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.
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|
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.
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
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