Friday, 25 March 2016

The Becker Milk Company vs. Bill Ackman (& how you can buy Alimentation Couche Tard Shares at a steep discount)

It's funny how in the universe of daily financial muppetry that a day doesn't go by without news concerning Bill Ackman or Valeant, or Ackman's exploits concerning Valeant, or Valeant's exploits concerning Ackman. I'd hazard a guess that if Valeant isn't mentioned 50 times a day, I'd be underestimating.  And it's all noise. It's all irrelevant.

And hiding in the dark cobwebbed catacombs of non newsworthy reporting, is a tiny little company that is so completely boring and off the beaten path that it gets completely ignored.  The daily trading volume is piddly, usually less than a few 1,000 shares, the market cap is minuscule, around $26M, and control resides in the hands of the president/directors, per below.  So, in a nutshell, likely minimal institutional involvement as there's no liquidity.  There's also no growth. Good I say.

Here sits the Becker Milk Company, ready for any fool with half a brain (that's me) to discover if they can be bothered.

To me, this is a scenario straight out of the teachings of esteemed value investors like Seth Klarman.  While everyone around you is focused on Ackman's next trip to the toilet, ignore everyone waiting for Ackman to flush, and continue looking for $.50 $1's.

So what does the Becker Milk Company do?  They own 66 commercial plaza's and, for the most part, lease these plazas to, you guessed it, Alimentation Couche Tard.  In addition, they own land for development. And get this.  No debt!  The properties are mortgage free.

I ran my numbers as follows, and found a few anomalies, which I haven't got my head around yet.

First the numbers:

A few comments on the as reported numbers.  Sources  = MD&A's and annual financial statements.  For 2016, I annualized the 9 month interim financial statements.

  • The company reports Net Operating Income in it's MD&A's and I've used NOI  / Fair Value of Properties to come up with an imputed cap rate.  I get around 11% each year, which I think is too high.  Either the company's measure of NOI is too high, or the Fair Value of the properties is too low
  • The company also discloses the cap rates used to Fair Value the properties in its annual reports.  I've reproduced these cap rates above.  
  • Using the reported cap rates, I've recast NOI which is significantly lower than NOI as reported in the MD&A's.  So what gives?  More on this later.
  • Next, I've attempted to do a sum of the parts sensitivity using the highest and lowest cap rate ranges. I've compared FV per F/S to Capitalized higher NOI of say, $3.472M /  7.9% = $43.9M.  This leads me back to the what gives question regarding the discrepancy between reported NOI per MD&A and imputed NOI for cap rate valuation purposes
  • Next, I've done a lowest vs. highest sum of the parts analysis.  The 66 plazas aren't the only assets on the books, they also carry about 20K Alimentation Couche Tard shares, mortgages receivable, cash, and other short short term investments.  I haven't included the value of the undeveloped land.  They've also accrued a provision for deferred tax, which, I'm guessing will come into play at some point in the future if the individual properties are sold. To be conservative, I've deducted the entire amount of deferred tax liability.
  • I've then compared the net value under both lowest and highest scenarios to average capitalization since 2010.  It appears that the company has consistently traded at a discount to average capitalization depending on how you look at NOI (with the exception of 2014 & 2015 under the lowest NOI scenario).

So what gives with the NOI discrepancy?  The following is an excerpt from the most recently published quarterly:

The 9 month ended NOI, normalized for the tax provision, admin expense, expenses related to strategic review and fair value adjustment to investment properties was around $2.6M through Jan 31, 2016. Annualizing, I get $3.46M.  On the subject of the strategic review expense...this is what caught my eye in the first place:

So here's a potential catalyst in plain sight, which may or may not be contributing to the current discount between market capitalization and sum of the parts at the lowest end.  My guess is that the discount exists because of concentrated control and overall illiquidity.  The hint of a sale probably caused the stock to trade at a premium to market capitalization back in 2014/2015, and as discussions were terminated, the stock slid back into obscurity.

So, on the subject of what the correct NOI is, my guess is it's somewhere between $2.4M (imputed) and $3.4M as presented in the MD&A.  The company runs a pretty tight ship with less than 10 employees, so whether admin expense of $842K is relevant on a going concern basis is up for discussion. What certainly is non recurring are the strategic review expenses.  To a lesser extent, increases or decreases in the fair value adjustment to the properties are likely not all that relevant.  The properties will either be sold or they won't. If they aren't sold, the year to year FV adjustments are likely irrelevant.

In the worst case, assuming full tax hit on sale of $3.7M, I've calculated a 17% discount between sale proceeds of $31M vs. current capitalization of $26M.  On a simplistic basis, this would put a sale at around $17.35 per share.

But, my logic may be too simplistic, as I would assume that in the case of an acquisition of control of the shares, the acquiring company would inherit the legacy tax characteristics of the acquired portfolio of properties, and any tax hit would fall into the hands of the vending shareholders.  In this case, $3.7M deferred tax isn't relevant if the portfolio of properties isn't sold piece-meal.

Concluding Thoughts

I bought 225 shares across the three retirement accounts I manage last month at an avg cost of $13.70 per share.  The company pays an annual dividend of $.80, and seems to me to be a good bet on an eventual takeout.

I suppose the major risk to my hypothesis is that a sale does not go through, which would put short term pressure on the stock given it's illiquidity.  

Update 03/26/16

Figured I'd post a monthly chart which may or may not be relevant.  The following provides a pretty clear trend since 2002 (I've drawn 08/09 as an overshoot to trend).  Full disclosure, I have good to cancel orders in at $10.99 for the next addition to the overall position.  With any luck, these get hit on overall market weakness in the coming months.

Ideally, I'd like to bring the position up to a maximum of a 5% weighting across the accounts, which would allow me two more strategic buys.  Maybe the answer is, next 1/3 at $10.99, with a stink bid for the last 1/3 at $7.50 (50% below current).


  1. One of my top 5 positions! I think it's extremely undervalued and I used to question who pays $800k on a strategic process and does not sell (but so far Becker has confounded me). Don't forget the also ran a process in '08 and called it off in '09 given market conditions and that this process was triggered by Firm Capital. They used to have a presentation on the website but they took it down. Send me your email address on SeekingAlpha if you like and I'll email it to you.

    For me to appreciate the valuation upside, I reduced NOI by "normalized" administrative expenses vs actual. I know you think the admin expense is reasonable but I can't figure out what they all do. They are spending north of 27% of revenue in admin expenses and I'm just using Plaza REIT as my benchmark and they are achieving 9% of revenue.

    I think there are lots of reasons for the discount but primarily

    1) some "faster money" came in on the strategic review and there has been no deal and the position has gone down over 20% while most REITs have also been hammered just as much means more sellers than buyers.

    2) Doesn't look that cheap on pure earnings multiple (because of admin expenses)

    3) Lack of coattail provisions on a takeover means the common shares can get a deal or a deal at a premium while Class B shareholders get nothing.

    For me 3) is the big issue but I think it's hard to extract value from Becker without owning both classes so a buyer will have to come up with a price that satisfies Class B shareholders (including Firm Capital) to make a deal economic.

  2. Thanks for the comments. Will send u my info on seeking alpha right away.

  3. Hi. Bek.b is by far my largest holding and still accumulating. Can you please email me the ppt as well. I'm not able to find mine.
    FYI: I was googling for the ppt and found your website~


    1. Just emailed to you. Hope it helps!