Selling off Gamehost and also looking into selling off Advent Wireless – will explain later this week
Revenues fell 23.3%, net income fell 15.4%. Boomtown Casino was closed for 32 out of 91 operating days during the quarter of the quarter because of the Fort McMurray fire; hence the sharp revenue decline — I briefly covered this back in May. The company recorded the estimated minimum insurance recoveries as ‘other income’ and hence why the net income decrease > revenues for the quarter. The company, unfortunately, does not break down the revenue numbers by hotel/casino. But we do have the percentages:
Table game, Slot, Ancillary, and Food and Beverage revenues were also down sharply because of the boomtown fire. Ancillary includes ATM fees, Video Lottery terminals, cigarette, lottery ticket sales, etc. Deerfoot is the only casino with an Inn attached.
Sales are down, as expected, because of the crude oil downturn. Alberta, being the oil capital of Canada, is most exposed to it. My target for GH revenue stabilization is this time next year. Although crude oil is yet to stabilize, I believe the crude oil revenues embedded within Fort McMurray and Grande Prairie will be priced in by then, and it will also provide ample time for Fort McMurray to recover from the wildfire. The 7% dividend is providing price support, if revenues do not stabilize next year, the company will likely cut the dividend. If the price approaches $12/sh before Q1 2017, I’ll be a seller.
I’ve been a bit sick and also really busy lately, so I haven’t posted anything in about 3 weeks. So I want to update, there will be no ‘Official’ May Performance Report, but I’ll summarize the updates on each position on here as of today’s date (5/5/2016) – Happy Cinco De Mayo btw – Regular monthly performance reports will commence in June. The portfolio rose 0.49% vs 0.39% for the S&P 500. The portfolio is still about 50% invested, it’s difficult to find bargains in this market – most of the ‘cheap’ cyclical stocks are stuffed with overvalued inventories that still need to be written down, so I don’t want to buy something just because it looks cheap. I’ll update for the other indexes later on the homepage, but I believe it underperformed all other indexes except the S&P.
Flanagan Enterprises (BDL)
I want to start with BDL since I purchased this stock mid last month but didn’t have time to post about it. This is going to be a very brief summary of what I would have written. I purchased this at $21.2, the stock trades at about $18/sh so i’m about 15% underwater now.
In a nutshell, the company owns and operates restaurants and liquor stores in the Florida area. The company still generates mid to high single digit comparable store sale numbers and is growing at 10% and yet it trades at about 11x earnings.
The company partners up with other investors on the restaurants and the way the partnerships work is that the company pays the investors with the cash flows and collects no management fees beyond the money required for regular operations. Once the investors receive their invested money back in full, then the cash flow each restaurant generates is split in half between the company and the investors. So, the company is basically guaranteed to increase the bottom-line in the future. This won’t happen quickly, but if you were to model this out, the company should at least trade somewhere around 15-20x earnings. So I believe there’s at least 50% upside from these prices. S&P’s P/E ratio is about 24x, so the current P/E is less than 1/2 of S&P’s.
While the company carries about $10 million in debt, it also owns about $20 million of land and property in florida, so there is sufficient equity to conservatively eliminate the debt from any valuation calculations.
Please note that BDI and BDL are different. BDI is Black Diamond Group Ltd, BDL is Flanagan’s Enterprises.
Before doing this, I want to send my thoughts and prayers to the people of Fort McMurray. As some of you may have heard by now, there is a massive wildfire in the Canadian city of Fort McMurray. The city has been evacuated – though no casualties have been reported, people have lost their homes and belongings.
The Canadian stocks have basically offset each other over the past few days. Gamehost down 17% because of the Fort McMurray fire (more below) and Black Diamond up 28% today because it has excess capacity for temporary housing in the Oil Sands around that area.
Gamehost was my largest position just a few days ago. One of Gamehost’s Casinos – Boomtown Casino – is located in the city of Fort McMurray. With the wildfire causing a complete evacuation of the city, the effect on earnings becomes obvious. Less activity at the Casino – if it even survives -and thus, less earnings for gamehost. I called the company two days ago to get more information before posting about this, but they were swamped with thousands of investors attempting to ask the same question I was – Is the building insured?
Per the company’s filing on Sedar yesterday:
The Company’s Boomtown Casino in Fort McMurray, Alberta is fully insured including property and business interruption coverage. All Gamehost properties and operations are fully insured by a leading multinational property and casualty insurance company. Management has initiated an insurance claim in anticipation of losses at our Boomtown Casino and is currently in discussions with the insurer regarding due process.
I had a 37% equity in the position wiped down to about 16%. I’m going to add more when I trim Black Diamond. I want this position and Black Diamond Group (See Below) to make up 25% of the portfolio. Any more positions on Canadian stocks will be hedged with futures or put options shorting the CAD to reduce currency exposure.
Black Diamond Group Ltd
BDI reported earnings yesterday and shot up 28% today – I don’t believe it was because investors liked the earnings, but because of the fire in Fort McMurray since BDI provides temporary housing. Total equity in this position is +19% and it’s now my largest position after the Gamehost decline.
The company reported:
- 47% q/q decline in revenues and Q1 EPS of -0.06.
- Total debt q/q down 20%
As I mentioned in the original thesis, the dividend was cut down to pay down debt and the company will still be cashflow positive even though earnings will turn negative. So that’s precisely what we’re seeing. While the company reported a loss of $2.4 million, it actually took in about $10 million of cash for the quarter. This is because of the discrepancy between the CapEx and Depreciation I mentioned in the original thesis.
The company has historically sold its used fleet for above book prices, but since the industry is depressed. Assuming a conservative 20% haircut on book value, the company will still trade below the new book value – this means we’re basically getting the company for free! The positive FCF and debt repayment should continue while we wait for the industry to recover.
The fire in Fort McMurray is providing support to the price, so as of 5/5, it makes up about 13% of my portfolio after the +28%. Once the stock surpasses book value, I’ll trim it down to 10% of the portfolio.
United States’ Trail
Pacific Health Care Organization
No new news on PFHO, but it has been fairly volatile. The illiquid nature of the stock leads to large swings in price. I’d buy more, but the bid/ask spread irks me. Price target remains the same at about $14/sh
Pier 1 Imports
Pier reported earnings and guided to higher margins as I anticipated in the original post. One mistake I made however, was ignoring the competitors. Piers inventories were so far in line that I thought their competitors would be irrelevant, but they are not. Virtually every cyclical company is stuffed with overvalued inventories that will have to be sold off. The company did guide to higher margins and is first in line for the industry recovery, so I’m holding on for now.
Trip Advisor (Short)
Reported earnings earlier this week. Revenues declined but investors are still not paying attention to the more important declining metrics – Trip’s Revenue per hotel shopper and Expedia’s Revenue per hotel night.
The company has investors convinced that their ‘successful expansion’ in China will fuel growth will 2017 while 2016 ‘will remain muted’. The same China where iPhone sales just fell (-25%) off a cliff? They have been deceived into pricing a company with declining revenues at 45x earnings. The company will have to fight an uphill battle with growth since the price of the service is in a deflationary spiral.
CarMax’s inventories remain elevated. One mistake I made on this one was buying short-term (1 year, January 2017) puts. I regret that and will get rid of all 2017 put options on the portfolio next time we have another volatility stint.
Recovery rates y/y fell from 54.2% to 51.2%. Inventories fell relative to sales, which is actually good. Past due accounts and LTV ratio trickled up a bit. The U.S. economy continues to slow and I believe we will likely see easy credit slow, which is bad for CarMax.
Lulu reports earnings later this month. I’m going to address the company after that happens. I’m still yet to add my January 18′ put, but if the stock sees $65 again, I’ll add January 18′ put options.
Mind CTI Ltd
Reported earnings this week as well. Revenues fell 19%. This was expected. As I mentioned, the company’s sales has historically risen over the long-term but have wildly fluctuated, which is why it trades at 5x its Enterprise Value. Its 10% yearly dividend is basically a unicorn in today’s market.
Gamehost reported earnings yesterday. Few things to note:
- Revenues fell 11.8%
- Gaming Revenues fell 3% y/y
- Hotel Revenues fell 11% y/y
- Food & beverage fell 8.3% y/y
The stock rallied 3%. People are clearly associating this with the recovery of Crude prices. Has crude bottomed? I don’t think so, but I’m going to hold on and buy more on any Crude oil volatility pullbacks. On a better note, management still has not cut the dividend. Net Income for the year was $19.8 million, and they paid out $21.4 million in FY 15. Excess cash on the balance sheet is clearly providing support.
Note: Purchasing is possible in U.S. Dollars (USD) on OTC Markets, or on the Toronto Stock Exchange (TSE) in Canadian Dollars (CAD). For liquidity purposes, I will be buying in Canadian dollars on the TSE. So, all figures listed are in Canadian Dollars, unless otherwise noted. Current USD price is $5.89, and CAD price $8.16 (2/9/2016).
Real Time price: GH 10,50 -0,01 -0,10%
|Purchase Price: $8.16 (2/9/2016)||Market Capitalization: $201 million|
|Price Target: $12.24||Enterprise Value: $221 million|
|Upside: 50%||TTM EV/EBITDA: 6.4|
Gamehost Inc (TSE: GH) is an operator of hospitality and gaming properties in the Alberta Province of Canada. The company operates four properties:
- Boomtown Casino
- Great Northern Casino
- Service Plus Inns and Suites
- Deerfoot Inn & Casino
The company derives revenues from:
- Gaming – segment includes Boomtown, Deerfoot, and Great Northern Casinos. They offer slot machines, VLT, lottery machines, and table games.
- Hotel Rooms – includes both guest and meeting room sales at hotels.
- Food & Beverage – Located within the casinos and hotels and is a complement to the segments.
The stock peaked in August 2014 at $17 and is still yet to find a bottom. The company is directly exposed to the Alberta economy which slumped along with crude oil prices as the majority of Canada’s oil sands, and Oil reserves are located in Alberta. Real Estate prices and economic activity are heavily dependent on the price of oil.
Fiscal 2015 revenues for the Gaming segment is down 1%, Hotel segment is down 16%, Food and Beverage segment is down 12%. Gaming accounts for 52% of the revenues, which is why total revenues for Fiscal 2015 has declined by just 6% so far. We saw a company wide revenue decline from peak to through of 18% last recession – 2007 to 2009. The same assumption this time is reasonable. It’s also no secret that Canada’s housing market is a bubble. Renowned economist, Jesse Colombo, succinctly lays out the case here.
So, why buy a company in the property biz?
Alberta’s Economy is more correlated to Oil than the rest of Canada
While Canada is clearly dependent on Oil, as it is their largest export, Alberta is even more dependent on Oil than the rest of Canada is. Canada Oil Sands and reserves are primarily located in Alberta, with the remaining in the Saskatchewan and Newfoundland provinces. Alberta, Saskatchewan, and Newfoundland have been hit with higher unemployment rates as a result of the oil rout.
Housing prices in Canada have defied the force of gravity over the past few years, but last year, Alberta’s actually declined while the prices around the country propelled 10%. Alberta’s months of Inventory has also taken off and sits at heights not seen since 2009:
Nationally, home sales activity rose 10 per cent from year-ago levels in December 2015. For 2015 as a whole, provincial home sales numbered 56,477, down 21.3 from a near-record level in 2014. The provincial average price for homes sold in December 2015 was $389,486, edging down 0.3 per cent from a year earlier. The national average price, by comparison, rose 12 per cent on a year-over-year basis to $454,342.
The MLS Index covers the 11 metropolitan areas listed above. Now, to put those prices into perspective, we are going to compare them to the Median family Income from the Government of Canada‘s database. The incomes are as of 2013, and the Median Income in Calgary has likely declined as a result of the oil rout. My guess, though is that they rose going into 2014. When oil rebounds, the median incomes should rebound as well.
As of December 2015, Benchmark price to Median Household Income for Calgary, Alberta in 2015 was 4.38 ($443,900/$101,260). Looks fairly modest compared to Toronto’s 7.87 ($573,500/$72,830) and Vancouver’s 10.35 ($760,900/$73,390). The Globe and Mail lays it out here in a tabular format (Note that the numbers are as of September 2015). Canada’s average Price to Family income was 5.2, where as Calgary’s was 4.2. Vancouver and Toronto are clearly the outliers. The housing markets in Seattle, New York and San Francisco for example, look more like Vancouver and Toronto than Calgary. So, while the markets as a whole are overvalued, Calgary is moderately priced, and will have a softer landing than Vancouver and Toronto when the Canadian housing bubble does indeed burst.
Dividend, Dividend, Dividend!
At these prices, the company pays a 10.7% dividend! Yes, you heard that right, 10.7%! Revenues for the first 9 months of 2015 fell 6.1%, the temporary business decline has placed pressures on the 0.0733 monthly dividend the company pays, as the company has paid out 100% of cash flows so far this year. Last revession, revenues fell 18% from peak to through, net income fell 28% from $11.45 million in 2008 to $8.16 million in 2009 and subsequently recovered to $14 million in 2010. Though they have not mentioned any intent of cutting the dividend, a modest 20% dividend cut would result in a yield of 8.56%, which is still extraordinarily high. David Will and Darcy Will, President/CEO and VP own a combined 39% of the company, it’s quite obvious that they love their dividend income. If you look at the first price chart above, the blue ‘D’ at the bottom indicates dividend payment, showing how consistent the company has been. Also, per the quarterly report ended September 2015:
It is the Company’s intent to continue a policy of consistent and regular monthly ‘ eligible’ dividends to shareholders of $0.0733 per common share …. If and when economic conditions and the financial performance of the Company dictate that an increase to the dividend rate is prudent and would not jeopardize future sustainability of the regular dividend rate, an increase or special dividend may be considered by the Company’s board of directors. (Source: Sedar, Nov 13 MD&A)
Profitability & Low Cost Structure
The Company has been profitable for 15 straight years (As far as I could go back). Net Income fell during 2008, but was still positive. CapEx spending is minimal and has hovered at <1% of Revenues for the past 6 years, management sticks to what works and is not itchy to grow the empire. The high insider ownership and shareholder friendly policies will likely keep activist investors away.
The company also does not just generate revenues from Oil & Gas customers, it also has customers in the local population. This is why even though crude prices fell by 50%, we saw the September 31, 2015 quarter’s revenues only drop by only 7% as oil companies have cancelled contracts with the company. Although I expect revenues to still trend lower from where it is in the short-term, Oil and gas recovery should drive the company back into a growth trajectory.
The Elephant In the Room: Crude Prices
Anyone reading today knows that I’ve been bullish on crude oil since December. In fact, my entire Reitman’s thesis depends on higher crude prices, and Reitman’s makes up 10.5% of my portfolio. When I wrote my Reitman’s long thesis, WTI stood at $37/barrel. As of this writing, we are looking at $26.73. I still believe we are going to see Crude bottom by early 2017, the signs are evermore apparent.
Big Oil is cutting CapEx – Shell announced that it was going to cut its 2016 CapEx budget by 30%, Chevron will be cutting CapEx by 24%, Brazil’s own Petrobras is cutting CapEx spending by 25% over the next 5 years, Consol ENERGY cutting by 41%. The list goes on.. All of these will lead to a drop in production, as the capital expenditures fund both upstream and midstream. These companies are likely going to hold back CapEx investments until the price of crude stabilizes.
Hedges – Hedging is widely used in every commodity industry. Companies hedge their inputs or outputs against price increases or declines. Two years ago, in February 2014 when WTI Crude Oil hovered around $100/barrel, shorting a futures contract that guaranteed a sale price of $80/barrel was feasible. That is no longer the case. Most companies do not hedge their exposure past 2-3 years, because if they do and their competitors do not, and they are wrong, the competitors will price them out of the market and they’ll go bankrupt. The longer-dated contracts come with uncertainty, and that is always reflected in the lower prices. As these hedges expire in 2016 and 2017, these companies will be forced to sell crude at spot price, this will accelerate the bankruptcies and that will naturally curb production.
Debt Deflation – What we are witnessing today in Oil and Gas is debt deflation. Crude prices are falling because the industry is so leveraged, and companies are not cutting production because they do not have a choice. These companies took out debt when oil was flying high, and they are now unable to curb production because they have to pay off debt. They are going to produce until they run out of money. The hedging phenomenon I explained above will accelerate this. Debt and equity markets for Oil and gas are basically frozen at this point, so they will not be able to raise more money. This should send Crude prices higher.
I mentioned that I purchased the stock and it made up 5% of the portfolio. I ended up buying more yesterday for $8.21. The average cost of purchase is now $8.19, and it makes up 6.5% of the total portfolio. Given that a 10.71% or even 8% dividend yield is rare in today’s markets, a modest 50% upside within two years is warranted.
Trimmed CBK yesterday by 25%, so it now makes up about 7.5% of the entire portfolio. Also added a new Canadian stock to the portfolio yesterday, Gamehost Inc. at CAD 8.16 (5% of the portfolio). I’m working on the write-up for it right now. I sold off magicJack at a 5% loss. It had a net effect of -0.5% to the entire portfolio, a very expensive mistake. The portfolio is nonetheless, still positive for the month February.