Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: Cigarbutt on August 03, 2019, 02:14:21 PM

Title: GBT.TO - BMTC Group
Post by: Cigarbutt on August 03, 2019, 02:14:21 PM
This is a company which was briefly mentioned in the share buyback thread that LC started.

Thesis: The company recently reported poor results and there are expectations of more to come. IMO, the company will benefit (growth of sales and margins) when there will be a return to a more ‘normal’ competitive landscape and when it will no longer be considered out of favor.

It is a relatively small and Quebec-based furniture retailer that was formed about 30 years ago and has grown significantly and profitably during the first 20 years. From year 2000 to 2009, it grew sales by about 50%, improved margins and shares performed well during that time frame. The industry is boring and the corporate level is very low profile. Since public inception, if my numbers are correct, the company has repurchased and retired 83% of its shares, repurchasing activity has been regular but occasionally opportunistic and a significant part of the total return has resulted from this capital allocation decision. They are strong operators, have been able to grow or maintain market share in key customer segments and have adapted well to the changing dynamics of the industry. I would say that, because of their relatively high margins, absence of debt and free cash flow potential, they are likely to outperform peers, especially during downturns.

Since 2009, the competitive landscape confirmed evolving changes with the expansion of national retailers (Leon and The Brick, which have combined), the appearance of many small players as well as the online Wayfair-type of threat in a relatively fragmented and highly competitive industry. The national chains gained market share and achieved adequate net margins (4 to 5%) and return on capital. Since 2009, BMTC has reacted by lowering net margins from 8-10% to 5-6% and basically revenues have remained flat (essentially the same number of retail outlets) and have even come down lately.

The 2019 annual report (end of yr Jan 31st) reveals revenues of 740.0M. The thesis relies on basically a reversion to the mean, given specific circumstances. Given the below-mentioned assumptions, a CAGR of 15 to 25% could be achieved (including an assumed dividend yield of 2-3%).

-Over the next 5 years, revenues grow by 20%, net margins reach 8%, a PE of 12 and 15% net reduction in share count
-Over the next 10 years, revenues grow by 40%, NM at 8%, PE at 12 and a 30% net reduction in share count
-The daughter of the founder, who has recently been named CEO will continue along the same principles

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There is a risk of adverse results with macro concerns but this seems to be, at least partly, priced in already and management has painted a picture with dark clouds. There has been a recent auditor change but I find corporate governance to be overall strong (given top execs pay level and structure, the elimination of the dual share structure along the way, the composition of the Board, the way they dealt with an asset-based paper crisis a while back and generally how conservative their reporting is).  Another negative includes a relatively high pension obligations.

An additional potential negative for them is the advent of e-commerce in their sector of activity. They have invested significant capital to establish an online platform in order to get sales from that channel and, especially, to increase customer presence in their physical stores to actually complete the transactions.

On the positive side, the company has now, on its books, 116.7M of net cash and investments, which comes to about 3.39$ per share (last share trade = 10.75$).

A potential catalyst may come from the founding family whose percentage of ownership has crept up over the years. As last reported, the Chairman holds 62.0% of shares. He was the CEO in 2015 when the company completed a significant buyback (15-16% of shares outstanding for 108M, per share 15.50$) so he may find the trajectory interesting along the way to the return to the mean.

The discussion is open here and now but will become quiet if the level of interest shifts into higher gear as the liquidity is fairly low.
Title: Re: GBT.TO - BMTC Group
Post by: Spos on October 08, 2019, 11:30:52 AM
I find this interesting as well.  Very cheap, strong financial position as you mention (they also own a lot of their real estate), buybacks, conservative management.  My one issue is the lack of growth, especially given the turnaround in the Quebec real estate market.  I appreciate the increased e-commerce competition, deflation, the growth of larger chains (the Ikea store in Quebec City is not helping), but I would like to see more growth.  Same store sales growth was negative in 2018 and looks to be negative this year as well.

I think the 2015 share repurchases were blocks from two directors selling their shares.  Would be nice to see something similar again as the small float/low volume limits their repurchase activity.  I do wonder if the family would like to take this private.
Title: Re: GBT.TO - BMTC Group
Post by: Cigarbutt on October 08, 2019, 05:16:49 PM
^They have located their stores very well and have unrecognized value in their real estate holdings. Last January, they sold their Repentigny store for 9M resulting in an after-tax gain of $4,5M or $0.13 per basic share. Their new Laval store has a different look and has been built in a very strategic location.

It seems to me that they will grow mostly, when that is possible, by gaining market share when others retreat.
One of Mr. Buffett's quotes comes to mind (1996):"The inflow of money and outflow of money should not be, in our view, attempted to be matched too carefully in this world, because you get investment and business opportunities at times that differ from the times that funds come in. And one of the most important disciplines in running a business or managing investments is to not try to coordinate your actions simply with the availability of cash."
Title: Re: GBT.TO - BMTC Group
Post by: ECCO on October 08, 2019, 06:56:07 PM
^They have located their stores very well and have unrecognized value in their real estate holdings. Last January, they sold their Repentigny store for 9M resulting in an after-tax gain of $4,5M or $0.13 per basic share. Their new Laval store has a different look and has been built in a very strategic location.

Totally agree. Real estate have been manage pretty well over the years. The price they sold the Repentigny store is a little more than the property assessment value.There is other exemple over the years and I dont remenber them not realise a gain by selling a property.

About 2 years ago, I have check all their property assessment and that is about 100M$ over the amount on the balance sheet, +/- 3$ per share (100M$ / 34M shares).

So you got:

4,00$  cash and investments (july 31st)
3,50$  land and property
3,00$  hiden value of land and property

Total of 10,50$ is the actual stock price so we could say that you got the operating business for free.

Yes the 2015 share repurchases were blocks from directors. Many years ago they did 2 (might be 3, not sure) dutch auctions. There is certainly a probability that they can do a dutch auction again. That being said, Desgroseillers own 62% and Fidelity 18%. Fidelity will certainly not sell at the actual price, so there is not that much float left to buy back in a dutch auction.

To take this private they would need to buy back 13M shares (38% of 34M shares). Fidelity would certainly need a premium and I think a price of 18$ could be accepted by Fidelity. The value of their property and land give them the fexibility to pay that price. Do the math and they can take the company private right now.

Disclosure: I own BMTC shares since 1997 and I recently bought more.
Title: Re: GBT.TO - BMTC Group
Post by: Spos on October 09, 2019, 11:30:03 AM
About 2 years ago, I have check all their property assessment and that is about 100M$ over the amount on the balance sheet, +/- 3$ per share (100M$ / 34M shares).

Funny, I went through this exercise as well.  I agree that there is extra value in the real estate, I think mostly in the Greater Montreal area.

To take this private they would need to buy back 13M shares (38% of 34M shares). Fidelity would certainly need a premium and I think a price of 18$ could be accepted by Fidelity. The value of their property and land give them the fexibility to pay that price. Do the math and they can take the company private right now.

For sure they would be able to privatize this right now.  I think a Fidelity exit would be great here whether or not the family wants to privatize.

For disclosure, I own this as well.
Title: Re: GBT.TO - BMTC Group
Post by: spartan on October 09, 2019, 07:19:18 PM
Can someone from Quebec tell me why their Google reviews are so bad??

Brault & Martineau, EconoMax... they have some of the worst reviews I've ever read!

If you're not getting a bargain from a NAV standpoint, the value of the operating business is really important. Why would I want to buy a business in an intensely competitive industry?

This reminds me of a talk Peter Cundill gave at Ivey a few years back. He made this exact kind of investment because "the business was free". Turned out that the business was worth way less than zero. (In case anyone's interested, it's a great talk - https://www.youtube.com/watch?v=UWMrBJxy3us&t=3007s)
Title: Re: GBT.TO - BMTC Group
Post by: ECCO on October 14, 2019, 05:55:06 PM
Can someone from Quebec tell me why their Google reviews are so bad??

Brault & Martineau, EconoMax... they have some of the worst reviews I've ever read!

If you're not getting a bargain from a NAV standpoint, the value of the operating business is really important. Why would I want to buy a business in an intensely competitive industry?

This reminds me of a talk Peter Cundill gave at Ivey a few years back. He made this exact kind of investment because "the business was free". Turned out that the business was worth way less than zero. (In case anyone's interested, it's a great talk - https://www.youtube.com/watch?v=UWMrBJxy3us&t=3007s)

I certainly agree that Brault et Martineau and Economax does not have the best reviews. That being said, it seems that it is something that is not exclusive to them and it is more an industry caracteristic, just take a look at reviews of Leon's, JC Perreault, Brick or Surplus RD. The fact that Brault and Economax sell low to medium quality stuff also does not help to get the best reviews.

Tanguay, that is also own by BMTC, seems to have better reviews.

I dont think that customers satisfaction of BMTC have change over the years, it is probably not worse than it used to be.