Tivan Ltd V.TVN

Why Grenville should be trading at over $0.90 within a week

[goldinontario]

If you read the press release and listened to the GRC conference call on Friday, and you are long GRC you would have had a restful weekend.  

If you missed the PR and CC here is what you missed:  We are now annualizing approximately $5 million of free cash flow per year, and still have $10 million of cash on hand.

A monthly dividend was declared equalling $0.05 per annum or 8.8% using Friday’s close.  A comment on the conference call stated that from this point on (i.e. because all revenuel drops to the bottom line as expenses are now covered) for every $3 million invested, the company can afford to pay an additional $1 cent per annum.

The pipeline is in excellent shape which is great because of the potential to see further increases in dividends as discussed above.

The current run rate of royalties we receive per $1 million invested is $247k and is growing.

So where does that leave us regarding the valuation of GRC?  In September GRC hit 94 cents.   It fell a bit from its high and then after it was reported that one investment went sour it trended down to where it is today at 57 cents.  The company referenced this one investment during the conference call and it seems that they are in the process of recovering what could be a good sized portion of the invested capital.  Most of the analysts had totally written off this investment.  Think about the model for a second.  Even if they completely lost one investment, each year, and if they made 16 investments/yr (4 per quarter) you would still realize over a 23% return on investments (on a cash on cash basis).  I frankly expect that we will see about one investment per year go south in the future, but due to the high expected returns our overall returns are hardly impacted, and don’t forget that the company uses leverage (hopefully in the future they will issue straight debt not convertible debt) to enhance these returns.

The two other business royalty companies that trade in Canada are Alaris (AD) and Diversified Royalty (DIV).  If you look at dividend yield, AD is yielding 4.3% and DIV is yielding 7.1%.  There were two comments on the conference call related to the conservativeness of the GRC dividend: (1) GRC is only paying out approximately 80% of their cash flow (and as stated above this percentage continues to lower as new investments are made) and (2) the company has a “dividend account” which I understand is cash set aside for a rainy day as a buffer in case additional bad investments arise, some royalties are cut, seasonality, etc.

If you use AD’s yield we should be trading at $1.16 and if DIV’s yield is used we should be trading at $0.70.  In my opinion AD should get a premium for being the oldest business royalty company which has proven its model.  DIV is also a new company like GRC.  On the other hand IMHO GRC should get a premium because its model is predicated on earning a 25% royalty rate while the other two are around 15%.  All in all I think GRC should trade at a lower yield (i.e. higher valuation) than DIV and a slightly higher yield (i.e. lower valuation) than AD, though in time I would say that GRC should be at least equal to the yield valuation matrix as AD. 
So I would say using this metric it would put GRC’s share price at over 90 cents.

If you look at the metric of enterprise value to EBITDA (using 2015 numbers), AD is trading at around 16.5x and DIV is trading around 14.5x.  Using these multiples GRC should trade at 94 cents (using ADs numbers) and 86 cents (using DIVs numbers).  Once again I believe GRC should trade at a premium to DIV and thus I would say GRC should be trading above 90 cents based on this metric.

All in all it is hard to imagine GRC continuing to trade in the 60 cent range come Monday morning and IMHO it should be in the 90 cent range by the end of the week, and continue to go higher as additional deals are announced.