Clarke Inc (TSE: CKI)
OVERVIEW & STRATEGY:
Clarke is an investment company based in Canada. It owns the following assets (publicly traded securities/company shares) with wonderful characteristics to increase the shareholder value over time. Long standing president of Clarke Inc, George Armoyan's
own words are "Our objective is to maximize shareholder
value. While not the perfect metric, we believe that Clarke’s book value per
share, together with the dividends paid to shareholders, is an appropriate
measure of our success in maximizing shareholder value over time."
The company's investments/assets are undervalued relative to their book
values and free cash flows. When they get repriced, the company's
book/shareholder values will increase.
The company's book value per share is $13.28 as of March 31, 2015.
Assets:
Holloway Lodging Corporation(40.7% owned): - $47M
Holloway’s core business is hotel ownership & it owns 35 hotels comprising of 3,967 rooms. As of March 31, 2015, Clarke owned 40.7% of the outstanding shares
of Holloway and $11.6 million principal amount of 6.25% convertible
debentures.
Selected Financial Information (audited) Year ended December 31, 2014 ($M)
Total assets - 382.4
Total liabilities - 264.5
Shareholders' equity - 117.9
Total revenue - 97.5
Net income - 27.3
P/E - 4.2
Clarke's portion of Net Income - 11.11
Terravest (27.6% owned): - $32M
Terravest is engaged in (i) the manufacturing of residential and commercial
tanks and pressure vessels, (ii) the manufacturing of wellhead processing
equipment for the oil and natural gas industry, and (iii) well servicing for
the oil and natural gas industry in Southwestern Saskatchewan. As of March 31,
2015, Clarke owned 27.6% of the outstanding shares of Terravest.
Selected Financial Information December 31, 2014 ($M)
Total assets - 165.3
Total liabilities - 82.2
Shareholders' equity - 83.1
Three months ended December 31, 2014 ($M)
Total revenue - 53.0
Net income - 5.3
P/E - 5.42
Clarke's portion of Quarterly Net Income - 1.46
Northern Frontier Corp:
The company provides civil construction and maintenance services in Eastern Alberta (with a focus on SAGD oil projects) and hydrotesting, fluid transfer and water management services throughout Western Canada. In early 2015 it appeared the company’s shares were being sold simply because the company was associated with the oil and gas industry; Clarke Inc, acquired as many shares as they could before the company implemented a poison pill to deter Clarke from acquiring additional shares. The following are several attractive characteristics of the company: it operates niche businesses that are skewed towards maintenance activities (rather than expansion activities); it has the opportunity to take business from weak competitors; it generates significant free cash flow, even in the current depressed environment; and it is using its free cash flow and any working capital releases to repay debt. Purchase price results in a greater than 50% free cash flow yield based on recent performance and in excess of a 100% free cash flow yield based on performance in a recovered oil and gas environment. Clarke currently owns 15% of Northern Frontier. It's worth $1.7M based on the current market price.
Keck Seng Investments Ltd. (“Keck Seng”):
During the first quarter of 2014, the Company started to acquire shares of Keck
Seng, a Singapore-based, Hong Kong-listed real estate company. The company’s
assets include hotels in major cities around the world (including Saigon,
Osaka, Ottawa, Toronto, New York and San Francisco), a portfolio of investment
properties in Macau and cash. The company has a long history of entering into
accretive transactions and growing its book value per share. In our view,
investors are meaningfully undervaluing Keck Seng’s assets. Investors seem to
be paying for some of the hotels or some of the Macau investment properties,
but certainly not both. While there are no defined catalysts that will
crystallize the value of Keck Seng’s shares, we believe there are several
opportunities for the company’s shares to be revalued higher by investors.
First, we believe the company will begin to sell its Macau investment
properties following the completion of new infrastructure projects that are
intended to improve connectivity between Hong Kong and Macau. Such sales should
result in significant gains as these investment properties have been held on
the company’s books for several decades at their historical cost which is
substantially below their market value. Second, we believe the company will
continue to direct its cash flows to US real estate investments (its last two
acquisitions have been in the US) and that such investments will be made on a
100% basis rather than with partners (which often obscures their financial
contribution to the company); doing so should provide investors with more
transparency and greater comfort in the value of the company’s assets. Given
the substantial discount to book value at which Keck Seng’s shares trade, we
would be thrilled if the company used its cash on hand to repurchase shares as well.
The company owns 3,908,000 shares of Keck Seng; it is worth $4.8M as
of March 31, 2015.
Management:
Mr. Armoyan is President of Geosam Capital Inc. and Executive Chairman of Clarke Inc. Mr. Armoyan is an entrepreneur with extensive experience in mergers, acquisitions and capitalizing on turn-around opportunities. He has led a number of companies to solid business results over the last 32 years. He owns about 12.6% of the company. The below graph gives us the history of value creation over time and share price response.
Conclusion:
Clarke Inc, is massively undervalued(at $199M, $12/share) company/shares based on the
assets/cash flow of their publicly traded investments and the $77M net cash which provides
a large optionality to invest in public markets or buyback their own stocks.
The company has bought back and cancelled around 2M shares in the last year and a half as the
shares were selling less than the book value of the company at that time. The
company's shares are still selling for less than the current book value although
the discount has narrowed a little. So, here we are,
- The company has undervalued public investments with huge upside
- Run by wonderful owner/operator efficiently allocating the capital both investing as well as share repurchases
- Selling cheap based on the sum of the parts, earnings, cash flow and book value
Disclosure:
