BIR – Page 2 – Divestor

The DREAM preferred share comes to an end

Dream Unlimited (TSX: DRM) had a class of preferred share (TSX: DRM.PR.A), which by virtue of their split from Dundee Corp (TSX: DC.A) had an unusual characteristic – it had a par value of $7.16/share, and was redeemable by the company or the shareholder at any time. In the meantime, it paid out a quarterly coupon of 12.53 cents per share, or 7% on par. The company retained an option to redeem the preferred shares for their own stock at 95% of a prior trading range of DRM stock or cash (or a $2 floor).

This preferred share has been trading for quite some time, and by virtue of DRM’s relatively stable balance sheet, was never in threat of suspending its dividend.

As such, yield-hungry investors could use this preferred share as a cash parking vessel. Even better yet, the dividends that were paid were eligible dividends which would qualify for the dividend tax credit in non-registered accounts. Over time, however, DRM.PR.A became over-utilized and started to trade at a significant premium to par:

The peak was on August 31, 2019 when some poor soul paid $7.56/share for this, or a 40 cent per share premium over par value. This investment would have taken over three quarters of dividends in order to pay itself off. Indeed, at this price the current yield would have been 6.63% for a perpetual investment.

All good things, however, come to an end. Today, DREAM Unlimited announced a substantial issuer bid on their common shares and also the following paragraph:

The Company also intends to redeem all of its outstanding First Preference shares, Series 1. As at November 11, 2019, there were 4,005,729 Preference shares, series 1, issued and outstanding. They may be redeemed at the option of Dream, at any time, at a price of $7.16 per share, plus all accrued or unpaid dividends up to but excluding the redemption date.

As such, one of the best cash parking vessels on the TSX will be off the ledgers. I would expect the shares to crash 4% tomorrow in trading. Fortunately I sold the last of my DRM.PR.A in 2018.

To my knowledge, there is only one other financial instrument that trades in a similar manner, which is Birchcliff Energy’s preferred shares (TSX: BIR.PR.C) which are redeemable by the holder as of June 30, 2020. They also give out a 7% coupon. They are also trading above par. Although the premium is very modest at present, when adjusting for the dividend dates it effectively makes these shares at a tiny discount. There is more balance sheet risk with Birchcliff given its spacing in the natural gas industry, hence why it is not trading wildly above par value at present, in addition to a potential share conversion price at a floor of $2/share (Birchcliff common closed at $2.21 today). I’ve held some of these since February 2016.

Tax loss selling candidates, 2019

Below are 29 companies that are trading lower than 40% year to date on the TSX, that have a market cap of above $75 million. I’ve also restricted the share price to greater than 50 cents.

TSX tax loss candidates

August 30, 2019 closing prices
Last trade > $0.50
Market Cap > $75 million
YTD change -40% or worse

Item	Symbol	Name	Sector	Last	YTD %Chg	MktCap ($M)
1	TH-T	Theratechnologies	Bio	4.98	-40.14	394
2	AVCN-T	Avicanna Inc	Cannibis	3.66	-41.25	88
3	IDG-T	Indigo Books & Music Inc	Retail	6.6	-41.49	180
4	BIR-T	Birchcliff Energy Ltd	Energy	1.77	-41.78	503
5	SOY-T	Sunopta Inc	Food	3.07	-41.86	275
6	SOX-T	Stuart Olson Inc	Engineering	2.89	-41.97	82
7	ATH-T	Athabasca Oil Corp	Energy	0.57	-42.42	303
8	ADVZ-T	Advanz Pharma Corp	Bio	14.7	-42.93	673
9	CFX-T	Canfor Pulp Products Inc	Forestry	9.08	-43.99	574
10	UNS-T	Uni Select Inc	Auto	10.79	-44.41	456
11	MDF-T	Mediagrif Interac	IT	5.23	-45.29	81
12	MPVD-T	Mountain Province Diamonds	Diamonds	1.04	-46.67	223
13	HNL-T	Horizon North Logistics Inc	Energy Service	0.95	-47.22	155
14	IMV-T	Immunovaccine Inc	Bio	3.58	-47.89	186
15	DII-B-T	Dorel Industries Inc Cl.B Sv	Retail Wholesale	9.1	-48.41	292
16	LGO-T	Largo Resources Ltd	Metals	1.37	-51.59	728
17	PONY-T	Painted Pony Energy Ltd	Energy	0.68	-54.36	114
18	PEY-T	Peyto Exploration	Energy	3.2	-54.8	554
19	BNP-T	Bonavista Energy Corp	Energy	0.54	-55	149
20	DR-T	Medical Facilities Corp	Hospitals	6.74	-55.19	211
21	NVA-T	Nuvista Energy Ltd	Energy	1.61	-60.54	370
22	MAV-T	Mav Beauty Brands Inc	Beauty	4.11	-61.52	155
23	SNC-T	Snc-Lavalin Sv	Engineering	16.41	-64.26	2,858
24	OBE-T	Obsidian Energy Ltd	Energy	1.27	-64.43	97
25	TRST-T	Canntrust Holdings Inc	Cannibis	2.3	-64.99	335
26	JE-T	Just Energy Group Inc	Energy Retail	1.46	-67.63	227
27	TRQ-T	Turquoise Hill Resources Ltd	Metals	0.58	-74.22	1,187
28	ZENA-T	Zenabis Global Inc.	Cannibis	1.06	-82.33	214
29	PLI-T	Prometic Life Sciences Inc	Bio	11.6	-95.54	280

Comments:

1: A bio company with an FDA approved small scale HIV medication (used in cases where mainline HIV treatments do not work), and a new product that is used for something called hard belly – which is a symptom in some long-term HIV patients as a side effect of the anti-retroviral drugs that they take to keep viral loads down. Stock is down because sales aren’t exactly going anywhere and those sales and marketing expenses are indeed quite high. Market cap is trading as if the company will get sold off (drug companies don’t capitalize their R&D expenses it takes to get a drug to market, so there is a bunch of hidden balance sheet value in the drugs, despite the relatively little revenues they get from them).

2, 25, 28: Are Marijuana companies, and I have no interest in analyzing them.

3: Indigo is a typical retail story. Their stock chart in the past 18 months is a straight line down. Aside from their lease commitments, their balance sheet isn’t in terrible shape and management has some time to decide what to do, but they are bleeding money at a frightening pace.

4, 7, 13, 17, 18, 19, 21, 24: Canadian oil/gas extraction companies, so I do not need to write further why they are trading down. 13 is an energy service company. My big surprise here is why there aren’t more companies on the down 40% list (doing some quick investigation, it is because most of them already got hammered in 2018 so the losses in 2019 relatively speaking isn’t as big).

5: A low margin food producer with a ton of debt on the balance sheet and bleeding cash. Not looking pretty.

6: Engineering firm impacted somewhat by oil and gas-related spending. Income statement shows they are treading water. They were able to raise financing from Canso at 7% for unsecured debt (rolling over an existing debt issue) and the balance sheet is not in terrible shape. May be a good possibility for a turnaround – given its market cap of $80 million in relation to its overall size (revenues will be roughly a billion in 2019), something to watch. Has a similar feel to IBI Group.

8: The old Concordia Pharma. Classic case of what happens when you over-leverage cash flows too much. They make a ton of cash, but they have a ton of debt and a ton of interest expenses.

9: Lumber has been killed for various reasons. Despite being from British Columbia, I should know more about the industry. Just a year ago it was trading at $27 and today it is nearly $9. The stock graph looks like a normal distribution curve. Despite the fact that their cash flows has been decimated year-to-year, they don’t have any debt and look like they can survive the cycle. Jimmy Pattison trying to take over Canfor Corporation (not the pulp subsidiary) for $16/share seems to be a case of trying to take them on the lows. Canfor owns 55% of Canfor Pulp.

10: I know less about automobile companies than forestry products. Skimming the financial statements, they just appear to be losing profitability and racking up debt.

11: A small IT firm that is undergoing a strategic change and also still looking for a new CEO. Still profitable, and with a relatively blank canvas balance sheet.

12: Owners of a 49% interest in a diamond mine in the N.W.T., and barely making enough to pay off their bank lenders. Will pass.

14: Early clinical stage biotech working on some cancer therapies, P2 studies have samples of less than 20 patients, and skimming the science, looks questionable.

15: Legitimate larger company that has been in a slow straight-line descent for the past three years. Three major product lines (babies, sports and furniture) are sold to major retailers worldwide. Management (Schwartz – family-controlled dual-stock corporation) has been around for a very long time, albeit they seem to be highly overpaid. They resolved an upcoming debt maturity last June with a 7.5% unsecured debt note (not convertible) and this will buy them time to figure out how to improve margins. Cash flows from operations have been diminishing, and they already once cut their dividend, and it is due for another cut. However, given the ~$300 market cap and $2.5 billion in revenues, the potential for a turnaround here is reasonably good, except for this looming worldwide recession coming which would surely impact this company’s fortunes!

16: They mine a commodity I know nothing about (Vanadium), in a country I know very little about (Brazil).

20: This one is interesting. A company that owns majority or near-majority stakes in a few hospitals in the USA and distributes most of its free cash. The only problem being that in the past few quarters, they have really underperformed. If they can figure out what they did wrong and reverse it, then the stock is an easy double from their depressed price. It was bond-like until the bottom fell out of it in the May and August quarterly reports. If there was a candidate for year-end tax loss selling, this one would be it. Another interesting quirk is that their distribution rate on a historical basis is now at a 17% yield. This distribution was below their cash generation in prior years, but not from the first half of this year. It’s likely they’ll cut this dividend unless if they think the past couple quarters was temporary. Knowing about the US healthcare industry, especially in the states that DR operates in, coupled with competitive dynamics of healthcare and competitors will help.

22: Cosmetics company that went public in July 2018 for CAD$14/share (proceeds to pay down debt with IPO). Now it is trading at $4.11/share, which is a fairly good 70% negative return on investment. The company is now barely profitable, but still isn’t at the level which supports the debt on its balance sheet. Still, cosmetics is a pretty high leverage industry to be in if your revenues start to take traction – and their revenues are growing. Might be interesting, considering that beauty products sell in any economic climate! Unfortunately, you won’t see me wearing any…

23: SNC. Enough said. There’s tons of industry analysts out there looking at this one. Their partial sale of the 407 freeway around Toronto will buy them a lot of time to get their act together, but in the meantime, their operations are a total mess. There will probably be a time to buy this one but it will take awhile, and likely more corruption from the federal government is required for a positive outcome (i.e. if Trudeau gets re-elected, it would be a positive for SNC for sure).

26: Balance sheet is a train wreck, company is exploring a recapitalization, and the business model itself is highly broken. Good luck!

27: Another mining company working in a jurisdiction I know hardly anything about (Mongolia), let alone I can’t even pronounce the name of its main flagship mine. Don’t have any more insight than that, sadly.

28: The big loser in the TSX is due to a debt-to-equity recapitalization and a 1:1000 reverse stock split. After the recap they did get rid of a bunch of debt on the balance sheet and raised some cash, which they need in order to bide their time to get FDA approval for their lead product. They burnt about $50 million cash in the first half of the year and have about $80 million left on the balance sheet, so looks like they’ll have to raise more financing…

Redeemable Preferred Shares – only 2 remaining

I’m going to track back to my previous post on the matter of redeemable preferred shares and point out today that Birchcliff preferreds (TSX: BIR.PR.C) traded at $24, which if you put back to the company on June 30, 2020 will result in roughly a 12% YTM. There is the equity risk of the company choosing to redeem in shares at 95% of weighted average trading prices, or a $2 minimum, which BIR equity is trading awfully close to. The company itself, however, even with depressed natural gas markets, is in no danger of becoming insolvent as its line of credit is healthily above the redemption amount of the preferred share series (CAD$50 million), coupled with the fact that the equity itself (despite management shrewdly engaging in a self-enrichment process at their last annual general meeting) appears relatively cheap.

Mentioning that you purchased these preferred shares is not going to draw much of a crowd at cocktail parties, however.

Canadian natural gas stocks

Birchcliff Energy (TSX: BIR) and Peyto (TSX: PEY) are two producers that have been able to be consistently profitable (or nearly so) despite horrible economics – in the case of Birchcliff, they have been able to do some degree of vertical integration, and in Peyto’s case, they operate organizationally very lean.

Investors that bought at the relative peaks of 2016 are sitting on losses of 70% and 85%, respectively.

These are the charts of despair that I like looking at, but when looking at natural gas economics, it is simply a story of a huge supply glut. The primary driver is AECO pricing:

(Charts courtesy of GLJ Petroleum Consultants)

AECO at USD$1 vs. Henry Hub at USD$2.75 is a gigantic difference. There’s no point to mining natural gas at USD$1/MMBtu rates – only companies that can get rid of the supply at “proper” rates will have any chance in that pricing environment.

Even worse yet is that you can sell the same commodity to Japan in LNG form for about US$11/MMBtu at present. Although construction on LNG Canada is progressing, it remains to be seen whether regulatory roadblocks will put a halt to the project in some shape or form.

Small notes on random equity research

I’ve been looking at some existing holdings and companies that I do not own, specifically what has been doing well and not doing well year-to-date. Some miscellaneous thoughts that are not so illuminating:

1. Natural gas has been getting killed lately. I’ve been looking at Birchcliff Energy (TSX: BIR) (I own the preferred shares but not the common shares), and they are going to face significant revenue compression in relation to past financial statements because AECO natural gas pricing is really, really, really low. We’re seeing continued pain in equity pricing (also looking at Peyto and others) and no signs of this getting better – demand isn’t rising that fast (especially since the dreams of the product being exported across the Pacific is completely dead), and supply is plentiful.

2. Any company with the word “blockchain” in the press release, no matter how junky, is getting a market reaction upwards as it is obvious there is algorithmic trading designed to pick up such releases, hit the “buy” button and sell an hour after.

3. Pulse Seismic (TSX: PSD) is a very interesting business with incredibly lumpy revenues. Their balance sheet is misleading in that they amortize their accumulated data, so the remaining asset is not really present in its monetarily realizable format. I am not interested in them with their existing valuation but from an analytical perspective an interesting business. They made a relatively large sale to a customer and they gave a lot of cash away to shareholders both in the form of a special dividend and a significant share buyback.

4. Other energy service companies have also been hammered. There’s a few that look interesting, although it is clear they are all still suffering from large amounts of overcapacity – it appears revenue margins are still quite low.