Canadian Finance and Economics
The reorganized entity of Whistler Blackcomb went public and has been trading for one week:
It has been trading narrowly around its (reduced) $12 price. With the announcement of inclement weather in the Greater Vancouver area and the early opening of the ski resort, it has not resulted in a budge in the share price.
I earlier covered Whistler Blackcomb and was not terribly positive on them at their IPO price.
Although I don’t have a stake in the equity of First Uranium (TSX: FIU), I note with some mild amusement how a company can go up and down so rapidly in a short period of time – makes you wonder whether it is the same participants buying and selling, or what the motivations of the market are at the time:
From a high of $1.36 intraday to 93 cents a share at the close is a 32% drop. Wonder who those people were that bought at $1.36, and what they are thinking now.
The debentures and notes were relatively stable – a trade went off at 110 cents on the notes (closing with a bid-ask of 95-100), and the debentures have creeped up to 74 cents, but nothing near the volatility seen in the equity.
Over the past five days, First Uranium equity has gone up approximately 50%:
Nothing public has happened to the company in the past five days, and the last major piece of news coming out was on October 20th when they announced their Q2 production results (which one can extrapolate into a quarterly report). The only explanation here is that either there is some insider news that is leaking into the marketplace, or there is a technical factor, such as very short term covering of short positions, or institutional demand on the stock.
The stock trades an average of $500k-$1M/day in volume, while not Microsoft-style liquidity, it is sufficient for most investment funds that wish to accumulate a position.
Something interesting is the effect on the debentures – if the equity trades higher, then it is more likely the debentures will mature at par because the company can recapitalize the debt by doing an equity swap. The subordinated debentures have not moved too much – up from roughly 70 cents to about 73-75 cents, while the notes (where I was a little more fortunate on my timing) have moved up from about 90 cents to par value.
There is an embedded call option in the notes to buy equity at $1.30/share, expiring at maturity (March 31, 2013) that has to be priced into the valuation of the notes – obviously if the equity is trading above $1.30/share, then the notes will be trading above par.
With an equity value of $1.07/share at present, the notes at 90 cents are a very compelling value. This price is now gone.
Readers should be cautioned that I do own the notes and subordinated debentures of First Uranium, but not the equity.
I have been posting about this very high-yield stock since late July, stating that their dividends would have to be chopped by about 25% or so to maintain their financial health.
Their last quarterly announcement was generally below expectations, and for the comparable period from 2009, they are down about $19M in operating cash flow.
They were trading at about $13.50/share when I posted about them originally, and they are now at $10.80/share. Their indicated dividend is still a whopping $1.62/share, but it is more likely than ever that management will reduce the dividend by a factor of 40-50% (compared to my expectations of 25% before), and that this increased dividend cut has been baked into the stock price. It is likely when they make the announcement the shares will drop further, as retail investors that assumed they were getting a 15% yield will be bailing out.
The company operationally makes money and will likely make money in the future, but their primary problem is they have slightly over a billion dollars of debt on the books and the financial leverage is quite high. SPB debentures are still all trading at around par, so management would be very wise to cut the dividend, and then lengthen the term structure of their debt – the first of which matures in December 2012. One never knows when this mania for fixed income will resolve itself.
SPB sticks out on my equity radar like a sore thumb (and likely on the radar of many others), but there is a reason why I am not buying it.
Whistler Blackcomb will be trading next week under ticker symbol WB in Toronto.
They priced their shares at $12 – down from the expected $15. The entity, assuming no exercise of the over-allotment, will have 37.8 million shares outstanding, so $12/share will have a capitalization of $454M.
The final prospectus was released on SEDAR yesterday and I went through it. What Fortress is leaving behind for the public is the empty husk of an entity that is heavily indebted, negative tangible equity on the balance sheet, and 97 cents of pre-capital expenditure cash flow to play with from the September 2009 fiscal year. 2010 will be a slightly worse year in terms of cash flow.
The biggest sham of this IPO is the dividend talk – 97.5 cents per share, based on a very flawed calculation on page 19 which will be very safe to say will not be sustained. Still, you will have enough retail investors that would be foolish enough to purchase shares strictly based on the 8.1% yield, but my guess is that this yield is not going to be sustainable in the medium term. They will have enough of a cash buffer ($29 million) to fund dividends beyond their cash generation, but it will not last long.
There is value in the shares, but certainly not at $12/share. This one is an easy avoid. I might take a look at the shares if they dip below about $5.30/share – they’ll likely get there once they cut distributions and/or have a bad season and/or are forced to recapitalize their $255 million debt.
There is more quantitative work that went behind this post, but for the sake of readability I have omitted most of it and stuck to the salient details of this IPO.
How this stock will trade will be interesting to watch – I suspect it will do a little better than $11.40/share (IPO proceeds minus fees) simply because it is an “income stock”.