Silver Beech Capital commentary for the fourth quarter ended December 31, 2024.
Dear Fellow Investors and Friends,
The estimated full year 2024 and historical net performance for Silver Beech Capital, LP (“the Fund” or “Silver Beech”) is presented below.
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Performance Summary:
Since track record inception, Silver Beech has compounded at a 22.6% annualized return, which equates to 9.5% annualized outperformance over the S&P 500. In 2024, Silver Beech delivered strong absolute returns of 23.9% for the full year, narrowly behind the S&P 500’s excellent 25.0% performance and well ahead of the Russell 2000’s 11.5% return.
Silver Beech’s strong performance in 2024 was attributable to outsized profits in financials, energy, and consumer sector investments. This is distinct from the S&P 500’s strong performance, which was primarily driven by the tech sector.
Today, we believe risk is generally elevated. As we write, uncertain American tariff policy has caused supply chain congestion as firms rush to acquire inventory in front of unclear tariff deadlines. This can lead to inflation that may or may not be “transitory.” Tariff uncertainty also discourages firms from making long-term investments, thereby reducing corporate and national economic growth. In addition to inflationary risk posed by tariffs, rumored corporate and personal income tax cuts could be inflationary as they increase the government’s fiscal deficit unless paired with commensurate cuts in government spending. We are actively monitoring Silver Beech’s portfolio for prospective tariff and inflationary impacts.
There is strong evidence of extreme speculation in financial markets. In 2024, retail investors piled into leveraged ETFs at an elevated pace not seen since 2021. The most popular leveraged ETFs offer retail investors 2x-4x long or short exposure to Telsa stock, other single-name “hype” stocks, and cryptocurrencies. This financial speculation has been stoked by all manner of authority and celebrity, including the President and much of his family, who have launched “meme coin” cryptocurrencies in the last year. At Silver Beech, we remain disciplined and aspire to invest dispassionately by systematically executing on our investment process, cognizant that even the most principled investors possess cognitive bias.
As a reminder, Silver Beech does not make macroeconomic or political predictions, nor select investments for direct exposure to such predictions. We note that U.S. equity valuations are high with the S&P 500 trading at a ~22x forward P/E ratio1. The S&P 500 has closed out a substantial two-year bull market where it rose by 50%+. The S&P 500’s ten largest constituents trade at nearly a 30x forward P/E ratio1. There have been decades when the stock market offered returns no better than holding cash, and those decades often began with elevated stock market valuations similar to today’s levels.
We are optimistic about Silver Beech’s opportunity set against this backdrop of elevated risk, uncertainty, and historically high valuations. Silver Beech’s portfolio is concentrated, actively managed, catalyst-rich, and comprised of durable companies priced at attractive multiples of free cash flow. This is in stark contrast to the S&P 500’s passively managed portfolio of five hundred large companies that trade at near-record multiples of free cash flow.
We believe several areas of our investment focus, including real estate, finance companies, banks, insurers, companies with misunderstood asset-rich balance sheets, corporate transformations, and turnarounds, are broadly out-of-favor and feature attractive valuations that are conducive to strong forward investment returns. We systematically identify and research these opportunities to build Silver Beech’s distinctive portfolio.
In this environment, a long-term investment strategy that can ignore short-term volatility is a significant advantage. This advantage comes from the trust and patience of our limited partners, and our shared dedication to long-term outperformance. Thank you for your continued support.
Portfolio Update
We have written about our recent investment in Rentokil.
Rentokil Initial (NYSE:RTO | LSE:RTO)
Rentokil Initial (“Rentokil”) is the world’s largest pest services company. The pest services business model is attractive because it is capital-light, revenues are acyclical and mostly recurring with high retention rates, costs are variable, and the sector benefits from structural growth tailwinds. As society grows wealthier, it prioritizes pest control and consumes more pest control services; this durable trend has driven GDP+ growth in the pest services sector for decades and will drive GDP+ growth for years to come.
Though Rentokil also operates profitable hygiene services segments2, we do not focus on them here as they contribute less than 10% to Rentokil’s profits and are therefore not core to our investment thesis.
It is relatively straightforward to start a small pest services company with a technician’s license, some chemicals, and a truck. But there are significant scale benefits that accrue to large companies like Rentokil due to route density, branch consolidation, and brand recognition that make it hard for a small, independent pest services company to compete effectively. The clearest evidence of this scale benefit is illustrated by Rentokil’s own branches: larger branches with more than $8M revenues operate at 10%+ higher operating margins than branches with less than $3M revenues; this disparity is even more dramatic when comparing scaled Rentokil branches with subscale independent branches.
Due to attractive scale benefits, Rentokil and other large players have been aggressively consolidating the marketplace. Over the last 10 years, Rentokil has acquired 200+ pest services companies. Most of these acquisitions were small “tuck-ins” and straightforward to integrate into Rentokil’s platform. Emboldened by the success of its consolidation strategy, in 2022, Rentokil acquired Terminix, one of the largest U.S.-focused pest services companies, for ~$6 billion3. Rentokil’s Terminix acquisition was a notable shift away from its historical tuck-in consolidation playbook and made its pest services segment the largest player in the attractive U.S. market, the largest global pest services market. After acquiring Terminix, Rentokil and Rollins (Rentokil’s largest competitor) collectively possess 50%+ market share in U.S. pest services.
In contrast to its smaller tuck-ins that it had integrated quickly and successfully, Rentokil has thus far struggled to realize the full potential of the Terminix acquisition. A key challenge is Terminix had notably inferior employee and customer retention figures than Rentokil and its competitors, and employee retention is strongly correlated with organic sales growth. Since acquiring Terminix, Rentokil’s consolidated North American pest services segment has lagged behind the organic growth of competitors, potentially signaling deeper issues than integration, such as a challenged sales strategy.
Rentokil’s management has formulated a plan to revitalize organic sales growth by focusing on employee and customer retention, but in the interim period the stock market is impatient and has not been kind to Rentokil. Since the December 2021 announcement of the Terminix acquisition, Rentokil’s stock price is down -40% and the S&P 500 is up 32%. As of December 31, 2024, Rentokil trades at ~11x TEV/EBITDA4, a substantial discount to private and public market comparables, a discount to its historical trading multiples, and a discount to the market overall.
Some notable investors agree with our assessment that Rentokil is one of the most attractive opportunities in public markets today: in June 2024, it was reported that Nelson Peltz’s Trian Partners had invested in Rentokil and was exploring corporate engagement. A few months later, it was announced that Trian had secured a seat on Rentokil’s board of directors. We think it is a good sign the company is open to shareholder feedback and welcomed Trian into the boardroom.
Silver Beech does not “borrow conviction” by investing at a lower price than other investors, but we do note that since Trian’s reported investment in Rentokil in June 2024, the stock has declined by over 20% due to short-term uncertainty in Rentokil’s North American pest services segment. We argue the market is missing the forest for the trees by anchoring to Rentokil’s recent weaker North American performance as the company integrates Terminix instead of focusing on the company’s durable medium-term fundamentals and high business quality.
We believe Rentokil is an attractive investment because:
- Attractive valuation: Rentokil trades at ~11x TEV/EBITDA5, a material discount to any private or public market trading comparable, and a discount to the broader market even though Rentokil is a vastly higher quality company than the average S&P 500 constituent. If Rentokil were to trade in line with our view of intrinsic value and other high-quality consolidation platforms, there is 40%+ stock price upside. In an upside scenario, if Rentokil were to realize its integration ambitions but still trade at a large discount to Rollins, its closest North American pest services competitor, we believe there is 100%+ stock price upside.
- The market is missing the forest for trees: the market has coalesced around a short-sighted focus on quarterly growth and other KPIs. This short-sightedness obscures the company’s enduring quality, low spot valuation, and leading scale-advantaged position in a sector with structural growth trends that will persist for decades.
- Speculative operational & governance improvements: Rentokil’s CEO Andy Ransom had a sterling reputation prior to Terminix’s acquisition, growing EPS at a ~10% CAGR since becoming CEO in 2013 by orienting the company around the pest services market. We don’t believe today’s low stock price, due to slower than forecasted integration of Terminix and recently decelerating North American organic growth, gives Andy’s leadership or operational effectiveness full credit. We are also optimistic about Trian’s boardroom involvement, which could lead to governance improvements and a long-term shareholder’s focus on operational improvement and execution.
- U.S. relisting upside: Rentokil is currently listed on the London Stock Exchange even though more than 50% of its profits come from U.S. operations. The company is exploring a relisting to a U.S. exchange. Though a U.S. relisting is not included in our core investment thesis or base case underwriting, we believe this action would drive additional investor demand. A U.S. relisting would also convert the company’s reported financials from IFRS to GAAP accounting, improving transparency and potentially attracting a broader investor base.
Conclusion
It is our great privilege to be your partner and manage your capital alongside our own. We appreciate your trust and partnership. Please do not hesitate to reach out with any questions.
Sincerely,
James Hollier
Partner & Portfolio Manager
James Kovacs
Partner
Silver Beech Capital, LP
