Tag Archives: PZA

March 2021 Update – $OSS.v, $REPH, $ISDR, $PSD.to, $ISV.to, $STC.v, $FTG.to, $VMD.to, $SYZ.to, $MTLO.v, $DWSN, $SVT, $FXC.to, $PZA.to

TIKR

I use TIKR to quickly look through ideas and check comparable companies. Would recommend. Referral code below.

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Podcast

I was a guest on In The Market Trenches podcast this past month. Have a look/listen.

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Thoughts on Market Activity

Once a month I write in my investment journal to attempt to capture my current thoughts on the public markets. It’s not a forecast and I am not a macro guy. It is a quick snapshot of what is happening in real time and how I’m processing it.

This month I made note of how the broader market seems to continue to rotate out of “what worked in 2020”/SaaS/lockdown names and into “recovery” companies. The S&P ended up 7.4% YTD, while the TSX ended up 6.7%. The Russel 2000 has now outperformed the Nasdaq comp over the ttm. The disordered pace of covid vaccine distribution seems to be creating lots of noise. As well, there are many that are very concerned about variants and their implications on the healthcare system. It is interesting to experience in real time. This goes without even mentioning NFT, crypto, EVs, etc. Such things I have no business commenting on.

I continue to find some interesting opportunities in more cyclical companies, although these usually amount to more and smaller positions. As always looking for businesses with long term potential, with incentivized management and a reasonable valuation is the main goal and will constitute the largest amount of my energy. Of course, building positions in such businesses takes continuous effort on the bid as they tend to be illiquid.

Building wealth in the most reasonable way for me is not always the optimal way in the short term.

Posts this month

Quick Notes on Companies Recently Mentioned

  • OneSoft Solutions ($OSS.v)
    • Announced an acquisition of IP
      • Not a ton of details
      • They are usually very thorough on MD&A’s so likely to get more color then
    • Posted Q4 2020 results
      • In line with my expectations
      • MD&A is a must read to understand the value proposition
  • Recro Pharma ($REPH)
    • As mentioned before, I have sold but continue to monitor
  • Issuer Direct ($ISDR)
    • Released Q4 2020
      • Results were good
      • Continue to hold my position
  • Pulse Seismic ($PSD.to)
    • Reported auditor change
      • Non event as it was board approved
    • Lots of volume on March 12
  • Information Services Corp ($ISV.to)
    • Released Q4
      • Business is holding up well
      • Margins have ticked up a bit
      • With the Paragon acquisition they are getting more revenue from services
      • Some delays due to covid, but it didn’t sound like anything major
      • Interesting company
  • Sangoma Technologies Corp ($STC.v)
    • Officially closed the acquisition of Star2Star
  • Firan Technology ($FTG.to)
    • Polar Asset Management sales
      • 528k shares sold from Jan 8 to Feb 12
      • About 50% of the trading volume
      • They now own about 9% of the outstanding shares
  • Viemed ($VMD.to)
    • Reported Q4
      • Still executing well
      • The covid related one time revenue will run off
      • Call indicated that they can return to historical growth rates once we are fully reopen
  • Sylogist ($SYZ.to)
    • Received conditional approval to list on TSX from TSXV
    • Acquisition of MAS (Municipal Accounting Systems) and new credit line
      • 37.8 mil in cash
      • 7.4 mil rev
      • 4.3 mil ebitda
      • Will be immediately accretive
    • Held a call after the acquisition
      • Will list on TSX shortly
      • Integration of MAS 90-120 days
      • Key employees staying on post integration
      • Investing in sales and marketing to expand MAS geographically
    • Announced they will list on TSX
  • Martello Technologies Group Inc ($MTLO.v)
    • They announced a private placement concurrent with the bought deal
      • This was closed and mgmt. participated for about 1 mil
    • I have sold my shares at a small loss and will move on
      • I will continue to monitor for a few quarters
    • Announced strategic sales win
      • It sounds quite positive
  • Dawson Geophysical ($DWSN)
    • Reported Q4
      • As expected rev way down
      • Potential to recover further with O&G activity
  • Servotronics ($SVT)
    • Filed a notification of inability to timely file their 10-K (deadline was March 31)
      • Micorcaps are fun
  • FAX Capital ($FXC.to)
    • Announced a placement with QUIS
      • 16 mil shares at $1.25 for 20mil total
      • 1 year lock up
      • Able to nominate a board member
      • They should still have lots of cash left over after this
    • Closed Carson Dunlop acquisition and placement with QUIS
      • Also appointed a president (graham Badun) of a new platform company
      • Was president of Alarm Force
    • Q4 results posted
      • No surprises
      • Estimating they have about 45% cash in book value after the acquisition of PEO
  • Pizza Pizza Royalty Corp ($PZA.to)
    • Reported Q4 2020 – Not much to report
      • Ontario and Alberta have been under fairly strict lockdowns during the back half of the quarter
      • Non traditional is hurting
      • Payout ratio was 84%
      • They feel they can grow store count by 5% in 2021

The author is long $OSS.v, $ISDR, $PSD.to, $STC.v, $VMD.to, $FXC.to at time of writing.

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Filed under Company Updates

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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