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

[SafetyinNumbers]

Checked all their financials and didn't found anything that would be a red flag. It still trades in a huge NAV discount. Does anyone has a reason why it is that cheap?

 

It's always been this cheap for many years now, so I don't see if that will suddenly change.

 

You don’t think buybacks can shrink the discount?

[clutch]

Checked all their financials and didn't found anything that would be a red flag. It still trades in a huge NAV discount. Does anyone has a reason why it is that cheap?

 

It's always been this cheap for many years now, so I don't see if that will suddenly change.

 

You don’t think buybacks can shrink the discount?

 

I guess it's a difference in our expectations. Certainly this could become a relatively safe 10% return with the buybacks. I was implying that the huge discount likely won't close.

[SafetyinNumbers]

Checked all their financials and didn't found anything that would be a red flag. It still trades in a huge NAV discount. Does anyone has a reason why it is that cheap?

 

It's always been this cheap for many years now, so I don't see if that will suddenly change.

 

You don’t think buybacks can shrink the discount?

 

I guess it's a difference in our expectations. Certainly this could become a relatively safe 10% return with the buybacks. I was implying that the huge discount likely won't close.

 

I think the discount could close to 25%.

 

Is that still huge to you? Would that increase your return projection from 10% if it takes 5 years to close the discount to 25%?

 

Genuinely curious how people think about this.

[no_free_lunch]

"It's always been this cheap".

 

No it hasn't.  You are being sloppy, go run the numbers.  It was trading at around a 30% discount just a couple years ago. That was with management sitting on their hands too.  I have no idea why it traded as it does but management is eating the shares and can take out the public float if they keep at it.

[clutch]

Not really for me...

 

First I'm not sure if I could expect 25% discount... closest it got last 10 years was about 35%? Seems like this will permanently trade at a large discount due to its obscurity, the ownership nature and the inherent holdings company discount.

 

If it takes 5 years to materialize, I'd rather invest in more solid companies like BRK. Not that I'm saying ELF is a shady business, but things could change in the 5 years time frame so there will be variance in intrinsic value as well. Just too long to wait for the revaluation that might not even materialize.

[SafetyinNumbers]

Not really for me...

 

First I'm not sure if I could expect 25% discount... closest it got last 10 years was about 35%? Seems like this will permanently trade at a large discount due to its obscurity, the ownership nature and the inherent holdings company discount.

 

If it takes 5 years to materialize, I'd rather invest in more solid companies like BRK. Not that I'm saying ELF is a shady business, but things could change in the 5 years time frame so there will be variance in intrinsic value as well. Just too long to wait for the revaluation that might not even materialize.

 

Interesting thanks. Time frame seems to be one of the major issues for the discount too. I didn’t really appreciate how much they were adding to long term returns through their patience and capital allocation until a few months ago.

 

My target is only 10%+ returns and it’s hard not to get that when buying ELF at this level but that’s what makes a market. I think I’ll end up doing much better than 10% but we’ll see.

[StevieV]

Not really for me...

 

First I'm not sure if I could expect 25% discount... closest it got last 10 years was about 35%? Seems like this will permanently trade at a large discount due to its obscurity, the ownership nature and the inherent holdings company discount.

 

If it takes 5 years to materialize, I'd rather invest in more solid companies like BRK. Not that I'm saying ELF is a shady business, but things could change in the 5 years time frame so there will be variance in intrinsic value as well. Just too long to wait for the revaluation that might not even materialize.

 

Interesting thanks. Time frame seems to be one of the major issues for the discount too. I didn’t really appreciate how much they were adding to long term returns through their patience and capital allocation until a few months ago.

 

My target is only 10%+ returns and it’s hard not to get that when buying ELF at this level but that’s what makes a market. I think I’ll end up doing much better than 10% but we’ll see.

 

A discount is fine so long as there is underlying value creation and you have some confidence the discount won't grow forever.  As I've mentioned to safety, I don't know ELF well, but I think the buyback is a huge deal.  That means you should get - (1) underlying value growth + (2) good reinvestments through buyback at a discount + (3) narrowing discount/better multiple.

I generally don't like to rely on (3) by itself, but it can be a nice tailwind.  At the least, you'd think the chances of the discount narrowing are much better than the discount expanding.

[D33pV4lue]

Not really for me...

 

First I'm not sure if I could expect 25% discount... closest it got last 10 years was about 35%? Seems like this will permanently trade at a large discount due to its obscurity, the ownership nature and the inherent holdings company discount.

 

If it takes 5 years to materialize, I'd rather invest in more solid companies like BRK. Not that I'm saying ELF is a shady business, but things could change in the 5 years time frame so there will be variance in intrinsic value as well. Just too long to wait for the revaluation that might not even materialize.

 

Interesting thanks. Time frame seems to be one of the major issues for the discount too. I didn’t really appreciate how much they were adding to long term returns through their patience and capital allocation until a few months ago.

 

My target is only 10%+ returns and it’s hard not to get that when buying ELF at this level but that’s what makes a market. I think I’ll end up doing much better than 10% but we’ll see.

 

A discount is fine so long as there is underlying value creation and you have some confidence the discount won't grow forever.  As I've mentioned to safety, I don't know ELF well, but I think the buyback is a huge deal.  That means you should get - (1) underlying value growth + (2) good reinvestments through buyback at a discount + (3) narrowing discount/better multiple.

I generally don't like to rely on (3) by itself, but it can be a nice tailwind.  At the least, you'd think the chances of the discount narrowing are much better than the discount expanding.

 

Agree at these levels, any narrowing of the discount should bring significant appreciation. I'm not expecting much but even at a 35-40% discount, decreased share count, and underlying growth, you should see solid returns. One of my frustrations with ELF has been management's unwillingness to buy back stock. IDK what changed that last year maybe they are sick of shareholders asking why they aren't buying back stock. Judging by the sentiment of the thread it's easy to see why ELF trades at a discount. How many people got into this thinking discount would narrow,  sat waiting with no results, and ultimately solid for better opportunities.

[SafetyinNumbers]

Not really for me...

 

First I'm not sure if I could expect 25% discount... closest it got last 10 years was about 35%? Seems like this will permanently trade at a large discount due to its obscurity, the ownership nature and the inherent holdings company discount.

 

If it takes 5 years to materialize, I'd rather invest in more solid companies like BRK. Not that I'm saying ELF is a shady business, but things could change in the 5 years time frame so there will be variance in intrinsic value as well. Just too long to wait for the revaluation that might not even materialize.

 

Interesting thanks. Time frame seems to be one of the major issues for the discount too. I didn’t really appreciate how much they were adding to long term returns through their patience and capital allocation until a few months ago.

 

My target is only 10%+ returns and it’s hard not to get that when buying ELF at this level but that’s what makes a market. I think I’ll end up doing much better than 10% but we’ll see.

 

A discount is fine so long as there is underlying value creation and you have some confidence the discount won't grow forever.  As I've mentioned to safety, I don't know ELF well, but I think the buyback is a huge deal.  That means you should get - (1) underlying value growth + (2) good reinvestments through buyback at a discount + (3) narrowing discount/better multiple.

I generally don't like to rely on (3) by itself, but it can be a nice tailwind.  At the least, you'd think the chances of the discount narrowing are much better than the discount expanding.

 

Agree at these levels, any narrowing of the discount should bring significant appreciation. I'm not expecting much but even at a 35-40% discount, decreased share count, and underlying growth, you should see solid returns. One of my frustrations with ELF has been management's unwillingness to buy back stock. IDK what changed that last year maybe they are sick of shareholders asking why they aren't buying back stock. Judging by the sentiment of the thread it's easy to see why ELF trades at a discount. How many people got into this thinking discount would narrow,  sat waiting with no results, and ultimately solid for better opportunities.

 

 

I went to the AGMs from 2015-2019 and there was certainly a reluctance to announce a buyback and not be able to buy a meaningful amount of stock. They didn’t want to be seen as gaming the NAV discount smaller is the impression I got. At the time I thought it was just excuses but now I realize my time frame was too short. One way to avoid being seen as gaming the stock and make sure to get fills is to wait for a persistent  discount (>40% for a period of time?) before launching a buyback. 

 

I think they are just much more patient and thoughtful than most investors give them credit for. When you think about it, most of their value add is capital allocation. They don’t try to pick stocks themselves, they use outside managers and ETFs. They are mostly fully invested and never sell because that has historically been the best way to maximize returns.

 

 

 

[woodstove]

From the press release about new buyback, one gets the impression of a plan to continue buying until market price gets to somewhere in the neighbourhood of book, maybe a discount of only 20-30 pct?  Last year 30 pct of float was retired, with the normal course issuer bid plus the special bid, from about 1000k shares down to 700k float.  It seems likely that at most 2-3 years of additiuonal normal course bids, even without perhaps another special bid, will soak up enough shares to make ELF fairly thinly traded.  At which point .. how is the market value to be decided?  Various possibilities, but one way or another, fairly likely to be beneficial to outsider minority shareholders even from present $850-ish price.  If discount stays at 50 pct, then a 5 pct buyback annually would add 2.5 pct to gain in book value over and above any gain due to business performance.

[Spekulatius]

From the press release about new buyback, one gets the impression of a plan to continue buying until market price gets to somewhere in the neighbourhood of book, maybe a discount of only 20-30 pct?  Last year 30 pct of float was retired, with the normal course issuer bid plus the special bid, from about 1000k shares down to 700k float.  It seems likely that at most 2-3 years of additiuonal normal course bids, even without perhaps another special bid, will soak up enough shares to make ELF fairly thinly traded.  At which point .. how is the market value to be decided?  Various possibilities, but one way or another, fairly likely to be beneficial to outsider minority shareholders even from present $850-ish price.  If discount stays at 50 pct, then a 5 pct buyback annually would add 2.5 pct to gain in book value over and above any gain due to business performance.

 

Unfortunately, reducing the float does not necessarily help reducing the discount, as shares get even more illiquid. Having few outside shareholders also increases the chance or a takeunder at an opportune time for the controlling shareholder. I actually think that cash distributions would be a way better for minority shareholders in cases like this.

 

Speaking from sad experience.

[SafetyinNumbers]

From the press release about new buyback, one gets the impression of a plan to continue buying until market price gets to somewhere in the neighbourhood of book, maybe a discount of only 20-30 pct?  Last year 30 pct of float was retired, with the normal course issuer bid plus the special bid, from about 1000k shares down to 700k float.  It seems likely that at most 2-3 years of additiuonal normal course bids, even without perhaps another special bid, will soak up enough shares to make ELF fairly thinly traded.  At which point .. how is the market value to be decided?  Various possibilities, but one way or another, fairly likely to be beneficial to outsider minority shareholders even from present $850-ish price.  If discount stays at 50 pct, then a 5 pct buyback annually would add 2.5 pct to gain in book value over and above any gain due to business performance.

 

Unfortunately, reducing the float does not necessarily help reducing the discount, as shares get even more illiquid. Having few outside shareholders also increases the chance or a takeunder at an opportune time for the controlling shareholder. I actually think that cash distributions would be a way better for minority shareholders in cases like this.

 

Speaking from sad experience.

 

Can you share your experiences? I’m curious if they are a fair comparison to ELF.

 

I don’t think a take under is possible as the NAV is so easily determined, too many minority investors would exercise their dissent rights.

 

Also, with a share buyback in place, that’s $850k in liquidity a day. I’m constantly surprised by how much liquidity investors need for all of their positions every day. A big advantage for retail is that most of us don’t have the liquidity restraints of pooled capital. It’s a definitive edge for the most part especially since the GFC.

 

BRK.A has less than 700k shares outstanding and the ELF float is about 763k. The former seemed to work out ok so far.

 

I also want to share this essay from Howard Marks on liquidity. It changed my thinking dramatically. It probably doesn’t, however, fit most investor personalities or investing styles.

 

https://www.oaktreecapital.com/docs/default-source/memos/2015-03-25-liquidity.pdf

 

[Spekulatius]

From the press release about new buyback, one gets the impression of a plan to continue buying until market price gets to somewhere in the neighbourhood of book, maybe a discount of only 20-30 pct?  Last year 30 pct of float was retired, with the normal course issuer bid plus the special bid, from about 1000k shares down to 700k float.  It seems likely that at most 2-3 years of additiuonal normal course bids, even without perhaps another special bid, will soak up enough shares to make ELF fairly thinly traded.  At which point .. how is the market value to be decided?  Various possibilities, but one way or another, fairly likely to be beneficial to outsider minority shareholders even from present $850-ish price.  If discount stays at 50 pct, then a 5 pct buyback annually would add 2.5 pct to gain in book value over and above any gain due to business performance.

 

Unfortunately, reducing the float does not necessarily help reducing the discount, as shares get even more illiquid. Having few outside shareholders also increases the chance or a takeunder at an opportune time for the controlling shareholder. I actually think that cash distributions would be a way better for minority shareholders in cases like this.

 

Speaking from sad experience.

 

Can you share your experiences? I’m curious if they are a fair comparison to ELF.

 

I don’t think a take under is possible as the NAV is so easily determined, too many minority investors would exercise their dissent rights.

 

Also, with a share buyback in place, that’s $850k in liquidity a day. I’m constantly surprised by how much liquidity investors need for all of their positions every day. A big advantage for retail is that most of us don’t have the liquidity restraints of pooled capital. It’s a definitive edge for the most part especially since the GFC.

 

BRK.A has less than 700k shares outstanding and the ELF float is about 763k. The former seemed to work out ok so far.

 

I also want to share this essay from Howard Marks on liquidity. It changed my thinking dramatically. It probably doesn’t, however, fit most investor personalities or investing styles.

 

https://www.oaktreecapital.com/docs/default-source/memos/2015-03-25-liquidity.pdf

 

Yes, my most recent cases:

 

FOPE SPA - IPO‘d a couple years back and the owner sold out at 9 Euro, which is most likely followed by an buyout. This seems to cap the shareprice

 

HDG.AS (Hunter Douglas) - trades at low volumes forever. Owner family took advantage of the COVID-19 dump and presented a takeout offer for ~ 10x earnings when it was clear that the housing went gangbusters.

I made money in both cases, but it could have been more if it hadn’t been controlled by a single shareholder to begin with. The way I see it, the controlling shareholder have a never expiring call option on buying the remaining shares and they will exercise it when it is extremely favorable to them.

[SafetyinNumbers]

From the press release about new buyback, one gets the impression of a plan to continue buying until market price gets to somewhere in the neighbourhood of book, maybe a discount of only 20-30 pct?  Last year 30 pct of float was retired, with the normal course issuer bid plus the special bid, from about 1000k shares down to 700k float.  It seems likely that at most 2-3 years of additiuonal normal course bids, even without perhaps another special bid, will soak up enough shares to make ELF fairly thinly traded.  At which point .. how is the market value to be decided?  Various possibilities, but one way or another, fairly likely to be beneficial to outsider minority shareholders even from present $850-ish price.  If discount stays at 50 pct, then a 5 pct buyback annually would add 2.5 pct to gain in book value over and above any gain due to business performance.

 

Unfortunately, reducing the float does not necessarily help reducing the discount, as shares get even more illiquid. Having few outside shareholders also increases the chance or a takeunder at an opportune time for the controlling shareholder. I actually think that cash distributions would be a way better for minority shareholders in cases like this.

 

Speaking from sad experience.

 

Can you share your experiences? I’m curious if they are a fair comparison to ELF.

 

I don’t think a take under is possible as the NAV is so easily determined, too many minority investors would exercise their dissent rights.

 

Also, with a share buyback in place, that’s $850k in liquidity a day. I’m constantly surprised by how much liquidity investors need for all of their positions every day. A big advantage for retail is that most of us don’t have the liquidity restraints of pooled capital. It’s a definitive edge for the most part especially since the GFC.

 

BRK.A has less than 700k shares outstanding and the ELF float is about 763k. The former seemed to work out ok so far.

 

I also want to share this essay from Howard Marks on liquidity. It changed my thinking dramatically. It probably doesn’t, however, fit most investor personalities or investing styles.

 

https://www.oaktreecapital.com/docs/default-source/memos/2015-03-25-liquidity.pdf

 

Yes, my most recent cases:

 

FOPE SPA - IPO‘d a couple years back and the owner sold out at 9 Euro, which is most likely followed by and buyout. This seems to cap the shareprice

 

HDG.AS (Hunter Douglas) - trades at low volumes forever. Owner family took advantage of the COVID-19 dump and presented a takeout offer for ~ 10x earnings when it was clear that the housing went gangbusters.

I made money in both cases, but it could have been more if it hadn’t been controlled by a single shareholder to begin with. The way I see it, the controlling shareholder have a never expiring call option on buying the remaining shares and they will exercise it when it is extremely favorable to them.

 

I don’t think those situations apply to ELF unless they bid during a big market dislocation. But even then they would just be buying the market at NAV when most of us would likely welcome the liquidity to go buy other cheap stocks.

 

Much like what happened this year except at a 50% discount to NAV. They launched the NCIB and all of a sudden a bunch of our value institutional managers took that liquidity to buy other cheap stocks or fund redemptions. They are likely quite happy about being able to access it. Maybe one or two have even bought back in.

[no_free_lunch]

I just know that they are buying the shares today. Every share they buy it's half price. It's so easy for them to drive the NAV with this formula.

 

It's been with present management for 50 years and they haven't burned us yet but I guess you do need to watch out.

 

As they buy the shares up , those who remain are the diehards. This is my third largest position. I'm not selling at half NAV. I am hoping my peers aren't either.  No sellers so that is going to push the shares up. At the end of the day it will be safety and me holding the float with the firm putting out bids.  That effect has to push on the discount.

[SafetyinNumbers]

If you are willing to share 1 and 2, I would be interested.

 

My 1 and 2 are ELF.TO and ATTO. Very different but both compelling in my view from a risk/reward basis.

[no_free_lunch]

1 - BRK

2 - BAM (this is basically a double and held in taxable, not reflective of a bullish stance so much as tax mitigation)

3 - ELF

4 - FFH

5 - AVB

[SafetyinNumbers]

1 - BRK

2 - BAM (this is basically a double and held in taxable, not necessarily reflective of a bullish stance)

3 - ELF

4 - FFH

 

Thanks!

[bbarberayr]

An example of a Canadian buyout which was done fairly was Third Canadian General (THD) which was majority owned by Morgan Heighen Funds, who still owns and runs closed fund Canadian General Investments (CGI).  The stock had traditionally traded at about a 35% discount, but they took it private at 95% of asset value.

 

E-L going at 95% of asset value would be a big win in my books. 

 

I also someone had posted about Hunter Douglas and the squeeze-out they employed.  I'm not a legal expert, but the Dutch Laws which were used for the squeeze-out do not apply in Canada and minority shareholders have much stronger rights.

[SafetyinNumbers]

I went on a podcast and talked about ELF a bit at the end (1:20:00).

https://twitter.com/BrownMarubozu/status/1378157840049782784?s=20

[woodstove]

Thanks to SafetyinNumbers for the link to that podcast.  I listened to the interview at about the 80-minute mark and enjoyed hearing his thoughts.  The rest of his podcast interview is on my "want to listen to" list. 

[SafetyinNumbers]

8 hours ago, woodstove said:

Thanks to SafetyinNumbers for the link to that podcast.  I listened to the interview at about the 80-minute mark and enjoyed hearing his thoughts.  The rest of his podcast interview is on my "want to listen to" list. 

Thanks woodstove! Much appreciated.