Category: Weekly Commentary

14 Sep 2017

Issue 37 – Storagevault

StorageVault’s (TSX: SVI) main business is owning, operating and leasing self storage facilities. Since SVI is the only public storage company in Canada, it is the only way for investors to get exposure to this space. We are attracted to this type of real-estate as it is the only one that can achieve 12% growth in net operating income (NOI). At the same time, SVI is consolidating the market by acquisition. Last quarter, SVI acquired a Montreal property for $8 million. Furthermore, on August 01, 2017, SVI announced the closing of the acquisition of Sentinel storage, which is made up of 24 properties, and is in the process of closing on 9 more properties.

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07 Sep 2017

Issue 36 – Gearing Up!!!

On September 5th 2017, Secure Energy Services Inc. (TSX:SES) announced some changes at the management level which we see as positive for the future growth of the company. Mr. Allen Gransch, formerly Chief Financial Officer of SES, will take the roll of Executive Vice President of Corporate Development. This will allow him to spend the majority of his time on acquisitions and green field projects. This change should translate into more deals and growth projects in the coming years. This is also a strategic and prudent way of grooming the future Chief Executive Officer of SES.

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31 Aug 2017

Issue 35 – Hello!!! Propane!!!

Propane has been a sleepy commodity for the past few years and most investors have lost interest in it. However, the fundamentals have been changing in a very unnoticed manner by most. Ever since the US opened its propane business to the world via export terminals, things have been getting a lot tighter for the commodity. We’re always on the lookout for opportunities such as this one where investors have thrown in the towel and driven valuations to compelling levels.

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24 Aug 2017

Issue 34 – Did Someone Say Dividend?!

So far this quarter, two banks have reported their earnings and both have increased their dividend. Royal Bank of Canada (TSX: RY) raised its quarterly dividend by 5% to $0.91, which was higher than expected. CIBC (TSX: CM) raised its quarterly dividend 2.4% to $1.30 from $1.27. In general, over the past few years, Canadian banks have reported strong financials quarter after quarter. However, they are not getting much respect compared to their US competitors. It appears the Canadian housing market and Canadian debt levels have overshadowed the positive news from Canadian banks. Meanwhile, the Canadian economy is firing on all cylinders and even the province of Quebec is experiencing the best economic expansion and unemployment rate in 40 years.

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18 Aug 2017

Issue 33 – The Tide Keeps on Rising

On Tuesday, Tidewater Midstream and Infrastructure Ltd. (TSX: TWM) announced that it will be making the following two acquisitions for $51M:
• Deep Basin and Montney assets;
• 51% interest in a Wapiti Pipeline.

Both assets are in areas where E&P’s are very active and demand for midstream services are high. The two acquisitions are expected to generate approximately $10M in annualized EBITDA, representing a 5x EBITDA multiple ($51M/$10M EBITDA). This is very accretive relative to TWM’s pre-deal evaluation of approximately 7x.

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10 Aug 2017

Issue 32 – On the Canadian Dollar

The exchange value of the Canadian dollar increased in a fast and furious manner in the last few months vis-a-vis the U.S dollar. Since May 4, 2017, the Canadian dollar rose from 72 to 80 US cents a few days ago. That is two cents above our calculated purchasing power parity rate but two cents below its twenty-year average of 82 US cents. At the time of this writing, the loonie was fetching 79 US cents compared to only 68 US cents in January 2016. It appears that the Bank of Canada encouraged the recovery for it sold more than $1.0 billion worth of U.S. dollars in the last six months. Nevertheless, future performance will depend on what will happen to Canadian terms of trade, monetary policy and economic growth.

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03 Aug 2017

Issue 31 – Cineplex (CGX)

The Palos Funds sold their last shares of Cineplex (TSX: CGX) yesterday after the company announced very disappointing second quarter earnings. What is more concerning however, is that the legacy business is under significant stress. Cinema advertising and box office revenue growth was lackluster and quite troubling. The majority of CGX revenue growth came from its acquisitions of TriCorp, Saw, and Dandy, which are amusement businesses. We believe these companies to be more capex intensive and more expensive to run as we expect operating expenses, G&A, and rents to rise considerably.

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27 Jul 2017

Issue 30 – The REIT

Whether interest rates move higher or lower, this REIT will continue to do well. InterRent REIT (TSX: IIP-U) is the best positioned REIT in Canada to fence off any potential rate increases. The reason for its advantageous positioning is that it’s not a traditional REIT where assets are purchased and a minimal amount of maintenance capex is spent. IIP-U is growth-oriented, with the vision of increasing value through acquisition, development, and the refurbishing of legacy assets. This activity allows IIP-U to grow like no other residential REIT in Canada.

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20 Jul 2017

Issue 29 – A Small Cap With a 7% Dividend and Much More

Pivot Technology Solutions Inc. (TSX: PTG) is a small cap dividend payer that is more than just a cash cow. The company has been paying dividends, reducing debt and buying back stock. Not many investors have heard of this company as its market cap is under $100 million. However, this company is expected to generate $1.5 billion USD in revenue and $32M in EBITDA for 2017. The EBITDA margins are currently at 2%, but are expected to expand in the coming years as the company focuses on its managed services. We are expecting managed services to grow from 10% of revenue to 30% in the coming years. Presently, most of the company’s revenue comes from the value-added reseller (VAR) segment. Its VAR business is underpinned by very strong customers, of which approximately 70% are fortune 100 enterprises.

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13 Jul 2017

Issue 28 – Rate Increase

On July 12, 2017, the Bank of Canada (BOC) raised interest rates for the first time in seven years and there is a high probability of a second hike by year-end. The income funds are well-positioned to take advantage of the new interest rate environment. Historically, the materials, industrials, and financials stocks outperformed the broader market under such circumstances.

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06 Jul 2017

Issue 27 – SNC-Lavalin Is Now on Top of The World

On July 3, 2017, SNC-Lavalin Group Inc (TSX: SNC) announced that it successfully completed its acquisition of WS Atkins PLC (Atkins). When combined, the firm will become a global player. The combination will enhance its presence in the rail, transportation, nuclear and energy infrastructure industries all over the world. It will also allow SNC to expand its tentacles into new geographical markets where it is not currently present and create cross-selling opportunities; which should lead to selling and revenue synergies. We are excited as this acquisition starts a new chapter for an old legacy business that needed a bit of a jolt. We are confident that SNC will be able to execute on the synergies as it has a track record of over-delivering on these types of transactions.

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29 Jun 2017

Issue 26 – Take Your Vitamins

If you have never seen this product, I don’t know where you shop. Jamieson Wellness is the leading Canadian vitamin company. Its products are distributed in every major food retailer, drug stores, health food stores and can even be purchased on Amazon. Jamieson’s market share is approximately 2.5 times greater than its largest competitor (Centrum). The company and its brand is clearly the leader in the Canadian vitamin market.

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22 Jun 2017

Issue 25 – The Marriage is Approaching

Potash Corp (TSX:POT) and Agrium (TSX:AGU) announced that the combined company will be called Nutrien. We are expecting the marriage to be finalized in the third quarter of this year. Once combined, Nutrien will be the global leader in reliable, low-cost crop nutrient production, combined with the largest agricultural retail-distribution network in the world. We are not expecting any recovery in fertilizer prices in the short-term. The attraction of the combined company comes from the potential synergies and future free cash flow growth. Even if fertilizer prices are flat, we are expecting free cash flow to grow by 40% in the next 4 years as synergies are achieved. Management has indicated that it expects approximately $450 million of synergies to be created.

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15 Jun 2017

Issue 24 – Energy in The Dog House

Oil prices took a 4% nose dive on Wednesday after the bearish DOE inventory numbers were reported. The bears are definitely in the driver’s seat, and any bad news can ignite an aggressive sell-off in the commodity. The DOE U.S. Crude oil Inventories reported a draw of -1661k and the market was expecting a draw of -2300K. A 4% drop seems a bit aggressive. However, when sentiment is considerably negative, panic selling is not uncommon. A sell-off in the commodity leads to a sell-off in the E&P’s. We are quite selective in picking E&P stocks and ensure that specific criteria is met before inclusion into the funds. Discipline is especially important when there is negative sentiment in the sector and the underlying commodity is under stress.

Charles has been featured in the Growth Story Podcast by David Inzlicht. To listen, go to:
http://bit.ly/GrowthStoryPodcast

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08 Jun 2017

Issue 23 – Activity in Single Family Rental

The Palos Funds have been investing in US single family rentals (SFR) via Tricon Capital Group (TSX:TCN) for the past few years. On May 9, 2017, TCN completed its acquisition of Silver Bay Realty Trust Corp. The enterprise value of Silver Bay is approximately $1.4 billion. On June 05, 2017, Colony Starwood Homes (CSH) announced that they were buying a portfolio of 3,106 SFR for $815 million. After comparing the two portfolios acquired, we concluded that the TCN portfolio acquired was done at a higher discount. The CSA portfolio acquired has an implied gross yield of approximately 7.5% while that of the TCN portfolio is 9.0%. Our conviction is that the TCN acquisition has been further solidified by the substantial discount it was acquired at.

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