Friday, June 2, 2017

Preferred Shares of Dundee

Dundee is a holding company involved in a lot of businesses in Canada: real-estate, energy, wealth management and other investments. The market cap of the company is currently $160 million with a tangible book value of about 800 million.

For what it's worth, they consider themselves value investors. But as you can probably guess from the difference between the company's book value and its market value, things have not gone so well for them in recent years.

The common shares are probably good value at this discount to tangible book value (so much so that they are owned by Francis Chou), but to me this is a bit risky because rather than buy back shares at such a wide discount, management seems hell bent on investing further, which makes me question how interested they really are in value versus growing their conglomerate, where they have made investing mistakes in the past.

On the other hand, the preferred shares (DC.PR.B) currently pay a yield of 10%. The real yield to the company is only 5.8%, however, the pref shares trade at a 43% discount to par ($25), which is why the yield to a current buyer is so high.

Because the company has such a diversified array of different kinds of assets, many of which are liquid (i.e. public company holdings), the downside seems protected pretty well, as these have a higher priority than common equity which has a tangible book value of $800 million. The company is easily able to pay its preferred dividend from cash on hand.

But these preferred shares do have more upside. The rates reset every five years, with the next reset in 2019. The rate is based on the government of Canada 5-year bond + 4.1%. I don't pretend to have any idea what the government rates will look like in 2019 or in five years after that. But if if the government rates went to 0%, these would still pay almost 7% at today's price. On the other hand, if government rates in the future were to return to let's say 5% one day, the yields on the current price would just to almost 15%. (Before that were to happen, the company may redeem the shares at par, but that still provides a nice capital gain.)

As a result, I think this is a good investment for fixed income, but also has potential for capital appreciation without a lot of downside risk.

Author has a long position in shares of DC.B

10 comments:

Anonymous said...

Is preferred DC.PR.B same as your long position disclosure in DC.B?
Thanks.
Ray

Saj Karsan said...

Yes

Viraj Samani said...

The yield on this security is undoubtedly high. The question, I think , is what is the chance of insolvency for Dundee and that they are unable to pay the dividend?

another value investor said...

I own the DC.PR.D as 1) there is a greater discount to par and 2) B and D are interconvertible every 5 years, which offset the slightly lower yield. I am wondering about your justification for owning the B instead.

I think the chance for insolvency is very low with the founder owning about 20% of the common. They may think about ways to screw the preferred shareholders though (see http://prefblog.com/?p=31878)

Saj Karsan said...

Hi Another,

You are right, that makes sense regarding the D.

Aly Mawji said...

Nice pic Saj. I like. Both the B and D look good. Just took a quick look today. There appears to be enough value on the balance sheet to support the prefs.

As a rough calc, I think total market value of equity (common+ 3 prefs) makes up about 44% of liquidation value.

I haven't really dug into the whole business yet as it seems complicated.

Aly Mawji said...

Looked at this some more today. There is probably good value here but the business is too complicated for me. I don't understand how they can be involved in wealth management, real estate sales and development, agriculture, energy and mining. And they are losing money in every one.

I don't know enough about how the prefs are treated in the case of bankruptcy/restructuring. Beyond my circle of competence, as they say.

Pete Richter said...

this thing has been in a free-fall since april. any catalyst that could lift this one higher in the short term? I would have thought in the short term given the yield, the base would be preserved. last quarter earnings were kinda weak...

Saj Karsan said...

I don't know of any catalyst. I say just enjoy the yield.

another value investor said...

Just a follow-up on this. I think there are two catalysts, UHIC and Parq.

United Hydrocarbon International had a heavily bleeding venture in Chad but recently entered a sale that management expects to close by 2017Q3 (I would give it end of the year). They will receive a upfront payment and future royalties. The key is they should stop the bleeding out of this company after the transaction closes.

The Parq casino in downtown Vancouver is scheduled to open this fall. This project has drained resources for the last 2-3 years and once it opens and stabilizes, Dundee's share of annual cash flow is roughly $15-20M. Not bad for a company with $160M of common shares, $220M of preferred, and $0 corporate debt (not counting non-recourse subsidiary debt). Longer term I hope they can work out some favorable re-financing / partial sale of this property while the Vancouver RE market is still going strong.




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