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:

AssumptionPredictedActual
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
Revenue$13,859,888$13,657,000
EBITDA$0.13/share$.066
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
Source: http://www.spectraproducts.ca/

Continue reading “Spectra Inc.”

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”

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?”

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 Integrated Asset Management.

The First One

Hello, I’m sure you are waiting to find out what this is. Here we go!

I’ll start with a little about me. By day, I’m just a mild mannered man who spends a lot of time thinking about stocks. By night however, I’m a mild mannered man who thinks even more about stocks. Contrary to popular opinion, this makes me both fun and mysterious, trust me.  I love thinking about any and all of the following: P/E’s of 3, management teams that own a lot of stock in their company and buy back lots of stock, Bruce Flatt, The Intelligent Investor, Joel Greenblatt, the funny sounding term GARP,  turn around stories, free cash flow, etc. Told you I was fun.

As part of this thinking, I often write down my thoughts about the stocks I research. I also do a lot of searching out ideas for new stocks to research. And during the course of looking for new ideas I noticed there are very few sites offering up ideas for a Canadian investor like me. My habit of writing my thoughts on stocks and the lack of Canadian investing blogs (Divestor and Financial Uproar are all that’s really out there, and they’re both great) made me think it’s a hell of idea for me to start an investing blog.

I will be writing about stocks I believe are undervalued, overvalued, and everywhere in between. Hopefully this blog becomes a place you, the dashing reader, can come to find investment ideas, or learn a bit about how to analyze stocks. If you close this window having learned anything about investing I will consider it a success.