AD.TO - Alaris Royalty Corp.

[Mark Jr.]

https://www.alarisroyalty.com/

 

Alaris Royalty Corp has been mentioned in a couple other threads here,

 

One was GRC (Grenville Royalty Corp - total implosion):

https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/grc-grenville-strategic-royalty-corp/msg313271/#msg313271

 

And the other was ALS.to

https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/als-to-altius-minerals/msg184868/#msg184868

 

I've had some of the RRSP in this for a couple years, it was a pretty decent dividend, you could get to 7.5% yield when you bought on the dips toward $18/share, with a solid monthly payout (until now, see below).

 

 

The yield now is at 19% based on Friday's close, it was over 20% earlier in the week. Of course, given the circumstances (writing this during the coronavirus drawdown), I don't expect this to hold up - they've already announced they're switching from monthly to quarterly dividend in anticipation of current uncertainty.

 

I did a table of their current investments/royalties and assigned a rough impairment estimate to each one on how much their royalty will be impacted over the next 12 months:

 

https://www.alarisroyalty.com/partners

 

CAD Royalties

 

 

USD Royalties

 

 

 

This is really back of the napkin and I tend to be overly dramatic when guessing at downsides, for example I wrote Planet Fitness and the plastic surgery clinics down to zero.

 

My model came in at about a 64% dividend reduction over the next year, depending on what the USD/CAD rate does.

 

When I first worked this up I thought it came out to a 6.8% yield based on current share price and a USD/CAD of 0.8, until I realized I had a mistake in my spreadsheet because the yield kept going down as I strengthened the USD.

 

Found the error, and it looks more like this, assuming my guesses at royalty impairment are in the ballpark then

 

USD/CAD 0.8 = 9.5% yield

USD/CAD 0.65 = 11.2% yield

USD/CAD 1.20 = 7% yield (USD crash scenario)

 

Assuming there isn't a glaring error in my spreadsheet (I already found one), Alaris seems more compelling now, as I type this, than when I did the original workup, and then it looked not bad at these prices.

 

Alaris also showing some sense in that they eschewed share buybacks during the frothy heyday of 2 months ago, and the years running up to it, but they're stepping in now and announced last week a buyback of 9% of their shares. This is the time to be doing this.

 

Between their revolving lines they have about $248M of investible capital, with WACC about 6%. They typically, during normal times garner a ROIC in the mid-teens percentage-wise.

 

With investible capital and a weak economy they could get some better values.

 

[Mark Jr.]

They've declared their first dividend since moving from monthly to quarterly, 0.29 which annualized to $1.16

 

This is 70% of the pre-COVID dividend, and, at least for the moment, 142% of my own projection guess.

 

https://www.alarisroyalty.com/news/article/316-alaris-royalty-corp-declares-q2-dividend

 

They've also announced a new $17M USD investment in a new partner, Carey Electric Contractors, LLC in Illinois. They were declared an essential service during lockdowns and business was minimally affected by shutdowns. They will commence receiving a 2.4M royalty in 2022.

 

https://www.alarisroyalty.com/news/article/315-alaris-royalty-corp-invests-us-17-million-in-new-partner

 

Share price was something like $8.57 when I did my original workup, trading at $12.19 today, putting current yield at 9.5%

 

 

 

[Mark Jr.]

Pronounced lack of interest in this name it seems.

 

Anyhoo. They've converted into an income trust, units converted 1 for 1, US holders being redeemed for cash. Dividend to remain steady, quarterly at the moment "because COVID." Current yield = 10.46%

 

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/pe-firm-alaris-royalty-board-approves-conversion-to-public-income-trust-59556511