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.
 


Thursday, 10 April 2014

Updates on Previous Posts

This post is going to be a bit of a grab bag of updates, as a couple of the stocks I profiled have had material news.

Petrobank (TSX:PBG) has announced a merger. I profiled the company here earlier in the year, as a net-net. While the company will no longer be trading below its NCAV after the merger, that is because it has parlayed its cash into a stake in valuable producing assets, and the market has bid up the stock accordingly. The combined entity will have the resources to more fully develop the assets in Trinidad, and will be less focused on THAI development in Canada, which hasn't worked. All-in-all this is a positive development.

Chaparral Gold (TSX:CHL) demonstrates one way that good things can happen when you buy companies for less than their net current asset value. When I profiled the company here they were trading at $0.32, and was available at a discount to their net current asset value at that time of approximately $0.48. This was also a spin-off situation, and those are often prospective for value investors. The mechanics of the spin was analyzed here.

Recently, a private equity firm has made an offer to purchase the entire company at a price not much above its NCAV. This seems like an opportunistic course of action, as the company's mining properties are likely to have some value. The bid was recently extended, and was for $0.50 per share. As the shares are trading at $0.68, or nearly 40% in excess of the bid price, I've closed my position. It's a double from where I recommended/purchased, and the incremental value of a higher bid is outweighed for me by the possibility of the deal going through at $0.50. I could be leaving money on the table here, but I don't see a margin of safety in the shares any more.

Whatever happens, I'll use the current $0.68 price when compiling my results at the end of the year, even if that turns out to have been a mistake.

Of course, not all of my net-nets have had something exciting happen to them, but that's not always necessary. Eyelogic Systems (CVE:EYE.A) is at $0.14, or nearly a double from $0.08 when I profiled the company as a net-net. It's still trading well below NCAV, and I still hold the shares. Maybe nothing exciting will ever happen, but the company is still trading around two-thirds of net cash, so there is a definite margin of safety.

Disclosure: Long PBG, EYE.A, 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.

Tuesday, 8 April 2014

Potential Arbitrage Opportunity - McVicar Industries (CVE:MCV $0.48)

McVicar industries is a specialty chemical company with operations in China.

For those of you that are still reading, the story gets worse before it gets better. In 2013, the companies Hongbo facility was "illegally occupied by the factory management and staff," according to the company's press release. The company sold that operation back to the entity it originally purchased it from, and has announced a plan of amalgamation with its largest shareholder. The amalgamation will deliver proceeds of $0.50 to shareholders, and the most recent trading price is $0.48, for a 4.16% return on the trade if the deal is completed.

The independent valuation prepared at the board's behest concludes that the transaction is not fair to shareholders and that the company is worth $0.70 to $0.76 per share. I think it is unlikely shareholders will put up much of a fuss, and will generally be happy to get out of a Chinese micro-cap at a premium of >100% to the pre-deal price of the company.

The special meeting to approve the transaction is scheduled for the end of April, so a completed deal would be an attractive annualized return.

Disclosure: No position, 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.