CKI - Clarke Inc.

[sbalsam]

Does anyone have a copy of (or a link to) a Clarke presentation from prior to the announcement of the trucking company sale? I guess that would be the Q3 presentation or earlier.

Thanks, Steve

[xtreeq]

2014 Q1 report is finally out

http://www.clarkeinc.com/documents/IN/2014%20Q1%20Quarterly%20Report.pdf

 

[investor-man]

ugh...

 

http://www.newswire.ca/en/story/1357149/clarke-inc-announces-nomination-of-armoyan-and-luborsky-to-its-board-of-directors

 

I hope these gains to disappear into big fat pay raises...

[Guest 50centdollars]

Clarke Inc. Completes Redemption of All Outstanding Debentures

 

Canada NewsWire

 

HALIFAX, May 22, 2014

 

HALIFAX, May 22, 2014 /CNW/ - Clarke Inc. ("Clarke" or the "Company") (TSX: CKI)

announced today that it has completed the previously announced redemption of its

6% convertible unsecured subordinated debentures maturing December 31, 2018 (the

"Debentures") for an aggregate principal amount of $6,154,300, representing all

of the outstanding Debentures. The Company, using cash on hand, paid to the

holders of redeemed Debentures the redemption price equal to the outstanding

principal amount of the Debentures redeemed, together with all accrued and

unpaid interest thereon up to but excluding the redemption date, for a total of

$1,023.34 per $1,000 principal amount of Debentures. These Debentures were

listed on the Toronto Stock Exchange under the symbol "CKI.DB.A".

 

Following the redemption, the Company has no debt other than a loan of $3.6

million and has in excess of $26 million of cash on hand.

 

The Company's last reported book value per share (as at March 31, 2014) was

$11.72 compared to the current trading of price of $8.55. Subsequent to this

redemption, the Company's common shares outstanding are 20,518,923.

 

 

[racemize]

Using the Q1 financials, the update from the 5/2 presentation, this recent update, and the public values of the securities listed in Q1, I have a current BVPS of $13.68, approximately 50% more than the current price.

 

[xtreeq]

Are you using the updated share count?

[racemize]

Are you using the updated share count?

 

yes.

[sbalsam]

Using the Q1 financials, the update from the 5/2 presentation, this recent update, and the public values of the securities listed in Q1, I have a current BVPS of $13.68, approximately 50% more than the current price.

 

You are not correct. At $13.68 and 20.5M shares, the Company would have $280M of SH Equity. After reducing cash for the redemptions post Q1, you are not even going to be able to get to that high a level of total assets (even ignoring the remaining liabilities).

 

Keep in mind that the figures in the presentation are not the same as Book Value in all cases so that you can't mix and match and arrive at a book value figure.

 

One example is the pension surplus which is actually $50M as shown in the presentation. However, its book value is actually significantly lower as the Company maintains a $21M valuation allowance against the surplus so the surplus is listed as only $29M on the Balance Sheet. 

(Note that the book value materially understated the actual value here giving further margin of safety.)

 

I haven't calculated the precise BV as of today as the exact figure seems unimportant given the substantial discount that the shares are trading at being more than enough for me to comfortably buy even at a BV in the area of $11.50. And, perhaps more importantly, for the discount to be more than enough for a Company like Clarke to get out there and do something about.

 

Steve

 

[racemize]

Using the Q1 financials, the update from the 5/2 presentation, this recent update, and the public values of the securities listed in Q1, I have a current BVPS of $13.68, approximately 50% more than the current price.

 

You are not correct. At $13.68 and 20.5M shares, the Company would have $280M of SH Equity. After reducing cash for the redemptions post Q1, you are not even going to be able to get to that high a level of total assets (even ignoring the remaining liabilities).

 

Keep in mind that the figures in the presentation are not the same as Book Value in all cases so that you can't mix and match and arrive at a book value figure.

 

One example is the pension surplus which is actually $50M as shown in the presentation. However, its book value is actually significantly lower as the Company maintains a $21M valuation allowance against the surplus so the surplus is listed as only $29M on the Balance Sheet. 

(Note that the book value materially understated the actual value here giving further margin of safety.)

 

I haven't calculated the precise BV as of today as the exact figure seems unimportant given the substantial discount that the shares are trading at being more than enough for me to comfortably buy even at a BV in the area of $11.50. And, perhaps more importantly, for the discount to be more than enough for a Company like Clarke to get out there and do something about.

 

Steve

 

Using values from the presentation as well as changes in public securities of their holdings, I have:

 

Assets:

Cash $26.00 (in current press release)

Securities $153.88 (current value from listed security holdings in Q1 and from presentation)

private $12.00 (from presentation)

other $88.00 (from presentation)

DTA         $2.50 (from Q1)

 

Sum         $282.38

 

Liabilities have now been reduced to no debentures and only 3.5 million of debt

 

 

This calculation does not include receivables/inventories/payables listed in Q1, but the calculation on Q1 using the same method comes out to 11.61, which was less than Clarke's listed BVPS then.  This is not necessarily precise, but it should give us some idea.

 

Moreover, with regard to the pension surplus, let's call the figure adjusted BVPS--I'm mostly just trying to figure out the effect of what's going on given the dilution, removal of the debentures, and general changes indicated by the data in the announcements and presentations.

 

For comparison, here is my calculation from Q1 to 5/2 to current:

[racemize]

The BVPS drops to 12.31 if the "Other" is pulled back down to the reported value in Q1, incidentally.

[racemize]

Looking at the changes in cash, it seems like he might have sold some of the securities since 5/2 in order to get rid some of the debt, which would also lower the adjusted BVPS. 

 

If we put the "other" back down to Q1 values and then pretend as though the debt didn't change (since assets may have decreased to offset it), the value is ~11.87.  That being said, the range of values on 5/2 were between ~13 without the "other" adjustment, and ~11.8 without.  So, mixing all of that together, we have a 35%-50% increase to the various possible values.

 

Please correct anywhere it looks like there are issues.  It seems like most of it revolves around whether securities have been sold since 5/2 and the value of the pension surplus. 

[original mungerville]

I had about $13 a share by end of Q2 but that was guess work. I think the fact that we have a 65-70 cent dollar (not the best discount but good) is OK. But the kicker for me is the CEO and family own a large amount of shares and so interests are aligned, AND he is buying in shares at these prices which will only widen the discount to book - ie if you work out a spreadsheet at these prices of buybacks the 65-70 cent dollar becomes a cheaper and cheaper dollar on a per share basis.

 

What this means is the shares will a) either not stay this discounted for long, or b) if they do, the revaluation in due course will be even larger due to the share buybacks.

 

To me this is a better situation/dynamic than finding a 50-60 cent dollar where you have no idea if / when it will revalue; if CEO interests are aligned; if CEO cares about the discount persisting.

 

At Clarke, it seems the CEO keeps highlighting the discount and wants to close it.

[Guest Dazel]

 

If you read my posts you know that my thesis was that they would redeem all of the convertible debentures....Well done Clarke! Done.

I now expect that Clarke will launch a larges scale buy back of their common shares below value as an example of what they are looking for when they are activists....book value is now very liquid. As activists they must do this or face scrutiny from all involved including future activist targets...An activist needs to walk the walk especially after not being able to shoot the Sherritt...and I am glad they did not shoot the deputy!

 

Dazel.

[plato1976]

And it barely moved compared with weeks ago...

 

 

If you read my posts you know that my thesis was that they would redeem all of the convertible debentures....Well done Clarke! Done.

I now expect that Clarke will launch a larges scale buy back of their common shares below value as an example of what they are looking for when they are activists....book value is now very liquid. As activists they must do this or face scrutiny from all involved including future activist targets...An activist needs to walk the walk especially after not being able to shoot the Sherritt...and I am glad they did not shoot the deputy!

 

Dazel.

[Myth465]

What Dazel is saying is we are sorted either way.

 

Clarke can trade at book value and GA can use its stock to roll up companies at 3-5x Ebitda, and can more or less pretend to be the guy from the show The Profit. We can also use up our tax loss carry forwards.

 

Clarke can trade below book value and we will sell stock down and buyback our own stock at a gain of the discount.

 

Clarke has the added value of needing to be perceived as shareholder friendly because its essentially an activist hedge fund with permanent capital.

I prefer the discount for a while. Would prefer to buyback 10% to 20% of the shares at the present discount.

[Andy Dufresne]

The company bought back shares for 0.8 million dollars in the first quarter and while prices have gone up, they state in their Q1 2014 MD&A (p.2 under the heading "Outlook for 2014"):

 

"We believe that our shares continue to be materially undervalued by the public markets and we will continue to work hard to

close this value gap. We intend to continue repurchasing our shares and the Debentures depending on market conditions,

market prices and other investment opportunities."

 

Assuming they would use 20 million of the 26 of cash to buy back shares, at current prices they could buy roughly 2.26 million shares, which translates to almost 57 days' worth of trading given the current ~40K shares traded per day in Toronto

 

In general I also think GA will now be able to refocus his energies after losing the S proxy fight and the sale of Royal Host ....

 

I actually hope it drops further down so I can pick up some more :)

[Guest Dazel]

Plato1976,

 

Today is the first day of trading since the converts were bought out.

 

The reason for quiet was the fact that they and we did not want to drive the price up before the converts were bought out. Once again $6.1 m converts were asleep at the wheel as basically they left almost 20% on the table by not converting and being bought out at par. So essentially we have traded under the assumption that we could have been diluted by the converts...so book value "was" a moving target. That is over.

 

Clarke got aggressive buying the converts and now they will move to the common shares directly. We will have an over hang of those that converted that want out and i expect Clarke to buy these shares in private transactions or a tender offer. While they trade at such discount to book value it is a great use of

resources...so we will benefit if the shares do not jump....however, the dilution discount is gone.

 

Dazel

[Guest 50centdollars]

Clarke Announces Renewal of Normal Course Issuer Bid

 

Canada NewsWire

 

HALIFAX, May 23, 2014

 

HALIFAX, May 23, 2014 /CNW/ - Clarke Inc. ("Clarke" or the "Company") (TSX: CKI)

announced today that it has filed a notice with the Toronto Stock Exchange and

received its approval to purchase, through the facilities of the Toronto Stock

Exchange, up to 1,025,946 common shares, representing 5% of the issued and

outstanding common shares (the "Share Issuer Bid"). As at May 22, 2014 there

were 20,518,923 issued and outstanding common shares, and the public float was

10,087,066 common shares. From November 1, 2013 to April 30, 2014, the average

daily trading volume ("ADTV") of Clarke common shares was 21,742 common shares.

Under TSX Rules, the Company is entitled to purchase up to 25% of the ADTV of

the respective class of shares which is 5,435 common shares, on any trading day.

Any common shares purchased by Clarke pursuant to the Share Issuer Bid will be

cancelled.

 

 

[Guest Dazel]

 

 

The normal course issuer bid is not big enough. I expect to see a tender offer likely around $9.50 if they get it done quickly enough.

 

Dazel

[mcliu]

Would they have enough cash for a big tender?

[Guest Dazel]

 

 

They announced yesterday they have $26m in cash....however, they have the majority of their assets in cash equivalent marketable securities. So the answer is yes they have plenty of cash to to do a big tender offer.

It is possible that they could borrow money (rates are low) to do a buy back as well...the dividend yield is so high that it makes sense to do a large scale tender offer to save the dividend payments. Most would not sell because of the yield and discount to book but those that converted may want out as they are bond investors.

 

[sbalsam]

Looking at the changes in cash, it seems like he might have sold some of the securities since 5/2 in order to get rid some of the debt, which would also lower the adjusted BVPS. 

 

If we put the "other" back down to Q1 values and then pretend as though the debt didn't change (since assets may have decreased to offset it), the value is ~11.87.  That being said, the range of values on 5/2 were between ~13 without the "other" adjustment, and ~11.8 without.  So, mixing all of that together, we have a 35%-50% increase to the various possible values.

 

Please correct anywhere it looks like there are issues.  It seems like most of it revolves around whether securities have been sold since 5/2 and the value of the pension surplus.

 

Racemize,

 

Thanks for posting your calculation.

 

The major correction I would make is as you suggested - revise other assets downward to about the $61M figure you have listed for Q1. I would note that the reason that your Q1 calculation comes in very close to actual BV is because you used the $61M figure rather than the much larger $87M figure listed in the presentation (for example, the March presentation listed $87M in other assets). The major source of the difference is the pension valuation allowance of $21M (or $1.00 per share). I think of this as a hidden asset that cushions the company's value in the event that some of its security holdings are worth less than the value implied by their share prices. To the extent that you crystalize the value in your mind, you should reduce the $21M by a 31% tax (which the Company already books against the $29M reported surplus - Annual Report, Note 8 - and which would ultimately be paid against the $21M excess also).

 

Another minor consideration to keep in mind is that you need to include a tax liability (or reduce the tax asset) against the increase in market price of share values since the end of Q1. There are a couple of other minor differences (book value of the remaining transport assets and including accounts payable - receivables) that would likely remove another 50 cents from your valuation.

 

Lastly, based purely on cash holdings and redeemed debt, I don't think the Company sold its securities. From March 31, Clarke redeemed $18M of face value of debt (along with a small amount in open market purchases of debt and stock) and cash is down by about $20M.

 

All in all, I still see a very large discount, a company that has a history of acting to reduce the discount and the means to do it in the form of large cash holdings.

[sbalsam]

 

 

They announced yesterday they have $26m in cash....however, they have the majority of their assets in cash equivalent marketable securities. So the answer is yes they have plenty of cash to to do a big tender offer.

It is possible that they could borrow money (rates are low) to do a buy back as well...the dividend yield is so high that it makes sense to do a large scale tender offer to save the dividend payments. Most would not sell because of the yield and discount to book but those that converted may want out as they are bond investors.

Dazel - They also have $6M in cash coming in for the cash portion of the Holloway Lodging acquisition of their 6M Royal Host shares. And I would not complain if Sheritt were sold down.

[Guest Dazel]

 

 

The other option is a large one time dividend...

[Andy Dufresne]

Dazel,

 

A special dividend would be a catalyst, but it is a very inefficient way, tax-wise, to raise share prices - especially for non-Canadians. It also forces you to realize part of the investment instead of allowing those who feel that they want to cash out presently to do so ...

 

George, if you are reading this (or if any forum member knows George), please issue a substantial share bid ASAP rather than distribute a dividend!