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Tannor Pilatzke
Tannor Pilatzke
Articles (76)  | Author's Website |

Could Clarke Inc. Supercharge Your Portfolio Returns?

October 02, 2013 | About:
Overview and History: Clarke is a Halifax-based investment company with interests in several businesses. The businesses are depicted below and talked about in further detail below as well. An entrepreneurial team of investment professionals leads Clarke and the company is actively involved with public companies to help improve performance and build value. Clarke incorporated on Dec. 9, 1997, and is a Canadian corporation. The company has several operations consisting of an investment segment, a freight transportation segment, commercial tanks and home heating and finally an “other” category covering miscellaneous business. The Clarke portfolio includes publicly traded securities as well as wholly owned and majority-owned businesses operating in diverse industries including industrial and consumer products and services and energy services.


The company seems to finance the growth of the new operations and investment portfolio from the transportation business as well as debentures, a unique and different approach from the typical reinsurance arm operations skillful investors seem to operate.


The company has done fairly well on a 10-year consolidated basis.

· Long-term debt has been consistently paid down while shares have been bought back at an annual rate of roughly 4%, the most recent three-year average being 13.8%. (The company repurchased 370,402 shares during the 2012 year.)

· EPS has remained fairly stagnant over the last decade while book value has grown at an annual rate of 10%.

· Operating earnings, margins and revenues have all been growing, adjusted for the cyclicality of the transportation and investment business.

· I believe a fair estimate for the normalized operating income to be in the range of 4% to 5% of revenues.

· Normalized ROIC of 10% to 12%.

· Retained earnings had a very large draw down in 2008, including the losses of paid-up capital, the retained business earnings have grown at a rate of 5% to 6% over the ten year period

There has been heavy insider buying in the most recent three-month period from $4.60 to $5.73 per share leading to over 2.3% ownership between two people, Charles Pellerin and Michael Rapps. The dividend is also fairly safe, (based on present metrics of just over a 27% payout) although the dividend policy was abandoned in the recession (Aug. 31, 2008), it has grown by over 60% since being re-implemented in 2012.

The Business and Competition

There is a large amount of competition in the transportation business (that is where the focus of my attention is as it derives the largest portion of revenues and cash flow, currently). The (transportation) competition Clarke faces is most likely to be from indirect large capital-based logistical business like FedEx and UPS, railroad companies and small boutique delivery services. The direct competition within Canada to Clarke may be viewed as Contrans Group, Trimac Transportation, Transforce and Wheels Group, of which the largest (based on market capitalization) is Transforce.

Another large portion of the business is the commercial tanks and home heating segment. Emera (Nova Scotia Power is a wholly owned subsidiary) and Bullfrog Power, as well as countless boutique operations owned privately are the competitors in the space Clarke should be aware of. The "Other" segment consists of real estate used primarily in the freight transportation segment, together with the company’s IT services, human resource and treasury functions and private investments in associates. The results of the pension plans are also reflected in the other segment, as well as the interest payable on the 2013 debentures.

Operations and Competitive Advantage

The company's accounting policy seems conservative, revenues are recognized when they are received, marked-to-market securities portfolio is in existence and a first in first out inventory policy in place. The competitive advantage almost entirely lies in the management’s capability at identifying opportunities and allocating capital efficiently. The geographic advantage also has a strong presence in Clarke’s business model and as Eastern Canada continues to grow they will likely prosper.

The operations are more easily identified on a segmented basis, with the growth of the commercial tank and home heating business leading over the last few years. At this point I will refer you to note 24 of the (2012) 10-K to view the segmented information in more detail.

The four largest investments that Clarke is currently holding in their portfolio are as follows for the period ending Dec. 31, 2012. (A summary of the investee performance is provided in more detail by management in the 2012 annual report and recent 10-Qs.)

1. Royal Host (owning 30.10% of total outstanding shares)Royal Host’s core businesses are hotel ownership and franchising. Royal Host owns 23 hotels (comprising 2,957 rooms), and franchised 91 locations (including 13 owned by Royal Host) under the Travelodge and Thriftlodge banners.

2. Bonnett’s (owning 24.91% of the total outstanding shares)Bonnett's is a trusted name in downhole operations. Their core service areas are wireline, swabbing, production and testing, as well as oilfield rental, fishing and pipe recovery in the Western Canada Sedimentary Basin.

3. TerraVest (owning 32.09% of the total outstanding shares)TerraVest is one of the largest providers of wellhead processing equipment for the natural gas industry in western Canada and a market leader in providing well servicing for the oil and natural gas sector in south western Saskatchewan.

4. Supremex (owning 45.20% of the total outstanding shares)Supremex is Canada's largest manufacturer and marketer of envelopes, labels and related mailing products. They provide stock and custom manufactured envelopes and mail packaging products to Canadian and US customers.

Balance Sheet and Profitability

In the latest quarter the debt to equity ratio was 1.2 with moderate leverage applied to the capital structure. The increase in the current portion of liabilities is attributable to debentures due Dec. 31, 2013.

· Current ratio of 2.43.

· Acid ratio of 2.09.

· Cash and cash equivalents: $75.54 million or 4.50 per share.

· Book value per share: $5.75.

· Dividend yield of 6.55% at a payout ratio of just over 27%.

As the success continues in the investment side of the business combined with double-digit growth in the commercial tank and heating business, I would expect the share buybacks to continue and the dividend to be raised consistently.

Value and Price

At $6 PPS the market capitalization is $100 million with 16.57 million shares outstanding. Using quick conservative estimates to discount the cash flow I find the following. Using a discount rate of 10%, a cash flow growth rate of 4.5% over the next five years, using 4% there after, leads to an intrinsic value of roughly $11.50 per share for Clarke Inc. From the current price, that would indicate almost 100% upside or a margin of safety close to 50%. My belief is that Clarke should trade at a more appropriate multiple of 10x to 11x trailing 12-month earnings, which would also lead to a present valuation of $8 to $9 per share. Currently offering a 13% earnings yield, combined with a 6.5% dividend is just shy of 20% expected yield.


Clarke Inc. seems to also be considerably cheap on a FCF yield basis and generic GuruFocus.com-projected DCF. My calculations were a little more conservative.


Currently trading just above book value, the growth of the business or the future investment prospects of management are not included in the price, exactly what bargain hunters like myself would like to find in an investment.


About the author:

Tannor Pilatzke
I am a self taught investor through Warren Buffett, Charlie Munger, Ben Graham, Peter Lynch, Joel Greenblatt, David Einhorn, Seth Klarman, Howard Marks, Phillip Fisher and Thornton O'Glove. My focus is a bottoms up Value-GARP strategy with a mix of top down contrarianism.

"When you find yourself on the side of the majority, it is time to pause and reflect." - Mark Twain

Visit Tannor Pilatzke's Website

Rating: 4.0/5 (5 votes)


Bbarberayr - 6 years ago    Report SPAM

he trucking business is being sold for $88 million. It is on the books for $20 million.

This will increase the book value by almost $4.00 per share.

Including the big increases in some of the investments this quarter like BT being taken out at $7.10 and SXP up in the $2.00 range based on it's review in the Value investing Congress by Guy Gottfried, the book value of CKI is almost $10 per share assuming full conversion of the debentures.

This assumes that the Home Heating business is being valued at book value of $25 million. Likely this is actually worth at least double this (for the same reason as the trucking business), so probably real value is around $11 per share.

Plus Armoyan seems intent on unlocking business value and also providing a dividend of $0.40 per year or over 5%, so we should see this gap shrink fairly quickly.

I think buying now at $7.84, even though is it p a lto this year, will be well rewarded. This stock has traded above book value for a good deal of the past prior to the financial crisis.
Tannor - 6 years ago    Report SPAM
Thanks for the update. I have also been following the story and I guess should have provided an update sooner. Looks like you beat me to it.

Yes I still see value, as stated in the article anywhere from $9-12. The methodology was DCF and included no sales of core assets and only 4% growth so I may have to revise the valuation. With the sale (as you noted) the current share price is still under what the B/V will be after sale of assets.

It will be interesting to see where the 88M is parked after the deal is closed. It looks like Clarke is continuing to make the transformation into a more focused investment partnership with an activist role.
Tannor - 6 years ago    Report SPAM
Clarke currently has cash availability and marketable securities in excess of $150 million and expects to generate further net cash proceeds in excess of $85 million through the sale of its freight division by the end of the current calendar year. This provides the Company with the financial capacity to redeem all of the $62 million of Debentures outstanding at any time as permitted under the terms of the indenture at a price equal to the principal amount and all accrued and unpaid interest thereon to but excluding the date of redemption. The interest rates on the cash available to Clarke through its credit facilities are substantially lower than the proposed increased interest rate on the Debentures contemplated by the Proposed Amendments. http://finance.yahoo.com/news/clarke-provides-clarification-proposed-debentures-140000244.html

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