Post on 28-Jul-2020
- PRIVATE & CONFIDENTIAL -
VALUE INVESTINGCENTRE FOR THE ADVANCEMENT OF VALUE INVESTING EDUCATION
July 26, 2019
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AN ENTERPRISING INVESTOR
“Someone with the willingness to devote time and care to the selection of sound and attractive instruments” - Benjamin Graham
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Source: Intelligent Investor published in 1949.
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AN ENTERPRISING INVESTOR
“The enterprising investor will buy… secondary common stocks, corporate bonds and preferred stocks at bargain levels” -Benjamin Graham
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Source: Intelligent Investor published in 1949.
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AGENDA
► What do we do?
► Approach to valuation
► Approach to risk
► Ewing Morris Playbook
► Case studies
► Questions
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WHAT DO WE DO?
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FULL CAPITAL STRUCTURE
SMALL CAP
NORTH AMERICAN (CANADIAN BIAS)
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APPROACH TO VALUATION
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TERMINAL VALUE RELATIVE TO INTRINSIC VALUE
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1 2 3 4 5 Terminal
Cash Flow5.2 5.5 5.7 6.0 6.3 105
Discounted 4.8 5.5 5.7 6.0 6.3 71.5
Intrinsic Value 100
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30% 70%
Assumptions: Terminal Growth Rate = 2%Discount Rate = 8%
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HOW MUCH IS THIS HOUSE WORTH?
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VALUATION TECHNIQUES
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DISCOUNTED CASH FLOW
REPLACEMENT VALUE
COMPARABLE TRANSACTIONS
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MULTIPLE (I.E. CAP RATE)
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FAIR VALUE IS RELATIVE
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$0 $2m
P$900k
CHEAP
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FAIR VALUE IS RELATIVE
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$0 $2m
P$900k
EXPENSIVE
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FAIR VALUE IS RELATIVE
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$0 $2m
P$900k
FAIR
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FAIR VALUE IS RELATIVE
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$0 $2m
P$900k
?
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APPROACH TO RISK
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INDUSTRY CHANGE
VALUATION
LEVERAGE
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THE PLAYBOOK
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INVESTMENT DRIVER EQUITY INVESTMENT DEBT EQUIVALENT
Business Great Business Durable Business
People Great Capital Allocator Credit Maker
Structure Cheap Asset Structural Value
CASE STUDIES
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PRECISION DRILLING (TSX:PD)
LARGEST DRILLING RIG CONTRACTOR IN CANADA
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DEBT VS EQUITY
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20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16
Equity Bond
Both were down 25%
►Bonds saw extreme selling pressure
►Bonds dislocated from equity
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Source: Company filings.
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DEBT VERSUS EQUITY
$3.9bn
EQUITY$1.8bn
DEBT$2.1bn
Bond price:70 cents
Equity investors were comfortable ($1.8bn market cap) but bonds at 70 cents perceived bankruptcy risk
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Source: Company filings.
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DEBT VERSUS EQUITY
ACTUAL RISK WAS FAR LOWER THAN PERCEIVED RISK
►High asset coverage
►Manageable obligations
►Strong liquidity
~2x
2019
$1.2 bn
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DEBT VS EQUITY
WHAT HAPPENED?
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20%30%40%50%60%70%80%90%
100%110%120%
Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16
Equity Bond +30%
-5%
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Source: Company filings.
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NORBORD INC. (TSX:OSB)
LEADING GLOBAL MANUFACTURER OF WOOD-BASED PANELS (ORIENTED STRAND BOARDS)
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WHAT THE MARKET SAW
Expensive stock: 30x EBITDA
Too much debt: 7x EBITDA
Underperforming stock price
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NORBORD STOCK PRICE
Example is not representative of entire portfolio. Source (OSB Share Price Data): Yahoo Finance.
$15
$20
$25
$30
$35
$40
$45
$50
1/1/2013 1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018
Down 18%
Ewing Morris entry
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BUT AFTER A CLOSER LOOK…
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BUT AFTER A CLOSER LOOK…
1. Depressed U.S. housing market
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1,030k
650k
0
200
400
600
800
1,000
1,200
50-year Average 2014
Example is not representative of entire portfolio. Source: U.S. Census Bureau.
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BUT AFTER A CLOSER LOOK…
1. Depressed U.S. housing market
2. Depressed commodity price
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Example is not representative of entire portfolio. Source: Company filings.
$230
$193
$150
$160
$170
$180
$190
$200
$210
$220
$230
$240
$250
10-year Average H1 2015
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BUT AFTER A CLOSER LOOK…
1. Depressed U.S. housing market
2. Depressed commodity price
3. Transformed industry
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Example is not representative of entire portfolio. Source: Company filings.
► 3rd and 5th industry players merged in 2015
► Former #1 was gradually exiting the industry
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WHAT WE SAW
Undervalued stock
Solid balanced sheet
Compelling investment opportunity
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WHAT HAPPENED?
1. Housing starts to rebound
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Example is not representative of entire portfolio. Source: U.S. Census Bureau.
650k
850k
0
200
400
600
800
1,000
1,200
H1 2015 2017
+30%
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WHAT HAPPENED?
1. Housing starts to rebound
2. Commodities rebounded
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Example is not representative of entire portfolio. Source: Company filings.
$218
$353
$0
$50
$100
$150
$200
$250
$300
$350
$400
2014 2017
+60%
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WHAT HAPPENED?
1. Housing starts to rebound
2. Commodities rebounded
3. Earnings soared
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Example is not representative of entire portfolio. Source: Company filings; 2014 EBITDA is pro-forma Ainsworth
$97
$672
$0
$100
$200
$300
$400
$500
$600
$700
$800
2014 2017
+600%
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NORBORD’S STOCK PRICE ROSE SUBSTANTIALLY
NORBORD STOCK PRICE
Example is not representative of entire portfolio. Source (OSB Share Price Data): Yahoo Finance.
$15
$20
$25
$30
$35
$40
$45
$50
1/1/2013 1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018
Down 18%
Ewing Morris entry
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NORBORD’S STOCK PRICE ROSE SUBSTANTIALLY
NORBORD STOCK PRICE
Example is not representative of entire portfolio. Source (OSB Share Price Data): Yahoo Finance.
$15
$20
$25
$30
$35
$40
$45
$50
1/1/2013 1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018
Up 100%Down 18%
Ewing Morris entry
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PARKLAND FUEL (TSX:PKI)
CANADA AND THE CARIBBEAN'S LARGEST INDEPENDENT SUPPLIERS OF FUEL AND PETROLEUM PRODUCTS
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AN ATTRACTIVE BUSINESS…
Focus on undersupplied markets
Create cost advantage with scale
Generate attractive returns on capital
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…WITH GREAT PEOPLE…
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Bob Espey, President & CEO
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…AND A GREAT TRACK RECORD
► EBITDA/share increased from $1.90 in 2010 to $6.10 in 2018
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Source: Capital IQ. $0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
2010 2018
EBITDA/share
+15% CAGR
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SHARE PRICE TRACKED EARNING POWER
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
Jan
2010
Jul 2
010
Jan
2011
Jul 2
011
Jan
2012
Jul 2
012
Jan
2013
Jul 2
013
Jan
2014
Jul 2
014
Jan
2015
Jul 2
015
Jan
2016
Jul 2
016
Jan
2017
Jul 2
017
Jan
2018
Jul 2
018
Shar
e pr
ice
PARKLAND FUEL SHARE PRICE
Source: Capital IQ.
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INVESTMENT OPPORTUNITY
Replicate results in the U.S.
Attractive evaluation (8x EBITDA; 10% FCF yield)
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KEY RISK
►Diversified product offering
►Adoption rate of EV is ~1% of new cars
►Real estate has alternate uses
ELECTRIC VEHICLE ADOPTION
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QUESTIONS
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DISCLAIMERThis presentation does not constitute an offer to sell units of any Ewing Morris Fund,collectively, “Ewing Morris Funds”. Units of Ewing Morris Funds are only available toinvestors who meet investor suitability and sophistication requirements. The EwingMorris Funds have flexible investment mandates. Therefore, the Ewing Morris Fund’scompositions are materially different than major indices listed. We have listed theindices herein because they are representative of widely known and followedinvestment alternatives. The information contained herein reflects the views of EwingMorris as of the date of publication. These views are subject to change without noticeat any time subsequent to the date of issue. All information provided is forinformational purposes only and should not be construed as personal investmentadvice. Users of these materials are advised to conduct their own analysis prior tomaking any investment decision. While the information is believed to be reliable, norepresentation or warranty is made concerning the accuracy of any data presentedand past performance is not indicative of future performance. There can be noguarantee that any projection, forecast or opinion will be realized.