ELF.TO - E-L Financial Corp. Ltd.

[Rod]

This may or may not be relevant for ELF, but I sold my EVT because I strongly suspect that the capital gains inclusion rate in Canada will be raised from the current 50%, probably to 75% to help pay for the COVID-19 deficit spending. Any company sitting on a large amount of unrealized capital gains (as EVT is) will see a large hit to their book value.

[JPerez]

I am not saying that the selling is a rebuke of their strategy.

I assume most of the shares have been sold by funds that were looking for liquidity and ELF was a good candidate because there was somebody in the market looking for blocks of shares, but they also chose to sell these shares over other ones in their portfolio because their investment thesis is not working out.

I would imagine that value funds bought these shares because it is a well managed company growing NAV at a good clip and the shares are very cheap relative to their value but as over the last 10 years the NAV keep growing and the share price is not going anywhere they are wearing out the shareholders.

Look at these numbers:

In 2007 the share price was around where it is now and the NAV was 675

In the years 2013 to 2016 the share price was also in the 650-720 range where it is now and the NAVs were 2013 (872), 2014 (970), 2015 (1089) and 2016 (1159).

And here we are in 2020 with a NAV of close to 1500 and the share price still at 685.

 

Of course eventually this should matter and the gap will close, all I am saying is that many shareholders are worn out and they were keen to sell when they found a bid from the company even if it was at less than half NAV.

During the market panic you could say they sold because they had to because of redemptions but who was selling to the company in May and who is selling now at these prices with the stock market back to near all time highs?

Of course this is great for the majority shareholder as they can buy their own portfolio at less than half its value and they are not trying to correct it.

 

 

[no_free_lunch]

My 2 cents, I have more confidence in management now than at any point since I bought in a few years ago.  The share repurchases are real.  The special dividend is real. If the plan was to screw over shareholder I don't think they would do these things.  Sure it's still trading at a crazy discount but I can't blame management when they are taking steps that would normally narrow the gap.

[SafetyinNumbers]

Does anyone else think this could be setting up a SIB?

 

https://www.newswire.ca/news-releases/e-l-financial-corporation-limited-announces-200-million-offering-of-4-000-senior-unsecured-notes-due-june-22-2050-858546685.html

 

It’s what makes the most sense to me but I am generally an optimist.

 

Last year at the AGM, Duncan was reluctant to buyback shares because he thought the discount would close too quickly before they could buy anything meaningful. Fast forward a year and the family loaded up its holdcos in the fall. Then they announce a NCIB and special dividend in March. They shockingly max our the NCIB in two months! Also one of the family holdcos then appears to have used its special dividend to buy even more stock.

 

To me a SIB makes the most sense but happy to hear other ideas.

[Rod]

Does anyone else think this could be setting up a SIB?

 

https://www.newswire.ca/news-releases/e-l-financial-corporation-limited-announces-200-million-offering-of-4-000-senior-unsecured-notes-due-june-22-2050-858546685.html

 

It’s what makes the most sense to me but I am generally an optimist.

 

Last year at the AGM, Duncan was reluctant to buyback shares because he thought the discount would close too quickly before they could buy anything meaningful. Fast forward a year and the family loaded up its holdcos in the fall. Then they announce a NCIB and special dividend in March. They shockingly max our the NCIB in two months! Also one of the family holdcos then appears to have used its special dividend to buy even more stock.

 

To me a SIB makes the most sense but happy to hear other ideas.

 

Maybe raising money to take EVT private?

[SafetyinNumbers]

Does anyone else think this could be setting up a SIB?

 

https://www.newswire.ca/news-releases/e-l-financial-corporation-limited-announces-200-million-offering-of-4-000-senior-unsecured-notes-due-june-22-2050-858546685.html

 

It’s what makes the most sense to me but I am generally an optimist.

 

Last year at the AGM, Duncan was reluctant to buyback shares because he thought the discount would close too quickly before they could buy anything meaningful. Fast forward a year and the family loaded up its holdcos in the fall. Then they announce a NCIB and special dividend in March. They shockingly max our the NCIB in two months! Also one of the family holdcos then appears to have used its special dividend to buy even more stock.

 

To me a SIB makes the most sense but happy to hear other ideas.

 

Maybe raising money to take EVT private?

 

Could be but it would be nasty on taxes wouldn’t it?

[Rod]

Does anyone else think this could be setting up a SIB?

 

https://www.newswire.ca/news-releases/e-l-financial-corporation-limited-announces-200-million-offering-of-4-000-senior-unsecured-notes-due-june-22-2050-858546685.html

 

It’s what makes the most sense to me but I am generally an optimist.

 

Last year at the AGM, Duncan was reluctant to buyback shares because he thought the discount would close too quickly before they could buy anything meaningful. Fast forward a year and the family loaded up its holdcos in the fall. Then they announce a NCIB and special dividend in March. They shockingly max our the NCIB in two months! Also one of the family holdcos then appears to have used its special dividend to buy even more stock.

 

To me a SIB makes the most sense but happy to hear other ideas.

 

Maybe raising money to take EVT private?

 

Could be but it would be nasty on taxes wouldn’t it?

 

I don’t think there would be any taxes to pay if they just took EVT private. Maybe if they liquidated it they would incur capital gains. But if they left it intact I don’t think so.

[SafetyinNumbers]

I’m thinking of the family controlled holdcos that control EVT. I guess they could be part of the group pursuing the acquisition so their shares would never be sold?

[Rod]

I’m thinking of the family controlled holdcos that control EVT. I guess they could be part of the group pursuing the acquisition so their shares would never be sold?

 

I can’t see any reason they couldn’t do it that way. But I’m no expert on takeover rules.

[ColdandRich]

I have a chunk of money to invest and am looking into either ELF or EVT. Does anybody have any thoughts on the one vs. the other? Assume liquidity is not an issue.

[no_free_lunch]

I own elf. I think I am more in alignment with the main shareholders this way.  Elf has more levers, in theory, to unlock value. They did the special dividend and large share repurchases recently.

[SafetyinNumbers]

I put up a poll to see if investors think ELF will do a SIB.

 

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/will-e-l-financial-(elf-to)-execute-a-substantial-issuer-bid/

[SafetyinNumbers]

Nice quarter from Empire Life and a big dividend to ELF after skipping last quarter.

 

https://www.newswire.ca/news-releases/empire-life-reports-second-quarter-2020-results-863059595.html

[SafetyinNumbers]

ELF results out.

 

NEV back to $1460, stock price remains constrained at 685 despite gobbling up 20% of the float for $600.

 

No plan for the $200m raised in 30 year paper in June, yet.

 

https://www.newswire.ca/news-releases/e-l-financial-corporation-limited-announces-june-30-2020-financial-results-817222604.html

[JPerez]

By my calculation book value is up to around 1550 CAD at this market levels, yet the price is still at 675.

In fact it is the same price it was at in mid April, for reference the s&p 500 was at 2800 then or nearly 20% lower.

Looking at the tape it seems to me that since the beginning of August somebody is getting rid of a block of shares through the NBC brokerage.

If there are a few hundred shares at the bid they hit it and also they put concealed sell orders with a few hundred shares at the ask.

This has increased the volume and put pressure on the price as they look for demand for the block.

Insiders have not bought shares in the last couple of months despite this.

For what is worth I picked up some shares at 675 today reversing 1/3 of the trade i made in May where I sold all my ELF and bought Berkshire just after Buffett's remarks at the AGM.

[SafetyinNumbers]

By my calculation book value is up to around 1550 CAD at this market levels, yet the price is still at 675.

In fact it is the same price it was at in mid April, for reference the s&p 500 was at 2800 then or nearly 20% lower.

Looking at the tape it seems to me that since the beginning of August somebody is getting rid of a block of shares through the NBC brokerage.

If there are a few hundred shares at the bid they hit it and also they put concealed sell orders with a few hundred shares at the ask.

This has increased the volume and put pressure on the price as they look for demand for the block.

Insiders have not bought shares in the last couple of months despite this.

For what is worth I picked up some shares at 675 today reversing 1/3 of the trade i made in May where I sold all my ELF and bought Berkshire just after Buffett's remarks at the AGM.

 

I really hope they pull the trigger on the SIB. It's pretty sweet to get 100% return on investment on day 1 of a trade which you borrowed money to do at 4% for 30 years.

 

I think that NAV is actually understated because they don't disclose how much ELF they own indirectly through their minority ownership of the family holdcos and they value it at market price.

[JPerez]

I just don't know why the needed the money they raised.

Most of their investments are in highly liquid stocks.

The only thing they needed to do to raise money for the SIB was to sell some securities, surely they can find some in their portfolio that don't have a big capital gain on.

I suppose they raised the money because it is a good time to do it at this rates.

Couldn't they retire some of the preferreds with that money also?

[SafetyinNumbers]

They outsource most of the equity investment management to outside managers so I don't think they would want to direct which positions would be sold because it would interfere with the PM's strategy.

 

I see the Jackman's as extremely patient capital allocators. They might only make one significant move every few years but every time there is a crisis they take advantage of the opportunity. I believe they think long term interest rates will rise eventually (decades at the latest?) so I don't think they would want to retire any fixed rate perpetual preferred. It's a relatively low cost source of permanent capital. If they were trading at a giant discount to par then maybe I could see it happening. I am usually wrong.

 

To me the SIB is the most likely use of proceeds. In this crisis, the biggest opportunity is in the company's own shares. I have attended the ELF AGM for the past 6-7 years and have stuck around listening to Duncan field questions from the audience during Q&A and after the informal part of the AGM is over. I really believe Duncan when he said if they tried to buy back stock they wouldn't get much because why would someone who thinks like them would sell a dollar for 65 cents (the discount was a lot smaller back then). I should be clear that is not a quote but what I took away from what he said. He didn't think they would be successful so it was just manipulating the stock for traders (again, my read on what he said and not his words). I often misread people so there is potentially very little credibility to my analysis as I'm sure many of you will point out.

 

Fast forward to last fall, the family holdcos in which ELF directly or indirectly have a stake started buying the equity in size while the discount widened. I'm sure it was commented on above (by me probably). Then in March while the pandemic loomed, the company announced it's first ever NCIB (to my knowledge) and it was the most efficient buyback I have ever seen. They managed to buy 20% of the float in a few months at a bigger discount to NAV then when they announced they were starting the buyback.

 

It just makes sense they follow with an SIB. The idea of using a small amount of leverage (the $200m bond issue) to retire another 6.7% of the float at a 50% discount to NAV is the stuff of legends. It's adding potentially giant amounts of performance to the long term NAV and providing liquidity for shareholders who might need it.

 

If I was in charge, I would have started buying back stock at 25% discount to NAV. I have so little patience. My goal would be to get the stock to trade at a premium to NAV. If ELF is excellent at capital allocation then they should have a significantly lower cost of capital. Why shouldn't it trade at a premium to NAV?

 

But if you follow my aggressive approach, you pay a lot of fees. It distracts management from doing what they are good at which is capital allocation so it's better just to wait for opportunities like this if they develop in the shares. They bought 5% of the shares outstanding back at over a 60% discount to the $1550 NAV suggested above. That's incredible. The SIB would be truly spectacular if they could pull it off.

 

I'm a really big fan of capital allocation and despite that mostly invest in the worst capital allocators in the world because I see promise. That is not the case with ELF. The Jackman's appear to be very shrewd. I have significantly more respect for their investing acumen then I did when I first started investing along side them 6 years ago. I have been very impatient this whole time. Suggesting strongly the company pursue a buyback but Duncan showed tremendous patience. Patience that I think I need and demonstrate on a lot of positions including ELF to the detriment often to my own investment performance.

 

I am down on my position despite it consistently being my biggest position for the past 6 years. That either demonstrates incredible patience or ineptitude. To be honest lately, when I'm having a bad spell I think it's the latter a lot. Also I should say when I made my first purchase in 2015 at 645 the NAV was $947 at the end of 2014 and has since increased to the estimate of $1550. It's not a spectacular return but they aren't really trying to be spectacular. If they were they wouldn't outsource so much capital. Also, there are a lot of double discounts in the NAV so it is understated pretty significantly. Also in any normal market they would be able to sell Empire LIfe at a premium to it's book value so theoretically intrinsic NAV is even higher but I don't think they will ever sell that business but never is a long time. If the yield curve ever steepens, the ROEs for lifecos are going to accelerate higher and so will the P/B value. Maybe they would sell for a large premium to book.

 

I increased my position in ELF a decent amount this year. I wasn't even patient enough buying ELF stock during the pandemic period as they were so I paid higher prices than they paid at ~$600 for 20% of the float on the NCIB. It's probably better if the Jackmans have my capital.

 

It's only been two months since they raised the debt capital. It's a 30 year bond. They can be patient. Maybe it makes sense to wait and see if there is another liquidity event. It's pretty clear there is no race to get into the stock so the opportunity cost is probably low.

 

Please excuse the rambling post.

 

 

 

 

[bizaro86]

I have re-bought this recently. I got impatient and sold a few years ago. That worked out for me, but I think its probably a character flaw.

 

I'm not sure they can do a special issuer bid. If I recall correctly, there are some requirements there around liquidity after a tender that I am not sure they could meet. I need to do more research on that but I have read a lot of Canadian tender filings and they often say they have gotten a comfort letter from someone saying the liquidity will be fine after the tender.

[Scunny Bunny]

FWIW deconsolidated ELF on NTA of everything ~$1525 a share; apply market value assuming 1.3x book for Empire gets you $1506 as at 30 June 2020. Given SPX is up 12% since then, you can reasonably add another $120 or so to the NTA basis one since about $1184/share of the NTA based version is "market linked". Hence, NTA based value > 41640. "Market based" vale continues to lag with massive discounts in EVT & UNC (the latter must be over 40% at todays market prices for their portfolio). All figures don't adjust for the 10.1% round robin of EVT into ELF.  Offset by a few index put options, would be near-bomb proof at these levels I'd reckon, especially if another SIB came along...   

[JPerez]

After safetyinnumber's post last week I was wondering what are the crossholdings between ELF and the Jackman family holdcos.

I knew about the family owning UNC, ELF, EVT and Algoma through holdcos and of course the ownership of ELF shares by EVT and EVT in ELF but I wasn't aware about ELF having any participation in the company holdcos so I was looking into it the last few days.

So this is what I found:

The main shareholders in ELF are:

 

 

EVT owns 386206 shares of ELF (10.11%) directly but also proportionally around 71200 shares (1.86%) through their investment in a partnership called Ecando investments.

The main Jackman holdco Dominion & anglo Investment owns 1459193 shares of ELF (38.21%)

Canadian and Foreign securities owns 535614 (14.03%).

The Jackmans also own another 476294 shares (12.47 %)  through other holdcos.

 

In total the Jackmans control around 77% of ELF directly or through this vehicles.

 

The main holders in EVT are:

 

ELF 1348163 shares (24.01%)

Dominion & Anglo investments 1502898 (26.87 %)

Canadian & Foreign securities co 717713 (12.83%)

Dondale Investments 692000 (12.37%)

Other Jackman vehicles 409255 (7.32 %)

In total they control 83.5% of EVT shares.

 

Over the years the speculation have been that if ELF buys EVT they will acquire their own shares cheap but I think this outcome is quite unlikely since ELF (controled by the Jackmans) would have to buy EVT from the Jackmans. It doesn't make sense that they would sell the ELF shares in EVT to ELF at a cheap price and at the same time they would have to deal with a capital gain and pay taxes.

The only way this could happen is through a merger paid with ELF shares but with ELF shares being so cheap would that even make sense.

 

Of all the holdcos the only one I could find filings on is Dominion and Anglo Investments, they used to have public filings until 2002. I checked that last year accounts and proxy and what i found is quite interesting.

 

ELF owned around 10% of Dominion directly so you could say that ELF owns 3.8% of itself proportionally through the direct shareholding of Dominion in ELF.

Dominion is a shareholder of Canadian & Foreign securities, Ecando and Dondale investments which are shareholders of ELF and EVT so ELF owns indirectly shares of ELF and EVT this way. (It is hard to know how much would it be since I can't find any information on the exact percentages on this companies that are owned by Dominion but and educated guess is that it is quite a significant percentage based on the value that they put on the assets of these corporations owned by Dominion in the 2002 accounts)

Dominion is also a shareholder in United-Connected holdings which in turn owns 22.7% of UNC

Dominion is a shareholder of Amogla holdings which owns shares of Algoma

 

I couldn't find any information on ELF owning shares directly in Canadian & Foreign securities, Dondale, United- Connected, Amogla, Ecando or any of the other holding companies but it is quite possible that they own some shares on those companies since they have north of 600 million CAD in level 3 Canadian shares which are invested in partnerships.

 

Based on all of this, in my opinion the most likely scenario is that they keep buying shares at all their companies opportunistically over a number of years.

 

I find interesting in safetyinnumber's post also the comments of Duncan Jackman about speculators vs investors and how in his interpretation of Duncan's words they don't want to increase the price of the shares to benefit speculators.

That is all fine and well and of course a discount of to NAV of 20-30 % has been quite common in listed CEFs and  listed Holdcos over the years.

But my question would be when do you go from speculator to investor? Because if you are invested in this company over the last 5 years I don't think anybody could reasonable argue that you are an speculator but all we have seen is the discount to NAV get wider and wider.

I mean if you are a very long term investor in this company (10-20 years) you might want, from time to time, sell some shares to buy a car or whatever it is and investors that chose a company to put their savings in trust that they can sell their shares at a resonable price that is grounded in fundamentals, but this is clearly not the case here with a 60% discount to NAV plus the double discount of ELF owning indirectly its own undervalued shares.

 

Berkshire Hathaway would never let something this extreme happen to its own shares, Buffett has talked extensively about the shareholders as partners that should have all the relevant information about the company and the fact that Berkshire's shares are trading at a reasonable level is important.

 

Here there is little to no disclosure of the cross shareholdings of ELF and the Jackmans holdcos and the minority shareholders are not thought of as partners by the Jackmans to say the least.

 

To finish I just wonder if there is any way to get the Annual accounts or proxy statments of Private companies in Canada and also if anybody knows what is the threshold of ownership at which a majority holder would have to make an offer to delist the company.

 

 

 

[SafetyinNumbers]

I have gone through some of those filings too. D&A also owns a bunch of CF&S and other holdcos including Ecando (2002 AR attached). I know some of those holdcos merged to create Dondale (PR attached). Dondale owns a bunch of EVT but they might own a bunch of ELF too.

 

DominionAnglo_Annual_2002.pdf

Dondalejan2011.pdf

[JPerez]

It is quite a complex structure.

I had seen the amalgamation back in 2011 of Overdown, Drawde, Cimonoce and Cirederf and Dondale into Dondale.

The amalgamated Dondale definitely owns a lot more than the 692,000 shares of EVT because at the time in 2002 Dominion owned 1,274,402 shares of EVT directly and they valued them at around 48 million CAD and the value of the stakes in what has became Dondale was 183 million CAD so the EVT they own now could only be around 26 million CAD at the time so only about 15% of the assets.

Also I wonder how many layers of ownership are there since the Jackmans are not directly the owners of Dominion either.

Dominion was about 50% owned by another holdco called Debentures and Securities corporation of Canada.

I wonder if ELF is a shareholder of this other holdco higher in the corporate structure as well.

 

 

 

[SafetyinNumbers]

Seeking Alpha article

 

https://seekingalpha.com/article/4374330-e-l-financial-trades-46-of-book-value-potential-catalysts

[JPerez]

I have re-bought this recently. I got impatient and sold a few years ago. That worked out for me, but I think its probably a character flaw.

 

I'm not sure they can do a special issuer bid. If I recall correctly, there are some requirements there around liquidity after a tender that I am not sure they could meet. I need to do more research on that but I have read a lot of Canadian tender filings and they often say they have gotten a comfort letter from someone saying the liquidity will be fine after the tender.

I read the Seeking alpha article, my only issue with it is that capitalizing the headquarter expenses at 20x seems quite aggressive to me.

To reach a fair value for the shares I would prefer to use NAV and apply a 20-30% discount which would get us to the 1000-1200 range which is the same conclusion that the author reaches but through a more complicated calculation.

Regarding the chances of a SIB, I was looking a bit at the regulations in Canada and it seems to me that the bizaro86 is right it seems that companies can do a SIB at a price of their choosing only if they get an opinion that the liquidity of the stock wouldn't be affected.

In this case with the very limited float that would be hard to argue.

If the liquidity would be affected then they have to do the SIB at a fair value which would have to be assessed by a third party.

Does anybody know if this interpretation is correct?

If that is the case is hard to see  why they would do a SIB at NAV, if they go this route if would make more sense to do a take private bid.

On the other hand there are encouraging signs like the 200 million raised and the dividend from Empire life to the holdco this quarter which was another 44 million.

What I find a bit strange is that none of the other family vehicles or Duncan Jackman has bought any shares since the beginning of June at this prices.

As I said in a previous post there is somebody selling a big block since at least the beginning of August through the National Bank of Canada brokerage, just yesterday they were sitting all day at 675 with an iceberg order showing a 100 lot but selling over 2000 shares over the day.

Other times this has happened in the past the family holdcos had come and taken advantage buying these blocks.

Are there any restriction in Canada about insiders buying shares before a SIB or a take over offer?