Investing Ideas from the Neighborhood

Investing Ideas from the Neighborhood

We're looking for the prospect of an accelerating rate of positive change. That means we're naturally drawn to management changes, turnarounds, or, more generally, to situations in which changes in the macroeconomic, competitive or regulatory landscape require a company to remake what it does or how it does it. Sometimes it's even more straightforward, where we see unrecognized assets that can generate significant value, or when a company blew something like an acquisition or a product rollout and we believe the fix will happen more quickly and with less pain than the market expects.

That strategy is particularly tailored to small caps. Simpler business models are easier to analyze and cross-check, while at the same time change happens faster in small companies, making for more investable inflection points. One or two people can also make a big difference, quickly.

Mariko Gordon, Daruma Capital Management

(Comments made by Stephen Takacsy (Lester Asset Management) on BNN's Market Call, over the past few months…)

Rogers Sugar…RSI

Former income trust which owns two sugar refineries in Canada (Rogers in the west and Lantic in the east). Rogers runs a duopoly with Redpath Sugar, and generates strong recurring free cash flow, most of which is paid out in the form of dividends (5.7 per cent yield). Although Rogers has increased its volumes and revenues over the past few years, refined sugar is a low-growth industry, and the stock was considered a “sugar bond." The new CEO has recently initiated an aggressive growth strategy by diversifying into higher growth ingredient businesses, and recently completed the acquisition of Maple Treat for $160M. Maple Treat is the largest exporter of maple syrup-based products in the world with 20 per cent market share. We expect Rogers’ new focus on growth to lead to a re-rating of the stock and a high valuation. Market cap is around $650M.

Logistic…LGT.B

Leading Montreal-based marine cargo handler and environmental services company. Owns marine terminals in over 30 ports in Eastern Canada and the U.S. Environmental division provides site remediation and trenchless water pipe repairs (AquaPipe). Logistec is an infrastructure play on two fronts: port facilities, which are currently commanding huge valuations by pension funds, and the repair of aging North American drinking water systems, which will benefit from increased government stimulus spending. Recently acquired their main water pipe contractor in Ontario to lead the North American expansion of AquaPipe. Site remediation and Aquapipe backlog are at record levels, while container volumes at its recently expanded Montreal terminal have picked up significantly. We expect earnings to be up this year and even stronger next year, so the pullback from the stock’s high of $48 represents an excellent buying opportunity. Increases dividend yearly and regularly buys back stock. Strong management. No analyst coverage.

BAYLIN TECHNOLOGIES (BYL.TO)
Market cap: $110 million. NEW HOLDING

We recently acquired five per cent of the company, a world leader in wireless antenna design for mobile, network and infrastructure applications. Huge growth opportunity for the next 25 years with increasing wi-fi coverage (DAS), wireless LTE network densification with small cell systems, and new antennae/components needed for 5G-connected devices.
Baylin’s new CEO reduced costs by moving R&D to Ottawa, expanded product lines from the mobile segment (where Samsung is largest customer) and the company is now profitable. It also just announced the acquisition of Montreal-based Advantech, which has complementary RF and microwave products for satellite and wireless base stations. We expect significant sales and cost synergies, with revenues reaching more than $120 million and an EBITDA of $23 million plus. Our Target price is $6 within 12 to 18 months based on 9-times 2019 EBITDA.

PLAZA CORP (PLZ_u.TO)
Market cap: $450 million. CORE HOLDING
Plaza Corp is a strong internalized developer of retail properties with holdings in Quebec, Ontario and the Maritimes. It has tenants resistant to e-commerce, like Shoppers Drug Mart (25 per cent of gross leasable area), KFC, Dollarama, Sobeys and Canadian Tire.
It has a strong pipeline of 25 projects, including acquiring old Sears sites for redevelopment. Plaza Corp is the only REIT to consistently increase AFFO/share and increase dividend every year for 15 years. Retail real estate is out of favor, so it’s a good time to buy this undervalued stock. Insiders own 21 per cent and are buying shares (Michael Zakuta). We recently bought more at $3.30. Nice safe dividend yield of 6.5 per cent.

GUARDIAN CAPITAL (GCGa.TO)

Market cap: $800 million. CORE HOLDING 

Guardian Capital is a Canadian asset management firm with $26 billion in assets under management (AUM) and $17 billion in assets under administration. It specializes in institution portfolio management and financial advisory services, such as selling life insurance policies and mutual funds.
Guardian has been expanding internationally by acquiring asset managers to broaden its investment products offering. It recently purchased Alta Capital in the U.S. with US$3.2 billion in AUM. Roughly half of Guardian’s market cap is comprised of BMO shares, so it’s also an indirect way to own the bank. Using a sum of the parts analysis, we get $18+ for the Net Asset Value of the securities portfolio plus at least $14 for the investment management business for a value of at least $32+. We believe the company is worth much more on a takeout.

DIAMOND ESTATES WINES (DWS.V)
CORE HOLDING
Diamond is the only publicly traded wine company in Canada besides Andrew Peller and the third-largest VQA producer in Ontario. Sales growth has accelerated thanks to new legislation allowing wine to be sold in grocery stores in that province. Diamond now has the largest supermarket wine shelf space at over 12 per cent market share. Currently, 70 grocery stores sell wine and this will quadruple to 300 over the next few years.
Diamond’s export sales to China are booming. It also owns an agency that imports wines, beer and spirits. We expect Diamond to make acquisitions and consolidate the fragmented wine market. The Beutel family owns 21 per cent and we own just under 10 per cent, having bought our last block at $0.28. Enterprise value is around $60 million or 1.7 times trailing-twelve-month sales, cheap for a fast-growing beverage company. As sales and profits grow and multiple expands, the stock should double over next two years.

BAYLIN TECHNOLOGIES (BYL.TO)
NEW HOLDING
We acquired 5 per cent of the company last December. Baylin is a world leader in wireless antenna design for mobile, network and infrastructure applications. They have a huge long-term growth opportunity, with increasing wi-fi coverage (DAS), wireless LTE network densification (small cell systems) and new antennae and components needed for 5G and connected devices (micro cells).
Baylin’s new CEO has really turned around the company by reducing costs and expanding product lines to lessen reliance on the mobile segment (where Samsung is largest customer). The company just announced a large acquisition of Montreal-based Advantech, which has complementary RF and microwave products for satellite and wireless base stations. We expect a significant sales increase and cost synergies, with revenues reaching more than $120 million and EBITDA of $23 million plus. Our target price is $6 within 12 to 18 months based on 9 times 2019 EBITDA.

SIENNA SENIOR LIVING (SIA)
NEW HOLDING
Sienna Senior Living owns over 100 long term care facilities and retirement homes in Ontario and B.C. It’s the second-largest publicly traded retirement residence owner after Chartwell. The stock has great defensive characteristics in this volatile market. The dividend yield is 5 per cent.
Rising interest rates should not impact this stock as rental leases are short-term in nature and can be adjusted for inflation. It should be steadily increasing its net operating income and adjusted funds from operations (AFFO) per share, and growing dividends over the long run. Sienna was recently added to TSX Composite Index.

GRANDE WEST TRANSPORTATION (BUS.V) – New position in 2018
B.C.-based developer of North America’s only single-frame heavy-duty medium-sized transit buses (30 to 35 feet) sold to public (municipalities) and private (airports) markets. The “Vicinity” bus was designed from scratch with BC Transit Authority and is cheaper, lighter, more fuel efficient and sturdier than competing buses, which are made by modifying larger ones. (New Flyer CEO raves about the Vicinity bus). Business model is “capital light” with manufacturing in China and final assembly in Vancouver and Atlanta. Stock came down due to some deliveries being delayed by one quarter, providing a great entry point. We visited the company in May and were very impressed. Backlog is strong at 240+ buses with potential to grow as municipalities “right-size” their fleets by replacing larger buses with medium-sized ones. Several catalysts should drive share price higher in next few months such as large orders from Atlanta Transit Authority and other U.S. customers. Market cap is around $100 million, and we expect the stock to double as order flow grows. Recently purchased more around $1.35.

ALTUS GROUP (AIF.TO) – Core holding since mid-2016
Global provider of software for commercial real estate management and consulting services for property taxes and appraisals, used by banks, pension funds, insurance companies and real estate owners. Altus is transitioning from a consulting services company to a technology company as it migrates clients to its analytics software and integrates more of its services onto its platform in order to cross-sell these. Strong organic growth from acquisitions. We expect multiple to expand as recurring licence revenue from their software platform grows. The stock has pulled back as Altus is investing heavily in growth. Market cap is $1.2 billion. Altus pays a two-per-cent dividend. We recently added to our position at under $30.

SOLIUM (SUM.TO) – Core holding since early 2017
Global provider of software services for the administration of employee stock option and share purchase plans for private and publicly-traded companies. In 2017, Solium signed “white-label” agreements with Morgan Stanley and UBS and has been migrating their customers to its own platform. Solium has also been acquiring companies that offer complementary services such as employee-compensation data and business- valuation analytics. While expenses have risen, sales are growing quickly, comprised of one-time set-up fees, recurring revenue and transaction charges. Market cap is $650 million. We recently bought a block at $10.

Past Picks

K-BRO LINEN (KBL.TO) – Core position since March 2017
Canadian leader in laundry and linen services to the growing health-care and hospitality industries. High barriers to entry and limited competition. K-Bro has 30 per cent market share in Canada with long-term contracts at high renewal rates. It is the lowest cost producer and is nearly finished a major capex program to build new plants in Ontario and B.C., which will increase capacity and lower costs and allow K-Bro to widen its lead over the competition. Recently acquired Fishers Topco in Scotland. Stock has come down due to transition costs of new plants and minimum-wage increases, which the company can pass on to most customers within a year. We expect improving margins as costs are absorbed and K-Bro wins more business. It is now a great buy at 9x 2009 EBITDA. Pays a 3.3 per cent dividend. We recently added to our position at $35.

EQUITABLE GROUP (EQB.TO) – Core holding since early 2015
Now Canada’s largest alternative-mortgage lender having gained significant market share from Home Capital.  Announced record profits in 2017 and increased dividend four times since we recommended it last year. Very strong management team and board. Despite what the U.S. short sellers portend, non-performing loans are at record lows. New B-20 mortgage rules stress tests may slow originations, but Equitable is still expecting to grow and generating strong EPS and high ROE (15 per cent+). Stock is trading at 0.8x book value ($67 and growing to $74+) and only 6.5 x 2018 EPS. We recently added to our position in the low $52s.

TEN PEAKS COFFEE (TPK.TO) – Core holding since mid-2015
Based in Burnaby, B.C., the company is the world’s only third-party producer of decaffeinated coffee using a 100-per-cent chemical-free Swiss Water process. Also provides coffee storage and handling/logistics services. Customers are large chains like Tim Horton and McDonald’s, specialty roasters/coffee chains and global importers. Decaf is growing faster than coffee, and methyl chloride used to decaffeinate most coffee is being increasingly shunned worldwide. Competition is shrinking as two older chemical-free CO2 plants have recently closed in the U.S. and Europe. TPK is forecasting double-digit volume growth in 2018, and is opening a European office to meet additional demand there. It is currently building a new plant to increase capacity by 50 per cent, which will be ready in 2019. Stock is very cheap at 14x trailing P/E and 0.6x sales for a consumer-product company with high barriers to entry, strong free cash flow generation and global growth potential. Also pays a 4.1-per-cent dividend. We recently added to our position in the low $6s, and now own eight per cent of the company.

In Closing...

Investing in the stock market should not only be profitable, it should be fun and stimulating as well. When investing in the small-cap realm (the neighborhood), the individual investor is partnering up with innovative, entrepreneurial business types. I would rather invest with them than the big protected institutional banks where creativity is stifled and the bureaucratic status quo is maintained.  

This list of stocks is not meant to be recommendations for investment (some of the comments made are from last year), but rather an example of how one small cap fund manager approaches his craft and lays out his investment thesis. Notice the recurring theme of 'change' operating under the hood of these small capitalization stocks. Money is made in the dark, not the light.


Resources

https://www.bnnbloomberg.ca/

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