Great article. Thanks for writing it. It’s still almost a 7% position for me and I have owned it since 2015 too. I think it’s much better than owning the index given the margin of safety you laid out so well. I agree with you on Empire Life. 1.5x BV is fair number for a trading value but 2x BV is probably closer to liquidation value. I think they are unlikely to sell it anytime soon. The other source of hidden value are the shares ELF owns in it self via family holding companies. I estimate it to be 70-75m shares and because of IFRS, they are marked at market not at NEV and certainly not w/ Empire Life marked at 1.5-2x BV.
Thank you for keeping E-L never too far from mind over the years. I agree that E-L should essentially return whatever XEQT plus a few percent given Empire's return, the leverage of so much invested vs the market cap, and the possibility of value creating buybacks and special dividends. With relatively low downside given its conservative financing and business. Plus additional upside if anything is ever done with Empire, or the shares it owns of itself, or United/Economic, however unlikely those things are. It's not an exciting set up but it's hard to argue against it.
Given the now huge overlap in our portfolios (I own FFH in size, SCR, MKO, FISH, and now ELF), I really should just defer to your model portfolio and call it a day.
Thanks for the write up. What are your thoughts on the likelihood of a take private? Could that turn into a risk if the stock trades at a deeper discount?
I don't think it's exceptionally likely for a few reasons. One thing I've heard from a few people is that so many of the Jackman (distant) family and friends, who wouldn't be part of the acquiring group, own this stock that a take private would force a huge tax bill on people that Duncan wants to do right by. That makes taking it private less likely, and makes a poor price if he does even more so.
There are also all the entanglements of the various public entities and family holding companies which means the Jackmans themselves would likely end up paying a lot of tax as well.
If we think of how much lower the float would be if E-L had bought back shares instead of paying the special dividends, it implies to me that taking it private is not the goal. There's been hundreds of millions spent on special dividends that could have gone towards buying out outside shareholders, and instead management chose paying it out (and incurring taxes). Yes, SIB's haven't taken in that many shares, but it still would have been more effective if that was the goal.
My cynical side views the special dividends as a way to build up funds and to buy out the remaining shares when there is another deep discount with the recent stock split being another mechanism to bump liquidity and squeeze out any further public float in anticipation. Hopefully I’m off the mark here.
The complex entity structuring was how I thought about the take private risk mitigation. However, it does beg the question of what a reasonable (or lack of) discount to book the entities should actually merit then just given in a hypothetical liquidation it seems like you would be receiving below its FMV after tax.
Thanks Nikhil. I haven't looked at Morguard recently. That's mostly a function of my real estate exposure being too high as it is, and also partly because I've always liked the idea of the company (Activist Outsider CEO allocating capital wherever it makes the most sense). I understand that because the price has gone nowehere for five years, and with George Armoyan getting involved, the future could be much more fruitful, but my oversized position in Dream makes diversification necessary.
Thanks Jim. I admit I haven’t looked at EVT and UNC as closely, but ELF looks to me like the most attractive at this point, though I think one could be happy holding any of them. And if your EVT position is large you own quite a bit of ELF anyway.
That would definitely be some of it, but it's still had the worst of the large closed end funds in Canada that mostly hold public equities (CGI, Cymbria, Urbana, Economic). Sure there are differences between them (leverage, private assets), but most manage to overcome the tax burden to put up at least decent returns. There's also a decent amount of underperformance in security selection, as the management fee and taxes probably don't account for 3.5% annual underperformance over the last 10 years.
It's a minor quibble, given United doesn't represent a huge percentage of E-L's portfolio, but it's definitely a drag.
Missed reading your posts, and you are back with a banger!!! I have been adding $ELF.TO but too slowly in hopes of maybe the stock going lower (my mistake).
Great article. Thanks for writing it. It’s still almost a 7% position for me and I have owned it since 2015 too. I think it’s much better than owning the index given the margin of safety you laid out so well. I agree with you on Empire Life. 1.5x BV is fair number for a trading value but 2x BV is probably closer to liquidation value. I think they are unlikely to sell it anytime soon. The other source of hidden value are the shares ELF owns in it self via family holding companies. I estimate it to be 70-75m shares and because of IFRS, they are marked at market not at NEV and certainly not w/ Empire Life marked at 1.5-2x BV.
Thank you for keeping E-L never too far from mind over the years. I agree that E-L should essentially return whatever XEQT plus a few percent given Empire's return, the leverage of so much invested vs the market cap, and the possibility of value creating buybacks and special dividends. With relatively low downside given its conservative financing and business. Plus additional upside if anything is ever done with Empire, or the shares it owns of itself, or United/Economic, however unlikely those things are. It's not an exciting set up but it's hard to argue against it.
Given the now huge overlap in our portfolios (I own FFH in size, SCR, MKO, FISH, and now ELF), I really should just defer to your model portfolio and call it a day.
It’s great to have your company on these deals. Makes me feel safer as I think you are a great analyst! We need another IAM!
Thanks for the write up. What are your thoughts on the likelihood of a take private? Could that turn into a risk if the stock trades at a deeper discount?
I don't think it's exceptionally likely for a few reasons. One thing I've heard from a few people is that so many of the Jackman (distant) family and friends, who wouldn't be part of the acquiring group, own this stock that a take private would force a huge tax bill on people that Duncan wants to do right by. That makes taking it private less likely, and makes a poor price if he does even more so.
There are also all the entanglements of the various public entities and family holding companies which means the Jackmans themselves would likely end up paying a lot of tax as well.
If we think of how much lower the float would be if E-L had bought back shares instead of paying the special dividends, it implies to me that taking it private is not the goal. There's been hundreds of millions spent on special dividends that could have gone towards buying out outside shareholders, and instead management chose paying it out (and incurring taxes). Yes, SIB's haven't taken in that many shares, but it still would have been more effective if that was the goal.
Thanks for the color. I think you are right.
My cynical side views the special dividends as a way to build up funds and to buy out the remaining shares when there is another deep discount with the recent stock split being another mechanism to bump liquidity and squeeze out any further public float in anticipation. Hopefully I’m off the mark here.
The complex entity structuring was how I thought about the take private risk mitigation. However, it does beg the question of what a reasonable (or lack of) discount to book the entities should actually merit then just given in a hypothetical liquidation it seems like you would be receiving below its FMV after tax.
Great article! All my new money has been going into Morguard corp. Have you looked at it recently? Looks much less risky now than 5 years back.
Thanks Nikhil. I haven't looked at Morguard recently. That's mostly a function of my real estate exposure being too high as it is, and also partly because I've always liked the idea of the company (Activist Outsider CEO allocating capital wherever it makes the most sense). I understand that because the price has gone nowehere for five years, and with George Armoyan getting involved, the future could be much more fruitful, but my oversized position in Dream makes diversification necessary.
Great article, I’ve held off ELF with all the EVT and UNC I own, but maybe I should add and make the family complete!! lol
Thanks Jim. I admit I haven’t looked at EVT and UNC as closely, but ELF looks to me like the most attractive at this point, though I think one could be happy holding any of them. And if your EVT position is large you own quite a bit of ELF anyway.
Some of the weaker performance of United Corporations is likely due to the tax it pays on investment gains as a taxable corporation.
That would definitely be some of it, but it's still had the worst of the large closed end funds in Canada that mostly hold public equities (CGI, Cymbria, Urbana, Economic). Sure there are differences between them (leverage, private assets), but most manage to overcome the tax burden to put up at least decent returns. There's also a decent amount of underperformance in security selection, as the management fee and taxes probably don't account for 3.5% annual underperformance over the last 10 years.
It's a minor quibble, given United doesn't represent a huge percentage of E-L's portfolio, but it's definitely a drag.
Missed reading your posts, and you are back with a banger!!! I have been adding $ELF.TO but too slowly in hopes of maybe the stock going lower (my mistake).
I appreciate you saying that, it's nice to think I've been missed. Always appreciate you as a reader as well Manana