Thursday, November 16, 2017

November 16, 2017, Quick Update: Peanut Convertible Debentures Power Rankings

Hi, readers.  This is the 20th update of the Peanut Convertible Debentures Power Rankings, which is current to November 16, 2017.  This is one of our quick updates, with abbreviated commentary.      

For a summary of the rankings of our entire convertible debenture coverage universe including the quantitative model prices of, and notes on each issue we follow, click on the table below to view it larger.



The Top-5 picks in the Power Rankings are also described with a little more detail in the corresponding section below.

For background information on the Peanut Power Rankings, please see our FAQs by clicking here

Important: the Peanut Power Rankings are provided as information and opinions only and are not intended to be a provision of investment advice or a recommendation of any investment action in any form.  As with all information concerning investments, it is highly recommended that an individual consult with a qualified investment professional before making any investment decisions.

Market Commentary - Quick Points (November 16, 2017)
  • No market commentary this week: no time!
  • Instead, we'll get right to the Top-5 convertible debentures below, as it's been a busy couple of weeks as we've passed through the thick of Q3 earnings season.   

Peanut Power Rankings Top-5 Convertible Debentures and Additional Bonus Coverage (November 16, 2017)
1. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last update's ranking: #1).  Nary an air pocket in sight, Cargojet announced yet another very good quarter on November 13.  Revenues up 10.8%, gross margin up 18.8%.  The bottom line: Cargojet is effectively a play on the growth of online retail and continues to have a dominant market position in an area (i.e., air cargo services) of long-term, secular growth.   Even at current prices, it's still decent entry point for CJT.DB.C.  There are still 3+ years to the hard call date and based on today's close of $112.00, the yield-to-hard-call-date is a positive 0.75% and the common shares only have to rise another 8.4% to hit the conversion price.  We continue to really like it.  We've been long CJT.DB.C since it debuted at $100.00.

2. Diversified Royalty Corp, 5.25% 31-December-2022, Convertible Debentures.  (Ticker: DIV.DB), (Last update's ranking: #3).  This new issue hit the market on November 7, and has been solidly trading above par since its debut.  Quarterly earnings, which were announced on November 9, were largely in-line.  Importantly, with $88 million of cash ready to be deployed, the market is eagerly awaiting their next royalty acquisition.  So far, their track record has been pretty good. The bottom line: this is an interesting royalty company, which currently owns the Sutton Realty, Mr. Lube, and AIR MILES® trademarks in Canada.  Management is highly regarded, and are aligned with shareholders through their own shareholdings.  Finally, the terms of the convertible debenture seem positive and this is a reasonable credit risk, in our view.  At today's close of $100.75, we have a yield-to-hard-call-date of 5.04%, and the common shares need to rise 28.9% to hit the conversion price.  We think the stock has potential to pop at the announcement of the next royalty acquisition.  Since our last update, we have acquired a position in DIV.DB at an average price of $100.08.  We also have a position in DIV common shares.

3. American Hotel Income Properties REIT LP, 5.00% 30-June-2022, Series 'U' Convertible Debentures. (Ticker: HOT.DB.U), (Last update's ranking: #2). American Hotel Income Properties announced their Q3 earnings on November 8, and the numbers came out somewhat mixed, but on the whole, okay.  Strength in some markets (Florida, Tennessee, Oklahoma) were offset by weakness in others (Pennsylvania, Texas, and Virginia).  The REIT has been very acquisitive the last year; we will see how they continue to digest the assets they've swallowed up.  The bottom line: HOT.DB.U has traded below par in the months since it hit the market.  With a yield-to-hard-call-date of 5.62% and over 3.5 years to the hard call date, we think it's great value here and the potential is there for future gains.  It closed today at US$98.00 and we're long HOT.DB.U at US$98.00.

4. Osisko Gold Royalties, 4.00% 31-December-2022, Convertible Debentures. (Presumed ticker: OR.DB), (Last update's ranking: #4).  The management team at Osisko Gold Royalties is known for their aggressiveness and deal-making in the precious metals space.  Since our last update, OR has made a US$65 million investment in Aquila Resources, which includes the acquisition of a gold stream from Aquila's Back Forty mining project in Michigan.   The bottom line: this is high quality, precious metals royalty company, with a superior growth profile.  We believe Osisko management will continue to be active in acquiring accretive royalties and streams in jurisdictions with low political risk.  We're long OR.DB as we subscribed to the issue at $100.00.  We also have a position in OR common shares.

5. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible US Dollar Convertible Debentures. (Ticker: TCN.DB.U), (Previous ranking: #5). Tricon stock (and convertible debentures) popped on the announcement of its third quarter earnings on November 8.  This is the kind of boffo quarter we've been expecting since we made TCN.DB.U the Peanut Power Rankings' inaugural #1 pick back on March 3.  The Silver Bay acquisition is starting to reap rewards.  The bottom line: this is a ver good quality convertible debenture issue, and has a nice combination of potential upside, yield, and USD-denominated exposure.  At today's close of US$109.67, the yield-to-hard-call date is 2.73% and there are about 3.4 years left until the hard call date. The common shares need to rise only about 15.7% to hit the conversion price.  We've been long TCN.DB.U since it debuted at US$100.00.

6. DHX Media, 5.875% 30-September-2024, Convertible Debentures. (Ticker: DHX.DB), (Previous ranking: #6). Wow, the market just hates this company right now.  We like it, so I guess that makes us contrarians on this one.  DHX's fiscal first quarter was announced on November 14, and lo and behold, it was pretty good.  Revenues were up 83%, management is trying to wrangle in costs, and fiscal 2018 adjusted EBITDA guidance remains at $125 million to $155 million.  By all accounts, Peanuts and Strawberry Shortcake appear to be performing as expected, and a deal was announced with Hulu earlier today, to boot.  Come on, market, give credit where credit is due.  The bottom line:  Despite the market hating on DHX right now, the company has attractive media content assets, its Peanuts IP assets (Charlie Brown and Snoopy!) have cash cow characteristics, and the company is currently undergoing a strategic review and could be sold at a premium (see our previous update on our theory as to why it could sell for $9.32 a share).  Nevertheless, there are considerable risks here.  The company is highly levered (outstanding net debt of about $1 billion), and the company has lost the confidence of Bay Street.  That said, we think the unique nature of the assets are potentially worth the risk if you can stomach the volatility.  The convertible debenture (DHX.DB) closed today at $94.00.  At this price, DHX.DB has a yield-to-maturity of 6.99% (note: there is no hard call provision for DHX.B, which is good for investors), but the struggling underlying common shares closed today 105.1% away from DHX.DB's conversion price of $8.00.  Recovery may take awhile, but if it happens, investors could be very handsomely rewarded.  We are long DHX.DB at an average price of $99.22.  We also have a position in DHX's Series B common shares (ticker: DHX.B).

8. Surge Energy, 5.75% 31-December-2022, Convertible Debentures. (Ticker: SGY.DB), (Previous ranking: unranked).  This $44.5 million new issue hit the market only yesterday, and had been announced on October 26 in conjunction with Surge's acquisition of crude oil producing assets in the Sparky area of central Alberta.  The bottom line: we're still a bit reticent about junior and mid-tier oil and gas at this stage, but as far as an oil-based convertible debenture goes, this new Surge issue does seem to have attractive aspects going for it .  At today's close of $99.60, the yield-to-hard-call of SGY.DB is 5.86%, and the common shares need to rise about 35.5% to hit the conversion price.   Surge seems to be sustainable at current oil prices, and this convertible debenture provides an opportunity for participation in the optionality of oil prices heading higher, but at lower relative risk to holding Surge common shares directly.  We have no position in SGY.DB.  

11. Innergex Renewable Energy, 4.25% 15-August-2020, Series 'A' Convertible Debentures. (Ticker: INE.DB.A), (Last week's ranking: #10). We're gonna say the exact same thing as we did last update on this particular issue.  Innergex made a splash on October 30 when it announced it was taking over Alterra Power for the price of $1.1 billion in cash and stock. Shares of INE traded down on the news but we're positive on the deal, as Alterra's Icelandic geothermal assets and US hydro assets represent an improved growth pipeline for the new Innergex, as well as the diversification of the new company into different geographies.  The bottom line: Cleaner, renewable energy is an important theme that we're bullish on over the medium to long-term.   We want to be in this space (and maybe you do too), and this convertible debenture is a way to play it.  At today's close of $105.99, INE.DB.A has a yield-to-hard-call date of 0.87% and is just under 2 years to hard call.  Also, INE is trading only 9.5% away from INE.DB.A being in the money.  We're long INE.DB.A at $102.75.

12. Algoma Central, 5.25% 30-June-2024, Series 'A' Convertible Debentures. (Ticker: ALC.DB.A), (Previous ranking: #13).  For as quiet as a company this is, its common shares have sort of been on fire the last few weeks.  The most recent news: the announcement of a substantial stock buyback, which will be executed in the form of Dutch auction.  Shiver my timbers, I like the cut of this jib! The bottom line: recent developments for Algoma Central are all positive, the company is gaining momentum, and the underlying common shares are starting to turn.  ALC.DB.A has mostly been on the expensive side since it hit the market in the summer, but our quantitative model now has the issue pretty close to fair value and this is a good quality credit.  ALC.DB.A closed Friday at $107.00, which gives it a yield-to-hard-call of 3.59%.  We have no position in ALC.DB.A but have a position in ALC common shares.

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