Over the last two days, I increased my position in Dundee Corporation to 2.5% of the portfolio at a price of CAD 2.5 per share.
Since I have started the WertArt portfolio, Dundee Corporation has been by far the worst investment (contributing a 3.2% loss at portfolio level).
Dundee Corp is an investment holding in the midst of a restructuring process led by
Mark David Goodman. His farther Ned Goodman looks back at a very successful investment career. Nevertheless, his last years as CEO of Dundee were full of capital misallocation. Unfortunately, I almost invested at the top of this process and did not see the results coming. In 2014, Mark David Goodman returned to Dundee and took over as CEO (from 1994 he had already worked at Dundee for more than ten years). Sooner or later, it became clear (i) that many of the investment holdings were facing substantial issues, (ii) that expenses were way too high and (iii) that ultimately liquidity became a constraint.
(Edit: Ned Goodman has four sons. Two of them David, as CEO, and Mark, as COO, are working for Dundee Corp)
To be fair, a large portion of the portfolio is allocated to the commodites sector putting external pressure on the portfolio. One of the largest investments is UHIC. It used to own oil exploration rights in the Republic of Chad. While this can be classified as speculative frontier market investment, it is noteworthy that Exxon is already producing oil next to UHIC’s site. This year Dundee managed to sell the rights to Delonex at a fraction of the original investment. At least, Dundee was able to outsource the development risk and additional cash needs to Delonex while keeping the option to participate in oil production from a milestone payment and royalty streams.
Another important holding is a trophy real estate development in Vancouver. The property was recently completed and comprises two hotels, a casino, parking lots, restaurants and event space. Total development costs were approx. CAD 800 m with 70% debt financed. After a ramp up phase of twelve months, management expects the property to generate CAD 75 m to CAD 100 m in EBITDA (with 60% coming from the casino). Currently, interest expenses are roughly at 9%, but with the stabilization of the asset, a lower interest burden seems achievable in the future. Dundee Corp. holds 40% of the asset. After another cash injection of CAD 12 m from Dundee Corp. at the end of this year, management expects Parq Vancouver to stay self-sufficient.
Whether Blue Goose will ever reach profitability remains questionable. The acquisition of Tender Choice last year should have brought the turnaround. However, a recent shut down of the Tender Choice production site initiated by government authorities was followed by a fire taking place at the same site. This creates another headache for shareholders. Blue Goose has assets of CAD 150 m mostly comprising of cattle and land, but also CAD 90 m in debt non-recourse to Dundee Corp. Over the next months, I expect management to communicate how much cash will be needed to keep this investment going. In my valuation of the company, I have entirely written off this investment.
Overall, management has made progress in going through the portfolio from top to bottom reducing capital needs and disposing non-core assets. However, it is of importance that operational results improve according to the management plan and therefore the misstep at Blue Goose is unfortunate.
Expenses have been reduced significantly and corporate bank debt was repaid this year. Still, holding costs sum up to CAD 30 m per annum. CAD 16 m are overhead expenses and CAD 13.7 m comprise of interest payments for CAD 220 m preference shares outstanding (to be reduced to CAD 205 m in January 2018). As of Q3 2017, Dundee Corp had CAD
68 53 m cash available at corporate level and roughly CAD 200 m of listed securities on its balance sheet. In addition, some of the subsidiaries have cash available to the company. Bank debt outstanding fully belongs to Dundee’s subsidiaries and is non-recourse. I think that the company is in a position to sustain this multiyear turnaround from a liquidity perspective provided that capital will be used efficiently (i.e. the Tender Choice acquisition was an exemption).
The Goodman family has a 25% economic interest in Dundee Corp and Ned Goodman is still in control of the voting shares. The value of their stake dropped from more than CAD 200 m in 2014 to slightly more than CAD 30 m as of today. David Goodman, CEO, is holding 5% and his brother Mark Goodman, COO, 4% of the shares outstanding. Of course, they might have substantial net worth outside of Dundee Corp.
I think that management compensation has been aligned to the current situation to a larger degree than before. In 2016, David Goodman received CAD1 m in cash including a CAD 0.3 m bonus payment. His base salary will be reduced by CAD 0.2 m in 2017. In 2016, the whole executive management team received for the first time CAD 3.7 m of share based awards. Cash payments for all five executive directors were CAD 3.6 m.
In addition to that, the number of board seats was reduced to seven and new members joined. The reporting has been improved and quarterly earnings calls have been introduced.
Notwithstanding the improvement in corporate governance over the last two years, the Goodman family is in full control of the company. To some extent, interests with minority shareholders are not fully aligned given the divergence between voting rights and the economic interest.
The share price has lost 85% since I have first bought invested in the company. The current net asset value (NAV) as provided by Dundee Corp is CAD 11.8 per share. The share price is currently trading at an 80% discount to the official NAV.
I think that the company is worth roughly CAD 4 per share taking into account
- a 34% hair cut on asset value (CAD 554m vs CAD 845 m);
- CAD 220 m in preference shares;
- CAD 53 m in cash available;
- CAD 160 m of capitalized holding costs;
Leading to net assets of CAD 227 m or CAD 3.90 per share. This scenario implies a potential upside for the share price of 56%.
The content contained on this site represents only the opinions of its author(s). I may hold a position in securities mentioned on this site. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. As always please do your own research!