AIM – Page 2 – Divestor

Another bullet fired into the heart of Aimia

The Aimia (TSX: AIM) zombie keeps on moving but when the corpse will finally lie down and die is another good question.

Today, it was reported that Esso’s partnership with Aeroplan will terminate at the end of May 2018. Instead, the loyalty program partner that will be picked up is the Loblaws’ (TSX: L) optimum program.

One of the issues when valuating the fundamentals of businesses that have setbacks (and judging whether they can make comebacks or turnarounds) is to determine whether the blow they suffer was critical. In the case of Aeroplan, it was Air Canada and the threat of substitutions. Although Aeroplan/Aimia used to be a subsidiary of Air Canada, it was spun out for financial reasons and it is pretty clear that Air Canada knows that there are other alternatives available (such as doing it in-house). The psychology damage done when you lose your major business partner, coupled with the effect that your business depends on large volumes of customers trying to collect aeroplan miles for the purpose of flying, suggests that the subsequent network effect (or opposite thereof) will significantly devalue Aimia’s offerings. Another way of thinking about this is a negative economy of scale, but from a marketing perspective. Or what would happen if some other competitor to Ebay spontaneously stole 90% of auctions from EBay (we’re talking in the late 90’s/early 2000’s context, not the present day EBay).

The other buzz is that Air Canada is just negotiating for a better deal (since Aeroplan is set to expire in June 2020) but this is wishful thinking. Likewise, Aeroplan can’t just sign up any other airlines spontaneously since it takes quite a bit of time to link up with the electronic information systems of competitor airlines (there is potential they will sign up with a new discount airline brewing in Canada, but the volume of this business will be much, much less and Aeroplan will not be able to receive commercially acceptable terms like they had with Air Canada).

This all points to a huge value trap situation still with Aimia, as I’ve been trying to illustrate since the Air Canada/Aeroplan collapse.

Personally I have cashed out anything of value from my Aeroplan account. As an interm measure they will be (and I notice they have already) devalued their existing rewards to offset their deferred liability balance.

General comments – market weakness

Another ranting post with little direction.

With marijuana-related equities and cryptocurrencies plummeting, the market for speculative investments appears to be topping. Probably the next short squeeze that occurs will be the best time to be shorting these instruments. Implied volatility on the options sadly are high, and the borrow rate on WEED, APH, ACB, etc., are astronomical.

I also note Aimia (TSX: AIM) has sold off one of their divisions today and most of the negative news is buried in a later paragraph concerning the tightening of their senior credit facility – this is basically part of the slow march to zero. The company is happy to cite the amount of cash on their balance sheet, but not so happy to cite the balance of their deferred revenues, which represents future commitments that will be offset by cost of goods sold – hence the cash reserve. Using an insurance analogy, they are running off their insurance book with little capacity to collect premiums written after Aeroplan expires in 2020.

There’s a lot of young people out there that have witnessed nothing but rising markets and low interest rates and the financial mindset is fixated on these two conditions. There is going to be a lot of financial roadkill along the way, similar to what happened in 2000-2002 where a lot of people got wiped out for believing the dot-com bubble.

Incidentially, 2002-2003 was the perfect time to invest in the inevitable winners of that technology boom (Amazon and Priceline being two great examples). There will have to be winners out of blockchain software, but it could just as equally come from a major player. Very difficult to say at this point in time as I still have not seen any functional system operating with blockchain that doesn’t have a parallel system that is better – unless if you believe that cryptocurrency’s best application is evading monetary authorities.

As I suggested in my previous post, the roller-coaster is just starting. No point in jumping in too early.

TSX Bargain Hunting – Stock Screen Results

I’ve been doing some shotgun approaches to seeing what’s been trashed in the Canadian equity markets. Here is a sample screen:

1. Down between 99% to 50% in the past year;
2. Market cap of at least $50 million (want to exclude the true trash of the trash with this screen)
3. Minimum revenues of $10 million (this will exclude most biotech blowups that discover their only Phase 3 clinical candidate is the world’s most expensive placebo)

We don’t get a lot. Here’s the list:

September 1, 2017 TSX - Underperformers

1-Year performance -99% to -50%
Minimum Market Cap $50M
Minimum Revenues $10M

#	Company	Symbol	YTD (%)	1 Year (%)	3 Year (%)	5 Year (%)
1	Aimia Inc.	AIM-T	-74.89	-72.74	-86.9	-84.6
2	Aralez Pharmaceuticals Inc.	ARZ-T	-73.77	-76.19	-56.6
3	Asanko Gold Inc.	AKG-T	-62.86	-71.4	-38.8	-58.1
4	Black Diamond Group	BDI-T	-58.41	-56.78	-93.7	-91.4
5	Cardinal Energy Ltd.	CJ-T	-60.91	-51.8	-79.7
6	Concordia International	CXR-T	-42.81	-85.24	-95.6	-69.2
7	Crescent Point Energy	CPG-T	-53.04	-56.72	-80.8	-79.1
8	Dundee Corp.	DC.A-T	-51.6	-51.76	-84.7	-87.4
9	Electrovaya Inc.	EFL-T	-42.72	-61.88	22	201.2
10	Home Capital Group	HCG-T	-55.42	-52.16	-74.3	-45.2
11	Jaguar Mining	JAG-T	-54.31	-62.14	-55.8	-99.7
12	Mandalay Resources Corp	MND-T	-53.75	-66.36	-65.7	-52.6
13	Newalta Corp	NAL-T	-56.9	-59.68	-95.5	-92.7
14	Painted Pony Energy	PONY-T	-64.97	-60.94	-77.4	-65.9
15	Pengrowth Energy	PGF-T	-60.62	-59.57	-88.9	-88.6
16	Redknee Solutions	RKN-T	-51.92	-64.95	-78.2	-41.4
17	Tahoe Resources	THO-T	-53.04	-66.27	-78.2	-66.9
18	Valeant Pharmaceuticals Intl.	VRX-T	-15.25	-56.68	-87.4	-67.3
19	Western Energy Services	WRG-T	-61.61	-55.09	-88.6	-82.7

Now we try to find some explanations why this group of companies are so badly underperforming – is the price action warranted?

1, 8, 10 and 18 are companies with well-known issues that have either been explored on this site or obvious elsewhere (e.g. Valeant).

2 is interesting – they clearly are bleeding cash selling drugs, they have a serious amount of long-term debt, but they have received a favorable ruling in a patent lawsuit against (a much deeper-pocketed) Mylan. There could be value here, and will dump this into the more detailed research bin.

3, 11, 12 and 17 Are avoids for reasons I won’t get into here that relate to the typical issues that concern most Canadian-incorporated companies operating foreign gold mines, although 12 appears to be better than 3 and 11. 17 has had huge issues with the foreign government not allowing them to operate their primary silver mine.

4, 13 and 19 are fossil fuel service companies.

5, 7, 14 and 15 are established fossil fuel extraction companies with their own unique issues in terms of financing, profitability and solvency – if you ever predicted a rise in crude oil pricing, a rising tide will lift all boats, but they will lift some more than others (specifically those that are on the brink will rise more than those that are not). 14 is different than the other three in that it is mostly natural gas revenue-based (northeast BC) which makes it slightly different than the other three which warrants attention.

6 If you could take a company that clearly makes a lot of money, and drown it in long-term debt, this would be your most prime example. It just so happens they sell pharmaceuticals. ~~Sadly their debt isn’t publicly traded but if it was, I’d be interested in seeing quotations.~~

9 A cash-starved company selling a novel lithium-ceramic battery at negative gross margins would explain the price drop. Looks like dilution forever!

16 Lots of financial drama here in this technology company. They went through a debt recapitalization where a prior takeover was interrupted by a superior bid. Control was virtually given at this point and the new acquirer is using the company for strategic purposes that do not seem to be in line with minority shareholder interests. A rights offering has been recently conducted that will bring some cash back into the balance sheet, but the underlying issue is that the financials suggest that they aren’t making money, which would be desirable for all involved.

Dividend suspensions – Aimia, and soon-to-be Teekay Offshore

Aimia (TSX: AIM) suspended their common and preferred share dividends today. While this decision could have been entirely anticipated, the market still took the shares down another 20-25%. If you read between the lines from my previous post on them, this should not have been surprising. Nimble traders that were awake around 9:40am Eastern Time could have capitalized on an intraday bounce, but the current state of the union is likely to be short-lived since the company still has to figure out how to work its way out of a negative $3 billion tangible equity situation and pay the deluge of rewards liabilities. This will probably not end up well.

And in a “tomorrow’s news today” feature, it is more probable than not you will see Teekay management finally tuck in their tails and suspend dividends entirely on Teekay (NYSE: TK) and distributions from common and preferred units of Teekay Offshore (NYSE: TOO). When the announcement will be made is entirely up to management but it will likely be before the end of the month. What is funny is that I called it a couple weeks in advance (post is here), while it took a Morgan Stanley analyst a few days ago to actually cause a significant market reaction in the share price while everybody rushes for the exit. Teekay Offshore unsecured debt is now trading at 17% and with their preferred units still at 12%, it doesn’t take a rocket scientist to figure out what’s going to happen next – they desperately need a few hundred million in an equity infusion and they will be paying for it dearly.

As a bondholder in Teekay’s unsecured debt, I’m curious to see how management will bail themselves out this time. Since I do not believe they are interested in losing control, I still believe the parent company’s unsecured debt looks fairly good since there isn’t much ahead of it on the pecking order in the event of an unlikely liquidation event.

Mad Retail Muppet – on Aimia debt

Daniel Austin has transitioned to a new site, the Mad Retail Muppet. On his first post in his forays with Aimia’s corporate debt, I am happy to bring his site to your attention.

I’m sure the 10 or 20 human visitors here will find excellent reading on his site.

I’ll add some value by saying:

* Aimia’s 2018 debt matures on January 22, 2018 and will likely mature. Their 2019 debt matures on May 17, 2019 and has a 5.6% coupon. They’re not actively traded via IB, but via Questrade they are currently being asked for at 84 cents (or YTM of 15.3% – noting these are the regular bonds and not the strip bonds). Retail bond pricing typically incorporates a VERY healthy price spread over what should be the existing market price (i.e. an institutional investor would likely get at least a couple cents better pricing, thus a higher YTM).

* The YTM of this debt issue should give you an idea of what I think about the preferred shares, which are trading at a yield of roughly 11% at present (AIM.PR.A/B).

* Taking a $456 capital loss (pre-tax!) on this debt transaction is a very low tuition cost. It’s even less than the cost of a typical 3-credit course at my old university!

* Daniel’s deferred revenue/cost analysis is spot-on: if Aeroplan members go on a Home Capital Group-style bank run on their Aeroplan accounts, Aimia is hard-pressed to pay – such is the perils of investing in a company with a negative tangible equity of some $3.1 billion! This alone is a major reason why I would not touch anything in this corporation’s capital structure.

* It’s obvious Aimia has another choice they will execute on in the future – watering down their rewards pricing. Legally speaking, if they were to double the price of all rewards, what recourse does the consumer have?

Let’s check the terms and conditions…

In particular, you acknowledge and accept as a condition of continued membership that:

1. Aeroplan Miles have no monetary value whatsoever and cannot under any circumstances form the basis of a monetary claim against Aeroplan.

…

5. Aeroplan assumes no liability to members whatsoever by reason of the termination of, or amendment to, the Aeroplan Program, in whole or in part, the addition or deletion of reward partners (including Air Canada), limitations on the availability of flights or seats, changes made by Aeroplan Partners to their terms and conditions, or any change made in accordance with sections 6 to 8 below.

Looks like the program (similar to Air Miles) is an unregulated confidence game – the only recourse Aimia has to watering down their product (or Air Miles) is the loss of consumer confidence. Not much of a remedy.

As a side note, I’m anxiously awaiting my $100 gas gift card in the mail.