Tremendous field report. Thank you ValueCap Thank you
You’re a scholar and a gentleman. My initial take is mixed. It’s great to see Jordan in sharp, accessible, and has seemingly good judgement. This is very positive. I didn’t meet Yuri his predecessor but I get the sense she wasn’t a heavy hitter. A capable CFO is important.
The show me ethos is fine, but we can’t cheerlead this up. He’s right that the “new CFF” will have to show results and I’m sure it will. But this isn’t a flash bang business. There will be no great excitement. It’s a boring business that needs to pay its owners a dividend with reliability - it is in a rare, enviable position to do so -- very unique in forestry. The continued avoidance of this screams agent-principle problem. A div stream unlocks the value here but perhaps leaves little role for Ken as the swashbuckling deal maker? Or so I tell myself.... I otherwise can’t fathom the intransigence. But does it? Ken loves equity financing so why not just park this thing at $3+ by paying out a portion of the power earnings steadily and then open the door to equity financing if he finds some screaming deal somewhere?
Great point on the NCIB. I hadn’t considered the administrative requirements there. In any event, it’s not impactful enough of a lever anyway. A div stream of 2/3 of the power EBITDA is close to 1/4 of the current market cap paid out annually. Whereas the 5% NCIB is much more modest — 5x less impact. He needs to have this buyback however, to at least contract the share base somewhere as there is some strained astrophysics analogy somewhere with a perpetually expanding universe of share count, with the much needed inventive shares being issued now (/s). This BOD is stunningly weak! Ken needs to be reined in. I have no issue paying the man but this seems to be madness.
I hope a strategy is articulated about making this more marketable. RBC called it already. They should do a reverse split if serious about getting funds in the mix... a div gets you $3+ but they need $5 to be eligible. The CFO can’t cheerlead this if there is no financial discipline. And no, the valuation gap is not a function of institutional ownership. It’s a function of a track record of value destruction. In fairness the power cash now won’t be siphoned off to prop up expansion so maybe this now will come into favour.
Pleased there are no divestitures planned. Don’t sell the power plant. Right now shareholders get no value from it. The marketplace doesn’t value it. Sheesh. How about try out a cash is king strategy?? One highly prized attribute is a sustainable yield and that alone will bid up the share price. Ad hoc will be less impactful. Honestly part of the value of this the financial discipline to rein in Ken. He can grow/expand/improve.... but with a modest portion of the earnings, not all of it. The weak board is truly something to behold.
The need for quick win projects is indeed real, but it does not preclude a balanced approach to capital allocation. I think in addition to the basic maintenance capex upward of 1/4 of cash earnings could be reinvested in gear. I have no insight into the power facility but the mill could benefit somewhat. It could also benefit from a wholesale rebuild. Where does the spending stop?
I am left with a sense of unease about this all. I don’t think there is any clear vision, even now. This BOD sounds increasingly like toadies who let Ken shamble around doing whatever at best, or a cadre of foolhardy buffoons who are complicit in, and accepting of, a needlessly dreary and dismal status quo at worst. I’m a bit riled by your great and accurate reporting of what I’d feared: “tHe BoArD doESnT wAnT to aLoCaTe cApItAL tHAT wAy”. Unbelievable. They absolutely must put a floor under the share price, which — not hard, guys. 2/3 of power earnings is a 17% dividend yield at today’s share prices, so that would likely see 8-10% yield be the new floor as you’d not rely on cheerleading, hope and prayers, or arm twisting to find investor interest at that level. It’s a floor of $2.40 or so and also allows strategic reinvestment — with the lumber windfall being entirely dry power for Ken to spin into gold (and justify his salary and incentive shares). I don’t want an Acadian Timber (no material upside / cash cow 100% payout) but you need some base level of decorum and should not be (massive but dubious upside, marred by a gross track record and tone deaf execution / 0% payout of the annuity revenue).
There’s a huge undertone here that’s troubling too. “Mgmt priorities” have many issues of their own making. “Ensuring they can sell the lumber....” “covid stuff....”. This reflects the churn, lack of bench strength, and poor hiring. This place has always been a revolving door. Covid takes a good tone from the top and some policy alignment but is dealt with at the mill level. Sales... ummm it’s a commodity you deal with at the Sales team level but who knows what’s going on their. If they don’t have any capacity and selling lumber at market rate is a headache for the C suite this should not be a going concern. Either get the small team that can do it, or have someone do it for you, OR quit making excuses. Tolko and Canfor have both shares sales and marketing capacity in the past for instance. My main point is the day to day operational minutia does not give you a pass for a nonexistent and nebulous at best (reckless and stupid at worst) approach to capital allocation. That’s your one most important job, guys. This is why I shudder about Ken printing new shares given the vast array of problems of his own making.
It’s not this is a bad bet on the whole, but increasing I am worried about the risk of it being a long term value trap lorded over by one man with no checks and balances on his power. I hear the Trump Tower has vacancy. Maybe rent to top two floors, but some hair dye and a golden toilet or 5, and complete the analogy. I’m perpetually amazed Polar and BWC put up with this. I suppose that's a question for the insiders and actual finance professionals we know - Black4444 might have insight? Life’s too short to put up with this, and I have to reduce my position in this dramatically by the sound of things. It’s too bad as the upside is massive, but cheerleading the investment case or the arms race (red queen hypothesis) of lumber mill capex is great for a rent-seeking Exec and terrible for all others. They are tactics, that need to be part of an overall strategy which has in no way been indentified or articulated... but it feels very incomplete and unbalanced. Very disappointing. Thank you for the great summary though, most appreciated!