Investment Case: Copart

Junk to Gold

Introduction

Copart is a leading provider of online vehicle auctions. Its focus is predominantly on salvage (i.e. total loss) vehicles that they receive on consignment on their junk yards across the United States from insurance companies and increasingly from non-insurance companies. It was founded in 1982 by Willis Johnson. The company is now run by Jayson Adair, only its second CEO. Copart went public in 1994 as it expanded across the USA. Over time, Copart has transformed itself thanks to the extensive use of technology to become a global remarketing platform that links buyers and sellers of primarily cars around the world. It sells more than one million cars every year.


David Simons

Founder and Portfolio Manager


A simple business model

One of our selection criteria is how defensible a business is. High barriers to entry are a key factor. Copart is a good example. It has expanded over three decades to build a unique network of junk yards (in Dutch: autokerkhoven). Cities are cautious about issuing licenses to open new junk yards (“Not in my back yard”). The networking effect that comes from having the largest supply of salvage cars combined with a dense junk yard network is impossible to replicate. Also, insurance companies need a reliable partner who can process their cars quickly and help obtain the highest possible price, making it extremely difficult to enter as a new company. Copart has long-term contracts with the major suppliers of salvage cars.

Steady Growth

The key drivers for volume of cars processed are 1) the number of cars on the road, which continues to rise; 2) the average age of cars, which is nearly twelve years now, the highest in at least twenty years and 3) accident rates, which have been increasing and 4) the total-loss rate, which has also been increasing. As the fleet ages, the value of cars decreases. An accident more quickly leads to a total-loss, also because repair costs continue to go up as a result of crumple zones, multiple air bags, sophisticated electrical systems, etc. This leads to a steadily increasing supply of salvage cars.

Pricing is either a fixed fee per vehicle sold, or a percentage of the value, plus fees for towage, title processing, etc.

Enhancing growth is international expansion, which it began several years ago. It is now active in Europe and the Middle East. It has been in investment mode for several years, generating small losses. 2015 was the year in which its international operations turned the corner as scale benefits kick in. We anticipate many years of international growth. Copart is introducing its auction model in these markets. Its value proposition is becoming clear to the relevant market participants, which is helping it to scale in countries such as Germany and the UK.

Altogether, it adds up to a reliable and steadily growing revenue base. Copart has the type of recurring revenue model that we look for.

Management

Copart management has shown a magnificent skill at building the business over 30 years from a single junk yard, and has allocated capital wisely and conservatively, leading to sustained high return on capital. It still owns roughly 10% of shares outstanding, ensuring alignment with external shareholders. A good example of its shareholder friendliness is its frequent use of share buyback programs which have helped reduce the shares outstanding by 36% in the last 12 years.

A Sustainable Business

When we judge a company’s sustainable credentials, we don’t just tick a list of boxes. Larger companies have dedicated sustainability marketing departments these days, that focus on making their company look ‘green’ and ‘responsible’ even as they face repeated ethical mishaps. We believe that it is more important to determine how a company’s business model contributes or is a solution to the challenges our society faces. Copart is a key player in recycling used car parts. It is an enabler in the efficient transfer of salvage cars from sellers to buyers such as car repair shops. And by providing perfect insight into the availability of salvage cars, it lowers the distance salvage cars need to travel on car transporter trailers to their buyers. Altogether, it decreases the use of energy, maximizes the use of used car parts and allows scrap metal to find its way to smelters to be reused.

Self-driving as a Risk

One of the risks we see for Copart is the emergence of self-driving cars and safety technology helping to decrease collision risk. Management has convincingly argued that its measurable impact is quite some years away and likely offset by other growth initiatives. Currently, in the USA some 300 million cars are on the road. Annually, roughly 15 million new cars are sold. As of today, none of them are self-driving and only some of the higher-end cars currently have safety technology on board such as automatic stopping. Ironically, the safety features are causing a rise in accident frequency. People feel safer in their cars, causing them to let their guard down and send that one text message to their partner... It is unknown when self-driving becomes a commonplace feature, yet even if it is close, the feature will not be built into all cars. As such, its impact as a percent of the total car park will remain low for decades to come.

How to invest

Participations in the Fund are qualified for sale in the Netherlands. SilverCross Global Small-Cap Fund does not pro-actively sell participations to investors residing outside of the Netherlands.

The minimum initial investment amount is Eur 100,000. Any subsequent investments must exceed Eur 25,000.

Before making any decision to invest in SilverCross Global Small-Cap Fund, we strongly recommend reading the Prospectus.

SilverCross Global Small-Cap Fund may be distributed through IBS Asset Management BV or through a licensed EU / EVA financial institution. Investors wishing to invest through their own advisor can do so by providing them the following ISIN code: NL0010832242.

All income generated by the Fund is treated as fiscally transparent. This means any income such as dividends and interest are taxed based on your individual tax position. We recommend consulting with your tax advisor about the potential tax consequences. Upon request, a list of all income received by the fund is available for your tax affairs.

For investors whose investments are treated in ‘Box 3’, the value of the Fund as of 1 January of each calendar year must be submitted to the tax authorities without any further requirements relating to income generated by the Fund.

 

Subscription Procedure

Please note that your subscription will be processed the first Transaction date following the receipt of the investment amount, which is weekly on Wednesdays, or the first business day thereafter if the Dutch stock market is closed. The Investment Manager has the discretion to determine additional Transaction dates at any time.

 

Transparency

The Fund Manager encourages potential investors to view an investment in the Fund as a long-term holding. Therefore, in case an investor wishes to sell its participations within 90 days after purchase, an anti-dilution levy of 3.0% of net asset value per participation will be incurred by the investor. This penalty serves to discourage frequent trading in Fund participations.

The Fund Manager is allowed to suspend or limit subscriptions or redemptions in the interest of existing participants. For more information about situations in which this can occur, see the Prospectus.