Chaparral mining is a spin-off of International Minerals after that company was taken over. I purchased shares before the spin, as I discussed here. That article includes an attempt at valuing the company's mineral assets, which is something I'm generally uncomfortable with. However, the company has begun trading at $0.32, below the approximately $0.48 in net cash and current assets the company indicated they will have on their balance sheet. At 66% of NCAV, this is a Benjamin Graham net-net type stock. If the mining assets turn out to have any value or the price of gold increases, there is additional upside past $0.48. Basically, I just look at this as a chance to not lose money with potential upside past the cash value.
Disclosure: Long CHL
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Tuesday, 31 December 2013
Saturday, 21 December 2013
2013 Year in Review and Performance
2013 was the first year I wrote this blog, and the experience has been rewarding. In the spirit of people who make predictions everywhere, I thought I'd do a review of the year, what worked, what didn't, and why. I'm going to keep this overview to the company's I profiled directly on the blog. I also write about larger companies and American companies at Seeking Alpha, and have included a few links to that site in various posts, but I'm tracking the performance of those ideas separately.
My first post was about Automodular, when it was trading at $2.95. I argued the probability weighted value was higher, with the main factor in the value being whether the Ford contract was renewed. It wasn't. The stock hit a low of $1.19 after the news, and I bought when I posted again, with a recommendation to buy with a stock price of $1.31. The stock has since recovered to $2.40, so its getting close to my estimated downside case value of $2.55 from my original post. Other bloggers have estimates of value ranging from $2.64 to $2.37. While there are some potential upside catalysts (like a win on the GM lawsuit or a further extension on the Ford plant), I don't see a margin of safety in the stock, and have sold my position.
My next post was on Southern Pacific debentures, when they were trading at $69.50. They're currently trading at $34.70, as the company's wells at their Mackay project have not reached their estimated production capacity. The major drop in the price of the debentures comes as the company's debt to annualized last quarter EBITDA has ballooned out to approximately 17 times. However, the company's Senlac project continues to be a strong producer, and the next phase to restore production there comes on soon. Additionally, they are drilling infill pairs at Mackay, which should allow them to get more of their available steam into the reservoir. Also, conformance in a SAGD reservoir will eventually come with time, so I expect these debentures will eventually pay off at par. I am now long these debentures after recent weakness, and the yield to maturity of 58% is extremely attractive.
My third post was about a very small company trading below its net current asset value, Arrowhead Water. At the time of the post, the company was trading at $0.015. After the company announced a new management team, the stock popped to $0.35, when I added a new post suggesting there wasn't a margin of safety at that price. That was easily the biggest success of the year, except that my limit order never filled, so I never cashed in on the 20 bagger
The next company I profiled was Indigo Books & Music. Trading at $10.79 at the time of my post, it's now trading at $7.67. The company's operating results have been poorer than I expected. However, the main catalyst for the stock price decline was the company cancelling its dividend. This is a puzzling move for a company with a huge amount of cash on its balance sheet. The stock price decline has made the stock much more attractive. The company has current assets of $427 million, against total liabilities of $242 million, and a market cap of $194 million. Thus, the operating business including all the stores, leases, goodwill, and website is selling for an effective $13 million. While operational improvements are possible (for example, the company is starting to sell American Girl dolls, previously unavailable in Canada) the company could liquidate for nearly its current share price, suggesting limited downside from here. This was definitely a situation where my post was early.
The first technology company I posted on was Axia Netmedia. Trading at $1.31 at the time of my post, I identified this as situation where the sum-of-the-parts was at least as valuable as the current stock price, with potential for upside if anything went right. A few things did go well, with Axia selling its Singapore and Spanish businesses, renewing its contract in Alberta, and its French business having significantly improved margins. The shares now trade at $2.35, and the thesis has mostly been realized, although I still hold part of my original position.
The next technology company I profiled was a micro cap ISP that uses Axia's SuperNet to provide service to rural Alberta. Trading at $0.085 when I profiled it and set a minimum target price of $0.14, the company's results have improved with operating leverage, and the company now trades at $0.18. With an enterprise value to EBITDA ratio of only ~6.5, the company is still inexpensive.
I mostly spent the summer relaxing and travelling, and only made one post in July, about a net-net called Africo Resources. The company's cash greatly exceeded its stock price at that time of $0.46. The stock price is now down to $0.43, while the net cash per share is now around $0.85. This hasn't been a success so far, but the thesis is still intact. I believe good things generally happen when you buy cash for fifty cents on the dollar, and that's what this situation is.
My next post was on Advent Wireless, a small Rogers dealer that was trading at $1.93. The company is trading up slightly to $2.00, and is still cheap on an earnings basis.
My next couple posts were all on net-nets. King George Financial was trading at $0.375 when I profiled the company, and is now at $0.31. Nothing has really changed, and I'm still holding. Phoscan Resources was trading at $0.28 when I posted, and its last trade was at $0.305. PGNX was profiled at $0.16, and just paid a $0.17 distribution, and now trades at $0.03. That was a 25% gain in under a month, and I wouldn't hold it at that price, as I doubt the liquidation will yield substantial more than three cents per share. Eyelogic was profiled at $0.08 and last traded at $0.10, for another 25% gain. The company's net cash is still dramatically in excess of this price, so I'm still holding. My last exclusive to the blog post so far this year was Karnalyte Resources, which was trading below net cash at $1.38. It's now trading at $1.62.
My main goal when starting this blog was to think through my ideas and become a better investor. I feel like it has helped with that, and doing a look over my posts for the year has led me to a couple of conclusions. My best idea posted by far was one I didn't make any money on personally, and it would have made a material difference if I had. I shouldn't have tried to squeeze the last half cent out of the limit order on my purchase. Missing out on a $20,000 gain in my twenties will keep that lesson fresh. The other errors were mainly of being too early. The Southern Pacific and Indigo ideas weren't bad ideas (I don't think...) but they were definitely too early. Just because something is cheap doesn't mean it can't get cheaper, and a bad business often will. I should have waited for a bigger margin of safety before posting those two ideas.
I've summarized my posts in the table below. I haven't included the interest or dividends earned, except for the liquidating distribution on PGNX. The average return of the ideas was 177%, but the average was dominated by the twenty bagger. If you exclude the best and worst performing ideas, the return drops to a still respectable 25.5%. The S&P TSX was up 8.7% from the time of my first posted idea until today, so that is a pretty respectable market beating result. The companies I selected had more volatility than the market, but on average buying them would have worked out very well.
I will do another yearly review next year around this same time, and will include all my new posts, plus the following that I'm keeping around for another year: Southern Pacific Debentures, Indigo, Axia NetMedia, Platinum Communications, Africo Resources, Advent Wireless, King George Financial, Phoscan Resources, Eyelogic, and Karnalyte.
My first post was about Automodular, when it was trading at $2.95. I argued the probability weighted value was higher, with the main factor in the value being whether the Ford contract was renewed. It wasn't. The stock hit a low of $1.19 after the news, and I bought when I posted again, with a recommendation to buy with a stock price of $1.31. The stock has since recovered to $2.40, so its getting close to my estimated downside case value of $2.55 from my original post. Other bloggers have estimates of value ranging from $2.64 to $2.37. While there are some potential upside catalysts (like a win on the GM lawsuit or a further extension on the Ford plant), I don't see a margin of safety in the stock, and have sold my position.
My next post was on Southern Pacific debentures, when they were trading at $69.50. They're currently trading at $34.70, as the company's wells at their Mackay project have not reached their estimated production capacity. The major drop in the price of the debentures comes as the company's debt to annualized last quarter EBITDA has ballooned out to approximately 17 times. However, the company's Senlac project continues to be a strong producer, and the next phase to restore production there comes on soon. Additionally, they are drilling infill pairs at Mackay, which should allow them to get more of their available steam into the reservoir. Also, conformance in a SAGD reservoir will eventually come with time, so I expect these debentures will eventually pay off at par. I am now long these debentures after recent weakness, and the yield to maturity of 58% is extremely attractive.
My third post was about a very small company trading below its net current asset value, Arrowhead Water. At the time of the post, the company was trading at $0.015. After the company announced a new management team, the stock popped to $0.35, when I added a new post suggesting there wasn't a margin of safety at that price. That was easily the biggest success of the year, except that my limit order never filled, so I never cashed in on the 20 bagger
The next company I profiled was Indigo Books & Music. Trading at $10.79 at the time of my post, it's now trading at $7.67. The company's operating results have been poorer than I expected. However, the main catalyst for the stock price decline was the company cancelling its dividend. This is a puzzling move for a company with a huge amount of cash on its balance sheet. The stock price decline has made the stock much more attractive. The company has current assets of $427 million, against total liabilities of $242 million, and a market cap of $194 million. Thus, the operating business including all the stores, leases, goodwill, and website is selling for an effective $13 million. While operational improvements are possible (for example, the company is starting to sell American Girl dolls, previously unavailable in Canada) the company could liquidate for nearly its current share price, suggesting limited downside from here. This was definitely a situation where my post was early.
The first technology company I posted on was Axia Netmedia. Trading at $1.31 at the time of my post, I identified this as situation where the sum-of-the-parts was at least as valuable as the current stock price, with potential for upside if anything went right. A few things did go well, with Axia selling its Singapore and Spanish businesses, renewing its contract in Alberta, and its French business having significantly improved margins. The shares now trade at $2.35, and the thesis has mostly been realized, although I still hold part of my original position.
The next technology company I profiled was a micro cap ISP that uses Axia's SuperNet to provide service to rural Alberta. Trading at $0.085 when I profiled it and set a minimum target price of $0.14, the company's results have improved with operating leverage, and the company now trades at $0.18. With an enterprise value to EBITDA ratio of only ~6.5, the company is still inexpensive.
I mostly spent the summer relaxing and travelling, and only made one post in July, about a net-net called Africo Resources. The company's cash greatly exceeded its stock price at that time of $0.46. The stock price is now down to $0.43, while the net cash per share is now around $0.85. This hasn't been a success so far, but the thesis is still intact. I believe good things generally happen when you buy cash for fifty cents on the dollar, and that's what this situation is.
My next post was on Advent Wireless, a small Rogers dealer that was trading at $1.93. The company is trading up slightly to $2.00, and is still cheap on an earnings basis.
My next couple posts were all on net-nets. King George Financial was trading at $0.375 when I profiled the company, and is now at $0.31. Nothing has really changed, and I'm still holding. Phoscan Resources was trading at $0.28 when I posted, and its last trade was at $0.305. PGNX was profiled at $0.16, and just paid a $0.17 distribution, and now trades at $0.03. That was a 25% gain in under a month, and I wouldn't hold it at that price, as I doubt the liquidation will yield substantial more than three cents per share. Eyelogic was profiled at $0.08 and last traded at $0.10, for another 25% gain. The company's net cash is still dramatically in excess of this price, so I'm still holding. My last exclusive to the blog post so far this year was Karnalyte Resources, which was trading below net cash at $1.38. It's now trading at $1.62.
My main goal when starting this blog was to think through my ideas and become a better investor. I feel like it has helped with that, and doing a look over my posts for the year has led me to a couple of conclusions. My best idea posted by far was one I didn't make any money on personally, and it would have made a material difference if I had. I shouldn't have tried to squeeze the last half cent out of the limit order on my purchase. Missing out on a $20,000 gain in my twenties will keep that lesson fresh. The other errors were mainly of being too early. The Southern Pacific and Indigo ideas weren't bad ideas (I don't think...) but they were definitely too early. Just because something is cheap doesn't mean it can't get cheaper, and a bad business often will. I should have waited for a bigger margin of safety before posting those two ideas.
I've summarized my posts in the table below. I haven't included the interest or dividends earned, except for the liquidating distribution on PGNX. The average return of the ideas was 177%, but the average was dominated by the twenty bagger. If you exclude the best and worst performing ideas, the return drops to a still respectable 25.5%. The S&P TSX was up 8.7% from the time of my first posted idea until today, so that is a pretty respectable market beating result. The companies I selected had more volatility than the market, but on average buying them would have worked out very well.
I will do another yearly review next year around this same time, and will include all my new posts, plus the following that I'm keeping around for another year: Southern Pacific Debentures, Indigo, Axia NetMedia, Platinum Communications, Africo Resources, Advent Wireless, King George Financial, Phoscan Resources, Eyelogic, and Karnalyte.
Wednesday, 4 December 2013
Karnalyte Resources Inc (TSX:KRN) $1.38
Karnalyte Resources is a junior with a development ready potash project in Saskatchewan. That description accounts for the company's current low price, as the potash industry has been recently rocked. Events include the breakup of a Russian/Belorussian cartel that culminated in the arrest of one of the CEOs involved, subsidies in India for non-potash fertilizer hurting demand, and huge layoffs at existing producing mines as the current producers try to support the price by reducing supply. The potash producing companies enjoyed super-normal profits in the 2006-2008 timeframe as they kept the price propped up through their cartels, but that has now come home to roost, as prices have come well down from their peaks. Additionally, players throughout the industry expanded supply capacity during the high price periods, and much of that capacity is now idle, which will likely mute future price gains.
Karnalyte had approximately $52 million of cash on its balance sheet, against $2.5 million of liabilities, leaving a net current asset value (NCAV) for the company of $49.5 million. With a current market capitalization of $37.9 million, the company is trading at 76% of NCAV. When the company reported its Q3 2013 results it indicated the following "the Company does not expect to spend further material amounts on Capital or Intangible Assets until further financing is available."
Thus, we should expect to see a minimal cash burn until either the potash space improves enough to make the project feasible or the company is liquidated for its cash by either management or an activist/competitor.
Disclosure: Long KRN
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Karnalyte had approximately $52 million of cash on its balance sheet, against $2.5 million of liabilities, leaving a net current asset value (NCAV) for the company of $49.5 million. With a current market capitalization of $37.9 million, the company is trading at 76% of NCAV. When the company reported its Q3 2013 results it indicated the following "the Company does not expect to spend further material amounts on Capital or Intangible Assets until further financing is available."
Thus, we should expect to see a minimal cash burn until either the potash space improves enough to make the project feasible or the company is liquidated for its cash by either management or an activist/competitor.
Disclosure: Long KRN
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Sunday, 1 December 2013
International Minerals - A Takeover Arbitrage Play
International Minerals is getting taken over, and buyers at the current price are getting cash and shares in a spin-co. The spin-co is being valued at less than the cash it will have on hand, but it also has valuable mining assets. I did a complete write-up, permanently available here: http://seekingalpha.com/article/1870071-international-minerals-a-takeover-arbitrage-play
Disclosure: No Position
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Disclosure: No Position
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Wednesday, 27 November 2013
PGNX to Liquidate - $0.17 Distribution by End of Year
Earlier this month I wrote up PGNX when the company's stock was trading at $0.16, with the thesis that the release of escrow funds at the end of November would free up their cash and allow them to purchase a business again. The escrow was released as I predicted, but the company has decided to liquidate. Shareholders will receive a distribution of $0.17 in December, and the company will be shut down and the remainder of the assets distributed in a liquidating distribution. Remaining cash on their balance sheet is around $0.045 per share, and the company has indicated a liquidating distribution of $0.02 to $0.04 may be paid, although they also note liquidating expenses could eat up the remainder of the cash. This changes the investment to a purely mechanical liquidation scenario.
I'm holding my shares and will take the distribution and will likely wait for the liquidation to complete, as the IRR of waiting is very high even at the low end of the distribution range. Liquidations usually take longer than people expect and cost more, so there is still some risk. However, anyone who bought at $0.16 when I posted and receives a $0.17 distribution a month later shouldn't have too much to complain about.
Disclosure: Long PGN.H
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
I'm holding my shares and will take the distribution and will likely wait for the liquidation to complete, as the IRR of waiting is very high even at the low end of the distribution range. Liquidations usually take longer than people expect and cost more, so there is still some risk. However, anyone who bought at $0.16 when I posted and receives a $0.17 distribution a month later shouldn't have too much to complain about.
Disclosure: Long PGN.H
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Friday, 22 November 2013
Holdings and Picks from Great Value Managers
I'm going to occassionally do write ups on the holdings of managers I respect. Generally you can expect them to be value managers with excellent results. In the future these will be posted in the tab at the top of the page, but I'm putting it in the body of the blog at first for those using readers/feeds.
Arlington Value
Manager Allan Mecham has been beating the S&P 500 for years, and is still in his 30s. He has outperformed by 10% per year, and was up in 2008 during the crisis. He runs the fund with significant concentration.
Arlington Value Q3 2013 changes
Arlington Value's Biggest Holdings Q2 2013
Oceanstone Fund
The Oceanstone fund has been outperforming the S&P by ~30% per annum, and has done it with a concentrated portfolio of deep value picks, and often with a large cash weighting for downside protection.
Oceanstone 2013 Biggest Holdings
Arlington Value
Manager Allan Mecham has been beating the S&P 500 for years, and is still in his 30s. He has outperformed by 10% per year, and was up in 2008 during the crisis. He runs the fund with significant concentration.
Arlington Value Q3 2013 changes
Arlington Value's Biggest Holdings Q2 2013
Oceanstone Fund
The Oceanstone fund has been outperforming the S&P by ~30% per annum, and has done it with a concentrated portfolio of deep value picks, and often with a large cash weighting for downside protection.
Oceanstone 2013 Biggest Holdings
Monday, 18 November 2013
PGNX Capital Corporation (CVE:PGN.H) $0.16
PGNX Capital is a company that was formerly engaged in pharmacy operations in Western Canada. In 2012, it sold these operations to Shoppers Drug Mart, and paid a dividend of $0.45 per share to its shareholders. At that time, it changed its name from Paragon to PGNX Capital, as the Paragon name was one of the assets purchased by Shoppers. A portion of the purchase price was held back for adjustments, and is to be released in November 2013. Thus, the company's next financial report should show all of its cash as unrestricted. With just under $28 million in current assets (the vast majority being cash and restricted cash) and just under $8 million in total liabilities, the company has a net current asset value of approximately $20 million. (I know, I know, but if I don't do the math this post will only be two sentences).
Anyway, with a market capitalization of approximately $14 million, the company trades at 70% of NCAV. This discount is sufficient for me to invest, for a couple of reasons. The first is that I expect the company to acquire an operating business shortly after their cash becomes unrestricted. This company bought the Paragon assets as a blank cheque company, and I expect they will follow the same procedure. Also, with the IPO markets for junior sized company's in Canada in poor condition, a shell with $20 million in cash will be extremely attractive for those looking to raise public capital for their currently private business.
I've posted a couple of net-net's here today, but I'm always on the lookout for more. If you know of anything interesting, please go ahead and mention it in the comments!
Disclosure: Long PGN.H
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Anyway, with a market capitalization of approximately $14 million, the company trades at 70% of NCAV. This discount is sufficient for me to invest, for a couple of reasons. The first is that I expect the company to acquire an operating business shortly after their cash becomes unrestricted. This company bought the Paragon assets as a blank cheque company, and I expect they will follow the same procedure. Also, with the IPO markets for junior sized company's in Canada in poor condition, a shell with $20 million in cash will be extremely attractive for those looking to raise public capital for their currently private business.
I've posted a couple of net-net's here today, but I'm always on the lookout for more. If you know of anything interesting, please go ahead and mention it in the comments!
Disclosure: Long PGN.H
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Eyelogic Systems (CVE:EYE.A) $0.08
The company is a cash box. Its been trading below net cash, and continues to do so. It is functionally controlled by the Olympia Trust/Tarjan Capital folks. The core Eyelogic business has been approximately cash flow even for a number of years, and their new business producing custom stretched canvases seems to be ramping up nicely.
The company's primary business is the sale of optical equipment for performing eye exams. This business has not produced a reasonable return on capital for a number of years, hence the low current price of the company's stock. I believe management intends to sell or wind it up, and continue with their new business of custom stretched canvas production and sale. The company would be better off liquidating, but I believe that to be unlikely. The management team uses the company as a publicly traded vehicle for raising private capital. This does not cost Eyelogic anything, and the company generates some small fee income. However, this is likely to prevent a liquidation in the near term.
All that being said, the company seems to be able to operate at approximately cash break even, and it trades at $0.08 for a market capitalization of $241,000. With current assets of $946,740 and total liabilities of $183,591 the company has a net current asset value of $763,149, or more than three times its market cap. In addition, the company also owns Eyelogic systems which it leases to customers, and those customers have been buying out their contracts in recent quarters, which converts non-current equipment assets to cash.
Disclosure: Long EYE.A
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
All that being said, the company seems to be able to operate at approximately cash break even, and it trades at $0.08 for a market capitalization of $241,000. With current assets of $946,740 and total liabilities of $183,591 the company has a net current asset value of $763,149, or more than three times its market cap. In addition, the company also owns Eyelogic systems which it leases to customers, and those customers have been buying out their contracts in recent quarters, which converts non-current equipment assets to cash.
Disclosure: Long EYE.A
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Wednesday, 30 October 2013
Advent Wireless (CVE:AWI) $1.93
Advent Wireless is a small company that operates as a wireless retailer. It operates stores selling phones and plans for Rogers and its Fido subsidiary. With $13 million of net excess cash and a $23 million market capitalization, the company is selling at an enterprise value of $10 million. And with TTM (trailing twelve months) net earnings of $1.6 million, you're buying the operating business for a 6x effective price to earnings.
The biggest risk to the company is that all 24 of their retail locations are dealers for Rogers and its subsidiary, so a loss of that dealer contract would functionally require the shutdown of the company, or at least a severe dislocation while they revamp to sell phones for a different carrier, or as a multi-line dealer. The Rogers contract expires in May 2014, and I would expect it to be renewed due to the fierce competition among Canadian telecoms for new subscribers and the distribution used to acquire them. The bigger risk is that Roger's squeezes Advent's margins by reducing commissions paid for plan sign ups. This risk is difficult to quantify. I would comment that the company's locations in a number of Asian specialty malls and ability to market to Asian centric populations gives it a competitive edge in certain areas of Toronto and Vancouver, and Rogers may want to keep this edge.
The company also has some downside protection from owned real estate. It has 24 stores, and only 20 leases, implying the remaining 4 stores are in owned commercial space. The have land and buildings on their balance sheet, and at the end of 2011 the depreciated cost was $1.8 million. Although I don't know the acquisition date of these stores, I'd be comfortable valuing them at their depreciated 2011 values in a liquidation scenario. The copmany is also purchasing commercial bays in both Vancouver and Toronto to move 2 of its stores into owned space in the near future. This transition to owned real estate will lower their expenses and provides some downside protection.
The company's stock is very illiquid. Although it currently trades at $1.93, volume is very low. I purchased my position (partial fill only) for $1.75, and still have a limit order outstanding. At that price the business is being purchased at more like 5x earnings, for additional safety. While the company has some downside risk if Roger's screws them, I think its more likely that they continue earning strong profits for some time, in which case the valuation at current prices in undeniable.
Disclosure: Long AWI
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
The biggest risk to the company is that all 24 of their retail locations are dealers for Rogers and its subsidiary, so a loss of that dealer contract would functionally require the shutdown of the company, or at least a severe dislocation while they revamp to sell phones for a different carrier, or as a multi-line dealer. The Rogers contract expires in May 2014, and I would expect it to be renewed due to the fierce competition among Canadian telecoms for new subscribers and the distribution used to acquire them. The bigger risk is that Roger's squeezes Advent's margins by reducing commissions paid for plan sign ups. This risk is difficult to quantify. I would comment that the company's locations in a number of Asian specialty malls and ability to market to Asian centric populations gives it a competitive edge in certain areas of Toronto and Vancouver, and Rogers may want to keep this edge.
The company also has some downside protection from owned real estate. It has 24 stores, and only 20 leases, implying the remaining 4 stores are in owned commercial space. The have land and buildings on their balance sheet, and at the end of 2011 the depreciated cost was $1.8 million. Although I don't know the acquisition date of these stores, I'd be comfortable valuing them at their depreciated 2011 values in a liquidation scenario. The copmany is also purchasing commercial bays in both Vancouver and Toronto to move 2 of its stores into owned space in the near future. This transition to owned real estate will lower their expenses and provides some downside protection.
The company's stock is very illiquid. Although it currently trades at $1.93, volume is very low. I purchased my position (partial fill only) for $1.75, and still have a limit order outstanding. At that price the business is being purchased at more like 5x earnings, for additional safety. While the company has some downside risk if Roger's screws them, I think its more likely that they continue earning strong profits for some time, in which case the valuation at current prices in undeniable.
Disclosure: Long AWI
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Monday, 21 October 2013
New Topic: Book Reviews
For those using a reader to access the blog, you may not have noticed the new section at the top of the home page. I'm going to start reviewing books on an irregular basis. (IE. whenever I read something I think is worth sharing). The first review is here.
Tuesday, 15 October 2013
Pure Industrial REIT (TSE:AAR.UN) $4.26
Pure Industrial REIT is a Canadian REIT with a 7% yield, a reasonable payout ratio, and long term leases/fixed rate debt. It's a conservative income play, which isn't my usual fare on this blog, but it is something I own personally. I wrote it up on Seeking Alpha, and the article will be permanently available at:
http://seekingalpha.com/article/1746802-pure-industrial-reit-safety-at-7-yield
Wednesday, 9 October 2013
King George Financial (CVE:KGF) $0.375
King George Financial is a micro cap company based in Vancouver. The company's primary business is real estate development. The company has a market capitalization of $14.8 million at its current share price of $0.375, and cash and cash equivalents of $23.4 million as of its last financial statement. That makes it a net-net trading at 63% of net cash as of the date on the financials.
The company reported two events subsequent to these financial statements that reduce this cash balance, as the company invested approximately $6.75 million in joint ventures to develop real estate in Singapore and Malaysia. The company has previously had success with real estate companies in Malaysia, so management is credible on this issue. Cash pro-forma for these acquisitions will still exceed the companies market cap.
The company also has $4 million of assets on its balance sheet for real estate under development. These assets are land in Surrey, British Columbia. One parcel is approved for development into high rise condominiums, and the other is in the zoning application stage. These land assets have upside value, and the company has the cash resources to participate in the development if they view it to be prudent. The company had one of these land ventures on the books in 1999, so significant appreciation above book value is possible.
The company is extremely illiquid, which can be considered a risk factor. In fact, when I put in a buy order, there was no "ask" price listed on the exchange. It took about a week for my limit order to fill. This is a situation that requires, limit orders, patience, and not investing money you might need on short notice.
Disclosure: Long KGF
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
The company reported two events subsequent to these financial statements that reduce this cash balance, as the company invested approximately $6.75 million in joint ventures to develop real estate in Singapore and Malaysia. The company has previously had success with real estate companies in Malaysia, so management is credible on this issue. Cash pro-forma for these acquisitions will still exceed the companies market cap.
The company also has $4 million of assets on its balance sheet for real estate under development. These assets are land in Surrey, British Columbia. One parcel is approved for development into high rise condominiums, and the other is in the zoning application stage. These land assets have upside value, and the company has the cash resources to participate in the development if they view it to be prudent. The company had one of these land ventures on the books in 1999, so significant appreciation above book value is possible.
The company is extremely illiquid, which can be considered a risk factor. In fact, when I put in a buy order, there was no "ask" price listed on the exchange. It took about a week for my limit order to fill. This is a situation that requires, limit orders, patience, and not investing money you might need on short notice.
Disclosure: Long KGF
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Saturday, 5 October 2013
PhosCan Resources TSX:FOS $0.28
PhosCan resources is a development stage mining company with a Phosphate project in Ontario. The company has $58 million in net cash on their balance sheet, and they've suspended operations on developing their project, so cash burn is very low. At the current price of $0.28, the market capitalization is $45 million, so the company is trading at only 77% of its net cash asset value. (NCAV).
The company's mining project is something I generally consider myself unqualified to evaluate, but they have built some infrastructure into the area, and the nearby Agrium phosphate mine closed this year as it reached the end of its mine life. Agrium has experience in mining phosphate in the area and might be a potential acquirer for a FOS' similar resource. Agrium has a contract with a company from Morocco to purchase phosphate until 2020, and would likely be able to build this mine in that timeframe to avoid disruptions to its fertilizer manufacturing operations. That adds potential upside, although I still believe the primary reason to buy shares in the company is the chance to buy $1.00 for 77 cents.
Disclosure: Long FOS
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
The company's mining project is something I generally consider myself unqualified to evaluate, but they have built some infrastructure into the area, and the nearby Agrium phosphate mine closed this year as it reached the end of its mine life. Agrium has experience in mining phosphate in the area and might be a potential acquirer for a FOS' similar resource. Agrium has a contract with a company from Morocco to purchase phosphate until 2020, and would likely be able to build this mine in that timeframe to avoid disruptions to its fertilizer manufacturing operations. That adds potential upside, although I still believe the primary reason to buy shares in the company is the chance to buy $1.00 for 77 cents.
Disclosure: Long FOS
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Thursday, 19 September 2013
Arrowhead Water - Update on a 10-20 Bagger, with a mistake
This is an update on Arrowhead Water, which I profiled positively in May: http://safetyinvalue.blogspot.ca/2013/05/arrowhead-water-products-ltd.html. At that time, it's most recent trade was $0.015. It closed today at $0.35, for a gain of 20 times the price from the time I wrote it up. Depressingly, I put in a limit order when I did the write-up to buy at $0.015, and never got a hit. The next trade was at $0.02, and it never traded below that again. It started to really move up in August, and the company announced the former management team of Western Wind would be taking over in September. They seem like a successful bunch, and the stock may have more room to run. But the margin of safety is out of the stock now, so any readers who took advantage might want to lock in some profits now.
There's a lesson here somewhere, but right now I feel like I'd rather have the $20,000 I would have made had I made my limit order $0.02 than the lesson.
There's a lesson here somewhere, but right now I feel like I'd rather have the $20,000 I would have made had I made my limit order $0.02 than the lesson.
Tuesday, 17 September 2013
I recently published an update on my previous Axia article available on Seeking Alpha for free for the next 30 days. A number of good things have happened since I first wrote about Axia:
1) Alberta SuperNet renewal
2) Sale of Spanish Assets
3) Sale of OpenNet for nearly 2x my previous valuation
4) Continued EBITDA growth in France
http://seekingalpha.com/article/1698372-axia-netmedia-newly-simplified-and-cashed-up
1) Alberta SuperNet renewal
2) Sale of Spanish Assets
3) Sale of OpenNet for nearly 2x my previous valuation
4) Continued EBITDA growth in France
http://seekingalpha.com/article/1698372-axia-netmedia-newly-simplified-and-cashed-up
Wednesday, 24 July 2013
Africo Resources - Trading under Cash
Africo Resource TSX:ARL $0.46
The thesis for an investment in Africo Resources is simple. The company's current market capitalization of $32.8 million is less than its current cash and short term investments. Since the short term investments are all short time deposits with Canadian chartered banks, I'll treat them like cash. In fact, the current assets minus all the liabilities of the company yields a positive value of $63.1 million. That implies a value just based on cash of $0.88 per share.
The company also has a mining project in the Democratic Republic of Congo. I claim no insight to whether the project is any good, and I don't think the quality of the project is material to the case for buying the company. If you happen to be interested, an updated NI 43-101 was filed in May, and can be found here: http://www.africoresources.com/ir/news/2013/kalukundi_copper_cobalt_project_23may2013.pdf.
The company has taken the position it won't be able to develop the project independently with its current share price, and has reduced its expenditures. In Q1 it had a cash draw down of $610 thousand, so you could wait a long time for the valuation gap to close before the cash burn impacted the value of the company's current assets.
The company is majority owned by a subsidiary of Eurasian Natural Resources (LSE: ENRC) which is a partially privatized Kazakh miner. This ownership and control position is the likely cause for the significant undervaluation. The logical endgame is to merge Africo Resources into ENRC (which has adjacent mining claims) at the value of the cash. I would expect any take private attempt lower than the value of the cash to face minority shareholder resistance and regulatory scrutiny, so there is some protection against the majority owner confiscating the value.
The thesis for an investment in Africo Resources is simple. The company's current market capitalization of $32.8 million is less than its current cash and short term investments. Since the short term investments are all short time deposits with Canadian chartered banks, I'll treat them like cash. In fact, the current assets minus all the liabilities of the company yields a positive value of $63.1 million. That implies a value just based on cash of $0.88 per share.
The company also has a mining project in the Democratic Republic of Congo. I claim no insight to whether the project is any good, and I don't think the quality of the project is material to the case for buying the company. If you happen to be interested, an updated NI 43-101 was filed in May, and can be found here: http://www.africoresources.com/ir/news/2013/kalukundi_copper_cobalt_project_23may2013.pdf.
The company has taken the position it won't be able to develop the project independently with its current share price, and has reduced its expenditures. In Q1 it had a cash draw down of $610 thousand, so you could wait a long time for the valuation gap to close before the cash burn impacted the value of the company's current assets.
The company is majority owned by a subsidiary of Eurasian Natural Resources (LSE: ENRC) which is a partially privatized Kazakh miner. This ownership and control position is the likely cause for the significant undervaluation. The logical endgame is to merge Africo Resources into ENRC (which has adjacent mining claims) at the value of the cash. I would expect any take private attempt lower than the value of the cash to face minority shareholder resistance and regulatory scrutiny, so there is some protection against the majority owner confiscating the value.
Disclosure: No current position, may buy shares without prior warning or update.
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author.
Friday, 7 June 2013
Glentel TSX:GLN $17.36
Glentel is a cellphone retailer operating in Canada, the US, and Australia, and is growing rapidly through partnerships, new store openings, and reasonably priced acquisitions. The company trades at a 13.8 price to earnings ratio and has excellent earning growth. It is integrating new acquisitions which should propel profits higher. I have done a complete write-up on Glentel which is available on Seeking Alpha.
Wednesday, 29 May 2013
Platinum Communications (CVE:PCS, $0.085)
Platinum Communications is a small internet service provider based out of Alberta. They sell fixed base wireless internet to rural Albertans. There are a number of important qualitative advantages to this business.
The current share price of $0.085 gives a market capitalization of $5.5 milion, and their most recent 6 months EBITDA was $826k. Annualizing that EBITDA gives an annual value of $1.65 million. Long term debt net of current assets surplus over current liabilities is $2.0 million, for a total enterprise value of $7.5 million, and an EV/EBITDA of only 4.5x, low for a growing business.
The best way to value this business is by customer accounts. PCS has made numerous acquisitions, and have usually paid $1000 per customer for the customers and the assets to service them. This suggests their 11,000 customer business is worth at least $11M, which corresponds to $0.14 after debt. Platinum is probably worth more than the sum of its acquisitions as it gains scale and can leverage fixed investments and corporate overhead.
Disclosure: Long PCS.
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
1) http://www.thealbertasupernet.com
Platinum Communications is a small internet service provider based out of Alberta. They sell fixed base wireless internet to rural Albertans. There are a number of important qualitative advantages to this business.
- High speed internet has become a staple good, people need it
- Limited competition in rural areas gives Platinum pricing power.
- The government built Alberta Supernet provides fiber backhaul services1
- Fixed costs - once a tower is built, adding more users is inexpensive
- Cost of capital advantage - most of their competitors are mom and pop operations. This is analogous to the early days of the cable TV industry, and PCS is following a similar roll-up strategy as the Shaw family did decades ago, without the multi-voting stock and egregious insider pay packages.
The current share price of $0.085 gives a market capitalization of $5.5 milion, and their most recent 6 months EBITDA was $826k. Annualizing that EBITDA gives an annual value of $1.65 million. Long term debt net of current assets surplus over current liabilities is $2.0 million, for a total enterprise value of $7.5 million, and an EV/EBITDA of only 4.5x, low for a growing business.
The best way to value this business is by customer accounts. PCS has made numerous acquisitions, and have usually paid $1000 per customer for the customers and the assets to service them. This suggests their 11,000 customer business is worth at least $11M, which corresponds to $0.14 after debt. Platinum is probably worth more than the sum of its acquisitions as it gains scale and can leverage fixed investments and corporate overhead.
Disclosure: Long PCS.
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
1) http://www.thealbertasupernet.com
Saturday, 25 May 2013
Murphy Oil NYSE:MUR $61.58
Murphy Oil is an oil exploration company that is about to spin-off its retail business to shareholders. I'm a huge fan of spinoffs, as I think they often surface value that was hidden in a larger entity. I suspect that will be the case here as the gas stations being spun off are high volume and co-located with Wal-Mart. The E&P business also includes many assets that could be sold off quickly, like a stake in Syncrude. I'm trying to keep this blog focused on Canadian value situations, so I wrote this up on Seeking Alpha at http://seekingalpha.com/article/1461311-the-long-case-for-murphy-oil-corporation.
Disclosure: No position in MUR.
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Disclosure: No position in MUR.
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Thursday, 23 May 2013
Axia NetMedia TSX:AXX $1.31
Axia is a company in the business of providing next
generation networks around the world. Essentially, the own fibre optic cable and allow others to sell network services using that cable. They currently have interests in Alberta,
Massachusetts, France, Catalonia, and Singapore. The France and Singapore
businesses are owned jointly with others. The best way to value Axia is by the
sum of its parts, as each network is a separate business. It would be very easy
for Axia to sell one of their networks, as they are separately operated.
North America
The other reason separate treatment is important is the
businesses are very different from a capital intensity and risk perspective.
The Alberta business was Axia’s first. The Government of Alberta paid for the
construction of a fibre-optic network called the SuperNet, which Axia operates on the government’s behalf. Their business in Massachusetts
operates in a similar fashion. These businesses are reported together as the
North American segment. North America
had segment income of $4.375 million in the last quarter, after depreciation of
$725 thousand was accounted for. Most of the value of this segment comes from
Alberta, and Axia’s contract to run this network expires in 2 years unless
renewed. The present value of my estimate for Axia’s income from the SuperNet
before contract expiry is $38 million. Massachusetts and any upside from an
Alberta renewal are not valued separately, but could be significant. The Massachusetts
network spend is minimal, so any value to that business is upside, and a
renewal in Alberta would be a huge catalyst, as it could add up to $120 million
in value if the terms are similar. Management is guiding towards completion of the
MA network in Q3 2013 (Q1 conference call)
Europe
Axia put in $80 million for half of a $280 million base. Cube paid 42+50mm
in earnouts for their half. Covage has $30 million in debt and $28.8 million in cash
(inferred from Jan 2013 corporate presentation on changes due to IFRS
consolidation). Covage as a whole had 3.355 million of EBITDA in the last
quarter. That was a big improvement over the past, as the operating leverage in
the business begins to show. If we annualize that we get $13.5 million. Cube
paid a minimum of $42 million for their half of the business, and that
valuation for Axia’s half of a business doing $13.5 million of EBITDA is very
conservative.
Singapore
Axia also owns 30% of Singapore’s OpenNet, a fibre to the
premises network that was mostly paid for by the Government of Singapore. That
business had operating income of $10.5 million in the most recent quarter, with
penetration of only 30%. Because the fibre product is dramatically superior to
other networks, and 8 companies are selling it on their behalf (including the
incumbents), penetration is expected to be very high, and has been growing
dramatically. Starting in April 2013, OpenNet will need to pay the greater of
75% of its revenue or $55 million per year to a SingTel subsidiary for use of
its infrastructure (network rooms, manholes, ducts, etc). Last quarter’s
revenue would annualize to a yearly rate of ~$60 million dollars. At present,
functionally all the value of OpenNet is going to SingTel’s Assetco. However,
OpenNet should easily be able to double their penetration within the next two
years, which doubles their revenue because their rates are regulated. At that
level of revenue two years out, they’d have $120 million in revenue, $90
million to AssetCo, and $10 million of other expenses. The $6 million per year
of those earnings attributable to AXX are worth at least $18 million. Another
way of looking at that is as an option on OpenNet improvement, and a very cheap
one at that, since OpenNet revenue could approach $180 million if penetration
increases sufficiently.
Sum of the part
and net Debt
The company is has around $10 million of net debt, and
taking that off the sum of the Alberta, French and Singapore businesses leaves
a valuation for Axia of $88 million, which is identical to its current market cap.
Those three businesses when very conservatively valued account for the entire
market value of the company. Thus, all the upside is free. The potential
catalysts of a SuperNet renewal, more than 50% of Singaporeans signing up for
the best and cheapest internet available to them, or Covage margins increasing
are all present, possible, and not accounted for in the current price. This also
doesn’t include any value for the Massachusetts or Spanish networks. It’s also possible that Bell Canada decides to
buyout Axia. They own a network that works with Axia’s in Alberta, and already
own 5 million shares. A dividend initiation is also on tap for the next two
years, which would likely provide a material rerate to Axia’s multiple. Axia
also bought back approximately 1.4% of the company last year, which improves
EPS going forward. Essentially, Axia is a good business trading at a price that discounts the worst case scenario for all of it's assets. That valuation provides significant downside protection, and a huge upside bias to future moves.
Disclosure: Long AXX
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Wednesday, 22 May 2013
America's Car-Mart NASDAQ:CRMT $46.81
America's Car-Mart is a great growth business trading at a great value price. It has the aspects an intelligent investor looks for: a good business with a good return on equity, a competitive advantage, room to grow, and a great valuation. Since this is an American company it's a bit out of the scope for my blog, but I did a write-up on Seeking Alpha that covers it in more detail.
Disclosure: Long CRMT
America's Car-Mart is a great growth business trading at a great value price. It has the aspects an intelligent investor looks for: a good business with a good return on equity, a competitive advantage, room to grow, and a great valuation. Since this is an American company it's a bit out of the scope for my blog, but I did a write-up on Seeking Alpha that covers it in more detail.
Disclosure: Long CRMT
Thursday, 16 May 2013
Indigo Books & Music TSX:IDG $10.79
Indigo Books & Music Ltd is the largest (and only significant) chain of bookstores in Canada. It operates a variety of small and large format stores under a number of brands, and the business has been profitable and cash flow positive. It also had a stake in Kobo, an e-reader device company, which competes with Nook and Kindle. Management sold the Kobo business for $315 million, or approximately $145 million for Indigo’s share.
The company has had same store sales declines of ~5%, but margins have been improving as management changes the assortment to include higher margin gift items, housewares, and greeting cards.
The real item of interest here is the company’s cash position. Their most recent balance sheet showed cash of $314 million and total current assets of $588 million. Inventories and accounts payable of $269 million offset payables of $272 million. Inventory risk is not significant as books are typically returnable to the publishers by the stores if they don't sell, an odd quirk of the business.
The only other liability of any significance on the balance sheet is $77 million of unredeemed gift cards and deferred revenue. This float is valuable in a Zero Interest Rate Policy world, and inevitably some will not be redeemed. To be conservative, if we deduct the entire amount from cash $237 million of net cash remains.
This leaves an enterprise value of $36 million for a company with revenues of over $900 million in the last 12 months, and where profits are improving dramatically. The first three months of fiscal 2013 (most recent financials) show continuing operations earning $12.5 million, compared to a loss from continuing operations in the comparable period a year earlier of $17 million. The bottom line improvement is even more dramatic as the Kobo business was a consistent money loser, so its disposition removes a significant earnings drag.
Indigo also pays a $0.11 quarterly dividend, so there’s a bit of a ‘paid to wait’ quality to this idea. There is also the potential catalyst of an activist becoming involved. Canada has much weaker "poison pill" rules than the US, and US activists have been agitating for change at numerous Canadian companies. It seems probably that at the current price someone will "forcefully request" the cash in the business be distributed.
Disclosure: No position at time of post
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Indigo Books & Music Ltd is the largest (and only significant) chain of bookstores in Canada. It operates a variety of small and large format stores under a number of brands, and the business has been profitable and cash flow positive. It also had a stake in Kobo, an e-reader device company, which competes with Nook and Kindle. Management sold the Kobo business for $315 million, or approximately $145 million for Indigo’s share.
The company has had same store sales declines of ~5%, but margins have been improving as management changes the assortment to include higher margin gift items, housewares, and greeting cards.
The real item of interest here is the company’s cash position. Their most recent balance sheet showed cash of $314 million and total current assets of $588 million. Inventories and accounts payable of $269 million offset payables of $272 million. Inventory risk is not significant as books are typically returnable to the publishers by the stores if they don't sell, an odd quirk of the business.
The only other liability of any significance on the balance sheet is $77 million of unredeemed gift cards and deferred revenue. This float is valuable in a Zero Interest Rate Policy world, and inevitably some will not be redeemed. To be conservative, if we deduct the entire amount from cash $237 million of net cash remains.
This leaves an enterprise value of $36 million for a company with revenues of over $900 million in the last 12 months, and where profits are improving dramatically. The first three months of fiscal 2013 (most recent financials) show continuing operations earning $12.5 million, compared to a loss from continuing operations in the comparable period a year earlier of $17 million. The bottom line improvement is even more dramatic as the Kobo business was a consistent money loser, so its disposition removes a significant earnings drag.
Indigo also pays a $0.11 quarterly dividend, so there’s a bit of a ‘paid to wait’ quality to this idea. There is also the potential catalyst of an activist becoming involved. Canada has much weaker "poison pill" rules than the US, and US activists have been agitating for change at numerous Canadian companies. It seems probably that at the current price someone will "forcefully request" the cash in the business be distributed.
Disclosure: No position at time of post
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Wednesday, 15 May 2013
Automodular Update TSX:AM $1.31
Automodular announced today that Ford is insourcing the work and will not renew their contract post 2014. This is the downside case in my original post, and I'm not very excited my first stock cratered right after I started the blog. I didn't have a position at that time, but have bought today after the large drop, since the company now has $27.7 million in cash. Their other current assets are $13.7 million, which exceeds total liabilities of $7.0 million by a margin comfortable enough that it should cover wind up expenses. They should also make ~3-4 million per quarter until the end of 2014. At a current market cap of $26 million, I believe there is now a sufficient margin of safety here, as cash exceeds the market cap and cash generation should be strong until the end of the contract. Management has proven to be shareholder friendly in the past, and I believe they will liquidate promptly if they don't source replacement business soon.
Disclosure: Long AM.
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Automodular announced today that Ford is insourcing the work and will not renew their contract post 2014. This is the downside case in my original post, and I'm not very excited my first stock cratered right after I started the blog. I didn't have a position at that time, but have bought today after the large drop, since the company now has $27.7 million in cash. Their other current assets are $13.7 million, which exceeds total liabilities of $7.0 million by a margin comfortable enough that it should cover wind up expenses. They should also make ~3-4 million per quarter until the end of 2014. At a current market cap of $26 million, I believe there is now a sufficient margin of safety here, as cash exceeds the market cap and cash generation should be strong until the end of the contract. Management has proven to be shareholder friendly in the past, and I believe they will liquidate promptly if they don't source replacement business soon.
Disclosure: Long AM.
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Wednesday, 8 May 2013
Arrowhead Water Products Ltd. CVE:AWA $0.015
Arrowhead Water Products Ltd (AWA) is a micro-cap company which recently sold its active business and all of its assets to the Ice River Springs Water Company. This will result in a company that holds only cash as an asset. The company has indicated they intend to pursue other business, so you're depending on their ability to merge their company with another or acquire assets at a fair price. However, their current market cap of $217,000 (I said it was a micro-cap) is substantially less than expected amount of cash they'll have after all payments relating to the sale are received. Their last MD&A indicated net cash proceeds of $750,000 after accounting for liabilities associated with the sale. That cash and their listing on the TSX-V exchange should make them an attractive way of going public for a small private company, as IPO markets are basically shut down right now for junior companies in Canada. Thus, they have both cash value and scarcity value. I expect a share consolidation and merger with a private company within the year. This is definitely a situation where a limit order should be used, as the stock is extremely illiquid.
Disclosure: No position at time of post.
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Arrowhead Water Products Ltd (AWA) is a micro-cap company which recently sold its active business and all of its assets to the Ice River Springs Water Company. This will result in a company that holds only cash as an asset. The company has indicated they intend to pursue other business, so you're depending on their ability to merge their company with another or acquire assets at a fair price. However, their current market cap of $217,000 (I said it was a micro-cap) is substantially less than expected amount of cash they'll have after all payments relating to the sale are received. Their last MD&A indicated net cash proceeds of $750,000 after accounting for liabilities associated with the sale. That cash and their listing on the TSX-V exchange should make them an attractive way of going public for a small private company, as IPO markets are basically shut down right now for junior companies in Canada. Thus, they have both cash value and scarcity value. I expect a share consolidation and merger with a private company within the year. This is definitely a situation where a limit order should be used, as the stock is extremely illiquid.
Disclosure: No position at time of post.
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Saturday, 4 May 2013
Southern Pacific Debentures TSX:STP.DB $69.50
Southern Pacific (STP) is a small company dedicated to developing oil resources using Steam Assisted Gravity Drainage (SAGD). It first came to my attention when it bought the Senlac project from EnCana in 2009 for $89 million. I came across the news release as I had an interest in EnCana, and the price they sold the asset for decreased my interest in EnCana. I realized if the price was a bad sell for EnCana, it was probably a good buy for STP. I bought the shares at that time, and have done well on them, but this write-up is about a debt security. STP did get a good buy in Senlac, as a recent investor presentation1 indicated they have taken out $180 million in funds from operations since that time. The asset is producing $56 million of operating income with $20 million of capital a year, which makes the purchase price a great bargain.
Southern Pacific (STP) is a small company dedicated to developing oil resources using Steam Assisted Gravity Drainage (SAGD). It first came to my attention when it bought the Senlac project from EnCana in 2009 for $89 million. I came across the news release as I had an interest in EnCana, and the price they sold the asset for decreased my interest in EnCana. I realized if the price was a bad sell for EnCana, it was probably a good buy for STP. I bought the shares at that time, and have done well on them, but this write-up is about a debt security. STP did get a good buy in Senlac, as a recent investor presentation1 indicated they have taken out $180 million in funds from operations since that time. The asset is producing $56 million of operating income with $20 million of capital a year, which makes the purchase price a great bargain.
However, Senlac is the smaller part of the company. It
produced approximately 3,300 boe per day of oil in 2012, compared to a
nameplate capacity of 12,000 boe per day for their newly started Mackay project
in Alberta.
The market has severely punished STP for the
start-up of the Mackay project, which has been slower than expectations. The
first well came on SAGD in Q4 2012, and recently announced production was only
1,400 barrels per day. Management expects the full capacity to be reached over
18 months, a position the market seems to doubt. STP also owns other
undeveloped land that is highly prospective for oilsands production.
The company issued $172.5 million of convertible debentures,
along with $260 million of long term debt to fund the construction of the
Mackay project. Net of cash and working capital, they had approximately $385
million of debt at the end of 2012. Interest charges on the second lien debt
are $22.75 million per year, and interest charges on the convertible debentures
are $10.35 million. STP also has a first lien revolver, which has a 4.25%
interest rate and a $75 million dollar maximum. This would have a maximum
payment of $3.19 million. This gives a total maximum interest payments for 2013
of $36.28 million. That happens to be almost exactly my conservative forecast
of free cash flow from the Senlac project. So whether STP does manage to get
Mackay up and running or not, they should be able to make the payments on their
debt. For additional safety, the convertibles I am discussing here mature in
2016, before the second lien debt in 2018.
So, STP will be able to make good on their obligations, but
I hear you out there asking, “So what?“ STP.DB is currently trading at $69.50 per
hundred dollars of par value, for a yield to maturity of over 19%. This large
discount to par provides a margin of safety to STP.DB if my cashflow estimates
are wrong or something unforeseen happens. It also provides the possibility for
a large return if events unfold as expected. If the Mackay project does work
out, the debentures are convertible into STP stock at $2.10, for additional
potential upside. (The NAV of their reserves is around $5, so the upside is
real). Those looking for a purer speculative upside could buy the shares
directly at around $0.70, but the debentures provide a mix of safety and value
I find irresistible.
Disclosure: Long position in Southern Pacific securities.
Disclaimer: The content
contained in this blog represents only the opinions of its author. I may hold
long or short positions in securities mentioned in the blog, and no updates to the
disclosure above will be made. I may buy or sell securities at any time. In no
way should anything on this website be considered investment advice and should
never be relied on in making an investment decision. Read that last line again.
Also, this blog is not a solicitation of business. The content herein is
intended solely for the entertainment of the reader and the author.
Friday, 26 April 2013
Automodular TSX:AM $2.95
Automodular is a sequencer and subassembler of modules for large manufacturers. This work has traditionally been for auto manufacturers within North America. Currently, their only go forward business is with the Ford assembly plant in Oakville Ontario. They provide just-in-time assembling and sequencing of modules, and use their location within a few miles of the Ford plant to provide this service.
In 2012 AM’s revenues and earnings were enhanced by a 1 year contract to provide subassembly and domestic content for Vestas in Ontario. This contract has expired, and I do not anticipate similar business based on changes to the FIT (Feed in Tariff) program in Ontario. There is potential upside to the business if management finds other subassembly work.
The valuation here is undemanding, with 25 million in cash, other current assets (mostly payables) exceeding total liabilities by a factor of 1.6, no long term debt, and 29.5 million of EBITDA last year against a market cap of 62 million. This valuation is caused by market concerns that it is an undifferentiated business with unsustainably high margins, excessive customer concentration, and contract renewal risk. (The Ford contract expires June 2014).
I believe the Ford contract will be renewed, although AM may have to take slightly lower prices/margins. Their facility is located in extremely close proximity to the Ford plant, and they have a long history of service to this plant. Ford has had high demand at this plant recently, causing Automodular's 2012 revenues from Ford to increase to 86 million from 80 million in 2011. In addition, Ford has added a third shift to the Oakville plant to begin production in Q1 2013. The high level of integration of AM’s operations into the plant’s production process means switching suppliers would be disruptive, and not likely in a high demand period for the vehicles produced there. I expect contract renewal sometime in the summer of 2013. Three valuation cases are presented below, and probability weighted for a price target.
Automodular also has a $25 million breach of contract lawsuit outstanding against GM for the early termination of their contract at a GM plant. The MD&A indicates that GM expressly waived its termination rights, but litigation is unpredictable. I have not included any value from the lawsuit, but assigned it to the “margin of safety” bucket.
Base Case: Ford renewal and margin compression
Assuming Ford renewal at slightly lower margins and no new business makes 2011 an excellent comparable. In 2011 diluted EPS was $0.61, capitalize that at an undemanding P/E of 7, and add the $1.23 of cash on the balance sheet for a valuation of $5.50. This is the most likely case, assigned 70% probability.
Downside Case: Ford non-renewal and business windup
In the case of a Ford non-renewal, I believe the business would be wound up and cash distributed to shareholders, as management has proven to be shareholder friendly in the recent past (significant special dividends the last two years). In this scenario valuation is based on the 25 million of cash, and 18 months of cash generation, estimated at 27 million. (18 million yearly run rate from 2011 calculated as earnings plus depreciation). The excess of other current assets over liabilities, and the provision for operations windup should be sufficient to pay for windup. This case has a per share value of $2.55, 20% probability.
Bull Case: Ford renewal at current terms, new business to replace Vestas
This case values the business based on 2012 earnings, assuming new business equally profitable to the lost Vestas account is found. 2012 diluted EPS of $0.82 at 8x is $6.56, and adding the $1.23 of cash gets you to $7.79. 10% probability assigned to this case.
Valuation:
The weighted valuation works out to $5.13, with significant upside skew. Because the business is trading at an undemanding valuation, it’s a heads I win, tails I don’t lose much situation, where heads is dramatically more likely than tails.
Risk Factors:
-Wage differential
Wages were nearly half of the companies expenses this year, logical for a company whose business is essentially outsourced manufacturing. This percentage will be higher next year without the windmill contract, as Ford supplies the materials for its contract. Lower all-in wages for OEM employees increases the cost pressure on AM, as labour differential is one of its strongest advantages. Its workers are CAW represented with a current contract. If Ford's all in costs become low enough that it internalizes this work, AM would enter the bear case detailed above.
Disclosure: No position at time of post.
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author.
1 http://www.theglobeandmail.
Automodular is a sequencer and subassembler of modules for large manufacturers. This work has traditionally been for auto manufacturers within North America. Currently, their only go forward business is with the Ford assembly plant in Oakville Ontario. They provide just-in-time assembling and sequencing of modules, and use their location within a few miles of the Ford plant to provide this service.
In 2012 AM’s revenues and earnings were enhanced by a 1 year contract to provide subassembly and domestic content for Vestas in Ontario. This contract has expired, and I do not anticipate similar business based on changes to the FIT (Feed in Tariff) program in Ontario. There is potential upside to the business if management finds other subassembly work.
The valuation here is undemanding, with 25 million in cash, other current assets (mostly payables) exceeding total liabilities by a factor of 1.6, no long term debt, and 29.5 million of EBITDA last year against a market cap of 62 million. This valuation is caused by market concerns that it is an undifferentiated business with unsustainably high margins, excessive customer concentration, and contract renewal risk. (The Ford contract expires June 2014).
I believe the Ford contract will be renewed, although AM may have to take slightly lower prices/margins. Their facility is located in extremely close proximity to the Ford plant, and they have a long history of service to this plant. Ford has had high demand at this plant recently, causing Automodular's 2012 revenues from Ford to increase to 86 million from 80 million in 2011. In addition, Ford has added a third shift to the Oakville plant to begin production in Q1 2013. The high level of integration of AM’s operations into the plant’s production process means switching suppliers would be disruptive, and not likely in a high demand period for the vehicles produced there. I expect contract renewal sometime in the summer of 2013. Three valuation cases are presented below, and probability weighted for a price target.
Automodular also has a $25 million breach of contract lawsuit outstanding against GM for the early termination of their contract at a GM plant. The MD&A indicates that GM expressly waived its termination rights, but litigation is unpredictable. I have not included any value from the lawsuit, but assigned it to the “margin of safety” bucket.
Base Case: Ford renewal and margin compression
Assuming Ford renewal at slightly lower margins and no new business makes 2011 an excellent comparable. In 2011 diluted EPS was $0.61, capitalize that at an undemanding P/E of 7, and add the $1.23 of cash on the balance sheet for a valuation of $5.50. This is the most likely case, assigned 70% probability.
Downside Case: Ford non-renewal and business windup
In the case of a Ford non-renewal, I believe the business would be wound up and cash distributed to shareholders, as management has proven to be shareholder friendly in the recent past (significant special dividends the last two years). In this scenario valuation is based on the 25 million of cash, and 18 months of cash generation, estimated at 27 million. (18 million yearly run rate from 2011 calculated as earnings plus depreciation). The excess of other current assets over liabilities, and the provision for operations windup should be sufficient to pay for windup. This case has a per share value of $2.55, 20% probability.
Bull Case: Ford renewal at current terms, new business to replace Vestas
This case values the business based on 2012 earnings, assuming new business equally profitable to the lost Vestas account is found. 2012 diluted EPS of $0.82 at 8x is $6.56, and adding the $1.23 of cash gets you to $7.79. 10% probability assigned to this case.
Valuation:
The weighted valuation works out to $5.13, with significant upside skew. Because the business is trading at an undemanding valuation, it’s a heads I win, tails I don’t lose much situation, where heads is dramatically more likely than tails.
Risk Factors:
-Wage differential
Wages were nearly half of the companies expenses this year, logical for a company whose business is essentially outsourced manufacturing. This percentage will be higher next year without the windmill contract, as Ford supplies the materials for its contract. Lower all-in wages for OEM employees increases the cost pressure on AM, as labour differential is one of its strongest advantages. Its workers are CAW represented with a current contract. If Ford's all in costs become low enough that it internalizes this work, AM would enter the bear case detailed above.
Disclosure: No position at time of post.
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author.
1 http://www.theglobeandmail.
Hello,
Welcome to my blog about value investments. I have a couple of goals in writing this, the first one is to shed some light on some of the great value opportunities I think exist in the Canadian stock market. This isn't a place to find information on big cap companies yielding 3% and trading at fair prices. There's nothing wrong with that, but it's not what I'm after. I'm looking for things that are undervalued - hopefully by a lot. If it's a small company with no analysts following it and no dividend that doesn't bother me if it's trading at 50% of fair value. I love a margin of safety.
My second reason, and the more compelling one for me personally, is to become a better investor. I spend a significant amount of time analyzing stocks, and putting my ideas on paper helps me focus them. I'd love to get comments on my ideas from others in the value investing community. If you can poke a hole in one of my ideas I'd love to hear from you! I'd much rather find out about my mistakes before they cost me money.
I should give a shout out to http://www.whopperinvestments.com/looking-to-become-a-better-investor-start-a-blog this post on Whopper Investments, which is where I got the idea.
Michael
Welcome to my blog about value investments. I have a couple of goals in writing this, the first one is to shed some light on some of the great value opportunities I think exist in the Canadian stock market. This isn't a place to find information on big cap companies yielding 3% and trading at fair prices. There's nothing wrong with that, but it's not what I'm after. I'm looking for things that are undervalued - hopefully by a lot. If it's a small company with no analysts following it and no dividend that doesn't bother me if it's trading at 50% of fair value. I love a margin of safety.
My second reason, and the more compelling one for me personally, is to become a better investor. I spend a significant amount of time analyzing stocks, and putting my ideas on paper helps me focus them. I'd love to get comments on my ideas from others in the value investing community. If you can poke a hole in one of my ideas I'd love to hear from you! I'd much rather find out about my mistakes before they cost me money.
I should give a shout out to http://www.whopperinvestments.com/looking-to-become-a-better-investor-start-a-blog this post on Whopper Investments, which is where I got the idea.
Michael
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