Legacy Ridge Capital Management, LLC recently published its “Legacy Ridge Capital Partners Equity Fund I” fourth quarter 2022 investor letter, which can be downloaded here. In 2022, the fund returned 12.5% gross and 10.3% net of performance fees compared to a -18.1% return for the S&P 500 Index. In addition, please check the fund’s top five holdings to know its best picks in 2022.
Legacy Ridge Capital highlighted stocks like Summit Midstream Partners, LP (NYSE:SMLP) in its Q4 2022 investor letter. Headquartered in Houston, Texas, Summit Midstream Partners, LP (NYSE:SMLP) owns, operates and develops energy infrastructure assets. On February 1, 2023, Summit Midstream Partners, LP (NYSE:SMLP) stock closed at $17.41 per share. One-month return of Summit Midstream Partners, LP (NYSE:SMLP) was 5.45%, and its shares lost 27.25% of their value over the last 52 weeks. Summit Midstream Partners, LP (NYSE:SMLP) has a market capitalization of $177.175 million.
Legacy Ridge Capital made the following comment about Summit Midstream Partners, LP (NYSE:SMLP) in its Q4 2022 investor letter:
“A month after discussing Summit Midstream Partners, LP (NYSE:SMLP) in last year’s letter, management provided 2022 guidance and the stock went down 30% that day. Such is the life of an investor in illiquid small-cap securities. Shares are still ~32% below the year-ago price despite results coming in at the high-end of the 2022 guidance range, and despite management selling 2 non-core assets for $115mn at a 15x EBITDA multiple, then subsequently acquiring $305mn of assets at a 4x EBITDA multiple, which should help the company generate $300mn +/- EBITDA in 2023. Most importantly, these transactions were a net positive to leverage ratios. Recent weakness in natural gas prices curbs our enthusiasm a tad, but SMLP is undeniably in a better position than it was a year ago.
Total obligations (including preferred equity and non-recourse Double E debt) have gone from $1.6 billion last year to $1.7 billion today and the EV has gone from $1.87 billion to $1.88 billion, yet EBITDA will be up $75mn+, or 34%. The stock market is valuing the newly acquired EBITDA at 1.3x. Odd. Obviously, leverage is still too high, but with $125mn+ of FCF (that’s a 70% FCF yield) management will continue to work it down.
We estimate SMLP’s year-end 2023 EV/EBITDA is just under 6x while the closest publicly traded peers are valued at closer to 8x. Just closing half of the relative valuation discount is worth $30 a share, on a $17 stock. And the last time SMLP was even close to generating $300mn of EBITDA ($288mn in 2017) shares sold for ~$170 (split adjusted) and the EV was $3.5 billion (about the same amount of debt as today, just $1.5 billion less equity value). The backdrop and sentiment have changed for gathering and processing businesses since 2017, so I wouldn’t expect to get back to those valuations, but with the balance sheet in better shape and corporate governance and corporate structure lightyears better, we’d argue the valuation shouldn’t be half of what it was 5-years ago. Lastly, the CEO, CFO and General Counsel recently forfeited $4.5mn of cash compensation, electing to receive phantom units instead. “That ain’t nothin’”, as a good friend of ours would say, so we continue to own the stock.”
Summit Midstream Partners, LP (NYSE:SMLP) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 2 hedge fund portfolios held Summit Midstream Partners, LP (NYSE:SMLP) at the end of the third quarter which was 2 in the previous quarter.
We discussed Summit Midstream Partners, LP (NYSE:SMLP) in another article and shared Legacy Ridge Capital’s views on the company. In addition, please check out our hedge fund investor letters Q4 2022 page for more investor letters from hedge funds and other leading investors.
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Disclosure: None. This article is originally published at Insider Monkey.
