Priszm, Plus Another Crazy Month on the Market

December 14th, 2010 by Potato

It was a pretty crazy month+ on the market. The overall indexes didn’t have huge swings in them, but I saw a number of stocks I watch (but don’t own) swing all over the place +/- 10%, with several-percent changes day-to-day. Part of me started to freak out at the apparent increase in volatility, but for the most part I just rode it out. Some key points:

Let’s start with Priszm, the troubled operator of KFC restaurants in Canada. I’ve written about Priszm many times before, in large part because I think it’s an interesting story with a lot of lessons to learn (and in no small part because I lost a lot of money on it, so it’s a very personal, painful lesson). Today’s update to the saga is that they’ve sold off over half their locations. The Ontario and BC restaurants were the “core” of their business in many respects, as Quebec has always been a bit of an oddball, and there just aren’t many restaurants in the other provinces (432 total, 232 for sale). So it looks like this is about it for the Priszm story: this is quite likely the first step in a wrap-up of the business. The amount they’re getting for the sale lines up with roughly half of the P&E and franchise rights values on the balance sheet, so they’re likely getting nothing back for goodwill. If that’s the case, then there’s not likely any value left in the equity.

In an effort to conserve cash as the company prepares for the traditional KFC sales decline during the winter season, Priszm withheld its continuing fee that was payable to the franchisor on December 7, 2010, as well as its debt interest which was payable to its senior debt lender on December 10, 2010. […] Priszm is also in the process of obtaining a forbearance from its senior debt lender relating to the debt interest which was payable to its senior debt lender on December 10, 2010.

Here we go, the end times are nigh. I’m actually surprised that they didn’t make this payment: I figured the default would come at the end of the month.

Canexus (CUS.UN) had another good, consistent quarter — most critically for me, demonstrating that their new technology upgrade is actually working (it’s always a worry with me that big capex spending on new technology for plants won’t actually deliver the efficiencies promised — see Opti). Despite that news, the stock barely budged, so I went out and bought more. It’s now roughly 9% of my portfolio, has an 8% yield, and the payout ratio (now that all that capex is coming to an end) is down around 50%, which means that distribution should be quite safe going forward. The big open question is what the end-game is here for Nexen. Nexen owns the lion’s share of Canexus, and is reported to be looking to sell its share. Would that go to the public market, or would another player (one of the pension funds?) instead try to take the whole thing private?

Other than that though, I’ve been a seller as stuff has been rising. I had an ask in on Imris (IM), but then got blindsided by the sudden share issue and NASDAQ listing (I thought it would have taken way longer to set a price and open — or at least that it would happen one morning, rather than halfway through the trading day!). So my nice-looking gain there has been wiped out, but I’m fairly confident it’ll get back up there. I do worry about why they were raising more money after finally starting to turn a profit — leaving their core competencies? I’ve also got a high ask sitting on IPL.UN (kind of the opposite of a stink bid).

Basically, the theme is that the rest of the market suddenly has a hard-on for yield, and with many trusts dropping to ~8% yield, I’m happy to take the capital gains now, and plow the money into the broader index. Indeed, aside from keeping some money in cash to cover the costs for finishing my PhD (another semester of tuition, and hopefully soon a few hundred dollars in printing and binding costs), I haven’t really found anything else I like to buy in my active portfolio, so I’m sending the money off to the indexed side of things.

One final note for the active portfolio: Freddie Mac reported its third quarter, and the results were incredibly obtuse. The numbers looked very promising for the bull case on the preferreds: delinquency rates are improving, non-performing loans have stabilized, and though they took more provisions for credit losses this quarter, it looks like they should be fully reserved at this point (a ~30% severity should be in the ballpark). However, the politics are still terrible and looking worse: I’ve made the point before that capital reserves are there to keep a company out of the shit pile, and once its in government protection, it doesn’t make sense to borrow money at usurious rates to maintain that margin-of-safety: the government becomes the margin-of-safety. Yet here FRE came up $58M short, and for the dollar amounts involved here, that’s basically a rounding error on a neutral quarter — next quarter they should start making progress towards paying back the treasury. Yet rather than overlooking the immaterial deficiency in their capital ratio, or just making them borrow the $58M from the government, the conservator requested an even $100M. This makes no sense at all, except if indeed the government is trying to make a profit from FRE at the expense of the other stakeholders. So even though the credit numbers look to be getting better, I think that the political risk is alive and well, and if anything is even more clearly negative.

3 Responses to “Priszm, Plus Another Crazy Month on the Market”

  1. Patrick Says:

    The only individual company I currently own is Pizza Pizza (PZA.UN). I’ve been delighted with them for several years now. Unit price has gone nowhere but the yield is north of 12%. I think this is a small-cap stock that the market doesn’t understand (it’s a complex corporate structure) so they’ve mispriced it.

    Beware though that new tax rules come into play for income trusts next year, and that will equate to a drop in distributions. With any luck, that will decimate the unit price, making it cheaper for me to buy new shares when I reinvest my dividends each month!

  2. Potato Says:

    I was just talking about PZA.UN with my dad today… It’s almost the exact opposite of what Priszm was. Priszm operated restaurants and paid franchise rights to YUM. PZA collects franchise rights from Pizza Pizza (and Pizza 73) stores, and pays them out to unitholders.

    The yield is going to be just under 9% going forward, as the post-conversion payout is going to be ~$0.70 (price today about $8). I think that’s fully priced in, but you never know until that first monthly cut if there’s someone out there that didn’t know and will sell.

    I don’t think there’s really any growth left in Pizza Pizza – today’s TD report suggested an end-game with I think something like 25% more stores than at present, but I don’t know how realistic that is. Pizza Pizza is pretty well saturated in Ontario now, and I don’t know how well it will play out east… So the unit price shouldn’t change IMHO (except to vary as yields change).

    Anyhow, that aside, the yield itself is pretty good, and moderately safe. Even if that’s all the return you ever get out of it, that’s still pretty good. Because of the structure they don’t keep a big cash cushion, but they do get their franchise fee based on gross sales of the pizza stores — if food inflation or whatever crimps margins, that’s the operating company’s issue. SSSG is a bit of a factor (esp. if it’s negative), but I think that should come out fairly flat for a long time to come…

  3. Patrick Says:

    Yes I think that’s a fair assessment. They have eaten significantly into their cash reserve for several quarters now to pay the distribution, but the upcoming distribution change will correct that situation. (I asked Investor Relations.)

    The only thing I would add is that they currently only operate restaurants in Ontario and Alberta. Seems to me that BC and Quebec would be profitable expansion opportunities if they could find a way into those markets. (In Alberta they did so by buying the existing Pizza 73 brand.) However, I’m happy with the company just running as-is indefinitely and spinning off distributions. Not every business needs to obsess over growth!

    I considered my original investment a win-win situation. I bought just 100 units (yeah, I know, I’m not what you’d call a high roller) at a time when the distribution was comfortably over 1% per month, so that meant my distro bought another unit each month. If the price went down, great, I could keep more of my distro each month, or even buy more than one unit. If the price went up so high that I could no longer afford a unit with each distro then, darn it all, I’d just have to sell and resign myself to being content with the hefty profit I made.

    Worst case, if it went to zero, it was only $700 down the drain.