RE:Call with Jordan Brilliant, you're a good man!
I'm really curious how the outcome of the report to the Board re: increasing value to shareholders went. I'd be pleased to weigh in on that however possible.
On a transaction, it’s an oddball because I don’t see any clear 50%+ blocks which usually help. I see Polar at 18.4%, BWC at 17.4% and it drops off precipitously after that to Aegis Value Fund at 3.1%. Fund ownership is pretty inconsequential, largely due to this disastrous run that cemented CFF as a grubby penny stock (e.g. <$5.00/share). RBC calls it “Hairy”. I don’t think they’re referring positively to Ken’s slick pompadour haircut, either. So, moving the needle would be grassroots and ambiguous – with the retail chumps like us presumably making up nearly 50% the count. They’re a beaten up lot. Some of my relatives were drawn to the deep value appeal of this, like me, and have maybe 100,000 shares – so that alone is 0.20%. they'd kill to get out at anything over $2.00, so the trick is to provide an exciting and clear vision so they don't bail as the price rises. Extrapolate that out and I guess it’s a retail game.
The saving grace is most folks have skin in the game now. Ken and Jordan have their money in this of course, and Ken is in for well over $1M out of pocket as memory serves. The total for the exec was 1.99M shares, so 4.3%. Dave Roberts and George Malpass are co-founders so they’re legit. I have a chip on my shoulder on Board passengers though, and would strongly hope Costello and North have bought in – their power generation and sales expertise is needed in 15 years when the deal is up, but maybe it’s time for them to go otherwise -- those skills can be hired as needed and they presided over a ruinous 2018-19 run. I believe Ken, Charlie Miller, and Dave R are not going anywhere and fair enough. The major question for me is where is Polar’s representation? Any thoughts?
If there’s merit on Polar sleuthing I/we can write them a letter and perhaps give some options for consideration. E.g. a shareholder motion for their inclusion on the Board. It would only take their 18% plus maybe 2/3 of the retails guys and I trust them much more than yesterday’s men and women.
The other thing I’d like to bring to a conversation might be some low-key benchmarking. We need CFF to largely conform to the industry norms. They’re dynamic as they’re two businesses not one – power and lumber. Lumber names played it really safe in Q3. However, RFP bought back 5% in the Q. Norbord can turn on their NCIB rapidly as they said in the CC. Interfor got approval to buy back 10% this quarter. Sounds like that’s an option.
I think CFF should have a framework to unofficially separate the two businesses – power pays a fraction of revenue (say 90% of EBITDA) to a div (2/3) and a NCIB (1/3). Lumber can do like the rest of the sector and take the cash and stuff it in the bank. Nobody did anything ground-breaking with the cash of than deleverage. Ken trumpets that the lumber side is debt free but insomuch as it’s one stock ticker they just need CFF net debt to be <$0, not $40M.
So, aim to use the foreseeable future lumber earnings to move to a net cash position. Assuming they earn $15M in Q3, the $65M in debt (less $11M in cash after Q2) would be $39M. I don’t think they need the powerplant for that. That’s going to go away on its own in 2021. Q4 should be another $15M, so they’d need CAD $100/MFBM margins for 2021 to be debt free.
That provides optionality, and in the interim you’d see annual div payments ($14M * 90% * 2/3 = $8.4M or $0.18 per share…. a decent 14% at current pricing. Shoot, don’t even need to call it a “variable div” like Norbord as it’s not on the commodity cycle. Then you’d be buying back ($14M * 90% * 1/3 = $4.2M). So that would be 7% of the shares annually at current pricing. Maybe outside the bounds of the possible if they can only get approval for 5% annually.
To me that would be prudent capital allocation and should be verbally enshrined as it has major ramifications for the share price which in turn drives the takeout options.
Otherwise, for Jordan, I’d suggest a few things:
>> Professionalize the website. I need less of Ken’s grim and leering mugshot everywhere.
>> Post more presentations. Convey your strategy for all, not just back channel that stuff.
>> Tidy it up. There’s no Q2 presentation on there. Not a deal breaker but if I’m new money I’m looking to say yes and don’t want red flags.
>> Fix (update) the mission, vision and values. You are no longer “poised for growth”. Actually, that might now be scrubbed. However, “Through astute strategic acquisition and strong leadership, Conifex is emerging as a major national player in the forestry, sawmilling, and power industries.” No you are not. This needs to go and is disingenuine at best and off-putting at worst. You are a cash cow providing safe and stable yield to investors in a cash-staved world, with a tremendous discount to sum-of-parts upside. You lost your mandate for “strategic acquisition”, although we are open to it when done properly and with spare cash – once folks like us get paid a reasonable fraction.
GLTA!