Enercare: Good Dividend And A Takeover Option
Way back in 2011, I wrote an article about EnerCare (ECI-TSX). I concluded with, “In my recent discussion with CEO/president John Macdonald, he stated that one of the corporate goals is to increase the dividend. That would be lovely. In the meantime, I’ll collect the dividend, currently at $0.64 per annum. At some point, especially if the payout increases, it would not surprise me at all to see the stock price again top $10.” Both of these have delightfully come to pass.
Unfortunately I did not get everything right in the world that was once income trusts as I got caught up, as did many investors, in the chase for income. I still rue the day I varied my system and became entangled in these entities, as many were subsequently crushed by their veritable disregard for good business practices. Many of these concerns had a Ponzi flavour, selling additional shares to maintain their distributions and put off their day of reckoning. Ultimately, some survived by cutting or eliminating payouts, while others ended up in the trust graveyard. EnerCare, which was the former Consumers’ Waterheater Income Fund, has ultimately done very well.
The primary business of the corporation is the rental of water heaters in Ontario. It also leases furnaces, air conditioning units and boilers. It has also been expanding its sub-metering division, which is the largest non-utility enterprise of this type in Canada. Recently it announced the purchase of a unit of Direct Energy for $550 million, which should close before the end of the year.
Established at the end of 2002 at $10 per unit, the payout was a fat $1.05 in 2003. It got even better after that, peaking at $1.29 in 2008. But at that point, the troubles at the trust became obvious and in 2009 the payout dropped to $1.08, before plummeting to where it bottomed at $0.65 in 2010. The trust price dropped accordingly and Benj jumped in at $4.31 in October 2009. Soon after, in the fall of 2010 with the change in government regulations, Consumers’ Waterheater converted to the corporation EnerCare.
CEO/President John MacDonald, who took the position in 2006, has faced some tough slogging. Besides being the main man when the dividend was sliced, the bottom line has see-sawed. Revenues increased from $188 million in 2009 to $304 million last year. While 2009 saw a glowing profit of $21.6 million, the following years were not so rosy. The black ink of $0.4 million in 2010 and $4 million in 2011 was followed by a loss of $3.2 million in 2012. 2013 was much better with profit of $8.8 million. The dividend now registers $0.72 on an annual basis.
The turnaround is not impressing activist investors Augustus Investors, TPG Special Solutions Partners and Octavian Special Master Fund, who combined are EnerCare’s largest shareholders. They have advised ECI that they would like to acquire the company and take it private if their due diligence is positive. The acquisition price would be from $13.50-$15 per share. That is a premium of 20-33 per cent higher than where the stock traded when the offer was made. Currently it trades at the $13.50 level.
EnerCare’s board responded that the offer was not high enough and therefore not worthy of discussion. It did not rule out a sale of the company, simply that before it would be considered, a higher bid was necessary.
On July 21 Moab Capital Partners, a group affiliated with the aforementioned disgruntled shareholders, chipped in with a letter to the company expressing “governance concerns” as ECI will not allow Augustus to perform due diligence. From this angle their “concerns” seem ridiculous as it appears that ECI is just deeming that the corporation is worth more than the suitors are willing to place on the table. Until what is deemed a reasonable offer comes forward, the company does not wish to open up the books.
This is not the first time that EnerCare has been at loggerheads with these New York big boys. Back in 2012, Octavian wanted four of their members appointed to ECI’s board who they said would, “work for EnerCare shareholders to maximize the value of their investment”.
This all came down to a battle at the AGM where I spoke quite strongly in support of management and the turnaround he felt was happening, to the point of almost belittling the lads from New York. Given how well the company has performed since that point in time, it appears that in this case, the Contra Guy was on the right track.
At this point, I am holding this position. Ideally an offer will come in around the $17.50 range and at that point, I would be pleased to sell my shares, Right now collecting the dividends and scrutinizing the action from the sidelines is the modus operandi.
Benj Gallander, MBA, Co-editor of "Contra the Heard",
Toronto, ON (416) 354-2458, gall@pathcom.com,