Sunday, March 4, 2018

March 2, 2018, Update: Peanut Convertible Debentures Power Rankings

Hi, convertible debenturers.  This is the 27th update of the Peanut Convertible Debentures Power Rankings, which is current to March 2, 2018.  Thank you for continuing to read and support 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.

Public Service Message: the Financial Post Convertible Debentures List
We've received quite a few emails asking about the Financial Post's convertible debentures list, which has apparently vanished from the newspaper's website.  Unfortunately, we don't know of another complete list of Canadian convertible debentures that is available free to the public that has the same depth of information that was contained in the Financial Post list.  The stats and figures we use for the Peanut Power Rankings we collect from various public sources and calculate ourselves (it's a lot of work!); we don't have a complete list of convertible debentures either.

For those of you out there that are clients of a full-service brokerage firm with a research team that covers convertible debentures, you may be able to obtain a complete list if you ask your broker.  Also, as we announced on December 20, thanks to one our valued readers, we were informed that the TSX publishes a basic list on its website approximately monthly.  It's not the same as the old Financial Post list, but hopefully it can still be of use to some of you out there. 

Market Commentary - Quick Points (March 2, 2018)
  • Wow, just so, so much has happened since our last update, but yet there's so little time to write about it all.  We'll try to blow through these points really quickly.  
  • Good news first: how about Canada at the Olympics? 29 medals, arguably the country's best performance ever at a non-boycotted games.  Made for some great TV viewing.
  • More unsettling: the market volatility that arrived a month ago has decided to stick around, jolting many portfolios.  As always, stay diversified out there, folks. 
  • To geopolitics: this week, there have been rumblings that the Chinese constitution would soon be changed to eliminate presidential term limits, which could entrench the most powerful Chinese president in a generation, Xi Jinping, as China's leader for life.  To this, Trump responded: "I think it's great. Maybe we'll give it a try someday." 
  • Of course he did. 
  • I'm no political scientist, but the US system of government is theoretically designed to prevent too much power from vesting in any given one office - there are supposed to be checks and balances.  Well, here we are in 2018, and things don't quite seem right, do they?
  • Here are a few random words to describe one of the two main political parties in DC: complicit, hypocritical, ignorant, self-serving, destructive. I'll leave it up to you to decide which one of the two these words apply to, and why things don't quite seem right in 2018.   
  • In other news: another school shooting.  Yet another one.  The stock answer from one of the two main political parties in the US, and their paid sponsors: how about even more guns!  Let's arm teachers!  What could possibly go wrong? [**Insert expletives here**]
  • In trade news: Trump tweeted yesterday: "Trade wars are good, and easy to win", following the US imposition of stiff steel and aluminum trade tariffs.  Even though the move is aimed mostly at China, Canada will likely also suffer some collateral damage.  Fun fact from history: big tariffs were a feature of the (Republican) Herbert Hoover administration of 1928-32, which oversaw the ushering in of the Great Depression.
  • Fed-watch: new Fed Chairman Jerome Powell spoke to the House Financial Services Committee on February 27 and it sounded to me like we're in store for four rate hikes in the US this year.  Recall our previous theory that unnecessary tax cuts (and hence fiscal stimulus) in the US during a time when the economy is running at full capacity will be inflationary and hence force the Fed to raise rates at a faster-than-expected pace.
  • Back home in Canada: as the Bank of Canada won't likely be raising rates at the same speed this year (again, our theory), we figured we'd see some air come out of the loonie and it looks like it's already happening - just like that, the Canadian dollar is down to 77.57 US cents.  
  • Over in equity markets, the TSX is off to a ragged start in 2018, down more than -5%. 
  • Yes, the markets generally coasted to new highs in 2017 with surprisingly little volatility, despite the minefield of powder-kegs in Washington.  Maybe 2018 is the year where the market re-discovers that there is only one world out there, and that we're all inevitably interlinked and affected by it all.  If so ...     
  • Let's get to the Top-5.  Before we do though, we have the same general reminder as last week: stay diversified and protect your capital out there.    

Peanut Power Rankings Top-5 Convertible Debentures and Additional Bonus Coverage (March 2, 2018)
    1. Liquor Stores, 4.70% 31-January-2022, Series 'B' Convertible Debentures.  (Ticker: LIQ.DB.B), (Previous ranking: #1).  Last update, we talked at length about Aurora Cannabis paying $15 a share to acquire a 19.9% stake in Liquor Stores, which is a price above both what shares in LIQ have been trading at on the TSX and the conversion price of the LIQ.DB.B convertible debentures.  We won't repeat ourselves too much this update, but the deal did quietly close on February 14.    Liquor Stores' full-year financial results are scheduled to be released after market close on March 14.  LIQ has had issues in its traditional liquor-retailing business; it'll be interesting to see if the company has made progress on its issues on March 14. 

    On pure numbers, our quantitative model has always liked the LIQ.DB.B convertible debenture, in part because the underlying shares of LIQ are volatile.  If anything, entering the marijuana retailing business only adds to that volatility, which is, theoretically at least, good for supporting the convertible debenture's prices. 

    The bottom line: If you were looking for a relatively safer way to play the brand new business of cannabis retailing, there are worse ways to do it than through Liquor Stores.  An investment in LIQ.DB.B isn't without risks, both in entering a brand new industry plus the lingering issues in its legacy liquor retailing business.  Nevertheless, it's encouraging that Aurora saw fit to pay well above market for LIQ shares, and with new leadership at the helm at LIQ, it does appear to have more assertive direction.  So here's the deal: if you believe in the Alberta recovery, want a cannabis play to boot, and generally like the outputs of our quantitative model, then LIQ.DB.B is worth consideration here.  At Friday's close of $105.00, LIQ.DB.B has yield-to-hard call date of 2.90% and the underlying common shares need to rise 21.3% to hit the conversion price.  We no longer have a position in LIQ.DB.B, but have initiated a position in LIQ common shares.. For more information on Liquor Stores, please have a look at the company's most recent investor presentation ... but note this presentation dates back to November, prior to the announcement of the Aurora deal.

    2. Hydro One, 4.00%/0.00% 30-September-2027, Instalment Receipts. (Ticker: H.IR), (Previous ranking: #3).  By now, you should know the deal with this one: as a large utilities company, Hydro One will be sensitive to rising interest rates.  Up until quite recently, our quantitative model has consistently rated H.IR as overvalued.  As prices of H and H.IR have fallen fairly sharply since the beginning of the year, the valuation of both by our model has now changed.  Based on Friday's close of $31.55, the model now ways H.IR. is about 13% undervalued.

    These Hydro One instalment receipts have a complex structure.  We won't go into details again in this post but for more information, check out our write-up from last update.  

    The bottom line: The interest rate environment has hit the price of the Hydro One instalment receipts hard.  If you didn't get in on the offering and have been a keeping an eye on this story, a second chance has presented itself as long as you're comfortable getting into a utilities play at this point in the interest rate cycle.  However, before making any investment decisions, as always, consult a highly qualified investment professional - H.IR is a more complex issue than most and you want to know exactly what you're getting into.  It is currently trading out-of-the-money; if the share price of H does not improve, you run the possibility of getting stuck into a zero-coupon convertible debenture after the Avista deal closes.  We have no position in H.IR.  For more information on Hydro One, please have a look at the company's most recent investor presentation.

    3. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Previous ranking: #4).  Last update, we mentioned the news that Amazon was going to be entering the time-sensitive delivery business.  This could effectively make the behemoth a competitor to Cargojet, which would be concerning.  So how did Cargojet stock respond? It sold off for a few days, but then bounced back from the canvas like a champ.  Impressive.  The company is expected to release its fiscal fourth quarter results before market open on March 12.  Given Q4 encompasses the Christmas season, this is typically Cargojet's strongest quarter. 

    The bottom line: After a brief dip on the Amazon news, Cargojet simply went on about its business and CJT shares are back above $60 again.  As we mentioned last week, Cargojet is a terrific little company and remains a very good story operating in an area of long-term, secular growth.   Amazon is worth keeping an eye on, however, as they are a fierce competitor in whatever market segment they choose to operate.  We had participated in the offering and had been long CJT.DB.C at $100.00.  However, we decided to take profits on the issue since our last update, selling our position at $116.23 to fund other opportunities.

    4. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible US Dollar Convertible Debentures. (Ticker: TCN.DB.U), (Previous ranking: #5).  Tricon released it's year-end financial results on February 28, and from what we can see, the numbers were really quite strong.  The market didn't seem to care, however, as the real estate sector on the TSX has been out of favour given interest rate worries.

    No matter, the fundamentals still seem to be in place so we aren't too worried. TCN.DB.U was this blog's inaugural #1 atop the Peanut Power Rankings.  Tricon made a transformative acquisition in 2017 and continues to be well-positioned for the future.

    The bottom line: TCN.DB.U is a very good quality convertible debenture issue, and has a nice combination of potential upside, yield, and USD-denominated exposure (for those who believe the Canadian dollar will depreciate somewhat, as we do).  At Friday's close of US$104.50, the yield-to-hard-call date is 4.18% and there are 3+ years left until the hard call date. The common shares need to rise about 32.2% to hit the conversion price.  We've been long TCN.DB.U since it debuted at US$100.00 and will continue to hold it barring a change in fundamentals.  Quite frankly, with the debenture trading at these levels, it might even be a buying opportunity. For more information on Tricon Capital, please have a look at the company's most recent investor presentation.

    5. American Hotel Income Properties REIT LP, 5.00% 30-June-2022, Series 'U' US Dollar Convertible Debentures. (Ticker: HOT.DB.U), (Previous ranking: #6).  Much like Tricon, as a real estate play, HOT.UN has struggled in recent weeks.   However, HOT.DB.U, the convertible debenture, has actually held in quite nicely.   Fundamentally, the story is still intact here.  Fourth quarter earnings are expected after market close on March 7.

    The bottom line: HOT.DB.U has traded below par in the months since it hit the market, but it's almost back to US$100.00 now.  This is a play for those who have confidence in the REIT's highly regarded management, believe in the strength of the US economy, and have a negative forward view on the Canadian dollar.  With a yield-to-hard-call-date of 5.67% and over 3 years left to the hard call date, we continue to think it's super value.  The company just needs to keep executing.  It closed Friday at US$98.00 and we're long HOT.DB.U at US$98.00. For more information on American Hotel Income Properties REIT, please have a look at the trust's most recent investor presentation.

    6. DHX Media, 5.875% 30-September-2024, Convertible Debentures. (Ticker: DHX.DB), (Previous ranking: #2). Oh, good grief! Last update, we were anxiously awaiting the release of DHX's fiscal second quarter, as we thought the shares (and by extension, convertible debenture) of DHX could move either way based on the results.  Well, the results were actually quite ok: Peanuts is performing as expected and the company is making progress in chipping away at its debt.  So all's good, right?

    Well, not exactly.  Shortly after earnings were released, it was announced that both DHX's CEO (Dana Landry) and CFO (Keith Abriel) were both leaving the company.  The market did not like this surprise announcement and it does raise questions about the direction of DHX going forward.

    As you're aware, DHX's board of directors is currently undergoing a strategic review of the company.  I suppose if you're an optimist, you could consider the exit of the CEO and CFO as a prelude to a sale.  However, the market definitely didn't take it that way given the ensuring sell-off.

    So where do we go from here? We don't know.  We like the company's assets but DHX needs to regain the confidence of investors.  It has done poorly on this front in the last few months. 

    The bottom line: DHX has attractive media content assets, but clearly there are risks. DHX's Peanuts intellectual property has cash cow characteristics, and the company is currently undergoing a strategic review which are positives.  However, although the company is making progress in paying off debt, it remains highly levered, which is potentially risky in a rising interest rate environment.  Further, the exit of the CEO and CFO does not help the company's relationship with Bay Street.   Results have been disappointing but we still think the unique nature of DHX's assets are potentially worth the risk if you can stomach the volatility.  However, at this point, any new investment in the shares or convertible debenture has to be considered borderline speculative.

    The convertible debenture (DHX.DB) closed Friday at a disappointing $90.00, indicating some investors have thrown in the towel.  At this price, DHX.DB has a yield-to-maturity of 7.85% (note: there is no hard call provision for DHX.B, which is good for investors), and the common shares closed the week 108.3% away from DHX.DB's conversion price of $8.00.  Recovery may well be a long road, but if we get there, investors in the convertible debenture could well in the end.  Management needs to execute, though, and as we've seen in the last couple of weeks, there is limited room for error.  We are long DHX.DB at an average price of $99.22 and continue to hold.  We also have a position in DHX's Series B common shares (DHX.B). For more information on DHX, please have a look at the company's most recent investor presentation.

    7. Diversified Royalty Corp, 5.25% 31-December-2022, Convertible Debentures.  (Ticker: DIV.DB), (Last update's ranking: #7).  It's sort of been just crickets with this company, as there really hasn't been much in the way of newsflow for DIV in weeks and weeks.  I suppose they just continue to collect their royalties and pay out dividends.  No word yet on any new royalty acquisition on the horizon.  Year-end financial results are expected March 29. 
    The bottom line: DIV is an interesting royalty company, and 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.  DIV.DB is holding steady in the current volatile market environment.  At Friday's close of $100.32, we have a yield-to-hard-call-date of 5.15%, and the common shares need to rise 40.0% 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 - but it's unclear when that will be. We're long DIV.DB at an average price of $100.08, and quietly await along with everyone else.  We also have a position in DIV common shares.

    8. Surge Energy, 5.75% 31-December-2022, Convertible Debentures. (Ticker: SGY.DB), (Previous ranking: #8).  If it's crickets with Diversified Royalty Corp, it's just been tumbleweeds with Surge Energy and just about every other energy producer on the TSX.  Sentiment for Canadian energy just seems really poor right now, even though the oil price environment is better than it was from a year ago.

    For what it's worth, Surge seems to be operating quite nicely within a difficult environment.   If you believe management's estimates based on its proven and probable reserves, the company has a net asset value per share of over $6, which is more than three times higher than its current share price. 

    The bottom line: These days, one needs to be something of a contrarian and have a stomach for risk to willingly invest in the Canadian junior oil market. That said, if you have a positive outlook on energy prices or even just a neutral one, SGY.DB might be worth a look here.  At Friday's close of $100.00, the yield-to-hard-call of SGY.DB is 5.75%, and the common shares need to rise about 51.9% to hit the conversion price.  We have no position in SGY.DB.  For more information on Surge Energy, please have a look at the company's most recent investor presentation

    9. Rogers Sugar, 5.00% 31-December-2024, Series 'E' Extendible Convertible Debentures. (Ticker: RSI.DB.E), (Previous ranking: #9).  That flash sale on RSI.DB.E, which occurred just in time for our last update, sort of disappeared just as quickly as it arrived, so hopefully those of you waiting patiently to get this convertible debenture at a low price managed to get your orders filled.

    An alternative, of course, was subscribing to the new convertible debenture issue announced by Rogers Sugar on February 26 (presumed ticker: RSI.DB.F, this update's ranking: #11).

    Other than that, there hasn't been much news on the company in the last three weeks. 

    The bottom line: For Rogers Sugar, there are trade and growth risks in its traditional sugar business.  That said, the new maple syrup business provides a nice growth opportunity for this century-old company.   RSI.DB.E is trading higher than it had been as at the time of our last update, closing Friday at a price of $103.0  At this price, the yield-to-hard call is 4.30% and the common shares need to rise 34.5% for the issue to trade in-the-money.  We have no position in RSI.DB.E.  For more information on Rogers Sugar, please have a look at the company's most recent investor presentation (note: the presentation is really not that recent - it dates back to last July and is related to the company's acquisition of L.B. Maple Treat Corporation).

    10. Algoma Central, 5.25% 30-June-2024, Series 'A' Convertible Debentures. (Ticker: ALC.DB.A), (Previous ranking: #10).  Algoma Central is the leading shipper on the Great Lakes - St. Lawrence waterway, and a large bulk shipper of iron ore.  As such, the surprise tariffs announced by President Trump on steel (and aluminum) may well be a negative for the company, should they reduce trade in this area. 

    The bottom line: Algoma Central is a good credit and an investment in ALC.DB.A offers exposure to a company with unique shipping infrastructure assets, a market-leading position, and a management that thinks sustainably for the long-term.  The Trump administration's protectionist trade policy is a wildcard for a company like this, however.  ALC.DB.A closed Friday at $103.04, which gives the issue a yield-to-hard-call of 4.47%.  The common shares need to rise about 44.9% to hit conversion price.  We have no position in ALC.DB.A, but have a long position in ALC common shares. For more information on Algoma Central, please have a look at the company's most recent investor presentation.

    Picture of the Day
    Hearts of spring. (Where are you, spring?) Edmonton, Alberta. Copyright © 2014 Felix Choo / dingobear photography.  Picture is available for sale as prints or wall art at Fine Art America.  Picture is also available for licensing at Alamy Images.  Photo may not be reproduced without permission. 

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