Normally, we do not comment on politics and government policies. However, there was a proposal in the 2011 Canadian Budget that irritated us to no end. Labeled as "Completing Canada's Highway Coast To Coast To Coast", the Federal government plans to contribute C$150 MM over 5 years from the 2012-13 fiscal year towards building a highway between Inuvik and Tuktoyaktuk.
We must apologize in advance to the 870 inhabitants of Tuktoyaktuk - we do not mean to be disrespectful or rude. But in an era of austerity, when governments the world over are looking for ways to trim budgets and find savings, earmarking C$150 MM towards a road to almost nowhere is not the right answer. The federal deficit is projected to be over C$40 BB in the 2012-11 fiscal year, for crying out loud!
Canada is not the U.S. in terms of fiscal largess. But that is not saying a whole lot. In trying to emulate our southern neighbour, we should try to copy the good parts (the proposed dismantling of Freddie Mac and Fannie Mae) and not the bad parts (Bridge To Nowhere).
- Your Disappointed Analyst
Tuesday, March 22, 2011
Tuesday, March 8, 2011
Asset Value: Getting Paid To Wait With Becker Milk Co (BEK.B-TSX)
On the surface, The Becker Milk Company (BEK.B-TSX; We are long the Class B non-voting shares) does not seem like a very interesting company. Just today (March 8, 2011), the company announced 9 month revenues of $3.0 MM and earnings of $0.58 per share. This financial result annualizes to $4.0 MM in revenues and $0.77 in earnings. Trading at a bit less than $11.00, the shares are trading at approximately 14x annualized earnings. So where is the value?
To figure out the value of Becker Milk Co., we need to take a trip down memory lane. The Becker Milk Co. was founded in 1957 by Dr. Geoffrey Pottow (President & CEO) and operated a chain of convenience stores with its own dairy production facilities until 1996, when the operating business was sold to Silcorp. Silcorp itself was acquired by Alimentation Couche-Tard (ATD.B-TSX) in 1999. Since 1996, the Company has downsized most of its operating staff (BEK only has 5 full and part-time employees in 2010) and the Company effectively operates as a real estate investment company with a portfolio of 69 retail commercial properties. One property is in Toronto while the rest are dispersed in Southern Ontario. Mac's (a subsidiary of Alimentation Couche-Tard) is BEK's largest lessee, with approximately 80% of BEK's rental income coming from Mac's. The Company also has 4 parcels of undeveloped land and 2 unoccupied buildings.
What attracted us to BEK was this legacy real estate. For a portfolio of retail commercial real estate that generates $4 MM in annual rental income, the book value of the portfolio is carried at just $12.7 MM. Imagine that! The reason this real estate has such a low book value (and the reason BEK has become an orphaned company with little investor following, in our opinion), is because this portfolio of real estate was acquired over the decades at significantly lower valuations than current market value. To put the value of this real estate in perspective, applying a market cap rate (used to value commercial real estate) of 8 - 10% on this portfolio implies that the real estate is worth between $40 - $50 MM or $22 - $28 per share!Moreover, the Company itself is debt-free and has $2 MM in cash. Altogether, we estimate the Company has an intrinsic value of $24 to $30 per share.
The analysis above sounds great, but what's the catch? The catch is that insiders (Dr. Pottow and his associates) hold 540 thousand of the 640 thousand outstanding voting shares. An investor in the Class B non-voting shares participates in earnings and dividend but has no say on the future of the business. However, we believe one upcoming catalyst is the age of Dr. Pottow and his associates. Although Dr. Pottow's age is not disclosed in the Company's filings, we deduce he is well above 75 (Company was started 54 years ago after he received a PhD) and may be contemplating selling the business. In fact, the Company did put itself up for sale in 2008 by hiring TD Securities, but no deal was consummated due to the credit crisis. With the economy recovering and credit markets more stable, we believe it will not be long until BEK once again explore opportunities to sell its real estate portfolio and realizes the hidden value of its assets.
In the meantime, investors get a 5.5% dividend yield (semi-annual dividend of $0.30 that has been paid since 1999) and the possibility of sizeable special dividends every few years ($1.75 in 2004 and $2.30 in 2009). If we assume that a special dividend of $2.00 will be paid every 5 years, or an average of $0.40 per year, then the dividend yield on BEK is closer to 9%. Essentially, investors are paid to wait for the eventual realization of full value of BEK's real estate portfolio (unless Dr. Pottow pulls a Frank Stronach and demands a significant premium for his voting shares - a real possibility!). We therefore believe BEK.B should definitely be on the radar screen of any value investor.
-The Aspiring Analyst
Sunday, March 6, 2011
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