Callidus Capital Update

Callidus Capital Corp (CBL) released earnings for the first quarter of 2017, and the market hated it. Among the important metrics that were down year over year:

  • Revenue
  • Net income
  • Net interest margin
  • Earnings per share
  • Return on equity
  • Loans receivable
  • Assets
  • Cash flow from operations

I can’t pretend any of these numbers are good. I will say that they aren’t exactly unexpected though. We knew the largest loan was paid off in full, reducing loans receivable. We knew revenues were going down (based o loans receivable going down and previous quarters).

But as with my last update, there is some good news that can be found if you’re looking for it. In the result Callidus reiterated that the privatization process is on track, “The Company remains optimistic that it will announce a transaction on or about the end of the second quarter of 2017”, and the number of interested parties has been whittled down to six.  Listening to the conference call Newton Glassman would not say that they still expected to receive $18-$22 per share, but he strongly implied it. I’m still betting on a takeout price of $18.

During the quarter Callidus returned significant cash to shareholders – mostly through debt reduction. Percentages below are calculated as: Dollars divided by market cap (50,210,000 shares outstanding x $14.83 May 4 closing price). And keep in mind these are yields in a quarter. I won’t extrapolate these over a whole year but you’ll definitely get the picture.

  • Dividends – Dividends on shares owned by Catalyst and Braslyn are paid out in shares, so the cash number looks off. But the 8% yield for a quarter works out to be 2% yield for the month.
  • Share buybacks – Share buybacks were nil for the quarter. Due to the above mentioned dividends paid with shares, outstanding shares increased. -1.6%
  • Debt reduction – Callidus reduced their debt by over $100 million. 13.5%

That works out to a shareholder yield of 13.9% in one quarter. I know reducing that much debt is an anomaly, which is the reason I won’t annualize this shareholder’s yield number. But I will point to this as another example of Callidus continuing to provide value to shareholders even in a down quarter. While assets and profitability went down, Callidus made sure to mitigate the negative effects by returning everything they could to shareholders.

Callidus remains an arbitrage play, but there should now be a reversion to the mean to somewhere around $16-$16.50 to reflect the likely takeover price and the discount to reflect risk a deal isn’t completed.

Disclosure: Long CBL.

Input Capital Update

Two months ago I wrote my thesis on Input Capital Corp, which essentially boils down to they are generating lots of cash but the business model seems to be misunderstood or otherwise not getting the full respect it deserves. Everyone seems to accept that mining streams are good models, and are safe ways to play precious metal prices. Far fewer seem to think that agricultural streams are a good way to play canola prices though.

Since I wrote that shares fell to $1.70 several times, but overall hasn’t moved much at all. Despite this I have been expecting a big quarter from INP, and they delivered. Investors are lucky to receive a “quarterly operations update” from Input shortly after the conclusion of each fiscal quarter, in addition to the audited financial statements provided by all public companies. The numbers are usually revised a little by the time earnings come out due to timing issues of sales or contract signings, but the numbers are good enough to judge a quarter by for the most part.

These updates won’t announce earnings per share, cash flow, or the other common metrics used for valuations. But they do state a few metrics that are important to Input: canola sold, capital deployed, total number of streaming contracts, and total canola reserves. Here’s what to take from each of those numbers in these updates.

Canola Sold – Input makes money by selling canola. Management will provide the money made from selling canola, the tonnes that were sold and the average selling price per tonne. I mostly use this number to determine a fair price to use in my estimates for canola sold. Input made $9 million selling almost 19,000 MT of canola at an average of $476/MT in the three months ended March 31.

Capital Deployed – Input purchases canola by giving farmers an upfront payment in exchange for the right to purchase tonnes at a later date for a very reduced price. So capital deployed is obviously a reflection of future revenues. Input deployed $20.2 million of capital in the quarter, which is their highest quarterly total to date. Management set a goal of deploying $50 million each fiscal year, and that is what I used in my first article to predict future cash flows. After six months this year they’ve deployed $32.2 million. Unfortunately this quarter is by far the biggest for capital deployment, so it is unlikely they get to $50 million this year.

Number of Streams – This is the number of farmers who are selling their canola to Input. Higher is better, and Input has made great efforts to diversify their sources of revenue by signing many small contracts with farmers rather than fewer big contracts. This came after a few highly publicized defaults. Input was able to recover most of their money through securing and selling land and equipment, and Input should now be a stronger, less risky company. The $20.2 million Input deployed this quarter went out to 126 farmers, meaning upfront payments averaged just $160,317. 61 of these were new contracts, bringing Input’s streams up to 181, a big jump from this time last year when they had 94.

Canola Reserves –  This is the number of tonnes of canola that Input has agreed to buy from farmers in exchange for the upfront payments and small payments upon delivery. After this quarter Input now has reserves of 465,000 MT.

This update gives us a few points from which we can adjust our valuation of the company.

With reserves of 465,000 MT, Input’s “assets” have substantially increased. Upfront payments have already been made for these tonnes, so the majority of the expense going forward is the crop payment. If we assume Input can sell these reserves for an average of $470/MT, this canola will provide revenue of $218,550,000.

Management predicted crop payments to average $86/MT as of September 30, 2016. This could increase though as contracts are structured differently to provide less cash upfront and more on delivery. If crop payments instead average $170/MT, buying these reserves will cost $79,050,000 in the future.

Combine these, and factor in a diluted share count of 89,150,609, and I calculate the future canola to be worth $1.56 per share. This money would need to be discounted to some extent to give a present value, but I maintain much of the current share price is backed by canola already “owned” by Input.

As of December 31, Input had $28,164,253 in cash. We know they made $9 million from selling canola, and they paid out $20.2 million for new streams. If we assume $86/MT for crop payments (management estimates should be accurate this close to the prediction), it’s another $1.623 million out.

Input also announced they closed the sale of 4320 acres of land. $1000/acre should be a conservative estimate, so this should add $4.32 million to cash.

Add in business cash expenses of $3 million and Input should report having $16,661,253 in net cash (no debt) at the end of the quarter – almost 19 cents per share. After the 1 cent dividend let’s say that leaves us 17 cents.

Future canola worth roughly $1.56 and cash at 0.17 makes “book value” $1.73 per share. Buying at $2.00 means you’re buying all that canola and cash and then only paying $0.27 for the business and management team going forward.

Shares ran up about 5% since the update, but I bought around this price and I think it’s still very undervalued here. Having no peers and not having the latest cash flow numbers makes me uncomfortable trying to pin down a potential return from INP over the next year like I could with Integrated Asset Management, but I can show you management’s estimates again.

In a presentation in January, Input predicted selling 65,000 of canola in fiscal 2017, leading to 24 cents in cash flow.

input capital corp cash flow

So far this year they have sold ~44,000 MT of canola for approximately their predicted sale price. In 2016 Input sold 16,166 MT from April 1 to September 30. Repeating that will leave Input at ~60,000 for the year. At .37 cents of cash flow (based on the above estimate) per 1000 MTs sold, Input should end the year with 22 cents of operating cash flow. This should be conservative, since last year was a down year with the loss of the defaulted or bought down streams, which are now mostly replaced.

At the current $2.00, shares are trading at 9x 2017’s predicted cash flow. Ending 2017 at 10x cash flow should be reasonable, so $2.20, and buying now you’ll collect 2 cents in dividends, giving new investors an 11% return by September 30th. In subsequent years any quarterly updates like this will only add to my excitement holding this stock, and add to potential returns.

Disclosure – Long INP.

Portfolio Update – April 2017

There’s been a lot going on in my portfolio, both with my transactions and news from the company’s themselves. And it’s given me the idea that it might be worthwhile writing up what’s been going on, a so called portfolio update.

This might become a regular thing, or it could be that the past couple weeks are the exception due to annual results and the like, so regular portfolio updates would be boring and unnecessary. Time will tell.

Sells

CLR

I ended up having to sell Clearwater Seafoods. It hurt because I still think that the company is going to grow well in the future and has very attractive business dynamics. This sale was not due to valuations or any problems with the company. But I saw that the thesis was going to take longer than that of another opportunity, and CLR was trading a few cents under my purchase price, so there weren’t any tax considerations to moving the capital elsewhere. The prudent move was to sell in order to buy another stock. Unfortunately these are the decisions you have to make when you’re fully invested or close to it.

Buys

IAM

Thanks to one reader to whom I’m very grateful, I recently became aware of Integrated Asset Management. In short, the company has raised a lot of money, but only receives revenue from it when it is invested. This has caused a situation where the company has not received the credit it deserves for the potential fees it will collect shortly. When I wrote my post on it, I came up with a target price of $1.49 by September 30th. In the 5 days since, it traded up to $1.47, and is currently sitting at $1.44. Luckily I got a small buy in at $1.33, but I would have preferred it stayed lower longer so I could accumulate more shares. The current price and dividend still offer a potential 7.6% return in five months, plus my prediction for a 22.8% return next year.

I think the big move up in the last month brings IAM closer to fair value, and an investor will still do well buying at these levels. However the big move up means I think there’s a better opportunity out there short term.

CBL

Callidus reported okay results for 2016. Revenue, earnings including unreported yield enhancements, loans receivable, and return on equity were all up. Meanwhile the leverage ratio was down over 10%, which should help reduce fears about investing in leveraged financial companies. The most important part of the release was this regarding the privatization process:

  • Based on the expressions of interest in the first stage, the Process has now moved to its second stage, with a more limited number of parties, which will not exceed six in number. Preliminary discussions with the smaller, second-stage group are focused on both structure and value.
  • Early expressions of interest support initial valuations that would translate into a price received by tendering shareholders that is consistent with the previously disclosed valuation range provided by National Bank Financial ($18 to $22 per share) that accompanied the SIB in April 2016

The process of taking Callidus private remains on track and schedule. Newton Glassman has tempered my expectations a bit, by narrowing the expected tender offer range to $18-$22, but with shares trading today at $17.76, CBL still represents a potential three month return of 3%-25% including the monthly dividend. I was too early at first, originally buying when I wrote my post at a bit over $19. But I added last week at $18. I consider this an excellent place to park cash short term. Worst case (or best case) scenario is you end up with a cheap lender doing everything they can to return money to shareholders and get to hold it longer term. This is a heads I win, tails you lose situation.

Lending Loop

I continue to deposit small amounts of money into my Lending Loop account. It’s pretty fun actually, and my account has a gross yield of 13.3% across a fairly diversified portfolio of loans. This should offer an after tax return of ~9.5% if all loans pay off. If I suffer some defaults I would still expect an after tax return over 6%-7%. This is a very small part of my portfolio, and I’m happy to sacrifice some marginal extra return for the fun of it and to support Canadian small businesses (both Lending Loop and the businesses to which I lend).

News

Now for some quick updates with the companies in my portfolio and about which I’ve written.

DIV

Steady as she goes here. Diversified Royalty Corp continues to have lots of cash and pay out more than it earns from royalties while they look for another royalty stream to purchase. The good news is that the Mr. Lube royalty continues to look incredible. Mr. Lube had same stores sales growth of 4.9% in 2016, and combined with the 2% effective SSSG of Sutton Group Realty Services, meant the DIV portfolio had a combined SSSG of 4.3% for the year. DIV is now out from under the Alberta cloud by selling their royalty stream from Franworks Restaurants. I believe that as soon as Diversified purchases another royalty stream the stock price should pop. Having sold Franworks, and the legal troubles of the old CEO behind them, the focus is now entirely on purchasing more royalties. Management’s current success should give anyone confidence that they’ll make an excellent investment.

BCE

My investment in BCE continues to bore me, and I love it. BCE raised their dividend 5.1%, while free cash flow increased 7.6%. Bell Let’s Talk was another huge success. BCE under performed the TSX and TSX telecoms index in 2016, but the real test of Bell’s inclusion in the portfolio will come during a market downturn. Until such a time, it will be a small holding I pay next to no attention to while I DRIP the very generous dividends it pays out.

DC.PR.D

These Dundee preferred shares remain undervalued. It’s not as attractive as it was under $9 at the start of 2016, but there’s still the 8% dividend while you wait for the price to reflect the safety of the preferred. This Globe & Mail article states there’s still some room to run for preferred shares, but investors may have to dig deeper for the best values. If they dig deep enough, they’ll find DC.PR.D and the price should rise. Even trading up to a 7% yield, which is still among the highest of preferred shares on the market, would lead to a share price of $16.22.

The Dundee business itself is terrible (but undervalued!),but still make plenty of cash to pay the dividend on the preferreds.

BAM.A

By far my largest holding. Funds from operations increased by 27.7%, but shares trade at just 11.5x P/FFO right now. Fee bearing capital increased over 16% continuing a trend of strong growth with no sign of stopping. Brookfield is constantly in the news for aking large purchases and investments. As long as Bruce Flatt is CEO, and probably for long after that even, I plan to never sell a share and continue to buy when I see a dip.

BBU

I hold this based on the returns of the other Brookfield spinoffs. BAM.A has an incentive for BBU to perform well, and every other spinoff has performed excellently. That said I can’t speak to it’s valuation here. It acquired a water utility in Brazil and a road fuel provider in the UK. This one will depend smart acquisitions, which I trust will continue.

BPY.UN

Remains undervalued. Pays a 4% yield with a 82% payout ratio, and the distribution was increased 5.4%. Has some of the highest quality real estate all around the world. Funds from operations increased 15% YOY, and BPY.UN currently trades at 16.8x P/FFO. NAV is somewhere north of $37, so shares trade at a deep discount to book value despite the high quality management and assets.

ECI

Enercare has kept growing, just like normal. But ECI had a big pop recently because investors got outside confirmation of a takeout valuation. One of Enercare’s peers, Reliance Home Comfort, was purchased by Victor Li for $2.8 billion. TD estimates that if Enercare were bought out at a similar EV/EBITDA valuation it would garner a purchase price of $29-$32 per share. I however hope Enercare continues to operate independently for years, growing the share price and dividend indefinitely.

SJ

Stella-Jones is still a great company temporarily beaten down by short term weakness in their core businesses. Stella-Jones will overcome this, possibly making accretive investments of companies with weaker balance sheets, and shares will be much higher in the future. Stella-Jones is a stronger company than Clearwater, and is a much bigger position for me, so it is very unlikely I ever sell it to fund a different stock purchase, even if I think SJ may not move much in the short term.

Stocks I didn’t buy but should have

  • Park Lawn Corp was $16.63 when I wrote about them one month ago. Then their full year results came out and revenue more than doubled and net earnings per share increased 83%. It now sits at $17.50.
  • Perlite Canada was 25 cents when I wrote about it three weeks ago. Then they reported revenues up 27% and a profit in Q1, big improvements over the first quarter of their record 2016. Shares are now at 34.5 cents. I wrote the damn article saying I should have trusts my gut the first time I studied PCI. Then I used my stupid head and thought good results couldn’t push the stock much past 30 cents. Lesson learned – I’m an idiot.

Conclusion

The first two months of this blog have been pretty eventful for my portfolio, and writing my research unfortunately publicizes my poor decisions like passing on Perlite Canada and Park Lawn Corp. But my portfolio remains strong and I’m happy with my holdings after some minor shuffling and investing into some good opportunities like Callidus and Integrated Asset Management.

Integrated Asset Management – A Tiny Brookfield?

Anybody who takes a look at my portfolio will see I’m a huge fan of Brookfield Asset Management. I’m a big believer in Bruce Flatt and know that I want him responsible for a lot of my portfolio’s returns. But BAM.A is huge. I salivate at the thought of having invested back when it was Brascan. Integrated Asset Management may give me a chance to turn back the clock so to speak.

Integrated Asset MAnagement
From iamgroup.ca

Integrated Asset Management (IAM) is an alternative asset manager for institutions and private clients, just like Brookfield. Where Brookfield focuses on private equity, real estate, infrastructure, and renewable energy; IAM focuses on private debt, real estate, and infrastructure.  Continue reading “Integrated Asset Management – A Tiny Brookfield?”

Perlite Canada – PCI

I love running stock screeners, which is even more proof of how fun I am. You get to find investments with the exact metrics you want. Want to find a company trading at 6.2x P/E, with a market cap between $550 million and $585 million, and debt/equity of less than 1? You can find it. Then you can do the rest of the research to find if it will also make a good investment. Continue reading “Perlite Canada – PCI”

How to Invest in Death: Park Lawn Corp (PLC)

There are three sure things in life: death, taxes, and insert joke inclusion here. Really there’s only two sure things. There aren’t any great ways to invest in taxes (get a government job?), but there is a way to invest in death. That’s to own a cemetery. Continue reading “How to Invest in Death: Park Lawn Corp (PLC)”

Clearwater Seafoods: CLR

One of the better pieces of investing advice out there is to “buy what you know”. It basically boils down to: if you use a product/shop at a store/ use a service, and are very happy with it, it’s likely that others do too. If many people are happy with a company’s offerings, that company very well could make a good investment. Continue reading “Clearwater Seafoods: CLR”

Callidus Capital Corp: CBL

In yet another example of “loaning money to Canadians or Canadian companies isn’t a real business and making money that way doesn’t count”, we have Callidus Capital. Now, to be fair, this is how Callidus explains their business:

 Callidus Capital Corporation is a Canadian company that specializes in innovative and creative financing solutions for companies that are unable to obtain adequate financing from conventional lending institutions. Unlike conventional lending institutions who demand a long list of covenants and make credit decisions based on cash flow and projections, Callidus credit facilities have few, if any, covenants and are based on the value of the borrower’s assets, its enterprise value and borrowing needs.

Continue reading “Callidus Capital Corp: CBL”

Stella-Jones: SJ-T

This is a company in a boring industry (utility poles and rail ties while moving into other lumber segments recently), but this boring company has simply crushed expectations and the market for years. Look at the chart below.

invest in stella-jones
From TMX

It’s that top right corner of the chart that has caught my interest. That part where this beautiful 45 degree line stops going directly up and to the right. The reason that this is really interesting is because this is the chart for the share price obviously, but the revenue, net income, and dividend charts have continues up and to the right. Eventually the above chart will continue up as well.

stella-jones income
From Stella Jones 2015 Annual Report

From 2011 to the year ended 2015 assets have increased almost 300%, as has shareholders equity. They’ve grown revenue from $640 million to $1.559 billion. Earnings per share rose from $0.87 to $2.04. The dividend has risen from $0.13 to $0.40 today.

The most recent earnings release showed net income rise another 16%, debt reduced by $92 million in the quarter, and sales in their newer residential lumber division increased over 100%.

Shares have been mostly flat and because of this can be bought for a very fair P/E of 17. When a company is growing by 16% per year that’s an excellent multiple. That’s a PEG of 1.07x for a company with lots of potential acquisitions out there, breaking into a new market (residential), and having enviable organic growth of approximately 6%.

From what I can see shares have not risen due to slightly lower sales in the rail tie and utility pole divisions, which are what people associate with SJ. In the 3rd quarter tie sales were down by 7% and utility poles down by 6.2%. This could look disconcerting, and obviously has the market worried, but growth in the other divisions is encouraging and even in a down quarter sales still increased by 18% to a record $512 million. And the purchase of railway ties and utility poles can only be put off so long, so this decrease now may persist for a couple quarters but will surely reverse.

stella-jones products
From Stella Jones Q3 2016 Investor Fact Sheet

The stock was absolutely punished for announcing preliminary results, telling investors that sales and income in the fourth quarter will be down. It presented a tremendous buying opportunity as shares dropped to around $38. Shares have since recovered to over $41, but that’s still far closer to the 52 week low than the 52 week high.

Stella Jones still shows strong organic growth but most importantly, management has shown they are great at accretive acquisitions and this should remain a strong driver of growth for the stock. Utility pole sales will not stay depressed. Railway tie sales will not stay depressed. If for some reason these two segments of their business do remain under pressure, that should present the company opportunities for acquisitions at a discount. Residential lumber sales are going to increase organically, and is where it seems the company is focusing on growing.

This is a fantastic company and I kick myself every day, as I looked at this company 5 years ago and in my naivety didn’t want to pay over 20x P/E. I know I’ll be very happy holding this stock long term, both by the share price growing and the dividend continuing to rise. I feel it’s often overlooked by retail investors because of the boring industry but there is nothing boring about the returns it has delivered.

Disclosure: Long SJ.

Continue reading “Stella-Jones: SJ-T”