Value Investigator - Value Library

Value Library

The following is an excerpt from the ABC Perspective - April 2000 - Pg. 4-5

Bountiful Bargains

With high technology and telecommunication common shares the present flavour of the day, many investors have been shunning traditional value investing. We believe, however, that value investing, which encompasses fundamental corporate accounting and analysis pertaining to liquidity ratios, book value, cash flow and earnings per share, offers tremendous long term benefits in today's frenetic investment environment.

As difficult as it may be in the current high technology mania, we believe that strict investment disciplines should be followed. In practice, we remain focussed on value and continue to abide by our ABC Funds' Ten Commandments of Value Investing:

Low P/E Multiples
Low Cash Flow Multiples
Discount to Book/Net Asset Value
Hidden Assets

e.g. Tax loss carry forwards, real estate, potential spin-offs, IPO's, favourable
litigation, etc.
Management
1. Solid, proactive management
2. Poor management - ripe for proactive acquisition or merger
Products/Services in tune with 2000 and beyond
- Expandable, growing markets, good margins
- Not outdated, shrinking e.g. buggy-whip manufacturer in pre-automobile period
Value Catalyst

Significant value creator i.e. new management with new directions; important sale or purchase of a meaningful asset; unsolicited takeover bid; disgruntled and impatient proactive shareholders, etc.
Discounted Valuations Compared to its Peers

i.e. P/E, cash-flow etc. Could be taken over by relatively expensive Canadian or
foreign competitors wanting to expand market presence.
Contrary Opinion and Under-followed by Investment Analysts

With little investor exposure, undervalued stocks are 'pregnant with possibilities' providing very little buying competition when attempting to accumulate the security.
Discipline

Stay on track and adhere to strict value discipline of P/E's, cash flow, price targets etc. Do not get sucked into buying the flavour of the day. Combine patience and persistence to attain superior performance. Patience! Patience! Patience!

With value investing out of favour and investor psychology so poor, we are uncovering innumerable extraordinarily undervalued Canadian common shares. These companies, primarily considered as "old economy", are trading at unduly low financial multiples and at huge discounts to book and net asset values. They are, at present prices, excellent candidates for takeovers, mergers, share buybacks or reorganizations. Several recent examples of this include: Scott's Restaurants, First Marathon Inc., SMED International, Alliance Forest and CTV. We expect to see many more corporate buyouts/reorganizations and, as a result, we expect the ABC Funds to be beneficiaries since many of our holdings would be prime candidates for such change.

Six favoured ABC Funds' securities held in our three portfolios include:

Canadian National Railway

While very "old economy", CNR is the premier railroad operation in North America, encompassing almost 14,000 route miles of track in Canada and the U.S. Led by an excellent manager in Paul Tellier, the company is a serious consolidator of North American railroads providing for improving margins through cost reductions. Trading near book value, paying a 2% dividend with a P/E ratio of 9 times, CNR is very undervalued. A hidden asset is its railroad right-of-way, which enabled it to acquire 9.4 million shares of 360networks inc. through a joint venture.
Fletcher Challenge Canada Ltd.

A B.C.-based producer of pulp and newsprint, Fletcher Challenge Canada has new management, a pristine balance sheet with net cash of almost $800 million or $6 ˝ per share and trades below book value. Under-leveraged, the company can be built up and could make selective acquisitions or be sold by its new proposed majority shareholder, Norske Skog. Yielding almost 4%, the company could also be a huge beneficiary of rising commodity prices.
Industrial-Alliance Life Insurance Co.

Recently demutualized, Industrial-Alliance of Quebec City is a well-run and undervalued life insurance company. Industrial-Alliance has excellent product brands, a captive sales force of over 1200 agents and has been expanding in Ontario and B.C. Trading around book value with a 2000 P/E ratio of under 8 ˝ times, Industrial-Alliance, with no controlling shareholder, is a very attractive takeover candidate.
Premdor Inc.

One of the world's largest manufacturers and merchandisers of doors, Premdor Inc. has fallen from a 12 month high of $18.50 to $11. At this price Premdor trades at slightly above 1999 book value of $10.41 and 6.3 times estimated 2000 earnings of $1.75. With forecasted 2000 sales of $1.75 billion, market capitalization under $500 million, a solid balance sheet and management ownership under 4%, Premdor is extremely undervalued and is a prime takeover candidate.
Rothmans Inc.

Headquartered in Toronto, Rothmans is a major Canadian manufacturer and distributor of cigarettes through its 60% ownership in Rothmans, Benson and Hedges Inc. With BAT's sale of its 71.2% interest in Rothmans Inc., Rothmans now has no controlling shareholder and could be an acquisition target. Rothmans is debt-free, has excellent free cash flow with little capital expenditure and pays an extraordinary 7 Ľ % dividend.
Ulster Petroleums Ltd.

Having disappointed investors with its 1999 results, Ulster Petroleums has declined over 50% from its 12 month high of $17.85. Ulster, nonetheless, is fundamentally very attractive with excellent proven oil and gas reserves, rising 2000 cash flow of over $2.75 per share at a 2.8 times multiple and trades at a discount to net asset value. With no controlling shareholder, we believe Ulster is very cheap and is a leading takeover candidate.

Irwin A. Michael, CFA