Maran Capital Eyes Abundant Growth for Pure Cycle Corp. (PCYO)

Maran Capital Management LLC, a value-driven, concentrated, long-term investment management firm, published its fourth-quarter 2020 Investor Letter – a copy of which can be downloaded here. A return of 14.8% was recorded by the fund for the Q4 of 2020, outperforming its S&P 500 benchmark that delivered a 12.15% return, but below its Russell 2000 index that returned 31.4%. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Maran Capital Management, in their Q4 2020 Investor Letter said that Pure Cycle Corporation (NASDAQ: PCYO) is one of the investments they own. Pure Cycle Corporation is an integrated water company that has a $270.6 million market cap. For the past 3 months, PCYO delivered a decent 18.86% return and settled at $11.28 per share at the closing of February 2nd.

Here is what Maran Capital Management has to say about Pure Cycle Corporation in their investor letter:

“Pure Cycle is the Denver land development and water company that I first wrote about last quarter. The Denver housing market remains strong – the number of listings on its MLS is at all-time lows. The shortage of entry-level homes (Pure Cycle’s market) is particularly acute.

The strength of the Denver housing market is evident in PCYO’s lot price acceleration. As a reminder, PCYO’s Sky Ranch development in Denver has approximately 5,000 single family lot equivalents (SFEs). In Phase One of the development (which spanned the last two years), PCYO sold lots for ~$72k on average. In Phase Two, which is now underway, the company has contracted to sell lots for ~$102k – a 40% increase. Assuming no future appreciation, the value of the remaining 4,500 SFEs is ~$450mm. Net of future development costs (which will be partly offset by reimbursements), ignoring the potential valuation boost of selling some of the land as commercial, and discounted back to today at a high (i.e., conservative) discount rate, I value PCYO’s land portfolio at ~$250mm, or $10-11/sh.

In addition to its land and lots, PCYO owns over 10k acre-feet of water rights and a water utility and associated infrastructure that is carried on the books for $55mm. The company can accommodate ~60k SFEs with its water portfolio, and it sells water and sewer tap hook-ups for ~$30k/SFE. This implies $1.8bn of future revenue associated with the water assets (before considering the monthly fees for water that PCYO will earn in its role as the utility). I believe PCYO’s water assets are worth at least $250mm (another $10-11/sh) on a net-present-value basis (using a high and thus conservative 10% discount rate), but in water-short Colorado, these are scarce assets that could be valued by an infrastructure fund or other investor at a much lower discount rate (and thus much higher price).

I estimate that PCYO’s NAV is north of $20/sh and therefore that PCYO is a “fifty-cent dollar,” for which the value of the dollar is growing. PCYO fits my underwriting standards: it’s potentially a three-year double with limited risk of permanent capital loss. With savvy capital allocation (the balance sheet has ~$20mm of net cash, no debt, and an additional “hidden” ~$20mm reimbursement receivable), value creation could be meaningfully higher.”

Pixabay/Public Domain

Last December 2020, we published an article telling that Pure Cycle Corporation (NASDAQ: PCYO) was in 11 hedge fund portfolios. Its all time high statistics is 14. PCYO delivered a -15.70% return in the past 12 months.

Our calculations show that Pure Cycle Corporation (NASDAQ: PCYO) does not belong in our list of the 30 most popular stocks among hedge funds.

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Video: Top 5 Stocks Among Hedge Funds

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