Investor letter, May 2020

API Group is described as the manager's largest new special-situation position trading at 5x cash flow as a nationwide essential service; following its NYSE listing, index-fund buying should provide a price floor and APG shares at 16x 2019 EPS would imply ~$20/share, roughly a +110% return.

“API Group (APG) trades at 5X cash flow and operates as a nationwide essential service in stable end-markets not exposed to COVID or work-from-home dynamics. Earlier this month, the company moved its listing from the LSE to the NYSE and is thus now eligible for inclusion in major indices. Over the seven weeks subsequent to the NYSE listing, over 30M APG shares need to be purchased by index funds and those that track them. At a minimum, these forced buyers will be insensitive to price or COVIDrelated factors and should provide a floor to the APG’s share price, which we believe is undervalued and underfollowed. These purchases may provide a substantial catalyst, creating an attractive non-correlated risk/reward in a time of heightened uncertainty. Public specialty industrial comparables, such as Honeywell (HON) or Johnson Controls (JCI), trade in the range of 15-18x EPS. Given that we believe API’s business is superior to most of its public comparables, has a proven capital allocator/owner at the helm, and has an established framework to expand EBITDA margins over the next few years, we believe the APG stock should trade at a premium to its larger peers. At only 16x 2019 EPS, APG shares would trade at almost $20/share or about a +110% return from today’s prices.”

ServiceNow is highlighted as a SaaS workflow platform that grew more than 30% at scale in the most recent quarter with minimal expected COVID impact, possessing an extremely strong value proposition and competitive moat that should drive success across economic environments.

“One example is our investment in ServiceNow (NOW), a SaaS computing platform enabling enterprise companies to digitize workflows. In the most recent quarter, the company grew – at scale – more than 30% and is expecting minimal impact from the coronavirus. We believe they have an extremely strong value proposition coupled with an enviable competitive moat that should propel success in a variety of economic environments.”