In Canada, a substantial issuer bid (SIB) is the formal term for a tender offer to repurchase shares. SIBs can be used to buy back an unusually large amount of shares beyond what’s allowed with a typical NCIB buyback program (Normal Course Issuer Bid). Tender offers may be a sign of improving corporate governance or savvy management taking advantage of their stock’s undervaluation. Or, large buybacks might simply be misleading demonstrations of confidence in a company’s prospects.
We’ve compiled a cheat sheet of Canadian stocks that are in the process of buying back a substantial portion of their float. We looked at the past 3 months of filings to find stocks that are:
- In the process of a SIB
- Have completed a SIB and continue to repurchase shares
The market capitalizations of the 5 stocks we’ve found range from C$133M to C$3,186M, so there should be a reasonable amount of liquidity for the largest stocks in this group. Without further ado, here’s our cheat sheet…
Callidus Capital Corporation (CBL:CN)
- Mkt cap: C$1,010M
- Book value of C$501M as of the latest quarter (Q3 2016). Price-to-book is roughly 2X.
- Callidus recently finished its substantial issuer bid, buying back 2,849,604 shares at $16.50 per share.
- Jan 16 share price: $20.61
- Callidus’ Dec. 29 press release (link to Sentieo doc/original press release) announced a buyback program (for 5% of shares outstanding) as well as the formation of a special committee for potentially taking the company private.
- Catalyst Capital Group, the major insider (67% of outstanding), does not intend on selling into the NCIB buyback program.
Interestingly enough, Callidus’ shares have continued to appreciate despite some of the issues it is currently embroiled in.
- Callidus and The Catalyst Capital Group has commenced litigation against its naysayers: West Face Capital (an asset manager) and Veritas Investment Research (an independent research firm). West Face has made the court documents easily accessible via CatalystLitigation.com. The first two pages of West Face’s statement of defence briefly summarize their reasons for betting against shares of Callidus.
- Arc Productions, the animation production company mentioned in Callidus’ 2015 annual report, entered bankruptcy in 2016. Callidus is listed as a secured creditor. Sentieo’s Financial Document Search feature could not find any SEDAR filings that mention “Arc Productions” other than the 2015 annual report. This process can be repeated for any other Callidus borrowers that may be in financial distress.
Certainly, this is not your everyday tender offer. There have been two very different narratives: a financial innovator buying back its shares… or a subprime lender that has hit a few bumps in the road. Investor sentiment has moved between the extremes, sending the stock from C$7 in Dec 2015 to its current price of $20.61. Unraveling this unusual situation may pay dividends.
Northern Blizzard Resources (NBZ:CN)
- Mkt cap: C$464M
- On Dec. 12, 2016 the company announced a substantial issuer bid (snt.io/1V2Kas57B, press release) for up to C$75.0M at a price of $4.00/share. The Offer will remain open until 5:00 p.m. (Toronto time) on January 20, 2017.
- Jan 16 share price: $3.79, a 5.25% discount to the purchase price.
- Northern Blizzard’s directors and officers do not intend to tender their Shares.
- R/C Canada Coöperatief U.A., which owns 28.9% of Northern Blizzard’s Shares, does not intend to tender any Shares pursuant to the Offer. NGP IX Northern Blizzard S.à.r.l., which owns 42.4% of Northern Blizzard’s Shares, has entered into a lock-up agreement to tender all of its Shares pursuant to the Offer.
- Trades at 0.6X book value.
Northern Blizzard is one of the unfortunate victims of oil falling to $50. But with oil prices slowly creeping upwards, there may be light at the end of the tunnel for this heavy oil company.
Trez Capital Mortgage Investment Corporation (TZZ:CN)
- Mkt cap: C$133M
- Repurchasing $35M in shares.
- Dutch tender offer: C$8.00 to $8.30 (in increments of 5 cents)
- Jan 16 share price: $7.98, a 0.25% discount to the lowest end of the tender offer.
- Insiders intend to tender (snt.io/jD2KaJkU4, press release): “The directors and management of the Company have advised that they, or entities related to them, intend to tender an aggregate of 623,628 Shares pursuant to the Offer”
Home Capital Group (HCG:CN)
- Mkt cap: C$1,967M
- Completed a substantial issuer bid in 2016, repurchasing C$150M in common shares.
- Repurchased $33.695M shares in the latest Q3 2016 quarter.
Home Capital is somewhat of a battleground stock (at least on finance Twitter), with the bears arguing that the Canadian housing market is overheated and bound for an ugly collapse. If a housing collapse does indeed occur, the companies that lend to riskier segments of the market could be hurt harder.
The stock currently trades at only a minor premium to book value (1.1X). Analysts are projecting a return on equity of 15.5% for 2017 and 14.9% for 2018.
TransForce Inc (TFII:CN formerly TFI:CN)
- Mkt cap: C$3,186M
- Announced a modified Dutch Auction, which concluded on March 28, 2016. The company repurchased 2.7M shares at a price of $22.00, for a total of $59.4M.
- Directors and officers of the company did not tender shares into the SIB.
- Since then, the company has continued to repurchase shares. In the latest Q3 2016 quarter, the company spent $41.8M buying back shares.
- The company trades at 13.6X estimated 2017 earnings.
- The company is not cheap on an asset basis, trading at a price-to-book ratio of 2.0X.
A word of caution
While investors often cheer buybacks, we note that buybacks tend to be common when share prices are high and uncommon when share prices are low. When putting together our July 2016 post “A list of potentially cheap stocks buying back their shares“, we noticed that very few companies actually bought back shares when the markets bottomed in 2009. Many serial repurchasers changed their tune in 2009, choosing instead to accumulate cash. Few were greedy when others were fearful.
So, please do your own valuation work and analysis on a stock. Simply looking at management’s conviction in buying back shares is no substitute for valuation work.
We also hope that we’ve inspired you to think about other unusual situations that are worth looking into. Searching through regulatory filings like SEDAR and EDGAR is a quick way to find unusual and obscure situations in the stock market. There are many pockets of the stock market that receive relatively less attention, sometimes leading to undervaluation that prompts management to try to buy back an unusually large portion of a company’s float. To write this article, we simply searched for the phrase “substantial issuer bid” in documents filed in the past 3 months. This allowed us to quickly pinpoint stocks with unusual buyback activity. We encourage you to use your own imagination to think up of other ways of finding interesting situations in the markets. With thousands of stocks out there, many of them are just waiting to be discovered.