Ergoresearch Going Private at $0.30

The news comes as bitter sweet. Ergoresearch is being taken private for just a 20% premium over my purchase price.

When I first bought ERG, I expected so much more. The company had discontinued an unprofitable line of business, which made revenue look bad but improved free cash flow. Ergoresearch was also starting up new clinics, moving into sleep apnea treatments, and had at least mentioned returning to its acquisitive ways. The bitter part of the deal is because my investment in Ergoresearch could have been so much more.

Then the company sort of went dark. One day I noticed that I hadn’t seen a news release about earnings, so I went looking and found that there wasn’t a press release, the financial statements were simply put on SEDAR. And the numbers were only put on SEDAR in French. I thought this was a little curious, it was a bit annoying but thought it may provide value investors more opportunity to buy while ERG was unfound.

Then this news of the privatization came out not long after. The sweet part is that Ergoresearch shares were unlikely to move higher anytime soon. By not announcing earnings, and by only releasing numbers in French, it effectively hides the company from a large percentage of the investment community. I’m fully aware that the business is improving, and this is an excellent deal for Sylvain Boucher and Walter Capital. They are acquiring a business with growing free cash flow and exciting initiatives that should grow the business in the future. For small shareholders like me, we’re provided an out for our shares that were probably still going to be in the $0.20-$0.25 range for  year or more.

I’m mildly disappointed in this investment. I think the prospects of ERG deserve a higher premium, but I doubt anyone who has been holding their shares is patient enough to demand it or want to keep the company public. I sold my share at $0.295 and have moved on.


Integrated Asset Management – Follow up

Nine months ago I wrote my thesis on Integrated Asset Management, which I thought should be trading at $1.49 on September 30th (end of fiscal 2017). I’m not usually anywhere close to this right, but IAM was $1.54 on September 29th.

Since then however, IAM has traded down to its current $1.38. I made a number of assumptions coming to my 2017 target, as well as my 2018 target of $1.76, with the share price lingering I decided I ought to take another look at these assumptions and make some new targets.

Fiscal 2017

I tried to be pretty conservative with my estimates of 2017’s financials, and this is how it turned out:

Expenses$10 million$12.2 million
Performance Fees$0$0
Dividend$.06/share, $1.7 million$1.685 million paid out.
Dividend raised to $.08
Managed Futures Sale closes.Sells for $3.3 million$3.2 million
Invested Capital$1.912 billion$1.854 billion
Management Fees$13,590,000$14,216,000
Cash$12.8 million$16.48 million

The table shows without a doubt that I don’t know what I’m talking about.

Most of my assumptions are significantly off, but what most affects my valuation is that expenses are much higher than I figured and lower EBITDA by nearly $.08. If I was a smarter investor, I would have sensed that expenses would be higher than $10 million. Despite the much higher cash balance (I had assumed $0 operating cash flow to be extra conservative), EBITDA growth was not as high as predicted which throws my target out the window. I figured an 8x EV/EBITDA multiple was fair (conservative, but fair) for IAM, and yet here we are sitting at 12x and under my target.

Reasons Not to Fret

My thesis for IAM is playing out, I just missed on the growth in earnings. There are still a lot of reasons to like the stock here.

  • The dividend is now quarterly, if that matters to you for some reason. More importantly, the dividend was raised to $0.08 annually, a 5.8% yield today. This also signals confidence from management that EBITDA/cash flow will keep growing, and revenue will be smoother.
  • IAM continues buying back shares. In December over 1% of shares outstanding were cancelled, and there’s a good chance that 5% of shares are bought back this year. If this happens, shareholders will have over 10% of the market cap returned to them through the dividend and buybacks.
  • Cash makes up almost $0.59 of the market cap with no debt. IAM has consistently had an excess of cash on the balance sheet, but probably $6 million is extraneous and could be used for an acquisition, investment, or special dividend.
  • While it did not grow as much as I thought, EBITDA still grew a lot. I originally predicted $4.825 million in EBITDA for 2018. That’s now a pipe dream, but $2.8 million is within reason, growth of over 50%.

Right now IAM is a growing, profitable asset manager with no debt and cash worth over 40% of the market cap. I can’t justify selling a company with those characteristics because I made poor predictions. I’m going to keep holding here, but will be keeping an eye on it.

Disclosure: Still long IAM.

Spectra Inc.

Trucking is pretty damn dangerous. Anyone in Ontario will likely recall this accident, which killed three and closed the 400 highway southbound lane for over a day. Some of you reading this may have heard of Operation Air Brake, which involve “blitzes” of commercial vehicle inspections, and always ends up taking hundreds or thousands of trucks off the road for brake related violations.

In Toronto, there is a small (and I mean small) company making products that would help prevent many of these violations, which means the truck keeps rolling, the freight gets where it’s going, etc. The value proposition is pretty clear for Spectra Inc.

Luckily for me, Spectra offers an excellent investment opportunity.

spectra inc ssa

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Atlas Engineered Products – Getting in on the Ground Floor

There is not much to read out there about Atlas Engineered Products. The company doesn’t even have a website (EDIT – now there is a website). But in that lack of information lies an opportunity for investors to get in on the ground floor of what should be a very successful capital compounding story.

atlas engineered products

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Portfolio Update – December 2017

It’s been a long time since I’ve gotten on here to write about my stocks. No real excuses, just prioritized some other things. I’m sure nobody was really calling the police wondering what happened to me, so I’ll just jump right into this. Let’s start with one where I was very wrong. Continue reading “Portfolio Update – December 2017”

Ergoresearch Ltd. – Another Diamond in the Quebec Rough

If you have been so kind as to have read some of what I’ve written on this blog, you may remember that I had a chance to invest in a Quebec microcap trading at just two times earnings. Alas, for reasons I either can’t or don’t want to remember, I passed on buying PCI. If I had bought when I originally found the company, I’d be looking at almost a 300% return in under a year. If I had bought it when I had wrote about missing the opportunity, I’d still be looking at over a double.

I don’t intend to make the same mistake again.  Continue reading “Ergoresearch Ltd. – Another Diamond in the Quebec Rough”

What is Diversified Royalty Corp. Worth?

Diversified Royalty Corp. got their start in late 2014 by buying a royalty on the sales of Franworks restaurants, with the goal of acquiring a diverse portfolio of royalties from multi-location businesses across North America. Diversified was a misnomer until June of 2015, when the company acquired a royalty from Sutton Group Realty. And then in August of that year, the royalty for Mr. Lube Canada was acquired.

At that time the story seemed to be on track. Continue reading “What is Diversified Royalty Corp. Worth?”

Enercare Inc. – A Cheap Utility with Growth

Utilities have long been considered a safe haven in the stock market. Utility stocks generally pay out generous dividends, have predictable revenues, and the business is somewhat recession proof (people usually keep paying their hydro bill if they possibly can). These qualities and the reputation as a safe haven has led to the sector appreciating a lot, with many believing utilities could be overvalued.

Enercare Inc. (ECI) offers the best qualities of the utility sector, with the added benefits of growth and being undervalued right now.

enercare stock Continue reading “Enercare Inc. – A Cheap Utility with Growth”