Idea Brunch with Brandon Daniel of Atai Capital
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Brandon Daniel!
Brandon is the founder and portfolio manager of Atai Capital, a Fort Worth, Texas-based long-only fund he launched in January 2023. Before launching Atai, Brandon worked as an equity analyst at a multi-billion-dollar investment firm and a credit analyst at a commercial bank. Brandon is active @AtaiCapital on Twitter and focuses on small-cap stocks.
Brandon, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Atai Capital so early in your career?
Certainly, the first time I was introduced to fundamental investing was through an internship at Breach Inlet Capital (an investment fund focused on small-cap transformations). I was incredibly fortunate to have secured this role while handing out resumes in person to several different investment firms in Dallas, TX. Chris Colvin and David Emmel (the portfolio manager and senior equity analyst there, respectively) are both extremely sharp individuals and great investors who I had the privilege to work under for two years during college. During my time there, I realized that I had a strong passion for investing and fundamental research, and it was what I wanted to do for a career.
After graduating from college, however, I was unable to secure any sort of investing role, so I took a job underwriting commercial real estate loans at a local bank here in Fort Worth, TX. It was a great experience that I am very thankful for, but nonetheless, I always had the intention of pivoting into a buy-side role at some point.
After around a year at the bank, I would get that buy-side opportunity at a large investment firm in Florida, so I packed my bags and moved down there in January 2022. However, this would be short-lived as I went from working on compelling small-cap ideas to working exclusively on boring large and mega-caps, toeing the line with very little intellectual freedom. So, after six months, I’d resign and move back to Texas.
I’m twenty-six, so compared to most of my peers, I’m certainly on the younger side. However, I think the record for the youngest fund manager likely goes to a good friend and mentor of mine, Samir Patel, who started his fund Askeladden Capital at twenty-one!
As for my decision to start Atai Capital at just twenty-five, it was fueled by a few different things. I’d say the main reason is that after working for the firm in Florida, I realized that there was likely only a handful of investors I’d want to work for that share a similar investment philosophy to my own (many of them are one-to-two-man shops who don’t need an additional analyst). However, I did apply to several buy-side roles over the months after moving back to Texas but was unsuccessful in securing any interviews, so I was faced with two options. I could, one, sit unemployed in the hopes of finding a job under someone whom I respected (that may never present itself), or two, start my own firm, which would enable me to adhere to my own investment philosophy without compromise.
So, that’s what I decided to do, and I launched Atai Capital in January of this year.
In a recent idea pitch competition, you pitched AstroNova, an airplane cockpit equipment manufacturer and label printer company, as your top idea. Why is AstroNova a good investment today and what do you think the company is worth?
AstroNova (NASDAQ: ALOT — $100 million) is one of our largest positions today, and we’re very excited for this one’s future. The thesis here is straightforward: the company is substantially underearning today, but earnings will inflect significantly alongside narrow-body aircraft production, which is still ~30% below pre-COVID levels.
AstroNova is led by Greg Woods, who we consider to be a good steward of capital and a conservative operator. Greg owns ~5.4% of the company, so he is well-aligned and has been working hard over the past three years to take various costs out of the business.
We see AstroNova hitting a run-rate EBITDA number north of $20M in the next twelve months, which compares favorably to the ~$13.5M in EBITDA the company generated over the last twelve months. The company is also far from capital intensive, with capex needs in just the low-single-digits of millions. Aerospace part-supplying peers trade in the mid-teens, and AstroNova’s pre-covid multiples were firmly in the low-to-mid teens range as well, so if we throw a 10.00x multiple on $21M in EBITDA, it gets us to ~$25.00 a share before accounting for any interim cash flow from future earnings or working capital release – this compares favorably to a share price of $13.50 today.
Furthermore, we don’t see a recession impacting narrow-body aircraft production rates and expect them to continue their recovery regardless of the macro-environment. Both Boeing and Airbus are far below their stated production goals and have huge backlogs, but due to well-publicized supply-chain issues, production has been slow to ramp but is improving.
Readers interested in AstroNova can listen to the pitch linked above and read about it in our Q1-2023 and Q2-2023 quarterly letters here.
You also recently posted a 66-slide deck about Enad Global 7 (STO: EG7), a Swedish video game developer that “has legitimate multi-bagger potential.” Can you please tell readers a little about the company and why you think it’s a compelling investment today?
EG7 has a pretty interesting story; starting as a work-for-hire video game developer in 2013 under the name ToadMan Interactive, they would eventually go public in 2017 in an effort to pivot to independent game development. When that didn’t work out, they’d shift again and start acquiring various video-game-related businesses from mid-2019 till early 2021. These acquisitions would eventually lead to a total shareholder dilution of ~80%.
Long story short, the prior owners of Daybreak Games (an acquisition the company completed in 2020) would oust the founder and CEO of EG7 in August of 2021. Millions of dollars under his tenure were invested into developing several unproven IPs with a high likelihood of failure at launch. The new CEO (Ji Ham) would cancel many of these projects and work to “right the ship” over the following two years, cutting costs, divesting non-core assets, and focusing on constructing a cohesive strategy and go-forward plan for the company.
Ji Ham (EG7’s CEO) and Jason Epstein (EG7’s Chairman) are business partners and seasoned private equity investors who were the majority owners of Daybreak Games before it was acquired by EG7 in December 2020 for $200M in cash and an additional $100M in stock. Ji and Jason originally bought Daybreak in early 2015 from Sony when it was an unprofitable business burning around $30M a year. Ji Ham would take the reigns there in early 2015 and turn that business around in just a month's time, and Daybreak would end the year with a $12M profit. They have a relentless focus on the bottom line and what sort of IRRs an investment could potentially generate for the amount of risk taken – we consider them to be S-Tier operators.
Ji and Jason together own ~12% of EG7 today and have increased their stake in the company twice since taking control by buying out the founder in 2022 and by purchasing additional shares in the open market earlier this year – these two purchases represented ~3.2% of the total shares outstanding.
Fast forward to today, and the company is now reinvesting into its most popular and proven first and third-party IPs – MechWarrior, Aliens (they are publishing this game, not developing it), H1Z1, and EverQuest. The company guided to SEK 1B in EBITDA for 2026 at their recent Capital Markets Day compared to an EV of just SEK 1.2B today, which implies it’s trading at just 1.20x EBITDA and 2.40x EV/FCF.
There’s a lot more to the thesis and business than what I’ve stated here, and those interested further should check out the deck linked above, as it’s rather comprehensive.