Thursday, July 13, 2017

Ready...Aimia...Get Fired!

I believe the preferred shares of AIM (e.g. AIM-C) represent a very good opportunity, and so I have been buying them recently. Although they are preferred shares, the company recently cancelled the upcoming dividend payment because of a significant event, which caused the pref shares to tumble by 33% (from 12 to 8). These pref shares also fell 33% when the significant event was announced previously (from 18 to 12).

However, the pref dividends are cumulative, meaning any missed dividends continue to accrue. So for example if the company ever does want to pay a dividend again to common shareholders, it has to pay all the pref dividends it missed.

Aimia owns and operates loyalty programs. For example, customers accumulate points on their credit cards, and then use those points to buy vacations and other products. Aimia manages a few of these loyalty brands.

Aimia's Aeroplan program has a contract with Air Canada that runs until 2019. Recently, Aimia announced that Air Canada would not renew the contract after expiry, meaning Aeroplan points holders would no longer get discounts when they redeem their points with Air Canada. This is the significant event that caused shares to drop, and then caused the dividend to be cancelled.

This is an important part of Aimia, as air travel represents 73% of the of the rewards claimed by Aeroplan members, and Aeroplan represents almost 60% of Aimia's revenue.

Aimia therefore has to find a new partner(s) to keep their customers happy to continue accumulating and redeeming points. The main risk here is that they can't, in which case Aeroplan goes to 0 after 2019. Even if that happens, Aimia has an international segment that generated $51 million in operating income in 2016. The annual preferred dividend is less than $10 million per year.

There is debt of $450 million and pension of $70 that rank ahead of the preferreds at $520 million total. However, the company also has cash of $300 million + short-term securities of $100 million + long-term investments of $350 million + equity-accounted investments (a joint venture in Europe that earned Aimia $15 million in 2016) of $100 million, for a total of $850 million, easily covering the debt and then some!

If the company ever resumed paying the dividend, it would have a yield of 20% at the current $8 price.

I think the price is so low because fixed-income investors were forced to sell when this no longer was a fixed-income investment. As such, I believe there is an opportunity here for much higher upside than downside. In the upside, I think the pref shares can be worth $25 in a normal interest rate environment and if the company were to maintain its program with a new partner.

However, this is not an investment where the downside is totally protected. It could end up like a run on a bank, where customers decide to cash in all their points before 2019, and stop redeeming points in order to switch to another program. This could cause bankruptcy. So I would say there is an asymmetric opportunity here, but not fully protected on the downside.

Disclosure: Author has a long position in shares of AIM-C


Adib said...

Interesting idea Saj.

Never heard of this company before. In the worse case, you say there is one segment that generates $50M of op income and cash + investments > debt by $330M. So, company could be worth $600M at the minimum.? What is the total market cap common + preferred? $400M?

Maybe that will help. If downside is very low in worse case then dont have to worry about calculating upside. And clearly preferred is superior to common shares.

Saj Karsan said...

Hi Adib,

The downside is not very low in the worst case. From the article: "However, this is not an investment where the downside is totally protected."

Also note that the segment that generates $50 million is just a segment. SG&A costs would have to be drastically cut for that to fall to the bottom line.

There are definitely some negatives here; I still think it's a good bet, but I would not go all-in.

Nick said...

How does deferred revenue liabilities factor into your analysis. Much of the revenue recognized in future accounting periods will be nno cash! So how is the company going to pay operating expenses and liabilities.

Anonymous said...

intresting it has already gone up 1.00.

Saj Karsan said...

Hi Nick,

This is the main risk that I'm referring to in the last paragraph. Management's main job right now is to do what it takes to ensure future periods are not cash free!

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