Sunday, November 5, 2017

November 3, 2017, Quick Update: Peanut Convertible Debentures Power Rankings

This is the 19th update of the Peanut Convertible Debentures Power Rankings.  This update is current to November 3, 2017.  This is one of our quick updates, with abbreviated commentary.      

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 3, 2017)
  • As we suspected, the Bank of Canada chose to hold the line on interest rates during its rate announcement on Wednesday.  This, in addition to some surprisingly weak GDP numbers helped to suppress the Canadian dollar, which ended the week at 78.35 US cents.
  • Yields in the bond markets also declined across the yield curve.    
  • It's been an active past two weeks in our convertible debentures coverage universe.  We'll get to the details below.       

Peanut Power Rankings Top-5 Convertible Debentures and Additional Bonus Coverage (November 3, 2017)
1. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last update's ranking: #2).  And this long-time top-5 mainstay finally ascends to #1.  Cargojet announced on October 23 that it had extended its contract with Canada Post and Purolator Courier until March 31, 2025.  In our view, this is just another example of the company executing well in its business.  The bottom line: Cargojet continues to have a dominant market position in an area of long-term, secular growth, and 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 $111.00, the yield-to-hard-call-date is a positive 1.10% and the common shares only have to rise another 9.0% 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. American Hotel Income Properties REIT LP, 5.00% 30-June-2022, Series 'U' Convertible Debentures. (Ticker: HOT.DB.U), (Last update's ranking: #1). On November 1, American Hotel Income Properties announced that it had signed a brand licensing agreement with the Wyndham Hotel Group for its entire rail hotel portfolio.  Furthermore, the REIT also announced that it had acquired two additional rail hotels, one in Fargo, North Dakota, and another in Whitefish, Montana.  Both bits of news can be viewed as positives, in our view. 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 5.31% 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$98.98 and we're long HOT.DB.U at US$98.00.

3. Diversified Royalty Corp, 5.25% 31-December-2022, Convertible Debentures.  (Presumed ticker: DIV.DB), (Last update's ranking: #4).  Note: this issue is not yet trading, but is expected to hit the market on November 7.  Earnings are expected November 9, and the numbers should be good.  The company pre-announced same stores sales growth at Mr. Lube of 4.7% for its fiscal third quarter, which is excellent performance.  In addition, DIV's royalty licensing agreement with Mr. Lube was amended to include sales from Mr. Lube's new incremental tire business, which is a positive looking forward.  Things are looking up.  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.  We did not successfully subscribe to the issue, but we are interested in acquiring one at the right price once it begins trading on the TSX.  We also have a position in DIV common shares.

4. Osisko Gold Royalties, 4.00% 31-December-2022, Convertible Debentures. (Presumed ticker: OR.DB), (Last update's ranking: #3).  This issue hit the market on November 3, and it was a smoking debut, with OR.DB ending the day at $104.80.  This high-quality issue is a welcome addition to the Canadian convertible debentures market.  The bottom line: this is top-shelf precious metals royalty company, with a superior growth profile.  Osisko is now cashed up and on the lookout for additional royalties to add to its growth profile.  We're long OR.DB, as we subscribed to the issue at $100.00.  We also have a position in OR common shares.

5. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible US Dollar Convertible Debentures. (Ticker: TCN.DB.U), (Previous ranking: #5). Tricon announced on October 24 that the company had sold 1,523 homes in non-core markets for a tidy sum of US$153 million.  Quarterly earnings will be announced November 9.  The bottom line: this is a good quality convertible debenture issue, and has a nice combination of potential upside, yield, and USD-denominated exposure.  At Friday's close of US$107.00, the yield-to-hard-call date is 3.55% and there are about 3.4 years left until the hard call date. The common shares need to rise about 22.2% to hit the conversion price.  We've been long TCN.DB.U since it debuted at US$100.00.

6. DHX Media, 5.875% 30-September-2024, Convertible Debentures. (Ticker: DHX.DB), (Previous ranking: #6). We asked last update if the worst was over, but unfortunately the Class 'B' common shares continued to sink even lower.  This has been an unwelcome white-knuckle ride, and the DHX.DB has been similarly sideswiped.  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 just over $1 billion), and the company has lost the confidence of the street.  That said,   However, 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 $93.00.  At this price, DHX.DB has a yield-to-maturity of 7.18% (note: there is no hard call provision for DHX.B, which is good for investors), but the struggling underlying common shares closed Friday 102.5% away from DHX.DB's conversion price of $8.00.  Recovery will take patience, 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).

10. Innergex Renewable Energy, 4.25% 15-August-2020, Series 'A' Convertible Debentures. (Ticker: INE.DB.A), (Last week's ranking: #8). Innergex made a splash on October 30 when it announced it was taking over Alterra Power for the price of $1.1 billion in cash and stock. Shares of INE traded down on the news but we're positive on the deal, as Alterra's Icelandic geothermal assets and US hydro assets represent an improved growth pipeline for the new Innergex, as well as the diversification of the new company's into different geographies.    The bottom line: Cleaner, renewable energy is a an important theme that we're bullish on over the medium to long-term.  At Friday's close of $106.00, INE.DB.A has a yield-to-hard-call date of 0.93% and is just under 2 years to hard call.  INE is trading only 6.3% away from INE.DB.A being in the money.  We're long INE.DB.A at $102.75.

13. Algoma Central, 5.25% 30-June-2024, Series 'A' Convertible Debentures. (Ticker: ALC.DB.A), (Previous ranking: #16).  For what's a pretty sleepy company, there's actually been a bit of newsflow the last week or so.  First, on October 27, Algoma Central announced that it had reached a tentative agreement with the navigation and engineering officers in the company’s product tanker fleet, effectively ending a week-long strike. Second, on November 2, the company announced that its first Equinox Class self-unloader, the brand-new, seaway-max size Algoma Niagara, had arrived in Canada from a Chinese shipyard.  New technologically advanced ships like this will lower costs, improve emissions performance, and add to the bottom line.  Finally, after market close on November 3, Algoma Central announced what we perceive to be very good quarterly earnings, which included the treat of an increase in the company's quarterly dividend, to 9 cents a share.  The bottom line: recent developments for Algoma Central are all positive, the company is gaining momentum, and the underlying common shares are starting to turn.  ALC.DB.A has mostly been on the expensive side since it hit the market in the summer, but our quantitative model now has the issue at fair value.  ALC.DB.A closed Friday at $105.40, which gives it a yield-to-hard-call of 3.97%.  We have no position in ALC.DB.A but have a position in ALC common shares.

19. Aecon Group, 5.50% 31-December-2018, Series 'B' Convertible Debentures. (Ticker: ARE.DB.B), (Previous ranking: #24). The strategic review bore results - Aecon found a buyer! On October 26, Aecon announced that it had agreed to be acquired by Chinese construction giant CCCI for $20.37 per share.  (This valuation compares to the conversion price of ARE.DB.B of $20.00 per share).  However, there is real question as to whether this deal will go through, as given the political sensitivities related to selling to a Chinese company, the Investment Canada Act can be cited by the federal government to nix the deal.  ARE.DB.B's hard call date is December 31, 2017, so time is ticking.  We don't have a position in either ARE.DB.B or ARE, but this will be an interesting situation to watch from the sidelines. 

Picture of the Day
Market bears have been sleepy like this grizzly bear.  Calgary Zoo, Calgary, Alberta. Copyright © 2016 Felix Choo / dingobear photography.  Picture is available for licensing with Alamy Images.  Photo may not be reproduced without permission. 

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