CSU - Constellation Software

[Jerry Capital]

Any thoughts on the special dividend?

[khturbo]

Not ideal but inevitable, sooner or later. As Munger says, if something (full fcf deployment into acquisitions in this case) can't go on forever, then it must end!

[Liberty]

 

Via

[Liberty]

Any thoughts on the special dividend?

 

It was discussed at the AGM. Seemed like Mark is as-always uber-conservative and his instincts would have him just never take any debt and pile up cash, but he seemed to open to the idea that at some point, too much is too much and unless there's a way to deploy it at the right hurdles, it's better to return the excess.

 

On one hand, it might seem like a signal that there's no elephant in the pipeline, at least in the near-term. But they've also said that to better compete with PE, they'd probably lever up elephants, so bagging one might not require that much cash. With their balance sheet and FCF, they should have no problem accessing capital (recently increased the size of their revolver and they can always issue more long-term debentures) if an opportunity arises, so I doubt the flexibility is much reduced..

 

I sent them a question about it. We'll see if they reply in the next Q&A.

[Liberty]

Interesting note in the filings:

 

Bargain purchase gain

Bargain purchase gains totalling $68 million and $69 million were recorded in the three and twelve month periods ended December 31, 2018 relating to nine acquisitions made during 2017 and 2018. Of the 2018 amounts $63 million relates to a single acquisition made in the fourth quarter for aggregate cash consideration of $nil. Prior to acquisition the previous owners had begun an extensive restructuring of the business which will need to be completed under Constellation’s ownership. It is therefore expected that the business will generate large cash and operating losses in 2019. For Constellation to ensure a sufficient return on its investment in the turnaround of the business there was a requirement as part of the acquisition for the seller to capitalize the balance sheet on closing with cash in the amount of €47 million (US$53 million). While this cash will be required to fund losses generated by the business in 2019, IFRS does not permit a restructuring accrual to be recorded as part of the opening balance sheet acquisition accounting for the majority of the expected charges. The result is a bargain purchase gain of $63 million being recorded in the Q4 2018 results, and based on current estimates an EBITA loss inclusive of restructuring costs of approximately $46 million that will be recorded in the 2019 results.

 

That's some nice vulture investing, if they can successfully restructure it.

 

Accounting wise, looks like it'll have some negative impact on margins, but hopefully it'll create a bunch of value over time.

 

h/t @JerryCap

[Liberty]

Acquisition at Harris:

 

http://www.collain.com/resources/collain-healthcare-joins-harris-computer-systems

 

Collain Healthcare, the leading EHR, Virtual Care and Interoperability provider for the Long-Term and Post-Acute Care (LTPAC) industry, announced that it has been acquired by Harris Computer Systems (“Harris”) through its healthcare group.  Prior to this transaction, Collain had acquired intellectual property from LG CNS and an Austin-based interoperability and data thinktank focused on Managed Care and Integrated Delivery Networks. ...

 

With this announcement, Collain also unveiled the launch of its brand-new Electronic Health Records Platform, Enterprise Resource Planning Suite, and Virtual Care platform with connectivity to hundreds of wearables, remote monitoring devices and secure HD Video telemedicine.

 

http://www.collain.com

 

h/t @pearnick

[Liberty]

For those starting to think about the CSU AGM, I've heard from the CFO that it'll be on May 2 this year ("current plan is to schedule from 8-noon at the Carlu (downtown Toronto)"). I'll most likely do a little get together at a nearby pub on the evening of May 1.

[Shooter MacGavin]

For those starting to think about the CSU AGM, I've heard from the CFO that it'll be on May 2 this year ("current plan is to schedule from 8-noon at the Carlu (downtown Toronto)"). I'll most likely do a little get together at a nearby pub on the evening of May 1.

 

Hey thanks! I'll definitely try to be there.  Last year was fun.

 

I'm writing out a set of important q's right now:

 

1) what life advice do you have for me?

2) what questions should I be asking you?

3) what can CSU do to lower the impact on climate change?

4) where do I get some peanut brittle?

 

[Liberty]

For those starting to think about the CSU AGM, I've heard from the CFO that it'll be on May 2 this year ("current plan is to schedule from 8-noon at the Carlu (downtown Toronto)"). I'll most likely do a little get together at a nearby pub on the evening of May 1.

 

Hey thanks! I'll definitely try to be there.  Last year was fun.

 

I'm writing out a set of important q's right now:

 

1) what life advice do you have for me?

2) what questions should I be asking you?

3) what can CSU do to lower the impact on climate change?

4) where do I get some peanut brittle?

 

I see you've been watching this: https://buffett.cnbc.com/annual-meetings/

[Shooter MacGavin]

For those starting to think about the CSU AGM, I've heard from the CFO that it'll be on May 2 this year ("current plan is to schedule from 8-noon at the Carlu (downtown Toronto)"). I'll most likely do a little get together at a nearby pub on the evening of May 1.

 

Hey thanks! I'll definitely try to be there.  Last year was fun.

 

I'm writing out a set of important q's right now:

 

1) what life advice do you have for me?

2) what questions should I be asking you?

3) what can CSU do to lower the impact on climate change?

4) where do I get some peanut brittle?

 

I see you've been watching this: https://buffett.cnbc.com/annual-meetings/

 

haha yup.  I've also been to Omaha a few times.

[FiveSigma]

New Q&A (beating both Liberty and Pearnick to the punch):

 

https://www.csisoftware.com/wp-content/uploads/2019/02/QA-February-2019-DivRelated-Final.pdf

[Liberty]

"I found a half dozen public companies out of 4000 had done as well or better than CSI with an acquisition strategy during the last decade. All of them were operating on a smaller scale than CSI."

 

What I want to know is what are those..?

 

"We are deploying more capital in the vertical market software sector, but don’t see dramatic growth this year unless competition slackens."

 

This will be interpreted negatively by some, but Mark is the most conservative man in the world, and he said "dramatic" growth. So there could still be growth over last year's excellent year. It also seems to mean that last year wasn't just a fluke but is more of a run-rate increase. To me that's positive.

[voyager]

Who do you all think those half a dozen companies are? I'd guess Transdigm is in there. 

 

"I found a half dozen public companies out of 4000 had done as well or better than CSI with an acquisition strategy during the last decade. All of them were operating on a smaller scale than CSI."

 

What I want to know is what are those..?

 

"We are deploying more capital in the vertical market software sector, but don’t see dramatic growth this year unless competition slackens."

 

This will be interpreted negatively by some, but Mark is the most conservative man in the world, and he said "dramatic" growth. So there could still be growth over last year's excellent year. It also seems to mean that last year wasn't just a fluke but is more of a run-rate increase. To me that's positive.

[Broeb22]

Yeah that's what I asked myself. Based on the criteria of them operating on a smaller scale than CSI, TDG could be excluded. I guess it depends on the criteria used. TDG has arguably deployed more capital and on larger acquisitions on average than CSI.

 

I would think these are much smaller companies. It's also hard to imagine what I'm about to say is correct given that returns like CSI's are just incredibly hard to duplicate, especially in better-understood parts of the market such as industrials.

 

Maybe HEI, TYL, MLAB, FSV, POOL, WSO.

 

Not sure if these would get close to CSI but their long-term returns suggest they're not extremely far off.

[Liberty]

I think PATK and BYD.UN are probably two.

[SlowAppreciation]

https://www.csisoftware.com/wp-content/uploads/2019/02/ASDP-press-release-Feb-2019.pdf

 

Toronto, Ontario – February 25, 2019 - Constellation Software Inc. (“CSI”) (TSX:CSU) announced today that Mark Leonard has notified the Company that he or entities controlled by him (“Leonard”) intend to enter into an automatic share purchase and disposition agreement (“ASPD”) with a registered broker in Canada.

Under the terms of the ASPD Leonard will sell 100 CSI common shares per week when the price exceeds $1,000 per share, and intends to purchase 100 common shares per week when the price is less than $800 per share. Leonard anticipates starting the ASPD shortly, and continuing it for one year.

[Liberty]

He's mentioned in the past that too high stock price has implications for employee retention. Clearly his way of trying to keep itk in a range where he thinks that won't be a problem. But if Mr. super-conservative thinks the stock is a good buy for employees at this price, fair value is above... I don't know if the market will realize that, though.

 

Not the first time this has been done, example from 2007:

 

[Broeb22]

Is he talking CAD or USD terms. CAD terms, the stock is above $1,000...

[Liberty]

Is he talking CAD or USD terms. CAD terms, the stock is above $1,000...

 

I'm sure it's CAD. The stock officially trades on the TSX in CAD.

 

He's talked down the price of the stock many times in the past. You just have to keep in mind that he's the most conservative person  in the world financially, though.

[bizaro86]

MTY.TO would be another one that's done very well with acquisitions the last decade.

[Liberty]

Jonas acquisition (in Australia this time):

 

https://www.jonassoftware.com/About_Us/Latest_News/Jonas_Software_Announces_the_Acquisition_of_Happen

 

acquisition of Happen Business Pty Limited. ("Happen"). With its sophisticated Enterprise Resource Planning (ERP) accounting software, Jim2, Happen delivers complete business management software solutions to an extensive regional and international customer base. [...]

 

Happen was founded in 2001 in Mortdale, New South Wales, Australia. Happen was established to fill a growing need in the market for a comprehensive accounting and business workflow solution. The company rapidly established a strong following for its Jim2 Business Engine software, and now has an extensive customer base in diverse industries such as managed print, managed services, importing, distribution, sales and service, specialized retailing and manufacturing. Happen’s in-house team of professional consultants, development experts and support engineers are ready and resourced to ensure businesses using Jim2 Business Engine maximize their return on investment.

 

H/t @pearnick

[Liberty]

COO Mark Miller doing something similar to what Mark Leonard did (but this one not over a year, just over a couple months, but with higher number of shares per month):

 

https://www.globenewswire.com/news-release/2019/03/13/1752885/0/en/COO-of-Constellation-Software-Enters-into-Automatic-Share-Purchase-and-Disposition-Plan.html

 

They really want to keep the price down. Which ironically is kind of a bullish signal, as you want management that focuses on talent retention and not the stock, and a stock that is high can be a problem for that. But at the same time, these guys (Leonard and Miller) are so financially conservative and probably have such high hurdles that what they consider fair value is probably lower than what most people would consider fair... We'll see how the market reacts and whether the gambit works or if the market sees things differently.

 

The timing to May 31st makes me wonder if this is because employee bonus open-market stock purchases are mostly during this time of the year...

 

Btw, the stock is going ex-dividend for the $20US special dividend today, so about $26CAD of the price move today is because of that.

[sane]

"When really good companies start trading at 5 and 6 times revenues, it’s time to start worrying. I hope

our shareholders are never in that position."  (Under the section: Great Companies Are Not Always Great Stocks

)

 

https://www.csisoftware.com/docs/default-source/investor-relations/presidents-letter/pl_2015.pdf

 

I see CAD 1000 per share as 5.21x P/Sales TTM, or would still be 5.0x P/S after 4% growth Q1 2019.

 

Any other suggestions for what metrics they used to decide to sell personally/attempt to cap the stock at CAD 1000 per share?

[Liberty]

"When really good companies start trading at 5 and 6 times revenues, it’s time to start worrying. I hope

our shareholders are never in that position."  (Under the section: Great Companies Are Not Always Great Stocks

)

 

https://www.csisoftware.com/docs/default-source/investor-relations/presidents-letter/pl_2015.pdf

 

I see CAD 1000 per share as 5.21x P/Sales TTM, or would still be 5.0x P/S after 4% growth Q1 2019.

 

Any other suggestions for what metrics they used to decide to sell personally/attempt to cap the stock at CAD 1000 per share?

 

With the caveat that this is all just my opinion...

 

I think there's a little more context needed to understand all these things.

 

I'm pretty sure that both Mark Leonard and Mark Miller are most worried about long-term talent retention. When you have managers and operators able to deploy capital at 30% ROIC and have a proven acquisition track record and proven operator track record, they don't have to work for you. They could leave and go do their thing. If the CSU stock price gets too high for too long, there might be a temptation for some of these people to sell and maybe try to go build wealth in a different vehicle. That's why Mark has often talked down the price of the stock and would probably want to to be perennially trading around fair-to-undervalued.

 

In that context, I see the recent stock sale plans as just a signal to try to make the stock drop a bit. It recently shot up, right around the period of the year when managers buy stock in the open market with part of their bonus (as per their incentive plans), and they probably worry a bit about that.

 

But what must also be known is that both Marks are no doubt very financially conservative and have very high hurdle rates. You don't get their track record without that. So when they're saying they'd buy at 800 and sell at 1000, it probably means that fair value for most people would be a fair amount above that.

 

I don't think they're judging CSU on a P/sales basis. I think it's probably on cashflows. They can rule-of-thumb a small VMS on price/sales because they know they'll restructure them and change the margin profile, so looking at those on EV/EBITDA only wouldn't make sense (their actual acquisition models are no doubt very detailed and take into account many metrics).

 

Also, a company can be expensive at 6x sales because it has no reinvestment opportunities, like most niche VMS, but another can be cheap at 6x sales if it has lots of high-ROIC re-investment opportunities and a long runway, like maybe CSU.

 

I think Mark is very truthful when he writes these things, but I think sometimes his readers extrapolate what he says to things that he didn't quite say, or they don't calibrate for just how conservative and "under-promise/over-deliver" he is.

[sane]

Thanks Liberty, appreciate your comments.  I think you are probably right.

 

But given the gradient between me and them (as insiders and smarter than me), their actions do give me pause.  Especially when the stock trades at a 10% premium to their signal.  And when it refuses to be concerned (so far) by a roll-up returning capital.