios are:

• $100 cost of PDP at inception

• 37% cost to collect on each cash flow – in line with Pioneer’s upper end of its Cost to Service (CTS) guidance

• Cash flow collection characteristics similarly in line with Pioneers: 36% collected in the first year, 18% in the 2^nd and 3^rd years, 12% in the 4^th year and 2.67% (rounded) for the remaining 6 years.

Hence, a 1.8x multiple gives us a gross IRR of 29% whereas a 2.4x multiple results in a 48% gross IRR given the same collection patterns (in line with Pioneer’s).

Given the average actual money multiple achieved (M.M) over the previous 6 years has been 2.65x or 2.44x if we exclude the outlier of FY21, I am comfortable in underwriting a 2.3x money multiple akin to a 44% gross IRR given the cash flow collection characteristics highlighted above.

The underwriting of this 44% IRR is further reinforced when you consider Pioneer’s underwriting throughout the FY20 and FY21 periods; when the PDP industry was on its knees, yet management was still able to achieve actual M.Ms of at least 2.4x on these vintages.

Hence, in an operating environment where the industry has since consolidated significantly and Pioneer today have more suppliers approaching them than they know what to do with, I underwrite a 44% gross IRR on Pioneers actual cash collection profile.

One could quite easily bake in more, but for the purposes of conservatism and uncovering how much of a margin of safety we have in the step-change in Pioneer’s earnings profile, I stick to 44% gross.

The effect on earnings

Below, I assume an EIR of 29% for calculating interest income at amortized cost – in line with Pioneers’ previous bookings.

To isolate for just the expected impairment gains, I am assuming the difference between 44% less 29% (the actual vs booked IRR differential) to accrue on the average PDP investment over the last 3 years.

This is a reasonable and likely conservative assumption considering how front-loaded the cash collection curve is for Pioneer’s PDP investments combined with the gargantuan yearly disparity between Pioneers’ U/W M.M’s versus their Actual M.M’s for each of the last 3 years:

FY22: 1.8 U/W M.M vs 2.2 Actual M.M

FY23: 1.9 U/W M.M vs 2.8 Actual M.M

FY24: 2.0 U/W M.M vs 2.5 Actual M.M

Each one of these are materially outperforming vintages, with a large part of the IRR discrepancy not yet booked in earnings!

If you then take the average % premium of Actual M.M vs U/W M.M. for the 3 vintages, you land at an average 31.5% premium to the U/W M.M. The average U/W M.M. over the last 3 years is 1.9:

1.9*1.315 = an average 2.5x Actual M.M. for the FY22-FY24 vintages.

If we chose to underwrite this, we would be baking in a gross IRR of ~51%.

The average PDP investment made during FY22-FY24 was $84.33M. Using our conservative 44% gross IRR on the actual cash collections, we therefore calculate ~$12.65M in ballpark expected yearly impairment gains (calculation: (0.44-0.29) * 84.33 = ~12.65).

The maths above shows that it is probable management is somewhat sandbagging guidance for FY25 of at least $9M in normalized earnings and a Statutory NPAT result of $18.1M in FY26.

This makes sense when you consider that as discussed above, they have been through the absolute ringer historically; surviving by the skin of their teeth; and therefore, very understandably want to ensure they under promise and over deliver. This combined with the fact that up to 4 years of their compensation package hinges upon achieving the FY26 guidance.

Given everything else above is held constant, it’s important to note that even if PDP investment was a meagre $30M in both 1H and 2H of FY26, FY26 NPAT would still reach managements’ said guidance of $18.1M.

However, this notion of only having $60M to invest in PDP’s in FY26 is something which appears highly doubtful, given today’s environment of growing supply and less competition, unless of course we have a deep global recession.

Today, the average Australian consumer is fully employed, meaning a myriad of PDP portfolios are available for Pioneer to selectively choose from in what management are coining as their bread-and-butter operating environment. As per MD Keith John:

“We've never seen the volume of vendors coming to market. And certainly, the volume is increasing all the time.”

“It's a great market. There's not a lot of competition, consumers fully employed. We've got funding. We've got exceptional free cash flow. This environment is as good as I've seen it in my years in this business.”

Even if FY25 happens to present lower impairment gains than in the table above; the difference will likely still contribute to FY26 and 27 earnings albeit in a smoothed manner.

Given the obvious limitations outsiders have as to true amortization rates and adjustments to the EIR rate changes that are booked against the Carrying Value of PDPs, the model above should not be taken as gospel. Despite this, it is useful for understanding the directional step-change in the bottom line that Pioneer is on the cusp of achieving.

It also clearly highlights the embedded leverage associated with increased PDP investment and how this adds to the base of the carrying value from which interest Income at Amortized cost is calculated.

Valuation – How cheap is PNC?

Some of the best opportunities to compound capital at gargantuan risk-adjusted returns occur when investors are more concerned with scars endured from past fires than with recognizing any latent step-change in operations, industry structure and earnings power.

By the time the “all-clear” sign is self-evident to consensus, the horse has usually already well and truly bolted.

Thankfully, I believe we are fast-approaching this re-rating tipping point upon the release of FY25 results.

On both an absolute and relative valuation basis; Pioneer is today trading at an astounding discount to its intrinsic value.

Absolute Valuation

Lets recap Pioneer’s portfolio and debt outstanding. Pioneer has:

• A Performing Arrangements (PA) portfolio of $431M today (i.e. high-quality debt with consumers paying weekly, fortnightly or monthly agreed upon sums).

• Estimated Remaining Collections (ERC) of $673M.

• Total debt outstanding of $290M (termed out until 2028).

• Total PDP face value of $1.9B (including PAs).

In a liquidation scenario, Pioneer would undoubtedly be able to sell their higher quality PA portfolio almost instantly to a swathe of willing buyers on the private credit side; even if we punitively assume a significant haircut on the portfolio and arrive at just a $300M sale price. These funds could immediately payoff the $290M in debt.

Pioneer then has another ~$260M in ERC remaining that it would either sell off at a discount or collect on themselves.

And after all that, it would still be left with ~$1.2B in face value of PDP’s that it could offload to a willing buyer at say a punitive fire sale price of 10 cents on the dollar, yielding another $120M.

Given these conservative assumptions, PNC’s equity liquidation value comes to: 300M – 290M + ~200M + 120M = $330M.

The point here is that we don’t need to get this down to a precise science when we have a downside conservative liquidation value of between $200-330M (depending on how punitive your assumptions are); one that is absolutely lightyears away from the ~$60M market cap ascribed to Pioneer’s equity by the market today. At today’s levels, this serves a monumental margin of safety for investors.

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Relative Valuation

When valuing companies that invest in and collect nonperforming consumer debt, the market primarily values these companies on a P/E basis due to “too hard” issues given the vastly different and constantly changing capital structures amongst the industry’s players.

Prior to 2019 and the issues which then ensued, Pioneer consistently traded at a 12x to 15x P/E multiple. Today, Pioneer is trading at a ~5.5x FY25 multiple and a meagre ~3x FY26 multiple.

Today, Pioneer is a lot more leveraged and will always have the overhang of a potential cyclical downturn affecting its earnings profile. As such, I am by no means suggesting a premium multiple for Pioneer Credit.

However, a 3x multiple is certainly not anywhere near right. Reinforcing this notion, Pioneer is now entering the greatest operating environment in its history, one with consistent and growing PDP supply and much less competition than ever before.

I believe a $1 stock price for PNC, an 8x FY26 P/E multiple, or 163% upside from today’s levels of $0.38 per share, is a conservative initial price target. At 8x, PNC will still be trading well below historical levels of 12-15x. Despite today’s higher leverage, I believe this multiple is justified as the market wakes up to the reality that PNC are entering a sustained multi-year industry expansion; one that will likely last well beyond FY26. On top of this, Australian unemployment rates are at all-time lows, despite the reality that people are still doing it tough; exemplified by low consumer confidence numbers. This environment favours selective operators like Pioneer, who inevitably have more serviceable debt packages to choose from.

Given this backdrop and continued execution, I struggle to see how Mr Market will continue to value this at 3x FY26 earnings; and believe upcoming earnings prints will serve as catalysts for a major re-rating in the stock price.

It is also important to consider that this 8x multiple still falls well below Pioneer’s conservative liquidation value. In other words, despite representing a 150% return on investment from today’s levels, an equity value of $160M would still not be pricing in any implied future growth in PNC’s equity.

Takeout optionality?

International Private Equity firm Bain Capital Credit showed interest in Pioneer Credit in 2019, running the ruler over the company amidst a 32% share price tumble. Further, Pioneer walked away from a scheme bid from The Carlyle Group in 2020 for $120M; a messy termination which led to Pioneer taking the group to court after they issued a 27-page default notice calling on $141M in debt it had extended the company.

Whilst no acquisitions materialized, this interest highlights the capacity for international firms to step in and realize value if the markets will not correctly price this entity.

MD Keith John overtly hinted to this possibility in PNC’s 1H25 earnings call:

“The majority of my family's wealth is invested into this business and certainly, we believe that the share price should be materially higher than where it sits today. To that end, we are working with the institutional funds, and we're working with the brokers that support this stock and making sure that we're spreading our message and putting it in front of people. I think the other part to recognize is this business is recognized across the world and across the Northern Hemisphere as being materially undervalued.

Certainly, as the year goes on, I will be exploring options around how we unlock that value. It's pointless continuing to go through equity markets where it's not recognized when there are other avenues to do that. And if we don't start getting appropriate recognition, appropriate share price appreciation in the near to medium term, we'll seek to change that and to unlock it in other ways.”

Competition

The Australian debt collection industry has undergone significant consolidation in recent times, with many former players acquired by larger firms like Credit Corp or liquidated due to financial difficulties. This consolidation was driven by regulatory pressures, economies of scale and the need for operational efficiency in an increasingly capital-intensive industry.

Credit Corp serves as Pioneer’s ‘last-man-standing’ major competitor in what is now essentially an oligopoly situation. Smaller Australian debt collection firms lack the scale and resources to challenge the market position of the two major players: Credit Corp and Pioneer Credit.

Credit Corp today has a market Cap of ~$825M.

Recently, they have been ceding PDP market share to Pioneer due to distractions surrounding their entry and subsequent underperformance in U.S. markets.

Credit Corp offers high interest credit products to their clients; offerings which present a bunch of conflicting moral hazard issues; whilst Pioneer does not extend any further credit to their customers. As such, Credit Corp have ceded institutional support, with AustralianSuper (one of the biggest Australian superfunds) departing from the register last year.

These issues serve as key points of difference for Pioneer and largely explain the recent market share gains the company has enjoyed. Inevitably, PDP suppliers want to avoid incurring any unnecessary risks whilst ensuring they minimize selling to customers that compete with them. A PDP sale to Pioneer is fundamentally less risky for the big 4 banks as Pioneer does not extend any further credit to its customers. Pioneer also doesn’t buy any controversial Payday or SACC loans. As such, Pioneer presents as a less risky customer for its PDP suppliers.

Furthermore, Pioneer have recently become a more efficient enterprise; having lowered their Cost to Service (‘CTS’) from 44% in FY22 to 36% in FY24. On the other hand, Credit Corp’s CTS has been steadily rising in Australian PDP markets since FY22, and is projected to be around 45% in FY25.

Credit Corp today trades at a depressed 8x P/E multiple; having historically traded between 16 and 20x pre–Royal Commission in 2019.

Pioneer have successfully eaten into Credit Corp’s lunch. So much so that in FY25, we may see Pioneer overtake Credit Corp as the country’s leader in PDP investment. The first image below shows Credit Corp’s recent PDP investment and the second shows Pioneers:

Alignment

Founder and Managing Director Keith John holds 17.2M shares, controlling approximately 11% of the company, ranking as the second largest shareholder.

Renowned value investing fund Samuel Terry Asset Management holds 26.7M shares, controlling 16.62% of the company. They were adding to their position as recently as late March this year.

With the recent $10M cap raise to fund further PDP’s, esteemed value investing firm NGE Capital were pushed just under substantial – but their monthly NTA updates show that ~7.1% of their FUM was held in Pioneer shares as at 31 March 2025.

Lastly, Pioneer’s LTI plan aligns management with shareholders even further as significant performance rights granted will only vest upon meeting FY23-25 hurdles. If these are achieved then management must achieve an FY26 NPAT of at least $18M for any of these rights to vest.

PWC Claim – Further Optionality

Pioneer are pursuing a claim against PwC for $32M including for interest accrued in the Australian Supreme Court. Whilst I assume no favourable outcome from this angle in my price target, herein lies further optionality. A settlement at 50 cents on the dollar would be greater than 25% of Pioneers’ market cap today. The matter will return to court in Q1 FY26.

Risks

• This is a highly levered entity. As such, a breach of financial covenants poses a tangible risk factor. All we are told on the covenants via the annual report is: “The Syndicated Facility, MTNs and Other loans contain covenants which are closely linked to the carrying value of the PDPs and are highly sensitive to the level and timing of PDP acquisitions, cash collections, and sales.”

  As such, any unexpected industry turbulence could result in covenant breaches. In the event of a breach, Pioneer have the option to raise equity or more than likely would sell off parts of its PDP portfolio – possibly at a significant haircut.

• The impact of Trumps’ ‘Liberation Day’ tariffs on the global economy is widely unknown. Recently, yields at the medium to long end of the curve have been extremely volatile. The U.S. and China could both fall into a deep recession as their ongoing trade war unfolds in real time. Whilst the Trump minimum tariff of 10% was slapped onto Aussie goods, these exports only make up 4-5% of total Australian exports. As such, it is highly unlikely they have any material impact on the Australian economy.

  However, there is a possibility where Australia’s economy gets punished as an indirect result of Trump’s tariff policy, due to global economic interconnectedness; specifically, if China falls into a deep recession. As such, a Chinese recession could have negative spillover effects into the Australian economy, resulting in potential mass layoffs of Australian workers and subsequent collection issues for Pioneer. This could lead to further impairments of Pioneers’ book, covenant breaches and/or fire sales of their PDP portfolio.

• Whilst Pioneer are fully funded and have indicated they expect to conduct no further equity raises, it is possible management taps equity markets unexpectedly, leading to further shareholder dilution.

• Australian recession resulting in mass layoffs and much tougher conditions for Pioneer to collect on their PDPs.

• Worse than expected PDP markets where Pioneer are unable to capitalize on the expected multi-year industry uplift, noting that a slowdown in PDP investment is a headwind against growth in the bottom line.

• Further impairments of Pioneer’s PDPs.

• Unethical treatment of customers.

  ---

Summary

Pioneer Credit has successfully emerged from extremely challenging times and today finds itself in an oligopolistic market environment. Trading at a 3x FY26 P/E multiple and 0.3x conservative liquidation value, the business is materially undervalued on both a relative and absolute basis. Pioneer is also on the verge of a meaningful step-change in their earnings profile. FY25 and FY26 earnings execution should alert the market to the structural industry changes that have occurred and serve as catalysts for a re-rating to a more appropriate multiple. Despite assuming no favourable outcome, optionality in the PwC case serves as a potential further catalyst for a re-rating.

Thanks for reading! Let me know if you have any thoughts, pushback or questions in the comments below.

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This publication was created with a simple mission: To uncover and present investors with highly attractive risk-adjusted IRR opportunities and to shine a light on the plethora of case studies showcasing brilliant investors doing just that.

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How I view risk and return

The love affair between Betas, Sharpe and Sortino ratios and the traditional finance world exists in plain sight for everyone to see. I view risk entirely differently. There are an abundance of flaws in simply equating risk with volatility. Joel Greenblatt touches on this notion flawlessly:

In that vein, I define risk as ascertaining the likelihood of permanent capital impairment as well as monitoring the opportunity cost of one's capital; and incorporating this into the investment decision and overall portfolio management.

It is the ratio of this risk, as defined above, to any potential gains that is the foundation for understanding the return profile of any investment.

Unfortunately, many investors also turn a blind eye towards how and when the extraction of value will indeed occur. A fundamental part of my process is factoring in the likelihood of any said catalyst/s to precipitate a re-rating and to incorporate this qualitative notion into the risk-adjusted return profile of the investment.

Value Investing, in its purest form, is the art of buying a security at a price lower than its intrinsic value.

I hunt far and wide for these overlooked and undervalued stocks. I look for a large margin of safety in situations where you can drive a bus between an entity's stock price and its intrinsic value; and most crucially where a significant catalyst unlock looms to bring the equity price much closer in line with its intrinsic value.

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What this publication isn't

This is not a portfolio management service. This is not financial advice. This is an idea generation platform as well as a place to take inspiration and learnings from some of the great value investing case studies. You are solely responsible for any investments you make and should always do your own work and/or seek the council of a financial advisor.

About me

My name is Jesse Fleiszig. I am a full-time private investor managing my own capital.

I am an active member of MicroCapClub (MCC) and was an audit member of Value Investors Club (VIC) from February 2024 to February 2025. I have previously worked on both the buy and sell sides of the industry.

In February 2025, I passed Level 3 of the CFA Program.

I hold a Bachelor of Commerce with a major in Finance from Monash University.

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