Thursday, 6 November 2014

Rockshield Capital Corp CNSX:RKS $0.06

Rockshield Capital Corp is a net-net which is transitioning from a junior resource company to an investment company. RKS has $5.4 million in cash and $5.2 million in investments on their latest balance sheet, against which they have on $32,000 in liabilities. That equates to a cash value of 11.9 cents per share, which is nearly double the current share price, before accounting for any value to their investments.

The investments are in a variety of small and micro cap companies in Canada. For those interested, the investments are in:

Saber Capital Corp.
Helius Medical Technologies Inc.
Hemisphere Energy Corporation
Lupaka Gold Corp.
Americas Petrogas Inc.
Intellispharmaceutics International Inc
Pan African Oil Ltd.

By far the most material is Helius Medical Technologies, where the company owns 1.3MM shares and 650,000 warrants which they acquired for $650,000. The carrying value of those securities is now over $4.3 million. Therefore, the prospects for Helius will materially affect the prospects for Rockshield.

Junior medical device companies are outside my circle of competence, so I'm only assigning value to the cash and putting the investments in the margin of safety bucket, giving me a price target of $0.11.

My price target of $0.11 is also material because that is the strike price of the 15 million warrants the company issued when they raised capital this summer. Unfortunately, they raised it materially below the value of the company, which provides doubt as the seriousness of their capital allocation. Nevertheless, the company is trading at a valuation where I would expect good things to happen, and their track record with the investments is excellent so far based on the Helius success.

Disclosure: Long RKS

Disclaimer: I am not a registered investment advisor and do not provide specific investment advice. The information contained herein is for informational purposes only, and none of the information is guaranteed. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusions. Seek qualified professional advice to make an investment decision. Investing includes risks, including loss of principal. Absolutely no warranty is made for the quality or correctness of the information above, and liability for its use is expressly disclaimed.

Tuesday, 21 October 2014

Ryan Gold CVE:RYG $0.11

Ryan Gold is yet another net-net, which regular readers will realize is a theme of the blog. The company has $21.2 million of cash on their balance sheet as of their last release, and 117.1 million shares, which provides a cash per share value of $0.179, materially in excess of the current share price. In fact, the company is trading at 61% of its NCAV, which is well into Ben Graham territory. The company also owns stock and warrants in Carlisle Goldfields Limited and Coastal Gold Corp. Based on current prices, the Carlisle Goldfields stock is worth about $280,000 and the Coastal Gold stock is worth about $80,000. Carlisle is also a net-net, although barely, so there is a little bit of value in these positions, that I would ascribe to the margin of safety bucket.

As Dundee Corporation owns or controls 26% of the company, I would expect them to use it as a cash shell to merge with a business they're taking public. I have no evidence that this will happen, (it is merely my suspicion) and I would certainly prefer a liquidation. However, a merger like that would likely coincide with a stock promotion of the company's shares, which would likely allow them to approach a more reasonable valuation.

I've divided this article into paragraphs, as the first is factual fundamental analysis and the second is rank speculation. Use them as you see fit.

Disclosure: Long RYG

Disclaimer: I am not a registered investment advisor and do not provide specific investment advice. The information contained herein is for informational purposes only, and none of the information is guaranteed. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusions. Seek qualified professional advice to make an investment decision. Investing includes risks, including loss of principal. Absolutely no warranty is made for the quality or correctness of the information above, and liability for its use is expressly disclaimed.

Friday, 22 August 2014

STP.DB $10.06 - Doubling Down on Distressed Debt

The alliterative title is my way of distracting from the fact that my previous post on STP debt was a terrible call. If you'd like to read that post, it can be found here. The short version is the company had debt obligations of around $32 million per year, and my prediction was for cash flow of around $32 million per year. However, cash flow came in much less than that, and the company's debt has now increased to a total of $603 million. (Including a finance lease).

A compensating factor is that the convertible debentures are now trading at 10 cents on the dollar. With $410 million in debt senior to the converts, that implies the company needs to be worth $430 million for the debentures to pay out. With operating cash flow last quarter of ~$5 million, the company wouldn't be worth that based on traililng results. The trailing results are terrible, because the company's performance at the McKay project has been very bad.

Hope is on the horizon however, with ICD installation proving productive. The company is using their last few quarters of time before bankruptcy sets in to install more ICDs, in hopes of turning things around. The following graph shows the potential of the new technology, as the results on the first well they installed ICDs in were excellent.
 
The debt is trading assuming the company will be bankrupt and debtholders receive a small recovery. However, if ICDs work long enough for the company to tread water for a year or two, there is potential for a significant return here.
 

My last prediction here was terrible, but I've (much more than) doubled down at recent low prices, and will count this as a double down/new recommendation when I calculate the results for my blog recommendations at the end of the year.
 
Disclosure: Long STP.DB







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, 23 June 2014

Batero Gold - Another net-net - (CVE:BAT $0.095)

Another short, sweet, net-net. This company has 15.5 cents per share of net cash after all liabilities on its balance sheet. It also owns a small, low-ish grade mining property in Columbia. However, the mine is oxide, and could be surface mined and then heap leach treated, so it still has potential. Nonetheless, an undeveloped mine owned by a net-net is just potential option value, as at the current 9.5 cents per share the company is trading at 63% of net current asset value, in the Ben Graham wheelhouse. The company has also announced plans to reduce their cash burn, which I like. They've also suggested they might buy an undervalued junior, which I don't like.

Disclosure: Long BAT

Disclaimer: I am not a registered investment advisor and do not provide specific investment advice. The information contained herein is for informational purposes only, and none of the information is guaranteed. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusions. Seek qualified professional advice to make an investment decision. Investing includes risks, including loss of principal. Absolutely no warranty is made for the quality or correctness of the information above, and liability for its use is expressly disclaimed.

Thursday, 15 May 2014

How to Prepare for Rising Interest Rates

Today's post is a portfolio strategy piece for income investors, which is a bit different than what I normally write about. It covers ways to alter a bond portfolio to reduce interest rate risk. Also discussed are types of equities that will benefit from high rates to use as a potential hedge. Although its different than my normal fare, I enjoyed writing it, and I hope you enjoy reading it.

Full article here.

Friday, 9 May 2014

TransAlta Renewables - Well Covered Dividend of 6.7%

My very first post on this blog, I indicated it was going to be for deep value ideas with a margin of safety, with a bias towards small Canadian companies. I've generally stuck to that, which is why today's post links to an article I wrote for Seeking Alpha and not the blog directly. It is a medium capitalization renewable power producer with a well covered dividend yield and decent growth prospects. The full article is here.

Friday, 11 April 2014

CanaDream (CVE:CDN $0.285) Well below earnings and book value


CanaDream (CVE:CDN $0.28) is a company that rents recreation vehicles (RVs) to tourists from locations across Canada. The protypical customer is a European or American tourist taking a vacation in the Canadian Rocky Mountains, who picks up a motorhome in Calgary, and returns it to the company's Vancouver location (or vice-versa). I will present a discussion on the quality of the business, why I think it has a reasonable moat (although it is economically sensitive) and two methods of valuing the company.

Quality of Business and Moat

The company is effectively the only game in town for RV rentals in Canada. It has the most scale, with locations across the country. It also has partnerships to share leads with RV rental operations in the US and Australia.

A business has a moat when a competitor would not be able to earn anything close to a reasonable return on capital by setting up a competing operation. This is true for CanaDream, as a new entrant would need to buy or lease large amounts of land in multiple cities (to allow for key one-way rentals) and acquire a variety of RVs for rent. Significant marketing expenditure would also be required, as RV rental is not a major category on online travel agency sites. Thus, a competitor would have to drive traffic to their own site, a potentially expensive proposition. Compare that to a new hotel or car rental operation, where the new entrant can sell their services online through Priceline, Expedia, Travelociy et al. and have instant distribution to the entire market on terms comparable to the incumbent operators. A new entrant would be unlikely to generate sufficient utilization on an expensive fleet to cover a reasonable return on these start up expenses, which makes competition unlikely.

Thus, the company has a natural monopoly on this service, and one that is unlikely to be subject to regulation. After all, it is improbable that the Canadian government is going to deem RV renting tourists a protected group and regulate the company's prices/returns. Renting an RV is not a need, so the regulation that applies to electric utilities and other natural monopolies is unlikely to be present here.

The company also holds exclusive dealerships for a number of RV lines, which allows it to utilize its internal resources (repair staff, etc) as well as source inventory for its rental operation. These sales centres also provide an outlet for selling RVs from its rental fleet when the company is finished with them.

The company is an ongoing business of reasonable quality, so its earnings should be valued at a reasonable mutltiple going forward. I will discuss valuation further below. It is also worth mentioning that the company is beginning to experience macro-economic tailwinds, as the economic recovery takes hold in Europe and the United States. Discretionary spending on travel is one of the last things to recover, and the recent decline in the Canadian dollar makes renting an RV from CanaDream more affordable for its international customers.

Finally, an RV rental is a relatively small purchase compared to the total cost of a family's international vacation, so the company should have some room to raise prices as demand firms.

Recent Developments

The company is relocating its Calgary office to a suburb directly north of the airport. This will improve access for customers coming from the airport, as the main road that went from the airport to their current location was closed to build a new runway. The big advantage is the land is outside the city, and they bought a bigger lot, which should give them room to expand. This also has temporarily punished their financials, as the cost of the new land is on the balance sheet, but the company will not move until they build their building. Thus, they currently own two Calgary locations, which makes their debt appear higher than it will be once they sell the original Calgary location. Owning their own locations also gives shareholders another way to win, as the company owns large parcels of land in major Canadian cities.

Valuation by Balance Sheet

At its current price of $0.285, the company has a market capitalization of $5.3 million. The company's most recently reported book value is $13.6 million, substantially in excess of its market cap. That is comprised of $49.1 million of assets and $35.5 million of liabilities. The largest asset on the books is RVs, both for sale and rent, which total $32.0 million. Another $11.6 million is property plant and equipment. In a liquidation, I suspect this number would be higher than book, because $10.6 million of the value is in land and depreciated buildings, which are likely worth more than they paid, even though some of the land was recently purchased. Thus, I feel it is conservative to include $11.6 million of value for PPE. Other current assets are $4.8 million, and most of that is cash, so I'll include the full amount. I will arbitrarily exclude their $730 thousand of intangible assets, which mainly relates to their reservation system and other software. Although this system is important to the company, it would be unlikely to have much value in liquidation.

The most important item to get comfortable with on the balance sheet is the value of the RVs, which is the largest asset. The company indicates that it depreciates its RVs "using the straight line method at rates set by management to reduce the carrying value to estimated net realizable value over the expected period of owership." This, if done accurately, would result in the RVs being held on the balance sheet at very nearly their current economic value. The company does not disclose the actual depreciation rates used, which would be a helpful check. However, the company has been consistently transfering RVs to inventory held for sale and selling them for a profit above its book value. Thus, I believe the value of the RVs on the balance sheet is a reasonable approximation of their economic value.

Turning to the liability side of the balance sheet, everything is relatively straightforward. There is a significant amount of debt at $30.5 million, and some accounts payables and deferred revenue, which is probably deposits the company is holding for the upcoming summer season. There is also a deferred tax liability of $2.8 million, which I seriously doubt the company will need to pay any time soon as a going concern, since they'll always have new RVs to depreciate. For the sake of conservatism, I will leave it in the balance sheet valuation, mainly to add a margin of safety to the analysis. That leaves the only adjustment to equity the removal of intangibles, which brings the book value to $12.9 million, or $0.68 per share.

Valuation by earnings/cashflow

The company can also be evaluated based on its record of earnings and cash flow. I've tabulated the recent results below.
 
Fiscal year ends April 30th
In $MM              TTM 2013 2012 2011
Revenue 28.3 27.9 26.5 25.0
EBIT 2.7 2.0 2.5 1.8
Net Income 1.1 0.6 1.1 0.3
Deferred tax 0.3 0.2 0.4 0.2
Effective income 1.4 0.8 1.5 0.5

Operating under the assumption that a business with a reasonable moat is worth at least 10X earnings, on trailing twelve month results that would suggest a reasonable valuation for the company's equity of $11 million, or approximately a double from here. Even taking an average of the 4 periods presented in the table and a 10X multiple would suggest a $7.8 million dollar valuation, for around 50% upside.

It is also worth noting that the company is in a cyclical industry (travel) but lost less than $10,000 in 2008. For them to effectively break even in the worst recession in living memory suggests that the business has reasonable staying power, and that its current multiple of ~5X trailing twelve months net income provides a significant margin of safety. The company has also been able to continually defer taxes, which provides additional cash for use in the business.

Risks

The business is highly seasonal. Most of their revenues are earned in the Canadian summer. Now, since they earn an acceptable return year round this does not bother me, but if you are going to be shocked by seeing negative results in the winter quarters this stock might not be for you. As an aside, I feel like there is a real opportunity inherent in the slack in the company's fleet during the winter. Whether RVs could be rented to snowbirds who travel to the southern US for the winter, (either for the whole winter or for one-way trips) or maybe used for temporary winter camps (as they are winterized) for drilling programs by oil companies. Any gross margin earned in the winter from the otherwise underutilized fleet would fall directly to the bottom line. I'm sure management is working on this, as they do have specials on their website for those who come to Canada to ski.

I covered why I do not think significant competition for the company is likely, but there is always the possibility that some RV dealer with a Napoleon complex could decide he wants to enter the business whether it makes any sense or not. This would be a significant negative, but in my experience most people who have access to the necessary tens of millions of dollars don't do things that are crazy and burn money.

The company has a significant debt load, but they're paying low interest rates, and have been able to keep current. A tighter credit market would be a potential issue, but their debt is generally secured by either their real estate or RVs, which makes it less risky for lenders and improves their access to credit.

Finally, the company is extremely illiquid. It took me a long time to build a position in the stock, and I would strongly recommend market orders. It may take time to sell a position in this company, so I wouldn't buy it with any money you might need any time soon. It is also a micro-cap and the usual risks associated with that status.

Disclosure: Long CDN, may change at any time


Disclaimer: I am not a registered investment advisor and do not provide specific investment advice. The information contained herein is for informational purposes only, and none of the information is guaranteed. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusions. Seek qualified professional advice to make an investment decision. Investing includes risks, including loss of principal. Absolutely no warranty is made for the quality or correctness of the information above, and liability for its use is expressly disclaimed.