Canadian Finance, Economics and Fiscal Analysis
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!