Sunday, March 25, 2018

March 23, 2018, Update: Peanut Convertible Debentures Power Rankings

Hi, again.  This is the 28th update of the Peanut Convertible Debentures Power Rankings, which is current to March 23, 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.  Note: we've done some additional tinkering on the quantitative model since last update, so you may notice some variation in the model prices if you're comparing to last time.  As always, everything about this blog is a work in progress, and we're trying to continuously improve outputs as best we can.  Hopefully you find our efforts useful.

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 23, 2018)
  • Not much time to write this week so we'll avoid all of the politics talk and keep this really brief.
  • Equity markets remain volatile lurching back and forth in search of direction.  The TSX in particular has had a rough go of it in 2018, and sits at a level below that of a year ago.  
  • The most recent data from both Canada and the US suggest that price levels are edging higher.  This means interest rate increases.  We're still of the opinion that the US will raise rates three more times this year, and Canada once or maybe twice.
  • So, to quickly sum, we have high equity valuations, a return of market volatility, rising interest rates, an aging bull market, growing trade protectionism, and the worst US administration, well, ever.  Clearly, there are risks out there.
  • As such, we'll keep pounding the drum for broad diversification across portfolios to help manage the risk.  In addition, a focus on quality names that can weather the storm of higher rates and an uncertain world would be preferable. As always, protect your hard-earned capital.
  • Let's get to the Top-5 convertible debentures.  This week, we struggled with coming up with names atop our list since, to be honest, there are warts with all of the names listed there.  All part of the fun being in the market, I guess.  If you have any comments, you can drop us a line as per usual.     

Peanut Power Rankings Top-5 Convertible Debentures and Additional Bonus Coverage (March 23, 2018
    1. Hydro One, 4.00%/0.00% 30-September-2027, Instalment Receipts. (Ticker: H.IR), (Previous ranking: #2).  Almost by default, we're moving Hydro One back atop our (vaunted!) list.

    Of course, Hydro One, as a utilities stock, is highly interest rate sensitive, not to mention the strange dynamic of being a former Crown corporation in which the Government of Ontario still owns a sizable minority stake.  But if this doesn't really bother you, based on Friday's close of $32.25, our model now says H.IR. is about 10.7% undervalued, and that's a big reason why this issue has re-surfaced atop our rankings. 

    By now, you probably already know that 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 a previous update.  

    The bottom line: The interest rate environment has hit the price of the Hydro One instalment receipts quite 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 slightly out-of-the-money; if the share price of H does not improve, you run the possibility of getting stuck in 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.

    2. Surge Energy, 5.75% 31-December-2022, Convertible Debentures. (Ticker: SGY.DB), (Previous ranking: #8).  Obvious observation of the day: Canadian resource stocks sure are volatile! And so are oil prices.  If you've filled up your gas tank in the last week, you already know that WTI is back up, and with it, so is Surge Energy.   

    Surge continues to quietly execute within the context of a tough environment for oil juniors - year-end results released March 14 were decent enough.  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 three times higher than its current share price.  The question is, however, with so many investors badly burned in the last oil downturn, are there any investors left who care?

    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 $100.25, the yield-to-hard-call of SGY.DB is 5.67%, and the common shares need to rise about 37.5% 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.

    3. DHX Media, 5.875% 30-September-2024, Convertible Debentures. (Ticker: DHX.DB), (Previous ranking: #6).  This embattled little company held its annual general meeting on March 23, and according to the presentation slides from the meeting, the board's strategic review of the company is expected to be complete by the end of fiscal Q4 which, for DHX, is June 30.

    Will the company be sold?  Hard to say.  The company has sought-after assets, but retains a heavy debt-load.  This said, the DHX.DB convertible debentures are trading at sizable discount to par, and in the event of a change of control, they may be redeemed at par.

    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 both 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 handle 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 $93.04.  At this price, DHX.DB has a yield-to-maturity of 7.23% (note: there is no hard call provision for DHX.B, which is good for investors), and the common shares closed the week 97.5% 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 do well in the end.  Management needs to execute, though, and as we've seen in the last few 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.

    4. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible US Dollar Convertible Debentures. (Ticker: TCN.DB.U), (Previous ranking: #4).  Not much new to report here.  Tricon is executing beautifully, but the market doesn't care, and the company has sold off along with the rest of its interest-sensitive brethren. 

    We aren't too worried as fundamentals are intact. 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$103.00, the yield-to-hard-call date is 4.67% and there are 3+ years left until the earliest potential hard call date. The common shares need to rise about 35.4% 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's possibly a good buying opportunity. For more information on Tricon Capital, please have a look at the company's most recent investor presentation.

    5. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Previous ranking: #3).  Economy and Amazon be damned, Cargojet just keeps going higher, doesn't it?  Impressive.  Very impressive.

    Since our last update, Cargojet announced strong year-end earnings and also increased its quarterly dividend.  Those lucky enough to be in the CJT.DB.C convertible debenture must feel like they are flying in first class.

    The bottom line: Cargojet is a terrific little company and remains a very good story operating in an area of long-term, secular growth.  No, the stock and convertible debenture aren't cheap, but they going higher because the company keeps executing on its opportunities.  Note that Amazon is worth keeping an eye on, however, as they are a fierce competitor in whatever market segment they choose to operate.  We no longer have a position in CJT.DB.C.  Apparently we sold too soon!

    6. American Hotel Income Properties REIT LP, 5.00% 30-June-2022, Series 'U' US Dollar Convertible Debentures. (Ticker: HOT.DB.U), (Previous ranking: #5).  Sigh.  This hotel REIT reported its year-end financial results on March 7 and the results missed, and the HOT.UN has subsequently been punished.  The HOT.DB.U convertible debenture is holding up relatively better, but Bay Street seems to want the company to execute better in 2018.  

    The bottom line: HOT.DB.U has traded below par in the months since it hit the market. 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 6.73% and over 3 years left to the hard call date, we continue to think it's very good value but Bay Street seems to be getting impatient with the story.  The company just needs to keep executing.  It closed Friday at US$95.00 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.

    7. Diversified Royalty Corp, 5.25% 31-December-2022, Convertible Debentures.  (Ticker: DIV.DB), (Last update's ranking: #7).  Still crickets over here.  I suppose, however, in times of market volatility, boring is good, right?

    No word yet on any new royalty acquisition(s) 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 $100.00, we have a yield-to-hard-call-date of 5.25%, and the common shares need to rise 40.9% 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. Liquor Stores, 4.70% 31-January-2022, Series 'B' Convertible Debentures.  (Ticker: LIQ.DB.B), (Previous ranking: #1). Well, to be blunt, that sucked: Liquor Stores' year-end financial results, released March 15, were quite disappointing.  Revenues, same-store-sales, and earnings growth were all negative, which suggests that the company's traditional liquor retailing business is struggling to find its feed right now.  LIQ traded like it was hungover in the aftermath.  Blah!

    To make matters worse, both Alberta-based NHL hockey teams have now been officially eliminated from the playoffs picture, which could make comps for this quarter and next challenging.  At this point, the saving grace may, indeed, be the company's foray into the cannabis retailing business going forward, but of course, that's an endeavour that comes with considerable risks. 

    The bottom line: If you were looking for a relatively safer way to play the brand new business of cannabis retailing, Liquor Stores is an alternative to speculating on the usual suspects of cannabis stocks pinballing up and down on the TSX.  An investment in LIQ.DB.B isn't without risks, however, both in the cannabis industry and its legacy liquor retailing business - as its most recent financial results suggest.  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, the company does appear to have more assertive direction.  So here's the deal: if you believe in the Alberta recovery and want a cannabis play to boot, then LIQ.DB.B is worth consideration here.  At Friday's close of $103.75, LIQ.DB.B has yield-to-hard call date of 3.31% and the underlying common shares need to rise 47.3% to hit the conversion price.  We no longer have a position in LIQ.DB.B, but have a position 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.

    9. Premium Brands, 4.65% 30-April-2025, Series 'G' Convertible Debentures. (Presumed Ticker: PBH.DB.G), (Previous ranking: unranked).  A noted consolidator in the pre-packaged sandwich and lunch meats industry, the stock price of Premium Brands has done very well in recent years.  The company has used new convertible debenture issues in the past as a financing vehicle to fund new acquisitions, and on March 15, another new issue was announced.  This issue is expected to hit the market on April 10.   

    The bottom line: We don't closely follow this company, but there's no question that the company's stock and convertible debentures have done very well for investors in recent years.  In our view, for a 7-year convertible debenture issue, the terms of the financing weren't exactly super generous for investors as the 4.65% coupon seems a little skimpy in a rising rate environment and the conversion price was set some 60% away from the price where the common shares are trading today.  That said, however, this company has been very effective in consolidating and operating in its business niche of pre-packaged foods, so if you believe they can continue to execute on their strategy, PBH.DB.G may be worth consideration.  We did not subscribe to the PBH.DB.G offering.  For more information on Premium Brands, please have a look at the company's most recent investor presentation

    10. Morneau Shepell, 5.00% 30-June-2021, Series 'A' Convertible Debentures. (Ticker: MSI.DB.A), (Previous ranking: #15).  Morneau Shepell, the human resources, retirement benefits, and technology company founded by our oft-embattled federal Minister of Finance, has done remarkably well in the market volatility of the last couple of months.  Year-end results were released on March 7, and the company increased earnings 33% year-over-year. 

    The bottom line: This is quietly a pretty solid company that executes very nicely in its niche.  MSI common shares have moved steadily higher in the last year, and closed Friday just 1.0% off the conversion price for the MSI.DB.A convertible debentures.  MSI stock is by no means cheap, but with hard call for MSI.DB.A still more than two years away, the convertible debenture could deliver nice returns should MSI continue its positive price momentum. 

    Picture of the Day
    Shipwrecked in the tropics.  An Hai Beach, Con Son Island, Con Dao Archipelago, Vietnam.  Edmonton, Alberta. Copyright © 2011 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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    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 

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    1. Interesting site.

      Have you ever reviewed NWH.DB.E

      1. Thank you. Hopefully you find the site useful and will continue to find it useful in the future. Regarding Northwest Health, no, I haven't reviewed any of the REIT's convertible debenture issues, but since I do get asked about it occasionally, I'll try to have one (or more) of the NWH issues run through the model in time for next update. No promises, but I'll try.