Bank of Nova Scotia (TSX: BNS) raised a cool $1.5 billion in equity financing today, citing the need to pay for acquisitions and shoring up their Tier I capital requirements.
This represents roughly a 3% dilution of shareholders.
I wonder why they raised equity capital instead of relatively cheaper preferred share capital.
Petrobank (TSX: PBG) announced today that they were selling their primary property asset, the May River project for $225 million. After paying off their $60 million bank debt, this will leave their corporate with approximately $165 million to figure out what to do in the meantime. Their other primary asset includes their 59% ownership stake in Petrobakken (TSX: PBN) which readers of this site will also know has its own issues, although it has solved its imminent financial problems by floating a $900M, 8.625% coupon bond issue with an 8 year maturity date.
Readers might suspect that I’d rather want to put my money in that bond than the equity.
This is about a clean a slate that Petrobank will have before it decides how to invest the proceeds in other projects. The May River project was not as successful as management anticipated and they likely hit the best bid they could solicit. The low-rate interest environment does create a lot of froth, and they were probably wise to take the money while they could.
I notice that John Hempton of Bronte Capital is scratching his head with Lululemon’s (Nasdaq: LULU) valuation.
I’ve been scratching my head since they had a $2.8 billion market cap, and now they are trading at $9.2 billion.
They are headquartered in Vancouver, British Columbia, Canada, which is right in my backyard.
The after-tax profit margin (19%, trailing 12 months) is just incredible for a clothing company. It is right up there with handbag producer Coach (NYSE: COH), although in the latter’s case they have a somewhat more reasonable valuation.
In both cases, understanding women’s sense of fashion is the key investing variable. What’s the next meme after yoga pants?
For the first time in about half a year, I’ve purchased a straight stock (not preferred or ex-income trust) for my portfolio. Current position is 1% but I am targeting a 5-7% position, so I am currently in accumulation mode. I’d be a little miffed if it moved up to my fair value tomorrow, which is about double-to-triple the current stock price.
Some metrics include roughly a $50M enterprise value (i.e. market cap minus cash plus debt), revenues of a quarter billion, negative profitability in the past 12 months and a brand name moat that some, but not most should recognize. In terms of expenses, over 60% goes to sales and marketing expenses. No dividends.
The “over 60% goes to sales and marketing expenses” should give the reader a hint that I am not talking about a company that is related to commodities!
The general thesis is that while revenues have appeared to be flattening, this company is generally regarded as the best of breed in its product category, and they should be able to reduce expenses to restore profitability.
If the world economy goes into a 2008-style meltdown, there is some downside protection in the stock, mainly embedded in the huge cash position it has relative to its market cap.
Using my not-patented risk-reward measure, I would say this is a low risk, medium reward type situation.
The last little bit of my longest-term holding, Rogers Sugar (TSX: RSI) I have unloaded today. The company is very well run, but substantially all of its free cash flow is sent out the window in dividends – at a yield of roughly 6-6.1%, historically this is expensive and by virtue of being in the sugar refining industry, isn’t exactly in a position to dramatically expand revenues and earnings.
Investors are paying bond-like premiums for equity-like returns. At the rate that yield-chasing is going, investors might even bid up the company to 5.5% or even 5%, but I won’t have any part of it. The golden moment was when in early 2009 it was trading at $3/unit and I did load up during this time since the stable 15% pre-tax returns made much more sense in terms of valuation. The only problem was that most other equities at that time were also exhibiting high risk-reward potential!
Every media outlet is reporting the blowout quarter that Apple had – the financials are just something to be salivated at. With $46.3 billion in sales, $25.6 billion in cost of sales, you are left with $20.7 billion of gross profit. Subtract $3.4 billion in operating expenses and you are left with $17.3 billion in operating income.
This was in a single quarter. A lot of people must have wanted their iPhones and iPads for Christmas.
Subtracting taxes and other matters still left shareholders with $13 billion net at the end of the day.
When you add up the cash and marketable securities, they still have $98 billion to splash around.
Normally in technology, companies face incredible price pressure as competition is very fierce. Apple behaves as if it has a monopoly on its market, and in the minds of many consumers, they might as well.
There is erosion potential with the iPhones (specifically with Google’s encroachment with Android), and the iPads are starting to face some functional competition. However, this will not dissuade people from the name brand, as Apple has turned into somewhat of a status icon – this in itself will make it more difficult for competition to break.
The question for Apple – can they keep it up?
The question more relevant for investors would be – what technology upstart ten years from now will be doing the same thing?
A fairly mundane day in the market, but there is one item that has been flashing red on my screen for the past week, and that is the spot price for natural gas:
The March contract is trading at $2.50/mmBtu and this is very close to the lows that were reached during the 2008-2009 financial crisis. At present prices, it becomes very uneconomical to develop produce natural gas and it makes you wonder how long it will be before you start seeing insolvencies in natural gas companies. Those that have over-leveraged themselves will be facing the consequences soon.
I look at companies like Encana (TSX: ECA) – their operating and transport costs is approximately $1.60-$1.70/Mcf, which is still well below spot price. It explains the $12 billion market capitalization, but it makes you wonder when the bottom will be for it and also the spot price.
Just a side note in the portfolio, I unloaded the last 100 shares of a company that was relatively illiquid (market cap under $20 million). The algorithmic order I set was placed in early October and the execution finished today.
The whole trade (in and out) ended up losing the portfolio less than 2%, but obviously the story after the investment was made changed which triggered my exit order. Getting in and out of illiquid stocks is a real pain, and unless if the potential risk-reward ratio is disproportionate, such transactions should be valued explicitly with a discount acknowledging the lack of liquidity.
Throughout my history my dabbling in illiquid stocks has been less than spectacular – my sweet spot of investing has tended to be small cap stocks ($100M-$1B capitalization) instead of microcaps.
Lululemon (Nasdaq: LULU) is up to US$61/share, nearly at its all-time high upon announcing that it made more money in the fourth quarter than analysts expected.
I have written about LULU before and am continually amazed at their ability to “surprise” in such a fashion. The most valuable asset such companies have is their branding, and LULU has been able to strike the sweet spot in women’s fashions for quite some time – although there is competition encroaching, they have still been able to keep surprisingly ahead.
At a market cap of 8.8 billion, it makes you wonder how much higher they can go – looking at what that capital can purchase, instinctively I would not want to put a single penny of that into Lulu given existing valuations. That said, I thought the same thing when it was trading at $4 billion. Tells you know much I know about fashion trends.
On December 13, 2011, Petrobakken (TSX: PBN) released more information with respect to their 2012 plans and numbers.
The two salient snippets are as follows:
We are also pleased to announce our initial capital plan for 2012, which allow us to build on our 2011 operational success. We anticipate capital development expenditures of approximately $700 million, primarily focused on horizontal drilling and completions, predominantly in the Bakken and Cardium light oil plays. We expect that this drilling-focused activity will generate a 2012 exit production rate of between 50,000 and 54,000 boepd. Our estimated year-over-year average production growth will exceed 15%, on an absolute and per-share basis. We expect this initial 2012 program to be executed entirely from funds from operations, with surplus cash flow available to fund dividends and debt repayment.
For 2012 we estimate that our corporate base decline rate will be in the range of 30-35%. In 2010, our base production declined approximately 40%, while the 2011 base decline rate is now forecast at approximately 35%. We have been encouraged by the results of our recently completed wells, and we are also beginning to see the benefit of the continued maturation of our producing assets with a significant proportion of our production now coming from older, shallower decline, horizontal wells.
…
As part of our ongoing balance sheet management, and to reward continuing support from existing shareholders, we are pleased to announce the implementation of a DRIP. The DRIP provides eligible holders of common shares resident in Canada the opportunity to reinvest their monthly cash dividends in PetroBakken shares at a 5% discount to the then current market prices. Petrobank (59% shareholder of the Company) has indicated an intention to participate in the DRIP with respect to 50% of their PetroBakken shares, which will amount to $53 million in additional liquidity to the Company on an annual basis. Subject to the receipt of approval of the Toronto Stock Exchange, the DRIP will be implemented for the January 2012 dividend, which is payable in mid-February 2012. Additional information regarding the DRIP can be found below.
The company is planning on spending $700M in capex in 2012, which is a decrease from projected 2011 capex numbers of $900M. The capital budget for 2012 will be slightly below their operating cash flow for the year, assuming current oil prices remain steady (a 12-month extrapolation of 2011 figures for the first nine months is $650M, noting that WTIC prices were lower then than they are now).
It still leaves one wondering when the company is actually going to generate significant amounts of cash in excess of capital expenditures – when you add the $180M of dividends projected in 2012 (minus the ~$53M that Petrobank will re-invest for Petrobakken equity), it does not leave much for them to pay off their February 2013 debenture, which holders have a one-day put option to redeem (and given the small coupon and the credit profile of the company, they most certainly will unless if there is a sweetener given to them in the interim).
The DRIP decision in itself is rather interesting – it effectively starves half the cash flow that Petrobank will receive from Petrobakken in exchange for further equity. Since Petrobank owns 59% of Petrobakken, it will result in Petrobank foregoing $53M/year in dividends in exchange for further equity. Assuming a $13/share price for Petrobakken, this will mean Petrobakken will issue 4.3M shares to Petrobank over 2012 – a cost of capital of 7.8% for Petrobakken, assuming the dividend is not cut. This is expensive capital for the company.
The company has hedged a significant amount of oil (20,000 boepd, about 40% of its expected production) with existing high prices which I think is a smart decision. Still, they are extremely leveraged and their only salvation is continued high oil prices. If there is any significant contraction in the price of oil, they will be in clear financial difficulty, especially when it comes to negotiating with the $750M debenture that is effectively due in February of 2013.