Saturday, November 25, 2017

November 24, 2017, Quick Update: Peanut Convertible Debentures Power Rankings

Hi again, readers.  This is the 21st update of the Peanut Convertible Debentures Power Rankings, which is current to November 24, 2017. As one of our quick updates, this article has abbreviated commentary.  Whether you're a retail investor or a research analyst from one of the big bank brokerages, we hope you continue to find value in reading The Canadian Convertible Debentures Project.      

For a summary of the rankings of our entire convertible debenture coverage universe including the quantitative model prices of, and notes on each issue we follow, click on the table below to view it larger.

The Top-5 picks in the Power Rankings are also described with a little more detail in the corresponding section below.

For background information on the Peanut Power Rankings, please see our FAQs by clicking here

Important: the Peanut Power Rankings are provided as information and opinions only and are not intended to be a provision of investment advice or a recommendation of any investment action in any form.  As with all information concerning investments, it is highly recommended that an individual consult with a qualified investment professional before making any investment decisions.

Market Commentary - Quick Points (November 24, 2017)
  • No market commentary (again) this week: no time (again)!
  • Instead, we'll get right to the Top-5 convertible debentures (plus additional bonus coverage on issues of interest) below.   

Peanut Power Rankings Top-5 Convertible Debentures and Additional Bonus Coverage (November 24, 2017)
1. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last update's ranking: #1).  A potential hiccup surfaced when it was brought to light that Cargojet's partnership with Air Canada Cargo on three international routes (two flights per week to Latin America, and one flight per week to Germany) would be terminated at the end of the year.  The expiration of this deal, which is good for about $9 million in revenue per year, seemed like a setback.  Well, no matter, but Cargojet management instead just coolly reassured the market by saying it expected to replace these flights and the associated revenue by operating the flights directly.  Cool.  They just keep executing.   The bottom line: Cargojet is effectively a play on the growth of online retail and continues to have a dominant market position in an area (i.e., air cargo services) of long-term, secular growth.   Even at current prices, it's still decent entry point for CJT.DB.C.  There are still 3+ years to the hard call date and based on Friday's close of $111.10, the yield-to-hard-call-date is a positive 1.00% and the common shares only have to rise another 10.3% to hit the conversion price.  We continue to really like it.  We've been long CJT.DB.C since it debuted at $100.00.

2. Diversified Royalty Corp, 5.25% 31-December-2022, Convertible Debentures.  (Ticker: DIV.DB), (Last update's ranking: #2).  This continues to trade solidly since its November 7 debut.  Not much in the way of new news for this company since the last update.  The story is still the same: with $88 million of cash ready to be deployed, the market is eagerly awaiting their next royalty acquisition.  So far, their track record has been pretty good. The bottom line: this is an interesting royalty company, which currently owns the Sutton Realty, Mr. Lube, and AIR MILES® trademarks in Canada.  Management is highly regarded, and are aligned with shareholders through their own shareholdings.  Finally, the terms of the convertible debenture seem positive and this is a reasonable credit risk, in our view.  At Friday's close of $101.45, we have a yield-to-hard-call-date of 4.85%, and the common shares need to rise 28.5% to hit the conversion price.  We continue to think that the stock has the potential to pop at the announcement of the next royalty acquisition.  We're long DIV.DB at an average price of $100.08.  We also have a position in DIV common shares.

3. American Hotel Income Properties REIT LP, 5.00% 30-June-2022, Series 'U' Convertible Debentures. (Ticker: HOT.DB.U), (Last update's ranking: #3). It was also a quiet week for American Hotel Income Properties REIT, which has actually been quite active thus far in 2017.  The REIT has been very acquisitive, and now we will see how they digest the acquisitions.  In addition, we will see if a recent branding agreement with Wyndham on its rail portfolio will reap benefits.  Fun fact: the REIT now owns 115 hotels in 92 cities in 33 states.  This is a nice, pure play on the US secondary hotel market.  The bottom line: HOT.DB.U has traded below par in the months since it hit the market.  With a yield-to-hard-call-date of 5.38% and over 3.5 years to the hard call date, we think it's great value here and the potential is there for future gains.  It closed Friday at US$98.75 and we're long HOT.DB.U at US$98.00.

4. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible US Dollar Convertible Debentures. (Ticker: TCN.DB.U), (Previous ranking: #5). Another fun fact: this Tricon convertible debenture issue was this blog's inaugural #1 pick.  Obviously, we still like it as the company continues to execute nicely and its Silver Bay acquisition earlier in the year is already starting add to the top and bottom lines.  The bottom line: this is a very good quality convertible debenture issue, and has a nice combination of potential upside, yield, and USD-denominated exposure.  At today's close of US$108.32, the yield-to-hard-call date is 3.11% and there are 3+ years left until the hard call date. The common shares need to rise only about 14.9% to hit the conversion price.  We've been long TCN.DB.U since it debuted at US$100.00.

5. Exchange Income Corporation, 6.00% 31-March-2021, Series 'G', Convertible Debentures. (Ticker: EIF.DB.G), (Last update's ranking: #7).  Although we're not quite sure what to make of this one because of all of the moving parts, we can't ignore it in our Peanut Top-5 Power Rankings any longer: on a pure quantitative model basis, it's the most undervalued debenture in our coverage universe.  In fact, the underlying common shares of EIF are trading well in-the-money but the convertible debenture issue closed Friday only at $110.00, for a yield-to-hard call date of negative -1.35%.  The Winnipeg-based company is a bit of an odd-duck conglomeration of northern-focused aviation businesses and manufacturing, and has been a very acquisitive management team.  Recent quarterly results seemed strong but the company has also been a favourite target of aggressive US short sellers, including the infamous Marc Cohodes. In addition, Exchange Income Corp. is also a serial issuer of convertible debentures, usually putting out an issue on roughly an annual basis.  Moreover, the company has also developed kind of a negative reputation for aggressively redeeming its outstanding convertible debenture issues, much to the chagrin of investors.  Maybe EIF.DB.G is good value for good reasons?  Hmmm, good question.  The bottom line: if our Peanut Power Rankings were purely about our model prices and the quantitative, EIF.DB.G would be #1.  But there's also a lot of noise here, which means you play this issue at your own risk.  This week, #5 sounds about right.  We have no position in EIF.DB.G.

7. DHX Media, 5.875% 30-September-2024, Convertible Debentures. (Ticker: DHX.DB), (Previous ranking: #6). At least DHX is finally starting to show signs of stabilizing?  As suffering DHX and DHX.DB investors are well-aware, the market has flat-out hated the company the last little while.  We continue like it, so I guess that makes us contrarians on this one.  There wasn't much new with the company in the last week, but our views (hopes?) continue to be buoyed by it's decent fiscal first quarter and the potential of the Peanuts and Strawberry Shortcake acquisition. The bottom line:  Despite the market hating on DHX right now, the company has attractive media content assets, its Peanuts IP assets (Charlie Brown and Snoopy!) have cash cow characteristics, and the company is currently undergoing a strategic review and could be sold at a premium (see our previous update on our theory as to why it could sell for $9.32 a share).  Nevertheless, there are considerable risks here.  The company is highly levered (outstanding net debt of about $1 billion), and the company has lost the confidence of Bay Street.  That said, we think the unique nature of the assets are potentially worth the risk if you can stomach the volatility.  The convertible debenture (DHX.DB) closed Friday at $95.00, so the issue is showing signs of stabilization.  At this price, DHX.DB has a yield-to-maturity of 6.80% (note: there is no hard call provision for DHX.B, which is good for investors), but the common shares closed the week 98.0% away from DHX.DB's conversion price of $8.00.  Recovery may take awhile, but if it happens, investors could be very handsomely rewarded.  We are long DHX.DB at an average price of $99.22.  We also have a position in DHX's Series B common shares (ticker: DHX.B).

8. Surge Energy, 5.75% 31-December-2022, Convertible Debentures. (Ticker: SGY.DB), (Previous ranking: #8).  This relatively new convertible debenture issue has mostly been trading below par since its debut, but we're gonna assume that it's the underwriters who are still working through their over-allotment inventory as the reason for this.  Don't look now but oil prices have been trending higher, ending the week at two-year high levels.  Call us conspiracy theorists, but with the impending Saudi Aramco IPO still slated for next year, the Saudis have good incentive to keep OPEC production in line, to fetch the best possible price in the biggest IPO there ever was.  I'm not going to go so far and say that we're back in a roaring bull market for oil since I think the groundswell for a cleaner, fossil fuel-free future is real and gaining momentum, but conditions are setting up for a possible positive trade for Canadian juniors like Surge. The bottom line: if you have a positive outlook on energy prices, SGY.DB is the top oil convertible debenture on our list.  At Friday's close of $99.85, the yield-to-hard-call of SGY.DB is 5.78%, and the common shares need to rise about 32.2% to hit the conversion price.  These aren't bad figures.  Surge seems to be sustainable at current oil prices, and this convertible debenture provides an opportunity for participation in the optionality of oil prices heading higher, but at lower relative risk to holding Surge common shares directly.  We have no position in SGY.DB but we're thinking about it.  

9. Liquor Stores, 4.70% 31-January-2022, Series 'B' Convertible Debentures.  (Ticker: LIQ.DB.B), (Last week's ranking: #10).  Liquor Stores has had an active year, not the least of which was a full-out proxy fight where the dissidents won and sacked the previous board and management.  After releasing some pretty terrible quarterly results (why not also let the door hit the previous team on their way out?), the new regime announced that the company would be retreating from liquor retailing in the lower 48 US states.  The market liked this lots. Let's face it, those US stores have never performed as well as investors always hoped they would.  The bottom line:  Long-suffering Liquor Stores investors have been eager for a new direction, and the new board and management at the helm seem ready to deliver it.  To boot, the underlying shares of the LIQ are more volatile than you'd expect, and this helps the valuation of the LIQ.DB.B convertible debenture.  At Friday's close of $102.26, LIQ.DB.B has yield-to-hard call date of 3.94% and the underlying common shares need to rise 45.1% to hit the conversion price.  We no longer have a position in LIQ.DB.B.

17. Rogers Sugar, 5.00% 31-December-2024, Sixth Series (Series 'E') Extendible Convertible Debentures. (Ticker: RSI.DB.E), (Previous ranking: #19). This past week was a tale of two stories (wait, that sounds weird but I think you know what we mean).  On November 20, the company announced it was making its second acquisition in the maple syrup business in 2017, by buying Quebec-based Decacer for $40 million.  Maple syrup has a better growth profile than Rogers' traditional sugar business, and this acquisition increased Rogers' presence in a fragmented market.  Pro-forma, after the Decacer deal closes, maple is expected to contribute 20% of Rogers' top-line.  Investors likey.  However, on November 22, Rogers announced its fiscal fourth quarter results, and this wasn't as sweet as the maple syrup news.  In fact, the traditional sugar business struggled and declined from a year ago.  Needless to say, investors didn't like this so much. The bottom line: consolidating the fragmented maple syrup business provides a shot in the arm for a long-time sleepy company, though trade, consumer sentiment, and growth risks remain in Rogers' traditional sugar business.  At Friday's close of $105.50, RSI.DB.E has a yield-to-hard call of 3.80%, and the underlying shares of RSI need to rise 33.0% to hit the conversion price of $8.26.  We have no position in RSI.DB.E.

Picture of the Day
Even black bears enjoy Swedish waffles with Canadian maple syrup. Edmonton, Alberta. Copyright © 2017 Felix Choo / dingobear photography.  Picture is available for licensing with Alamy Images. Photo may not be reproduced without permission. 

Drop Us a Line

Thank you for reading this blog.  As always, if you have any comments or questions about convertible debentures or this blog, please leave us a comment at the bottom of the page or email us at 

In addition, for media, sponsoring and/or financial institution inquiries, please email us at  Thank you for your interest!


No comments:

Post a Comment