VALUE INVESTING · 2019-08-06 · VALUE INVESTING. CENTRE FOR THE ADVANCEMENT OF VALUE INVESTING...

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- PRIVATE & CONFIDENTIAL - VALUE INVESTING CENTRE FOR THE ADVANCEMENT OF VALUE INVESTING EDUCATION July 26, 2019

Transcript of VALUE INVESTING · 2019-08-06 · VALUE INVESTING. CENTRE FOR THE ADVANCEMENT OF VALUE INVESTING...

Page 1: VALUE INVESTING · 2019-08-06 · VALUE INVESTING. CENTRE FOR THE ADVANCEMENT OF VALUE INVESTING EDUCATION. July 26, 2019 - PRIVATE & CONFIDENTIAL - AN ENTERPRISING INVESTOR “Someone

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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

1

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

2

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

5

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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?

7

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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

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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.