Category Archives: Company Analysis

Macro Enterprises – $MCR.v

Here is a quick idea for those interested.

Company: Macro Enterprises

Ticker: $MCR.v

Price: $2.40

MC: 75 mi CAD

EV: 80 mil CAD

Background

Macro Enterprises Inc., together with its subsidiaries, provides pipeline and facilities construction, and maintenance services to companies in the oil and gas industry in western Canada. It is involved in the construction, alteration, repair, and installation of pipeline and facility pressure piping, and structural steel facilities, as well as provision of pipeline integrity digs services. The company was founded in 2006 and is headquartered in Fort St. John, Canada.

As noted above, they are heavinly dependent on Western Canada. Construction activity here relies on more traditional O&G, pipeline, and LNG facilities and related infrastructure.

Managment & Operations

Frank Miles founded Macro in 1994. He is the current CEO and comes acrross as quite conservative on how the business is run. They traditionally have low debt loads and reinvest cash generated into the business.

Compensation seems reasonable for a company this size.

The company is based in western Canada and has a local presence. They employ local workers including unionized and first nations. The company has worked in western Canada for many years and has experience with the terrain, seasons and various building conditions.

Large construction company’s must have a strong safety record which MCR possesses. The repeat business with large clients is a testament to the work they have put in build relationships. The specialized work can lead to margins above industry peers.

Construction companies like this are interesting as they can be lumpy and tend to provide an opportunity.

You can see the share price take off in 2013. This corresponds with the increase in business activity and the company’s profitability. The company’s earnings continued until 2016 when construction activity in western Canada dried up. It loosely tracks the price of oil produced in Alberta, Western Canadian Select (WCS) which is delivered at Hardisty as well as the natural gas price.

For those unfamiliar, Alberta’s oilsands produce nearly 3 million barrels per day. The oil produced is “land-locked” and is sent via pipeline, rail and truck. Continued production with limited pipeline capacity and the heavy crude being less ideal for refiners to process has led to WCS trading at a discount to WTI.

Ownership

The CEO owns 9.2 mil shares or about 27% of the outstanding shares. Mike Nielsen (VP) also owns over 1% of the company. Other holders of note are Gate City Capital at 11.7%.

Balance sheet

As expected the majority of assets are comprised of fixed assets. PPE (net of depreciation) has historically been over 40% of stated assets. I think it’s important to monitor working capital as well.

In order to win business, MCR needs a large modern inventory of equipment. Though salvage prices likely fluctuate during boom/bust times, the use of tangible book value I believe provides a decent proxy for replacement value at a minimum. They also have significant real estate and maintenance facilities that it likely understated on the balance sheet.

Income Statement & Cash Flow

Now that we have that out of the way, below is a quick look at the income statement in ttm for MCR. I don’t think looking at this business (or really any business) on a quarterly basis is a good idea.

Earnings are lower than the recent peak but are not quite as low as the previous downturn when the was EBIT negative. As with many cyclical companies, there tends to be floor in the valuation based on trangible assets.

Downside Price

The chart shows the company can trade at well under tangible book value during downturns. It goes as low as 0.50 P/TB in 2016, but hovers around 0.60. I think this represents the downside potential if activity does not return (or return for some time).

Though the company does lose money, they do not tend to bleed a ton of cash for an extended period.

At a stated value of $3.32 per share and a multiple of 0.60 gives us a downside potential of $1.99 or approximately 20%.

Upside

I think it’s important to make an estimate of what the potential is if activity returns. Looking at previous cycles to get an indication of where MCR could trade provides an upside scenerio.

In 2019 EV/EBITDA hasn’t been much higher than 3x. It’s pretty much the same story for 2014/15. The chart is hard to read as they trade at high multiples of EBITDA in downturns.

EV/Rev can be another indicator and also apears to be trading below mean, but higher than the lows.

The company recently stated that they anticipate 2021 to have at least 250mil in rev. We can take an estimate of what EBITDA will be based on history. I get about 36mil using previous gross margins and operational cost requirements. There are few estimates from analysts stating 32-34mil in EBITDA in 2021. Any additional increase in revenue will mean even more upside.

TMX Pipeline Expansion

The Canadian government purchased the in 2018 from Kinder Morgan.

Therer has been some interesting developments frecently with their JV and Trans Mountain. MCR has written off the JV in the quarter ending Dec 2020. They are still entitled to recieve 20 mil in cash by end of Q2 2021. I have no opinion on the matter other than what has been stated by MCR management. There was a contract signed with Trans Mountain in Feb 2021 for an initial value of over $50 mil CAD. I think this bodes well for their ability to win contracts as the expansion continues.

I believe that the TMX expansion continues (even if it’s over budget). There really isn’t a reason to replace MCR as a contractor at this point in the project. The increased capacity will be a major benefit to Canada as a country as oil is a largest portion of our trade and the oilsands are the 3rd largest proven reserve of oil in the world.

Risks

  • Activity could remain lower (or go lower), particularly in western Canada.
  • The business could perform well, but may not reach the multiples that I have indicated.
  • The tangible book value of the assets that I am relying on for my downside scenerio could be worth less than stated.
  • MCR may win contracts with the TMX expansion, but margins may be lower than previous projects that I am using to benchmark my analysis on.
  • One must acknowledge the polical risk with pipelines and hydrocarbons in general. Decisions made by political leaders are not always based on sound economic decisions and you never know if the TMX could end up in the political crosshairs.
  • Environmental reasons specific to the work MCR provides specifically. Here is a recent example.
  • There is no dividend to support the share price if earnings don’t materialize.
  • There is not a meaningful NCIB presence.
  • The CEO (Frank Miles) has been at this for 30 years. If he decides it’s time for a transition, there could be some additional uncertainty in the business.

With a 4:1 upside to downside ratio, I think MCR is worth a position here. The CEO runs the business conservatively and has skin in the game.

NGTL is of particular interest to MCR as will connect natural gas from BC and AB to major LNG export points. I think a project win from the NGTL pipeline project(s) would propel the shares higher as this would ensure meaningful equipment utilization for MCR.

Big thanks to UV for the collaboration on MCR.

Anyone else own or have an opinion on MCR? Stockhouse has some good information on MCR.

Thanks,

Dean

*the author is long shares of MCR.v at time of writing.

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URBANA Corp – $URB.to & $URB/A.to

Another two weeks since posting…. a couple started but I don’t think they are good enough to publish yet.

Another very simple idea. Hat tip to DD for the help and data collection.

I originally posted about Urbana 10 years ago here in March of 2011. I ended up selling about 6 months later and posted about it here. Originally, I was overly attracted to the discount to NAV. I don’t believe I appreciated the growth potential in NAV on a per share basis.

Background

Price – $2.99

Shares – 44.2 mil

Market Cap – $134mil CAD

Here is URB/A vs. the TSX over the last 5 years

Urbana Corporation is an investment fund launched and managed by Caldwell Investment Management Ltd. For its equity investment the fund primarily invests in public equity markets of United States and Canada. The fund primarily focuses on U.S. financial companies and Canadian resource companies for equity investments. The fund also focuses on private equity investments.

Private company and start-up investments are usually vetted by the board and generally at arm’s length from Urbana.

Fund Perf

When looking at the performance of the fund, I am thinking about the growth in NAV. Despite the fees and annual dividend, the NAV has grown at quicker pace than the TSX. Below is the average performance in NAV growth.

Discount to NAV

Despite the performance the, shares are trading near the largest discount to NAV in the last 15 years.

Share Structure

There are two classes of shares. 10 mil voting/common shares and 38.9 mil class A or non-voting shares. The share repurchases are from the A shares. There is more liquidity in the A class shares.

They have bought back about half the shares since 2009.

Ownership

As mentioned the Caldwell family owns the majority of the voting shares.

EdgePoint has been selling some class A shares. This could weigh on the shares, but they could also arrange a block trade and buyback the shares.

Portfolio

Portfolio as of March 12, 2021

They are fairly concentrated. The largest 5 public equities make up 34% of assets. The top 5 private investments make up 32% of assets. The largest holding is the Canadian Securities Exchange at 13% of assets. They have had the position for many years and Brendan Caldwell is on the board. The CSE recently announced record trading volume and capital raised in Jan 2021. The marked value of their holdings was recently raised in 2020.

Mineral Properties

The company has a some mineral claims that are carried at zero value. There are 44 claims for 2,852.7 acres. So far, they have not commented on if/when this claim will be crystalized. The last time there was an update was in 2017.

Pros

  • Continue to buy back shares at a discount to NAV.
  • Pays an annual dividend. If the dividend is maintained it yields just over 3%.
  • The Caldwell family about $18 mil worth of the company and should be incentivized to have the shares perform.
  • Potential value in mineral properties.

Cons

  • There is a 2% investment and advisory fee (used to be 1.5%).
  • Dual class share structure.
  • Private investments may not be liquid and can be subjected to judgement by management.

As mentioned, simple idea. I’m comfortable parking some cash here in the A shares. Not a huge position, but enough to move the needle if it runs one way or another.

For those interested, you can hear the Chair & CEO share his thoughts on an audio podcast here.

Am I the only one holding some URB/A?

Thanks,

Dean

*the author is long URB/A

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Pizza Pizza Royalty Corp. ($PZA.to)

I intentionally included the share price after the change in tax requirements for income trusts took hold

Chart from TIKR, referral code https://app.tikr.com/register?ref=smob7c

  • Ticker: PZA
  • Market Cap: 312 mil (CAD)
  • Current Yield: 6.8%

This is a fairly straightforward idea for those looking for income (and maybe a bit of capital appreciation), though the structure is a little complex. This slide from the most recent AGM presentation will explain it better than I can.

The public shares (Pizza Pizza Royalty Corp) give you access to 76.5% of the Royalty Limited Partnership, the remaining 23.5% is owned by PPL.

PPL, a private operating company, was amalgamated with Pizza 73 Inc. under the OBCA pursuant to articles of amalgamation dated July 24, 2007. The registered and head office of PPL is located at 500 Kipling Avenue, Toronto, Ontario, M8Z 5E5. PPL is the successor to a corporation initially incorporated in 1967. PPL operates the Pizza Pizza and Pizza 73 quick service restaurant systems using the Pizza Pizza Rights and the Pizza 73 Rights as permitted under the Licence and Royalty Agreements. PPL owns Class B and Class D Units representing an effective 23.0% interest in the Partnership at December 31, 2019.

From the most recent MD&A and AIF:

As of September 30, 2020, PPL indirectly held an effective 23.5% interest in the Company (December 31, 2019 – 23.0%) by holding all Class B and Class D Units of the Partnership. PPL has the right to exchange one Class B or Class D Unit indirectly for that number of Shares equal to the Class B Exchange Multiplier or Class D Exchange Multiplier, respectively, applicable at the date of such exchange, as described under “Royalty Pool Adjustments”.
The Class B and Class D Units are entitled to receive monthly distributions established by PPRC’s board of directors. A monthly distribution is paid to both PPL and PPRC on a pro rata ownership basis, with PPRC’s ownership held through its Class A and Class C limited partnership units of the Partnership.

When I calculate earnings to shareholders and payout ratio, I am including the distribution to PPL from the Partnership on Class B and D shares. I am using fully diluted shares in my per share calculations.

The multiplier is reviewed annually based on the number of new stores in the system. There was no change for 2021 in the multiplier.

Additional Background

Pizza Pizza was founded by Michael Overs in the 60s. He owned it until he passed away in 2010. PZA went public as an income fund (remember those?) in 2005 and has Governance Agreement with the Overs Family.

They purchased Pizza 73 in 2007 for $70.25mil with a combination of debt, shares, cash and an earn out. At the time Pizza 73 had 48 restaurants, of which 41 were added to the royalty pool upon closing. Upon closing 62.4 mil in system sales added or about 5.6 mil of net royalty revenue (at 9% royalty fee). Those that were around in 07/08 will remember how strong the Alberta economy was due to the oil boom.

Restaurants

Pizza Pizza has a strong presence in Ontario with over 500 stores and Pizza 73 has a strong presence here in Alberta with nearly 100 stores. The formats are pretty similar.

Restaurant Count (pre-covid)

Slow and steady store count growth was the name of the game until 2019.

The company underwent a review of existing restaurants and closed more than typical in 2019. They were ready to be a more efficient operation in 2020 just in time for covid.

System Performance

Going back to 2011, system sales have been trending upward. For the most part SSS was slightly positive until 2017/18 (and of course in 2020).

The majority of the earnings are from Pizza Pizza, but Pizza 73 does contribute a meaningful amount.

Monthly Distributions

Pizza Pizza GP, as managing general partner of the Partnership, has adopted a policy to distribute the Partnership’s available cash to the maximum extent possible. Such distributions will be made to partners of record holding Partnership Securities of their share of available cash as set out below. Distributions will be made within 15 days of the end of each month and are intended to be received by the Company prior to its related dividend to shareholders.

As an owner of the Royalty Corp your share of the earnings were flattish from 2015 both nominal and per share. Of course, all these earnings were returned to shareholders.

You can see stability in distribution and payout. Interesting that the share price moves around so much.

Risks/Items of Note

  • There are some very confusing change in control measures that prevent a potential take-over
  • Rent a facility and purchase food from the Overs family
  • Independent board members don’t own many shares (22,000 total)
  • CEO doesn’t own many shares (11,600 total), but the MIC does list that an associate of his owns 500k shares
  • Ontario was in a strict lockdown starting in December and that may weigh on results in the near term
  • Reopening may take way longer than anticipated, don’t look at Canada’s vaccination rate compared to other G7 countries
  • Many of the franchisee’s and customers are utilizing government support that may go away soon or go away sooner than business activity returns to normal
  • People may not like pizza today as much as they did yesterday
  • Valuation could drop
  • High inflation would be bad for consumers and hard for franchisee’s to pass on costs

What needs to happen to make money

This isn’t your high growth SaaS company with infinite TAM. Though capital appreciation may be not be the main driver of returns, there are still ways to make money on PZA. Here are some items that will be a driver for future returns.

  • distributions need to remain constant or increase
  • additional restaurants can be opened
  • SSS growth or at least no decline

Summary

As a shareholder your yield based on using the last couple of months payout ratio and today’s price is 6.8%. I would assume that the distribution will get bumped higher as stability returns and the economy reopens. The last two quarters the payout ratio was under 100%. As well, the shares are cheaper than they were in 2015 both on an absolute basis and relative to revenue. One could paint a picture where the valuation and the distribution improve from here.

This operation screams of stability to me. In a world with negligible interest rates, this may fit as a good alternative if you can stomach some share price volatility.

Anyone else look at PZA or other restaurant stocks?

Thanks,

Dean

*the author does not have a position in PZA at time of writing

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