Vision for the future.I’ve been considering the RBC three courses of action, and I think that (1) becoming a cash cow does not preclude (3) privatization. A clever leadership group would lead with 1 and see how it goes. In this case, paying out say $11M a year as a div is a 30% yield at current prices. The SP will rise and push this down to a maximum of 10%. That would be about $2.30 per share. Perhaps not a coincidence, that’s the Raymond James price target.
When firms go private you will see a premium, often about 2x. Getting the SP to the mid $2.00 range let’s them go private with some dignity – in the $5.00 range. It also allows more time to find a buyer and from a position of some strength.
RBC had another option they doesn’t see likely – more M&A under Shields. Not only unlikely, it’s grotesque. I suspect Mr. Shields will be removed in 2020, as will the CFO. I realized this when seeing Hans Thur and Brett Bray are both no longer with the company. This is good, they don’t belong in the future version I see for the firm. It makes sense to jettison the other leadership group who are remind investors of the bad old days. Removing Shields will clearly end the era of reckless M&A and questionable operational skills. They don’t need to be turning around old assets – there are big players who excel here like WFT and SPI. Conifex can simply run the assets it has, which are simple and doing well.
This will happen I think based on the top three investors having a combined 51% of the company. I knew Polar was there with 17.6% and they have been buying more. Blue Wolf is there and is likely seething, having been hosed by Ken to take on this stake for $6.50 per share. There was also 3.5 million warrants are part of the consideration that are worthless. Firms like this don’t care for dead money, they will move to more or less break even and move to the next opportunity. They sure won’t be onboard with goofing around in the M&A space having been badly burned by this leadership group once already. Lastly, and news to me is Donald Smith & Company. They own 16.8% of the company. They are focused on deep value investing. You unlock deep value not with the status quo, but a new approach. They will likely back the new leadership group and new strategy.
I think the strategy will be run this like a Brookfield business. Like a mini Brookfield Infrastructure Partners or Brookfield Energy Partners. These firms are led by younger people in there 30s or 40s usually. Conifex can just keep the VP Finance Neeser on as CEO as he is all they need to steer the ship into an Acadian timber sort of boring reality (that commands an 18x EBTIDA multiple – I’ll take that thank you.) They could also use Infanti the VP opps who has been there longer but seems like a risker choice. Keep him on as the 2nd in command. Absolutely key to this is removing the failed CEO and CFO currently there, whatever the cost may be. Last of all, consider renaming the firm to Be Crookfield Energy Partners. Kidding there, but it’s not a hard blueprint to follow. Be rid of the deadweight leadership who are making this a sketchy investment and who are INCREDIBLY off-putting to investors, map a clear strategy to be a cash cow with a simple and lean business, and then consider going private when the right deal comes. They may well thrive as is – they could easily be worth $5.45 per share (14x on the $14M for power; 6x on the $20M for lumber) and paying still a comfortable 5% div with major upside for special dividends based on the lumber cycle.
Also clean up the board. Ensure that folks like Jia are removed. Shields has no place there either as his judgment is tarnished by this recent fiasco.
So, I’m buying based on this having a high likelihood of happening. I don’t trust the management or even the board. But I do trust that Polar, BW, and Donald Smith Co can easily come to a deal for a new reality. Polar picked up another 820,000 shares on Dec 24, 2019 I see. A few calls and an afternoon whiteboard session is really all they need to make it happen. They may be waiting on a strategy from the current group to approve or reject, or maybe they just don’t care. I would highly doubt the latter case. And a strategy of “more of the same Ken Shields show” is just downright awful.
I don’t know when but I would wager it’s going to happen in 2020 sometime.