American Coastal Insurance Corporation – A hidden gem, or hiding in the eye of a hurricane?

Provided to subscribers Aug 17

Here’s the latest from Canadian Value Investors!

• American Coastal Insurance Corporation – A hidden gem, or hiding in the eye of a hurricane?

• Suncor Q2 update; Petrobras note

• Other ideas from around the world

• Michael Burry is shorting, but what is he buying?

• Berkshire Q2 update and Buffett’s 44% CAGR

https://www.instagram.com/reel/Cvvwt12tRZn

American Coastal – A hidden gem, or hiding in the eye of a hurricane?

Disclosure: We own this one.

Sohra Peak Capital Partners recently posted a pitch on American Coastal Insurance Corporation (NASDAQ: ACIC). What are your thoughts on investing in a growing insurance company focused on niche insurance for smaller multi-unit complexes with a great reputation and a very nice twenty-year track record? What if this was an insurance company that provides hurricane insurance in Florida and was a subsidiary of a recently bankrupt parent?

[ACIC] a commercial property & casualty insurance carrier in the state of Florida that exclusively insures garden-style condominium and homeowner association properties against hurricanes and other catastrophe risks. American Coastal is a gem of a business hiding in plain sight. Since its founding in 2007, American Coastal has dominated its niche and captured 40% of its TAM. It has also delivered an average ROE of 23.1%, has demonstrated exceptional loss and profitability ratios, and has never had an unprofitable year despite withstanding several major hurricanes.

Shares appear exceptionally undervalued based on our EPS estimates of $1.89-$2.86/share over FY24-29 vs. share price of $5.63. Our estimates imply a FY24E P/E of 2.9x, FY25E P/E of 1.9x, and a P/BV and P/TBV of <1x by mid-FY25 while delivering 53% ROE. From FY25 onward, with a healthy capital surplus, American Coastal should return 100% of its incremental net profits to shareholders, which would imply a ~50% dividend yield and/or significant share repurchases. We see an asymmetric path for to appreciate from $5.63 today to $16.00 $22.00 over the next 24-36 months.

It is one of the better reports we have come across. Here is the write up. https://t.co/zWkMGn97AN

Here is the post - https://twitter.com/JonCukierwar/status/1689225931636809729

A key part of the thesis is that competitors have been leaving the space, which should help maintain and even grow underwriting margins. Some competitors have indeed left  (https://www.nbcmiami.com/responds/another-insurer-is-withdrawing-part-of-business-from-florida-what-happens-next/3070500/ ) while the Florida state-backed insurer (meant to be a last resort and primarily provides insurance to homes) is now the biggest (

https://www.bloomberg.com/news/articles/2023-08-10/hurricane-season-2023-florida-s-biggest-property-insurer-is-nonprofit-citizens ) and is trying to stop growing ( https://www.nbcmiami.com/news/local/floridas-largest-property-insurer-shifting-184000-homeowner-policies-from-citizens-to-private-insurers/3087706/ ).

We do not feel we have a lot to add beyond the write up and we do have a long position. If any readers have particular expertise in this niche, please reach out. Of course, as always, do your own due diligence.

Florida man rocks out to Slayer during hurricane

Suncor Q2 Update

-FFO of ~$3B+ YTD on lower than today oil pricing is not so bad. YTD brent was $79.80, and every dollar higher is $180MM AFFO, so with spot at $87 or so it would be another $600MM YTD. Refining is doing great.

-CEO Richard Kruger’s comments on the “refocus” is appropriate to us. https://www.cbc.ca/news/canada/calgary/suncor-too-focused-on-energy-transition-rich-kruger-says-1.6937360 Suncor got a bit lost, and I am glad they divested their renewables businesses that they had absolutely no competitive advantage in. Per the transcript: “The lack of emphasis on today's business drivers and while important, we have a bit of a disproportionate emphasis on the longer term energy transition. Today, we win by creating value through our large integrated asset base underpinned by oil sands. Discussions have occurred with our board of directors who are supportive of our revised direction and tone. And I would just leave this with more to come, but you can expect a sharper, clearer, more tangible articulation of how Suncor plans to win.”

-Importantly, we think the transition efforts are going to be forced anyway via things like the Pathways Alliance. We are still viewing the transition costs as either being $5-6B of hidden debt or a few hundred million of hidden annual capex.

-Repurchases are fantastic. What a table. We understand them slowing down on the repurchases; debt providers are not friendly and we would assume debt capital will be continually less available (coal is the canary). We are not too worried about it as they might hit their $12B net debt target early next year, and then they will switch to 75% of surplus FCF to repurchases.

As for Petrobras

We are still more bullish on Petrobras; seems like a better risk/reward (we own both, but a bit more PBR than SU). Petrobras just announced a big gas/diesel price hike, which them not doing was one of the biggest things I was worried about. https://www.energyportal.eu/news/brazils-petrobras-hikes-fuel-prices-after-abrupt-global-spike/163566/ We are keeping close tabs on this one. The CEO noted the increase on Twitter and is implying that gas station owners are to blame for high prices!

Other ideas from around the world

We have no positions in these companies but are evaluating.

“Cigar butt za Price/Earnings 2x” - SigmaTron International Inc. NASDAQ:SGMA is a circuit board assembly company that has made it to our screens a few times but we never had a chance to look into trading at a very low P/E. But is all as it seems? Currently do not own. Current market cap of $141MM. Great write up here (we suggest Google translate) - https://jakubkriz.substack.com/p/sigmatron-international-inc-cigar

Housing shortage? Why not look at engineered wood products? Atlas Engineered Wood Products TSXV:AEP “There’s no doubt that Canada is currently in the midst of a housing supply crunch and Atlas Engineered Products would be there to capitalize on this opportunity. $AEP.V is an ambitious growth company focused on acquiring and operating well-established, profitable businesses in Canada's truss and engineered wood products industry. The company's strategy involves both consolidating the fragmented industry through acquisitions and pursuing organic growth and efficiency improvements.” https://thechopwoodcarrywater.substack.com/p/strong-future-in-canadas-wood-products

Speaking of homebuilding.

If you are interested in staying on top of the housing industry, we suggest keeping tabs on the National Association of Home Builders. Here’s the latest on availability of materials for example.

https://www.nahb.org/news-and-economics/housing-economics/indices/remodeling-market-index

Michael Burry is shorting, but what is he buying?

We saw the headlines about Michael B of The Big Short fame’s new bet on the market crashing - https://www.telegraph.co.uk/investing/shares/michael-burry-big-short-stock-market-crash-wall-street/

Mr Burry’s firm, Scion Asset Management, has bought $866m in “put options” against a fund that tracks the S&P 500, the American benchmark index. These give investors the right to sell shares at a fixed price in the future and means that he could make a profit if shares fall.

Bearish news, of course, but the real story is more nuanced. He also went long bulk shippers and a whole of other things like WBD. With indexes dominated by a few very high multiple companies (see “The problem with the S&P” https://www.canadianvalueinvestors.com/cvi-club-ideas/2023/7/9/2023-mid-year-portfolio-update ), going short the index and long companies you believe are undervalued is a neat approach.

Berkshire Q2 update and Buffett's 44% CAGR

Here are the latest purchases at Berkshire in Q2. The Japan trade is amazingly timed and well done.

It brings to mind this article from Base Hit Investing we came across. https://basehitinvesting.substack.com/p/buffetts-44-cagr-and-various-types

“I've noticed three common themes with Buffett's recent investments in energy and Japan: low valuations, improving capital allocation, and rising ROIC's.

Warren Buffett initially invested in 5 Japanese stocks in 2020 and I don't think many people realize how successful this investment has been so far: That initial basket investment is up over 200%: a 3x in 3 years, or 44% CAGR on that initial investment. Each stock is up over 2x, one is up 5x, and the basket in aggregate up 3x.”

I see three things that Buffett probably saw (among other things) in Japan and also in energy:

1. Cheap valuations

2. Rising ROIC's

3. Significant change in capital allocation policies

Disclaimer - The content contained in this blog represents the opinions of contributors. You should assume contributors might have positions in the securities discussed and that this creates a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance whatsoever and are subject to certain risks, uncertainties and other factors. Information might also be completely out of date and may or may not be updated. No one here guarantees the accuracy of any information provided and none of the information should be construed as investment advice under any circumstance. Frankly, no information here should be used for any purpose except for entertainment (and we hope you enjoy).

Suncor Q4 Update, 13F Ideas

Provided to subscribers January 19, 2023.

Here is the latest from Canadian Value Investors!

• Suncor Q4 Update – Buybacks bonanza

• Happy 13F day! What are super investors buying?

• Are we going to avoid a recession? Sam Zell vs Campbell Harvey

• Mispriced Markets on The Case for Value

• Complaining about mortgage rates? At least you are not in Mexico

• Are North American refining margins structurally higher?

Suncor 2022 Q4 Update

-We are still long. Relative to MEG (our other Canadian energy holding), we consider SU a better bet at current prices.

-Net 2022 adjusted earnings of about $11 billion versus market cap of ~$60 billion, creating an earnings yield of ~18% (of course it is all about future prices, capex, and the cost of Pathways). Where did the money go? The quarterly dividend increased to $0.52, 23.8% increase. For 2022 they repurchased $5.1 billion of shares, paid $2.6 billion of dividends, and $2.5 billion of debt (would have been $3.2 if the U.S. dollar didn’t go the wrong way on them). “Based on current business plans and commodity pricing, the company expects to increase its share buyback allocation to 75% by the end of the first quarter of 2023, and to continue to progress towards its net debt reduction targets in 2023”.

Cumulative repurchases are now up to about 19% of total shares since 2017. Not bad. If they could only get their leadership, safety, and operational issues behind them. They say that the current dividend (4.66% at todays $44.59 price) is sustainable down to US$40 WTI; with Pathways capex, regulatory risk, AROs, and other issues, it is probably more like $45, maybe $50 long-term. Not so bad.

Where is the new CEO anyway? From their Q4 conference call (emphasis ours)…

Kristopher P. Smith - CEO & Interim President

Yes. Thanks. No, I'm not in a position to make an announcement on this call. And I'll say what I said before. The Board is going through a very diligent process, ensuring that they make the decision that's going to take this company forward. Expect the decision is going to be very soon. It's been communicated in the past that decision is expected in mid-February. I mean, we're sitting here at February 15. So I expect the decision and the announcement will be coming fairly soon.

Roger David Read - Wells Fargo Securities, LLC, Research Division

Yes, I appreciate that. I'm not real good at math, but it struck me the 15th was mid-February.

Other notes:

-Wind assets were sold for $730MM. Petro-Canada is being kept. NCIB was renewed. -“Pathways Alliance was awarded exploratory rights from the Government of Alberta for the proposed carbon capture and storage hub to safely and permanently store CO2 captured from over 20 oil sands facilities in northern Alberta”

-And TotalEnergies executed their ROFR, must be annoying for Suncor – “Teck’s 21.3% interest in the Fort Hills Project (Fort Hills) and its associated sales and logistics agreements for $1.0 billion, subject to working capital and other closing adjustments. Subsequent to the fourth quarter of 2022, TotalEnergies EP Canada Ltd. provided notice of the exercise of its contractual right of first refusal to acquire from Teck a 6.65% interest in Fort Hills, which reduced the amount of working interest available for Suncor to purchase. As a result, on February 2, 2023, Suncor completed the acquisition of an additional 14.65% working interest in Fort Hills for $688 million {before W/C adj)”.

Happy 13F Day! What are super investors buying?

In the United States, any institutional investment manager that manages over $100 million or more in Section 13(f) securities (explained below) must report its holdings on Form 13F with the Securities and Exchange Commission (SEC).

As defined by the SEC:

“In general, an institutional investment manager is: (1) an entity that invests in, or buys and sells, securities for its own account; or (2) a natural person or an entity that exercises investment discretion over the account of any other natural person or entity. Institutional investment managers can include investment advisers, banks, insurance companies, broker-dealers, pension funds, and corporations.

The securities that institutional investment managers must report on Form 13F are “section 13(f) securities.” Section 13(f) securities generally include equity securities that trade on an exchange (including the Nasdaq National Market System), certain equity options and warrants, shares of closed-end investment companies, and certain convertible debt securities. The shares of open-end investment companies (i.e., mutual funds) are not Section 13(f) securities.

These filings usually land on the last day they are due, being February 15th for Q4. Most notable changes for us were Li Lu buying more Google and Berkshire buying LPX and PARA.

Li Lu bought more Google around the same time we did last year for our Diversified Portfolio. What nice company to have. We really should send him a Christmas card next year.

LPX, or Louisiana Pacific Corp and PARA, Paramount Global, are the ones worth noting at Berkshire (we are still long Warner Brothers), though they are Ted or Todd holds and are too small for Buffett. We will leave PARA for another day. However, LPX is interesting.

The company “was founded in 1973 and is “a leader in strand-based engineered wood siding [that has] strategically transitioned from commodity to specialty.

…

LP is committed to returning cash to shareholders through dividends and share repurchases after necessary investments in growth. Capital Allocation (2019 through Q2-22): $690M in growth capital, $230M in dividends, $2.7B in share repurchases, Strong balance sheet with zero net debt.”

A few numbers. Interesting indeed. No position at the moment. August 2022 corporate presentation is here https://investor.lpcorp.com/static-files/8397d6ca-2100-4efc-9b8b-0eef1a55426a and their Q3 presentation is here https://investor.lpcorp.com/static-files/44bad8c7-a039-4e31-8060-4e295fa88270

Thinking about Pricing Political Risk – Petrobras, Chevron, Suncor

Provided to subscribers January 13th. Disclosure: We own Petrobras and Suncor.

Here is the latest from Canadian Value Investors!

Today we dive into our latest purchase, Petrobras. We just sold off half of our MEG position for a 98% gain over ~2 years and used the proceeds for PBR.A (Petrobras’ U.S. listed preferred shares).

Thinking about Pricing Political Risk – Petrobras, Chevron, Suncor

Disclaimer: We own Suncor and Petrobras.

We are long Suncor Energy and have spoken about it several times. We are always thinking about relative value, and so when we learned Petrobras, the Brazilian energy giant, was trading at 2-3x earnings and had a trailing dividend above 30% in U.S. dollar-terms, we thought we should look. Suncor is cheap, but not that cheap. https://www.nasdaq.com/market-activity/stocks/pbr/dividend-history

This prompted the question, what is the right price for political risk? Today, we compare Chevron, Suncor, and Petrobras. Before we explain why these three, we argue that:

1) You must always think about relative returns and your opportunity cost.

2) Relatively speaking, Petrobras might not be such a bad bet, but would be difficult for us to make it material at the moment. The political risk is high and in a jurisdiction we do not know that well, but you are compensated by a very high earnings yield that is actually money coming to you via their mandatory dividends policy de-risking you along the way. https://www.investidorpetrobras.com.br/en/investor-services/individual-investor/common-questions/

Where are they trading today?

Here are their multiples based on the trailing twelve months and analyst estimates. The last year for all three were relatively normal all things considered.

We highlight these three because: 1) They all have upstream and refining operations, 2) Buffet bought Chevron, suggesting it is the high-quality U.S. large cap, and 3) We bought Suncor, which we view has being relatively cheaper with potential multiple expansion vs peers.

We note that:

-All three companies have upstream and refining businesses (Petrobras having the worst refining business, but probably better upstream assets than Suncor).

-Their products, oil and derivatives, are priced in U.S. dollars, reducing relative currency risk when thinking about Suncor and Petrobras.

-They are all paying out dividends (Petrobras significantly so due to their governance policies) while Suncor and Chevron continue to repurchase shares.

-They have all significantly reduced debt (Petrobras has reduced total debt from $100 billion in 2019 to ~$55 billion today) and are all relatively under levered relative to historical levels.

-Petrobras has the best ticker, being PBR for their American Depository Receipts.

Buffett’s Energy Bet

As we wrote back on November 8, 2022 (see archives), “we have talked frequently about Warren Buffet being heavily concentrated. The top ten positions of the $300 billion+ Berkshire Hathaway portfolio represent almost 90% of the market value at the moment. What is particularly interesting is Buffett’s bets on Occidental and Chevron. Together they are now 16% of the portfolio, which we would say is pretty material. This is, of course, ignoring Berkshire’s other significant investments in energy like Berkshire Hathaway Energy.”

Our energy thesis is probably similar (at least we can hope it is and hope we are both right). But Buffett bought Chevron, and we bought Suncor. And so, we must conclude that Suncor is the poor man’s Chevron. The race is on Buffett.

For context, here are their market caps in U.S. dollars back to 2018.

What do they do? What is the new government/management actually doing so far? Who is buying? Current Valuation vs Historicals Should you buy PBR?

The Trouble with Taiga Building Products (TSX:TBL)… What’s next? And what is Avarga (SGX:U09) anyway?

Here’s the latest from Canadian Value Investors:

-The Trouble with Taiga Building Products (TSX:TBL)… What’s next? And What is Avarga anyway?

-Whitehaven ASX:WHC - Update on coal prices

-The Great De-levering of Canadian Oil and Gas

Whitehaven ASX:WHC - Update on coal prices

Disclosure: We still own this.

Oil prices are always in the news, but coal prices are typically much-less-so. Here’s a quick update for fellow coal-holders on the benchmark price most important to them. Operating performance at Whitehaven remains in line with expectations.

The Great De-levering of the Canadian Energy Sector

Despite much higher oil and gas prices, the industry continues to de-lever and underinvest. We are still long Suncor and MEG (though much less bullish on MEG).

https://boereport.com/2023/01/19/boe-intel-production-and-capex-guidance-trends-for-2023/

The Trouble with Taiga Building Products (TSX:TBL)… What’s next?

The Trouble with Taiga Building Products (TSX:TBL)… What’s next?

Disclosure: We own TBL and shares of the parent, Avarga Ltd. SGX:U09

Back in February 2022 we wrote about Taiga Building Products. We encourage you to read that article first before this update, but TLDR Taiga is Canada’s largest wholesale distributor of building materials, such as lumber, panels, etc, and now has a large footprint in the U.S. west coast after an acquisition in 2018. It is still trading at a low multiple, but has a wide range of potential future earnings, and is effectively debt free after a debt exchange and subsequent further reductions aided by a COVID boom. So the question is, now what?

We decided to dig back into this with:

1) A financial update.

2) Background on the effective parent, Avarga Ltd., which now owns ~72% of the Company, and whose share ownership in Taiga is now larger than its market cap despite other operating businesses (interested now?).

Financial Update

Our February 2022 article was before their 2021 year-end, which we have now added. The COVID bump continued.

They have released their Q3 results obviously. However, we have not included/annualized them for the chart above given seasonality and volatility, but their YTD results below tell the story.

The Company is now totally de-levered and has ~$100MM of cash. We note though that the business is seasonal with significant capital required in the spring for inventory build up.