Hawk Ridge Sends Letter to Supervisory Board of Intertrust N.V.

LOS ANGELES, Nov. 4, 2021 /PRNewswire/ -- Hawk Ridge Capital Management LP, one of the largest shareholders of Intertrust N.V. ("Intertrust" or the "Company"), with an ownership stake of approximately 4.1% of the Company's outstanding shares, sent the following letter to the Supervisory Board of Intertrust today:

November 4, 2021

Intertrust N.V.
Prins Bernhardplein 200
1097 JB Amsterdam
Netherlands

Attn:
Hélène Vletter-van Dort, Supervisory Board Chairperson
Shankar Iyer, Chief Executive Officer

Dear Members of the Intertrust Supervisory Board,

Hawk Ridge Capital Management is a $2.2Bn investment firm that has been in business over 14 years. We own approximately 4.1% of Intertrust as of today. We have been a patient and long-term oriented shareholder for nearly four and a half years, maintaining a frequent dialogue with the Executive Board throughout our time as Intertrust investors.

Some of our fellow large and long-time shareholders have already publicly voiced to you the urgent need for change at Intertrust. We write to you in the same vein—we could not agree more.

As one of Intertrust's largest shareholders, it should go without saying that we see the opportunity in front of the company very favorably—a highly-defensible leadership position in fund and corporate services that should enable capture of sizeable industry growth opportunities. However, over our time as shareholders, we have been disappointed time and time again over our time as shareholders by the performance of the company and its inability to properly capitalize on this opportunity, including (but certainly not limited to):

• Paltry organic growth: Intertrust's quarterly average organic revenue growth has been just 2.8% going back to 2016, despite having targeted medium-term mid-single digit growth for most of its time as a public company and having grown in excess of that as a private company. This growth also pales in comparison to many publicly traded peers.
• Margin deterioration: Intertrust adjusted EBITA margins were 41.3% in 2014. Today, the company is guiding to 31.5% at the midpoint of FY21 guidance.¹ While we appreciate there are some natural sources of margin dilution (e.g. from acquisitions), we do not believe those even come close to accounting for this massive degradation in margin. We also note that post the Viteos acquisition, adjusted EBITA margins were >36% in H2'19 versus ~32% in 2021 YTD.² This performance appears particularly poor when considering Intertrust guided to 400bps of margin expansion post-acquisition.³
• Massive share underperformance: given the results detailed above, it is perhaps unsurprising that share performance has been extremely poor. As a basic benchmark, the MSCI World Index has outperformed Intertrust by 125%+ since IPO and nearly 40% over the last year.

Today, Intertrust trades under 9x EBITDA on consensus NTM estimates. This is many turns cheaper than any public peer or comparable transaction⁴ we have come across. A business of this quality has no business being valued anywhere near this low of a multiple.

We appreciate that both the Executive and Supervisory Board share our opinion that the company is significantly undervalued.⁵ We also view the recently announced share repurchase program as a positive first step in correcting this valuation disparity.

However, we are convinced more can and should be done to unlock value. We urge the Supervisory Board to promptly:

1. Appoint new independent members to the Supervisory Board: five of six members of the supervisory board have been in their seats since 2017, over which time operating performance has dramatically underperformed targets, the stock has dramatically underperformed the market, and the regulators have uncovered major regulatory deficiencies (e.g. CIMA fines & remediation charges). We believe the appointment of multiple new independent members would go great lengths to rejuvenate oversight, hold management accountable to higher standards, better align incentives and drive long-term shareholder value. We would view shareholder representation in those seats as a significant positive—we think whoever is appointed should be materially economically aligned with shareholders.
2. Explore strategic alternatives: Intertrust has not found success under its current governance and ownership structure over a multi-year time horizon. We think that there may be a more attractive future for Intertrust under new ownership and a sale of the company could be an attractive alternative for stakeholders, given the substantial undervaluation of the company's shares.  We therefore recommend the company engage advisors to explore potential interest from strategic acquirers and financial sponsors—interest we believe should be robust given the volume and valuations of recent M&A activity in the industry. We believe that a well-executed sale process would result in a sale of the company at a substantial premium to the current valuation.

While we continue to believe in the long-term opportunity in front of Intertrust and appreciate hard work and good intentions of the Management and Supervisory Boards, it has become increasingly clear that a low level of performance has persisted for too long. We believe urgent action is necessary to create value for all shareholders—a view we trust many other shareholders hold as well.

We will continue to be constructive shareholders and hope to productively engage with you and other fellow shareholders ahead of the November Capital Markets Day.

Sincerely,

David Brown
Portfolio Manager
Hawk Ridge Capital Management LP

About Hawk Ridge

Hawk Ridge is an investment firm founded in 2007 focused on investing in high quality, misunderstood small-to-mid cap equities with $2.2 billion in assets under management.

¹ Or 34.5% before FY2021 guidance was impacted by remediation expenses.
² Excluding remediation expenses.
³ Intertrust guided to at least 40% adjusted EBITA margins in FY2021 after announcing the Viteos acquisition.
⁴ Since 2015.
⁵ As voiced in both the September 27, 2021 press release as well as the Q3 2021 earnings results.

SOURCE Hawk Ridge Capital Management