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

[no_free_lunch]

Thanks for the link notorious.

 

It is still on the cheaper side based on a simple price to book comparison.  I like that book has increased despite what is happening with bond yields.

[SafetyinNumbers]

Write up on SeekingAlpha http://seekingalpha.com/article/4032732-e-l-financial-trading-nav-potential-value-accretive-catalysts

 

can you post article can't seem to read/get access to it?

 

I can't it went premium so I don't have access either.

 

One interesting way to play ELF is to buy EVT which is a closed end fund where over 40% of the NAV is ELF. It also trades at over a 25% discount to NAV so its a bit of a double discount and it has lagged ELF lately. There is some cross ownership as well as EVT's biggest shareholder is ELF!

[SafetyinNumbers]

I want to point out that E-L has been doing a good job growing Empire Life since they bought the 20% they didn't already own in 2015. Since then the book value has grown over 20%. It's important to note that if they sold Empire Life, it would sell at a multiple of book which implies the actual NAV is actually a decent amount higher. Empire Life is around $300/share of the $1159.26 NAV. The last large transaction in Canadian life insurance was Manulife buying Standard Life for about 19.5x EPS and 1.9x book value. Based on 2016 results, this would put Empire Life worth around $575-725/share for ELF.

 

I'm not sure what the tax basis is for Empire Life is but even if its somewhat nominal, there is a real argument that the NAV here is closer to $1400 after tax vs the stated $1159.

 

There is seemingly no rush to sell Empire Life and last quarter ROE was 17% so perhaps it's in our best interest that they keep growing it and sell it when the outlook dims.

 

 

[no_free_lunch]

Safety,

 

This is good to hear.  It is very cheap based on your assumptions and crazy cheap when you look at the market at large.  I have read that they are very prudent on asset sales / purchases so probably are just waiting for multiples to heat up a bit more.

[SafetyinNumbers]

The lack of liquidity, high stock price and the fact that it's not in any index keep retail and institutional investors away alike.

 

Management also does zero to promote it and slowly buys the stock of ELF and the closed end funds EVT and UNC. It's like sneaking going private story!

[bizaro86]

You know they aren't promotional when they don't have a website!

[SafetyinNumbers]

Anyone going to AGM in Toronto this week? It's one of the few chances to talk to management given the lack of conference calls.

 

They will also report Q1 that day and I expect NAV should increase by about 4%. It's a very crude estimate! However, if correct will take NAV to about C$1200 versus the recent quote of C$816. Of course, as I noted in a post above, the NAV discount looks a lot bigger if Empire Life is valued on the basis of what it would sell for to one of the big three versus book value.

 

 

[SafetyinNumbers]

The quarter ended up being a bit better than expected.

 

Discount to NAV stands at 33%.

 

Duncan made the point at the meeting that now that Empire Life has ROE's north of 15%, the discount to book seems unwarranted.

 

http://www.marketwired.com/press-release/e-l-financial-corporation-limited-announces-march-31-2017-financial-results-tsx-elf-2215419.htm

[no_free_lunch]

If they want to close the discount some type of dividend or share repurchase might be necessary.

[SafetyinNumbers]

They do have a dividend but it's tiny.

 

I don't think they really care about closing the discount per se. The family is usually adding to their position over time. Maybe one day they take it private.

[SafetyinNumbers]

Article in the Financial Post from last week with ELF as a top pick.

 

http://business.financialpost.com/investing/buy-sell/this-fund-manager-is-sticking-with-quality-despite-the-allure-of-cheaper-names

[no_free_lunch]

Great link.  Just wanted to pull a snippet from it.  Basically just affirms what you have been saying.

 

“It’s got profitability measures that are as attractive as the other public life insurers,” Cooke said, noting that those names trades at roughly 1.5x book value, while E-L trades closer to 0.7x.

..

Netting out what he thinks the insurance business is worth, Cooke believes E-L’s collection of corporate investments is trading at about 50 or 60 cents on the dollar.

[EliG]

Article in the Financial Post from last week with ELF as a top pick.

 

http://business.financialpost.com/investing/buy-sell/this-fund-manager-is-sticking-with-quality-despite-the-allure-of-cheaper-names

 

It's funny that the article didn't mention -- even in passing -- their big loss on Home Capital:

 

https://www.qvinvestors.com/Commentary?id=19119

 

They owned ~13% of HCG before they dumped the shares at the end of April. Their ACB was in the high 20s / low 30s. They sold around $7 or $8.

 

Two weeks later, they are giving interviews about "sticking with quality". ::)

 

[no_free_lunch]

True and honestly I have never heard of the company before but they have kicked the markets butt in the past 3,5,10 years and also since inception.  People on this board said the turtle creek and mawer had positions in HCG.  Donville Kent also had a position, maybe still does, and has written the stock up at least once.  I am not trying to make excuses but it fooled a lot of people so I wouldn't ignore their analysis in general.

 

I just look at this type of thing as another set of eyes and more importantly publicity for ELF.  They just aren't going to go out and sell the story themselves.

[SafetyinNumbers]

ELF reported Q2 last night. NEV/share increased to $1241.48 so at the current stock price of $840, the NEV discount is around 32%. Overall the NEV is up 7% this year so far.

 

https://www.globenewswire.com/news-release/2017/08/03/1072324/0/en/E-L-Financial-Corporation-Limited-Announces-June-30-2017-Financial-Results.html

[no_free_lunch]

ELF is now trading at 64% NAV.  I am not sure how good of a comp they are but Great West Life is about 150% NAV and SunLife is around 130% NAV.

[bbarberayr]

With these smaller life insurers, you have to know that they almost always will trade at low valuations.  They have for decades and I don't see any reason that this will change.  I think ELF's business is good and will continue to do well, but you can't expect much of an upward revaluation or reversion to the mean.

 

The other specific unique thing about ELF is they used to also own P&C insurer Dominion and sold it to the Travelers in 2013.  I'd have to go back to their annual reports to see what % of their profitability was from Dominion vs. Empire Life, but it was quite large and that probably is a good reason for their outperformance over the life insurers as the life insurers have been hurt more by low interest rates and MFC specifically was overly aggressive prior to 2007 and paid for that over the last 10 years.

[clutch]

With these smaller life insurers, you have to know that they almost always will trade at low valuations.  They have for decades and I don't see any reason that this will change.  I think ELF's business is good and will continue to do well, but you can't expect much of an upward revaluation or reversion to the mean.

 

One could argue why this should trade consistently at low valuations (in absolute terms) while all other stocks / asset categories have been inflated in the current environment. In theory, shouldn't this type of stock's valuation have been inflated as well?

[SafetyinNumbers]

With these smaller life insurers, you have to know that they almost always will trade at low valuations.  They have for decades and I don't see any reason that this will change.  I think ELF's business is good and will continue to do well, but you can't expect much of an upward revaluation or reversion to the mean.

 

One could argue why this should trade consistently at low valuations (in absolute terms) while all other stocks / asset categories have been inflated in the current environment. In theory, shouldn't this type of stock's valuation have been inflated as well?

 

In 2005-2006, ELF traded at a premium to NAV. It kind of ties in with your inflation argument to the extend that financial stocks were overvalued in that time frame. I still find most financial stocks to be pretty fairly valued so perhaps that's why there is no inflation its valuation.

 

I think the broader reason for the discount is that ETFs and more funds being indexed means that not many are looking at ELF stock as it's not in any ETF. It's also illiquid and since the financial crisis, money managers care way more about liquidity.

 

Also, Empire Life had an ROE below 10% for a long time and its only a recent development that the ROE has improved. An ROE above 10% argues for a P/BV north of 1 but since not many people are looking, the revaluation may take a long time. Not a problem for me as I just add more when the discount gets bigger than "normal", like it is now.

[clutch]

The way you framed this, this one seems like a good opportunity.

[no_free_lunch]

Thanks for the feedback all.

 

I am definitely not suggesting it will trade up to book any time soon.  Just pointing out that there is large margin of safety combined with excellent management track record.  These two in conjunction are hard to find these days.  I do think it will trade to book if interest rates ever move up but won't hold my breath on that.

 

Historically it has traded roughly 55% book to 110-120% (back in 06).  So based on this simple metric it is well on the lower bound but I suppose could always go lower.  Limited downside, substantial upside and in the meanwhile should earn you high single digits to low double digits if prior record is meaningful.

[ourkid8]

Is there a share repurchase plan in place?

 

Thanks for the feedback all.

 

I am definitely not suggesting it will trade up to book any time soon.  Just pointing out that there is large margin of safety combined with excellent management track record.  These two in conjunction are hard to find these days.  I do think it will trade to book if interest rates ever move up but won't hold my breath on that.

 

Historically it has traded roughly 55% book to 110-120% (back in 06).  So based on this simple metric it is well on the lower bound but I suppose could always go lower.  Limited downside, substantial upside and in the meanwhile should earn you high single digits to low double digits if prior record is meaningful.

[oddballstocks]

I think this is an excellent opportunity.  I find the "It's always traded cheap" arguments flimsy.  A counter argument is if this is cheap then why aren't all other similar companies cheap as well?

 

I think there are a few dynamics at play:

 

1) The company doesn't have a website, they are 'hidden'

2) There are large insider holders

3) There is a bit of a convoluted structure with their ownership in subsidiaries and subsidiaries owning them

 

As to buybacks.  The parent owns funds that continually purchase shares of the parent.  This isn't the same as a buyback, but it's similar.  Along the same lines other subsidiaries have purchased shares in the parent as well.

 

A collection of assets that aren't impaired, and are at least run average (which ELF is) should at least trade at book.  The market is saying they are in the process of destroying shareholder value.  Yet results say otherwise.

 

This is the type of name I like to buy and shove in the corner of my portfolio.  Right now it seems cheap, it might in a year or four, then suddenly it'll be time to sell.

 

[SafetyinNumbers]

I think this is an excellent opportunity.  I find the "It's always traded cheap" arguments flimsy.  A counter argument is if this is cheap then why aren't all other similar companies cheap as well?

 

I think there are a few dynamics at play:

 

1) The company doesn't have a website, they are 'hidden'

2) There are large insider holders

3) There is a bit of a convoluted structure with their ownership in subsidiaries and subsidiaries owning them

 

As to buybacks.  The parent owns funds that continually purchase shares of the parent.  This isn't the same as a buyback, but it's similar.  Along the same lines other subsidiaries have purchased shares in the parent as well.

 

A collection of assets that aren't impaired, and are at least run average (which ELF is) should at least trade at book.  The market is saying they are in the process of destroying shareholder value.  Yet results say otherwise.

 

This is the type of name I like to buy and shove in the corner of my portfolio.  Right now it seems cheap, it might in a year or four, then suddenly it'll be time to sell.

 

I couldn’t agree with Nate more.

 

I have asked Duncan about a buyback or stock split and I wouldn’t expect either to happen (at the last few AGMs). I think they like the discount as it lets the family acquire shares more cheaply. I know stock splits don’t effect value but if the stock was liquid enough after a split, it would allow market participants with liquidity constraints like Indices/ETFs to include ELF in their screens.

 

I also suggested they consider doing a tender offer below NAV for EVT as a way of effectively buying back stock. As an aside, EVT is a publicly traded closed end fund that is controlled by ELF that has a large position in ELF.

 

It’s nice to see a discussion on ELF.

 

 

[no_free_lunch]

I guess the one con I can see is that the founder has handed control over to his son, Duncan.  Not sure what his track record is.  Not a show stopper for me but something I will have to keep an eye on.

 

Appreciate the heads up on Economic.  Hadn't read their report in detail to notice the loop.  For those interested their stake is:

 

At December 31, 2016, the Company’s carrying

value of its direct and indirect investment in E-L Financial of $337,414,000 (2015 - $323,007,000)

represents 41.0% (2015 – 41.2%) of Economic’s total equity investment

 

So they own about 10% of ELF and ELF owns 24% of them.  This should cancel out 2 or 3 percent of ELF public equity.

 

Do any of the other subs own ELF?