Imvescor Restaurant Group (TSE: IRG)

“Oh man, I love this business, I have the luckiest career of anyone that I can imagine. I have two kids, and I constantly tell them that what you’ve got to do is find the things in life that you’re passionate about and do it. I’ve been lucky enough to find something that I’m passionate about – because it’s people. It’s different. It’s not cookie-cutter. It’s competitive, and I like that competitive aspect. It’s always going to be new.”

Frank Hennessey, CEO Imvescor Restaurant Group (RestoBiz Interview)

Investment Highlights:

-3-year strategic plan (announced April 2015) has led to turnaround and 9 straight quarters of SRS sales growth, with 4.9% SRS growth in the most recent quarter.

-Sale of Commensal manufacturing operations on Dec 1 2017 for $4.2M now means Invescor is a purely asset light franchisor.

-CEO Frank Hennessey is an expert operator and Adam Wyden of ADW Capital is a young highly motivated cornerstone shareholder.

-An almost debt free balance sheet provides opportunity to relever and create platform for acquisitions or become the acquisition target.

-The business can earn north of 23M in operating EBITDA in FY 2018 with the turnaround complete and business at an inflection point.

Brief company history: Founder Bernard Imbeault acquired Pizza Delight in 1969 and slowly built it into a recognized brand in Atlantic Canada over many decades followed by the acquisition of Mike’s in 2004. A successful IPO in 2004 led to a few years in an income fund structure (2004-2009). Newly public with ambitious plans, further fundraising led to the purchase of Scores and Baton Rouge with Imbeault stepping away from day to day duties in 2007. In 2011, high debt levels and a tepid economic recovery led to a liquidity event and recapitalization led mostly by Fairfax ($15M equity and $10M in debt). In 2013, Fairfax exited their investment. Continued weakness in system sales and the recapitalization led to the board considering strategic alternatives which eventually led to the hiring of Frank Hennessey as CEO in September 2014.

Business description: Imvescor is an asset light franchisor in Eastern Canada, primarily Quebec & New Brunswick. Its brands include Pizza Delight, Toujour Mike’s, Scores, Baton Rouge and the recently acquired Ben & Florentine. As of Q3 2017, the company had 255 franchised and 7 company owned restaurants.

Business Model: Company makes money by charging an initial franchise fee of 30 to 60k and an ongoing royalty of 3 to 6% of gross sales. It also licenses products under its brands to be sold by 3rd parties. It has the No.1 pasta sauce in Quebec which is priced 70% higher than other pasta sauces and roughly 20 skus in marketplace.

The Turnaround: When Frank Hennessey was appointed as CEO system sales of $410 million in 2010 had fallen to $377M in 2014. Finance and administration was immediately moved from Moncton to Montreal. Subsequently key hires included Tania Clarke (formerly of Keurig) as CFO, Vincent Dugas (formerly of Sysco) for acquisitions and Robert Longtin (formerly of Boston Pizza) for business development. In April 2015 Imvescor announced its strategic plan to transform its brands over the next 3 years with fiscal 2018 goals of 14-18% revenue growth, SRS of 3-5%, 10 net new restaurants & $20M+ of EBITDA. To do this management sought to simplify and standardize service & training, purchasing, G&A Optimization & communication. In addition, they sought to revitalize the menu, food culture, marketing and introduce a $5.5M Restaurant Rejuvenation Plan (RRP). The objective was to increase SRS, franchise profitability, leverage shared services, and improve shareholder returns. So far 51 restaurants have been renovated with a goal of over 100 by FY 2018. Franchisees have invested $15.6M thus far, with IRG investing $2M alongside. Some results include a 22% reduction in SKUs, 42% reduction in vendors, 67 renegotiated leases, & $10M saved for franchises. This had led to the 9 straight quarters of SRS growth, Q4 2017 (reported on Dec 19th) will make it 10.

Going forward:

The major legwork is behind Imvescor and I expect the effects of the RRP to keep paying dividends going forward. In addition, at least 50 more stores are still to be renovated.

Capital Allocation: Imvescor closed a deal at the end of Feb 2017 to acquire the Ben & Florentine breakfast/lunch concept, founded in 2008, for $25M ($17.7M upfront and $7.3 earn outs). This acquisition included 40 locations and $35M of system sales with opportunities for sharing services due to Imvescor’s Quebec entrenchment. In Q2 2017 (Imvescor’s Fiscal year starts in November so Q2 is Feb to April) Ben & Florentine contributed $2.8M of revenue and $600K of EBITDA. Annualizing this number shows Imvescor acquired Ben & Florentine for approximately 10x EBITDA. This acquisition has some real potential. It gives Imvescor more access to the growing breakfast segment and as at Q3 2017 they have already added 6 more locations.

Frank Hennessey has stated that for acquisitions he has 3 things he looks for: First, the target must be a franchise or franchisable. Second, the target should be of a size that enables Imvescor to gain operating leverage on their G&A or be a concept which has strong and immediate growth potential and third, Imvescor must always act responsibly as it relates to valuation. He has also stated a desire to acquire in Ontario but wants to see how the introduction of the $14 minimum wage plays out. Hennessey’s ability as an operator is undeniable but he does not have a Stanley Ma-like record of acquisitions, so some execution risk exists. Some estimates peg the full service restaurant segment at $25B of sales in Canada. Conversations I’ve had with analysts suggests there are at least 100 potential acquisition candidates floating around Canada. In the U.S. you can find many private equity sponsors and large players scooping up concepts in a competitive environment. In Canada, you basically have MTY and Cara in a duopoly as far as acquisitions go. Imvescor is uniquely positioned to become a 3rd player in this highly fragmented field. It is also ¼ of the size of the other players so smaller deals will move the dial more.

Invert, Always Invert: If Imvescor does not go on an acquisition spree, there is always a chance they become the acquired. Say they earn 23M of operating EBITDA in FY 2018, add to that roughly $10M in corporate G&A and expenses allocated to the franchise segment that can be eliminated by an acquirer. Apply a 10x multiple to $33M in operating EBITDA and you get $330M in EV. Debt will probably be minimal or nonexistent by then so it is all equity. That’s 30% above current prices. Stanley Ma will probably not pay up as he is quite disciplined in the multiples he is willing to pay but one can always hope. Cara is more likely to pay if you consider what they paid for St Hubert.

Key Players:

Frank Hennessey (President & CEO): Ex Darden, Cara, Harvey’s exec who has developed a reputation as a turnaround artist. Turned around Bento Sushi (2010-2014). Over his tenure sales grew by 50% and EBITDA by 150% in less than 3 years. Is using a similar playbook at Imvescor. I have read a few earnings calls transcripts and he seems to focus on the long term. For example, he does not give short term guidance. He understands the business inside out. He stresses the core tenets of price, quality, value & ambience as the keys to success in this industry. The only major negative is that he owns almost no stock but stock options instead.

Adam Wyden: Columbia Business School MBA and son of Oregon Senator Ron Wyden, Adam Wyden started a hedge fund (ADW Capital) in his parent’s basement in 2011 and has had an impressive CAGR of 31% net so far. He has been involved in Imvescor for years with some purchases going as far back as 2011. In August 2016, along with Camac Partners, ADW Capital sought the sale of Imvescor by writing this letter to the Board. No sale happened. Fast forward to November 2017 and Wyden has increased his stake now to 12% of Imvescor. Now, why would an individual who encouraged a sale increase their stake to 12% of a not too liquid stock? In a phone call I managed to organize with Wyden, without giving too much away he reiterated many of his views from his Value Investor Insight interview in March 2017 (belief in the turnaround, potential for further acquisition, 2018 EBITDA estimate, etc). My view is that in Wyden, fellow shareholders have a highly motivated partner who also understands the name inside out and is not afraid to engage with management if focus were to be lost.


Assumptions & Inputs:

-MTY trades at 12.8x EV/EBITDA and Cara Operations at 10.9x, using an average of these 2 I will apply a multiple of 12x to Imvescor FY2018E Operating EBITDA.

-As at the last quarterly report (Q3 2017 ended July 30 2017), net debt was $15.2M. Assuming the $4.2M from the Commensal sale will be used to pay down debt, Net Debt will be reduced to approx. $11M. With debt to EBITDA below 1 Imvescor can pay off the remaining balance by end of FY2018 barring any acquisitions.

-The increase in revenue from FY 2014 to FY2015 is due to the fact that Imvescor temporarily assumed responsibility for the manufacture of some Trattoria di Mikes products as the manufacturer was in bankruptcy proceedings. The drop from FY2015 to FY2016 is due to the ending of this arrangement and the listing of Commensal as discontinued operations

-Higher franchise revenue in FY2018 due to a full year of contribution from Ben & Florentine vs 8 months in FY2017. In addition, there should be north of 50 Ben & Florentine’s vs the 40 at acquisition and continued strong SRS sales closer to the 4.9% recorded in Q3 2017.

-Corporate Expenses as a % of revenue returning to FY16 levels in FY18 (15%) due to the fact Ben & Florentine will be fully integrated and shared services can be leveraged.

-0.3M DSUs, 1.78M options @ $2.27, 60.5M shares outstanding. Dec 5th, 2017 closing price of $4.08 for fully diluted shares outstanding of 61.6M.

-Dividend yield: 2.2%

-Operating EBITDA: EBITDA + RRP – Discontinued Operations + Acquisitions costs – Change in Onerous Contract Provisions + Reorganization Costs + Shareholder Proposal Costs.

-There are some reservations about focusing on operating EBITDA as a metric but in a business model that is this asset light issues are less egregious.


Ontario Minimum Wage: With the introduction of the $14 minimum wage on Jan 1 2018 in Ontario it is difficult to estimate the impact it will have on the restaurant industry. Franchisers like Imvescor are less exposed than the actual restaurant owners but the environment might lead to franchisees becoming unwilling to invest in current restaurants and obtain more franchises. Imvescor is further protected with its locations being concentrated in Quebec where the minimum wage is $11.25.

Quality Assurance & Health Concerns: In this industry, brand equity can suffer greatly if a customer falls seriously ill due to a bad meal. 2 years after Chipotle’s E-coli issues the company has still not recovered. This is always a concern. Shareholders can take some solace in the fact that Frank Hennessey earned his chops in supply chain and quality assurance at Cara.

Low insider ownership: Insiders own almost no shares and only have exposure through options which is less than desirable. As of the most recent AIF directors and executive officers were listed as owning 139,000 common shares which is less than 0.25% of shares outstanding. On the flipside, this becomes an advantage as individuals like Wyden are capable of instituting change if management does not deliver on the potential of the company.

Recommendation: In conclusion, I believe Imvescor is a buy at these prices. The turnaround is almost complete and the seeds planted will keep bearing dividends in the years to come. There is also potential in the M&A space, whether as an acquirer or an acquirer. Finally, management is strong operationally and you have the possibility of change being effected if they do not deliver.

Note: Imvescor reports on Dec 19th and conference call is on the 20th. I think it would be a very interesting listen. Tune in.

Links: Frank Hennessey interviews in Les Affaires & Resto Biz , Adam Wyden Value Investor Insight Interview , Imvescor Investor Relations , Imvescor Earnings Call Transcripts , Sell Side Research from GMP and Acumen Capital. ADW Q12017 Letter to Investors, Cara Investor Relations , & MTY Investor Relations


Preface: In this market one finds it hard to find great businesses at great prices or even fair businesses at great prices but every now and then you spot what appears to be a great business at a fair price. I believe Cymbria fits this bill. Allow me to explain why.


Company history: Cymbria is an investment company incorporated in 2008 by 4 Trimark alumni (Tye Bousada, Geoff MacDonald, Patrick Farmer and Robert Krembil) who became disgruntled with the sales driven, asset gathering nature of the Canadian fund management space. Cymbria was created by the IPO of Class A shares and the private placement of Class J shares in 2008 for gross proceeds of $234M.The proceeds went into the holding company structure which consisted of $509,585 for a 20.7% stake in the new investment manager created, Edgepoint Wealth Management, and the balance to manage an active portfolio of global securities. Edgepoint Investment Group is the manager of Cymbria.

Business description: The holding company is simple: a portfolio of mostly public companies and the 20.7% stake in Edgepoint. The group of four (Bousada, Farmer, Krembil, MacDonald) own 100% of the voting common shares of Cymbria and 68.1% of Edgepoint Wealth Management. Cymbria shareholders own 20.7% of Edgepoint Wealth and Edgepoint Wealth’s employees own 11.2% of their firm. Furthermore, Robert Krembil entities (Krembil Foundation and Chiefswood Holdings) control 12.6% of the Class J Shares and the industrialist Robert Schad controls another 12.2% of the Class J Shares. Edgepoint Investment Group charges Cymbria a MER (management expense ratio) of 1% for the Class A shares and 0.5% for Class J shares.

Business model: At the Cymbria level, value comes from growth of the portfolio of securities and increases in the valuation of Edgepoint Wealth. Edgepoint Wealth operates mainly in the competitive Canadian retail ($13.5B AUM) and institutional ($3B AUM) spaces through four funds (Edgepoint Canadian, Edgepoint Canadian Growth & Income, Edgepoint Global and Edgepoint Global Growth and Income). Retails funds can be purchased in either Front End (FE), Low Load (LL) and Fee Based/Advisory Fee Formats. Interestingly enough, the firm does not offer any Back End (BE) funds. With BE funds the standard arrangement is that the mutual fund manager pays the financial advisor a fee upfront (usually 5%) while the manager charges the client this fee on early redemption over a declining schedule (usually seven years). LL funds have both lower upfront fees (usually 3%) and shorter schedules (usually three years). On an annual basis, Edgepoint Wealth Management charges retail clients a Management Expense Ratio (MER) which ranges from as low as 0.8% with the fee-based option, to as high as 2.42% with one of its LL options. Institutional fees are usually lower and negotiated by mandate. Out of these fees Edgepoint Wealth expenses are the annual trailer fees to the advisor, transfer agency, custody, fund accounting, filing fees, legal, audit, general and administrative, and other costs.

Canadian AUM Space: As of September 2017, Canadian mutual fund assets stood at $1.43T of which $1.2T was in equity and balanced funds. Another approximately 1T sits in segregated and pooled pension assets. In a sense this is Edgepoint’s addressable market but a large section of these assets are sticky and sit with the big banks. A retail client whose mortgage, chequing and savings, and insurance is at a big bank is very difficult to recruit back into the non-bank space. Not impossible but difficult. A more realistic addressable market are Edgepoint’s non-bank competitors. The most recent AUM reported of the major public non-bank competitors (IGM, CI, Fiera, AGF) adds up to $424B. Round that up to include much smaller shops and one can say Edgepoint is playing in a $500B pool. As imprecise as these figures probably are it is better to be roughly right than precisely wrong.

Investment Rationale


Strong Performance: Over its four portfolios Edgepoint Wealth Management has outperformed its benchmark since inception (November 2008 to September 30th 2017 CAGR) by adhering to its discipline process of buying companies with strong competitive positions, strong managements, strong barriers to entry, and long term growth prospects at discounts to intrinsic value. Their highest conviction ideas are added to the public equities section of Cymbria’s portfolio. At the Cymbria Level NAV has grown by 311% (Nov 08 to Q2 2017).

Culture/Skin in the Game: The company seems to have a strong culture at the employee level, advisor level, client level. Up until this point, the company has done no advertising and marketing, released no fancy merchandise, sponsored no major events and even uses black and white printing to save costs. Retail clients tend to pull money out at the worst time and Edgepoint has taken moves to curtail this. It has a $15,000 minimum and every financial advisor they develop a relationship with has to sit with a relationship manager who ensures the advisor is aligned with the firm. By December 2016, employees of Edgepoint had over $160m of their own money invested in their funds. They also own 11.2% of Edgepoint Wealth Management as mentioned earlier. As of the last count, all 62 employees listed on the Edgepoint website are listed as partners and this level of commitment clearly shows. Employee turnover is extremely low, outside the founding partners, of the 14 new hires I counted in their 2008 annual report, 12 are still with the firm. Edgepoint’s non-bank competitors have 4x as many employees. Even if you factor in the fact that some back-office administration is handled by CIBC Mellon as opposed to non-bank competitors like Mackenzie and CI where these activities happen in-house, the productivity per employee is impressive. The future effect of culture is hard to quantify and often poorly underwritten in public markets.

Threat of ETFs is overblown in Canada: Canadian ETF assets are now over $135B. Total Canadian AUM is probably closer to $3T so ETFs are roughly 4.5% of the market. Over time ETF market share will only increase and many active fund managers will be badly affected. To the contrary, fund managers that provide value to their clients after fees will remain valuable, maybe even more so with less active competition. Also, ETF inflows have increased in a rising market. In the next major downturn where there is forced selling of ETFs, prepared active managers will benefit greatly from the indiscriminate selling.

Disagreement with Deloitte on Edgepoint Valuation: The company works in consultation with Deloitte as the 3rd party in helping value Edgepoint. The accounting profession is conservative by nature, and rightly so, but I believe Cymbria’s stake in Edgepoint is worth considerably more than the $151M it is valued at as of Q2 2017, and will explain why in the valuation section below. Deloitte’s assumptions ranges are:

Annual market growth 4%–8% ($14.4M)–$14.6M

Annual gross sales $700M–$1.9B ($14.0M)–$12.9M

Redemption rate 8%–14% $21.7M–($22.1M)

Discount rate 10%–13% $25.4M–($7.8M)

Terminal value 7x–11x ($6.9M)–$18.0M


I am of the view that Edgepoint is likely to hit or exceed the high end of the ranges for annual market growth, annual gross sales and terminal value.



Assets (ex Edgepoint stake): The value of Cymbria assets less its stake in Edgepoint is $816M as of Q2 2017. This consists mainly of cash $75M and public equities of $731M. The top holdings are listed below.



As of October 31st, 2017, Class A NAVPS was reported at $43.46 compared to $39.46 in Q2 2017. Adjusting for this 10.14% increase leads to an estimated increase of assets from $816M to $898M.


Edgepoint: As no public financials are available for Edgepoint Wealth Management one must infer from other publicly available data.



The 2 public companies used as comparables are the Mackenzie segment of IGM Financial and the Asset Management segment from CI pulled out of their 2016 Annual Reports.

Rev as % of Average AUM: 1.7%. Should be at least as high or slightly higher than CI considering the fact that Edgepoint does not offer any low margin fixed income funds, but CI does.

Commissions as % of Revenue: 7.35%. To be conservative I chose the average of CI & Mackenzie numbers and applied it to Edgepoint. I suspect it might be even lower as Edgepoint does not offer BE funds, which have the highest commission.

Trailers as % of Revenue: Again, average selected, 31.2%.

Non-Commission Expenses as % of Revenue: 10% as a percentage of revenues is applied. This is where you would find general & administrative costs, and sales & marketing. Here, Edgepoint should be best in class due to employee productivity and lack of advertising and marketing expenses. In the startup years they chose a transfer agency cost per account as opposed to % of AUM. As the business got bigger, they benefited from economies of scale. In 2015, Custodians switched from Citibank to CIBC Mellon but similar agreements are probably in effect.

P/E Multiple Applied: At the end of 2009 Edgepoint AUM was $450M and now stands at $16.5B. That’s a CAGR of approximately 60% per year! It is reasonable to assume AUM can grow at 15% per year. for the next five to ten years from a combination of inflows and performance. With staff productivity and the scalability of the investment management business it is difficult to see employee count more than doubling over the next five to ten years. The firm ended 2009 with 21 full time employees and now has 62, so 3 times more employees but 36 times more AUM. 20x earnings is a reasonable multiple to pay for that can double assets in the next five years with very little incremental expense.

*Firm only post current AUM on website thus September 2016 could not be located but June 2016 located on Way Back Machine.

Liabilities: Total of $43M with the majority ($39M) being a deferred income tax liability.

Share Count: 100 common stock held by Edgepoint Investment Group, these are the only voting shares. As of August 8th, 2017, Cymbria had 14,409,374 Class A shares, which are non-redeemable and traded on the TSX, and 8,214,987 non-redeemable Class J shares, which are also non-redeemable that can be exchanged for an equivalent value of Class A shares on the last business day of each week. As of Q2 2017 the per share value for Class A shares was 39.46 and 43.50 for Class J, which equates to an exchange ratio of 1 to 1.102382 (J to A). This means if all J shares were to be exchanged for A immediately, there would be an additional 9,056,054 Class A shares. Finally, there are 13025 DSUs. Add all this up and you get 23,478,553 Class A equivalent shares.

Putting it all together:


In August 2017, CI announced an agreement to acquire Sentry’s $19.1B of assets for $780M, that comes to a purchase price of approximately 4% of AUM. IGM has $150B of AUM and is trading at $11B (7.3% of assets) and CI Financial had 121B of AUM (pre-Sentry deal closure on Oct 2nd) and is trading at $8B (6.6% of AUM). The weakest player, AGF, with $35B of assets is trading at 665M (1.9% of AUM), and has been shedding assets for many years. Valuing Edgepoint at approximately $1.7B is 10% of its $16.5B AUM which is very clearly on the high end and implies putting a lot of faith in the product and the management.



Competitive Landscape: The big Canadian banks have been particularly adept at acquiring and integrating asset managers and dealers. These banks may solely or partially offer their related proprietary investment funds, which could have an adverse effect on independents such as Edgepoint.

Timing: Being almost 9 years removed from the last market bottom we are statistically closer to the next bottom than during the Cymbria IPO. This might not prove to be the ideal time to own a portfolio of securities and a stake in an asset manager. However, this risk is mitigated to an extent by the fact that the portfolio in concern is actively picked by managers with a proven track record and might be cheaper than the market at large.

ETFs/Fee Pressures: CRM2 regulations came into effect in 2016, which require greater disclosure of fees to clients. This might prove to be a tailwind for ETFs, which sometimes have fees as low as single digit basis points. Asset managers as a whole will always perform worse than the index after fees but there will always be pockets of managers who will outperform over the long term. Can they be identified ex ante? I believe so. Here is one of best examples of this by none other than Warren Buffett. A large part of my investment thesis is that the bad performers are the most affected in the long term but maybe even stellar performers like Edgepoint will have to charge drastically lower fees. In that scenario, the thesis falls apart.

Recommendation: So, all of that for a mere 7.1% upside. Cymbria is still a BUY in this environment. It presents an opportunity to own what seems to be a hard to duplicate culture in the retail mutual fund space and a proven process and results at a slight discount to intrinsic value. Great business, fair price!


Some Links:


Cymbria’s Investor Relations, CETFA ETF data, CI Acquires Sentry, Benefits Canada article and PDF, IGM Financial 2016 Annual Report, CI Financial 2016 Annual Report, IFIC Industry Overview September 2017, Latest AUM figures for CI, IGM, Fiera, & AGF.


Note: This post has many similarities to my “100 Years” Google post. Some sections are even repeated verbatim. That’s because the more and more I looked into Google, the more I realized Facebook is the Ying to Google’s Yang. Why have one when you can have both.


The story: Imagine creating a product where the user of the product was also the product (to a 3rd party) but never thought of himself/herself as such. This user then constantly provided the most intimate details of their lives as content for free and then gives you the privilege to bundle their personality up and sell to the 3rd party (an advertiser). Essentially, cost of good solds at no cost. Creating this all from the starting point of your dorm room. Then waking up one day to realise that your company might have played a not-so-small role in electing a leader who is the living breathing antonym of all your liberal ideals, leading you to one day do some deep self-reflection and wonder where it all went wrong in a post on the network you created. You can’t make this stuff up.


                             Facebook post by Mark Zuckerberg on Sept 30th 2017


All that being said, Mark Zuckerberg is a great CEO. He is only 33 and seems to sincerely want the world to be a better place. See his Harvard commencement speech and  US 2020 presidential campaign  tour but as the saying goes, “The road to hell is paved with good intentions.” Only time will tell.

Now on to brass tacks.

Theme: As Marc Andressen put it, “Software is eating the world.” The firms most likely to benefit from this are technology platform companies. Ben Thompson put it best in his brilliant post “Aggregation Theory.” The theory breaks down how suppliers are being modularized by technology platform companies, the new distributors, who then take a disproportionate share of the spoils. For example, Airbnb modularizes the rooms in an apartment building which then disrupts the previous supplier (hotels).

Thesis: Facebook has a stellar management team and a strong moat through its network effect. Its messenger platforms (FB Messenger/Whatsapp) are yet to be monetized. Facebook ad buys might not be underindexed in Europe and the company will benefit from improving standard of living in emerging market economies. Human beings are social creatures thus social data might be more valuable than other forms of data to advertisers. In addition Facebook has a walled garden with information that is currently inaccessible to the biggest data beast of them all, Google. It is also possible the stock is underbought by many institutions due to the sometimes negative connotation attached to FANG stocks.

The business: Facebook sells ads programmatically worldwide mainly through its platforms Facebook and Instagram. It owns 2 other messaging platforms with over a billion users, Facebook Messenger and Whatsapp, that are yet to be monetized. Its virtual reality efforts are housed under Oculus. Finally, Facebook has a small payments/fees business is approximately 3% of revenues.

Market Size: Global advertising is an approximately $600B market with online being approx 38% of this at $228B. At $33B LTM Revenue, Facebook is just 6% of global advertising and 14.4% of online advertising. After reading this post on the total addressable market (TAM) of search it is possible to imagine long term market size being grossly underestimated. Take the following thought experiment: if a brand, say Louis Vuitton, has to close a prime retail location (in, for example, London or Manhattan) because more and more retail is migrating online, how much of its former rent will LVMH pay for a “prime location” on Google Search or one of Facebook’s many platforms (Whatsapp, Instagram, Messenger, Facebook)? See it this way and the TAM of search becomes more unbounded.

Competitive Advantage/Moat: Facebook and its umbrella properties have created the largest network effect mankind has ever seen. Some numbers. Facebook has 2B monthly active users (MAUs) and 1.3B daily active users (DAUs). Whatsapp has over 1B DAUs. Facebook Messenger has 1.2B MAUs. Instagram has 800M MAUs. It has now become much more difficult for a social network to achieve massive scale. Edge cases exists where a niche is created (see Tinder or Twitter) but Facebook size social networks will become increasingly difficult to create. To deepen the moat Facebook continually adds new features to drive engagement. In addition, in the old days when your competitor created a revolutionary product the lead time one needed to catch up might be months or years (product development, testing, manufacturing at scale etc). Now it takes Facebook just weeks or months to copy the features of would be incumbents.

Average Revenue Per User: In Q2 ‘17, across all its platforms Facebook earned $18.93 per user in US & Canada, $6.19 per User in Europe, $2.12 per user in Asia Pacific, $1.47 in Rest of World, and averaged $4.65 per user Worldwide. Looking at these numbers two observations come to mind that might indicate the room FB has to grow. Firstly, US & Canada revenue per user is 3.05x that of European but North America GDP Per Capita GDP is only 1.6x European per Capita GDP. This indicate Europe is possibly under indexed for Facebook Ad spend. The other comparison is between US & Canada ARPU  and Asia Pacific & Rest of World, $18.63 vs $2.12 & $1.47 respectively. As the poorer regions of the world become wealthier, it is entirely possible that brands reach their customers most efficiently through Facebook. Facebook is a play on a richer world 5, 10, 20 years from now, without the heavy capital expenditures that greenfield projects usually entail. Additionally, from comparing my personal user experience on Facebook to that which I had on Instagram, one gets an intuitive feel that Instagram is under-monetized. The delicate balance management has to maintain is to load ads but not interfere with user experience.

Whatsapp/FB Messenger: In times past, the West has led in technology and China has been accused of producing knockoffs but this is not the case when it comes to messaging. One only needs to look at China’s WeChat to see the potential of Whatsapp/ FB Messenger. In addition to messaging, WeChat can be used to shop online, pay for physical goods, share large files, exchange money. Although Facebook has not been clear on how it is going to monetize its messaging services, on the most recent earnings call Zuckerberg’s comment was “I want to see us move a little more quickly” when ask about monetizing Whatsapp. At the F8 Developer conference held in April 2017 the company stated that their roadmap was to focus on video now, messenger in 3 to 5 years, followed by virtual reality and augmented reality over the longer term. The chart below from the Economist shows the potential of Whatsapp/FB Messenger. It might be absolute domination like WeChat might have due to services like Venmo that already exist but the potential is there.

the economist


Zuckerberg the Monopolist: Zuckerberg is only 33 and has been a great owner/operator thus far with a long runway ahead of him and with monopolist tendencies to boot. He has sought to crush competitors at every opportunity. Instagram Stories as a rebuttal to Snapchat. Facebook Live as a rebuttal to Periscope. He has completed acquisitions at every opportunity in order to protect the network effect at all costs (e.g. Instagram and Whatsapp), There was even a rumored failed bid for Snapchat. In addition, Facebook barely shares its economics with its ecosystem as opposed to Google that shares ad revenue with Youtubers and with websites via its Adsense network. Recent announcements to focus on more content initiatives might hurt margins but will probably be best for the ecosystem.

World Class Supporting Cast: This includes the fantastic COO Sheryl Sandberg, the very underrated Jan Koum of WhatsApp (who managed to sell a 55 employee business for $19B), Marc Andreessen of the venture capital firm Andressen Horowitz, Peter Thiel (Zero to One is a must read), Reed Hastings of Netflix, statesman Erskine Bowles and you have an all star top brass.


It is important to keep things simple when it comes to valuation. My approach is to look out 5 years, estimate what the company is going to earn and what it might be worth then and what its future might look from that point on. So, in the last 12 months Facebook earned $13.2B, with a market cap of $516B and $35B of cash on the balance sheet, one is paying roughly $481B and 36x earnings for the whole business. EPS has grown at a CAGR of 62% over the past 5 years and is expecting to grow at a CAGR of 28% over the next 5 years by some street estimates which I will use for simplicity’s sake. I think these estimates might end up looking conservative. Management has started making investments in content that might put pressure on gross margins but a lot of operating leverage will appear from increasing ad load outside the US & Canada and bringing more users online in the developing world. As supply decreases (by not bombarding consumers with ads), demand (programmatic ad buys) will increase which will probably result in higher ad prices. So in 5 years time Facebook might be earning around $45B. Throw on a conservation 20x to these earnings due to a more mature growth profile after 5 years and the business is worth $900B sometime in 2022. So it’s entirely possible that you could compound your money at 13% annually over the next 5 years with Facebook. I have excluded effects of dilution for simplicity, as market value gets larger, an increasingly smaller portion of aggregate value will be used to compensate employees. As of last count they were 2.7M options at a weighted price of $7.38 and 100M RSU at a weighted price of $100, with 2.9B shares outstanding at the last count this is less than 5% of the share count and won’t make or break the valuation case. As Broyhill Asset management points out here, in a market that has a dividend yield of 2%, real earnings growth of 1.5%, inflation of 1.5%, expected P/E increase change of 0% as P/Es already elevated, although not impossible, it is difficult to imagine the S&P 500 gaining more than 5% annually going forward. In that context a 13%, again not fact but estimate, by Facebook is decent.


Technological Disruption: The world of bits (tech companies) will always be more prone to change than the world of atoms and immutable laws of physics (railroads, utilities, etc.).

Consumer Revolt: Although hard to estimate, they have been times in the past where consumers revolted against advertising which is in some ways exploitative. If this happens do users move to another platform? Alternatively, Facebook could move to a subscriber model if/when that happens.

Antitrust: In a world of slow growth, higher inequality and more winner take all scenarios there is the chance of a backlash against tech companies having a larger share of the spoils. See Google’s $2.7B settlement with the EU as an example. A situation could occur where a company like Facebook could have it profits taxed at a much higher rate than currently persists.

Amazon: If Facebook is a tool to capture people’s attention and subsequently advertise to them but more and more retail product is going through Amazon which has its own advertising program (Amazon Affiliates), it is entirely possible that a Facebook ad might not have the same value in 10 years as Amazon becomes more pervasive.

Recession: Advertising is cyclical to some extent. In a scenario where there is a recession in the next 5 years, Facebook business and multiple might get really affected.

Conclusions/Standing on the shoulders of giants/the institutional imperative.

It does not hurt that investment managers much smarter than me, like Pat Dorsey at Dorsey Asset Management and Shad Rowe at Greenbrier Partners, have Facebook as their top holding, but on the other hand, the stock has been either completely ignored or taken up as a small holding in the institutional world (ex ETF). From anecdotal conversations with a few analysts at some big shops that I’ve spoken to, the train of thought goes something like this, “We are a value shop, no way I’m convincing my PM to buy FB at close to 40x earnings.” or “We have avoided FANGs this far in the bull market, the optics of owning one now is hard to sell to clients. It either shows we were wrong all along or we do not believe in our process.” This evidence is purely anecdotal but it is possible there are reasons for not owning the stock that have nothing to do with FB and its actual merits. It will be great to be able to buy Coca-Cola at a single digit multiple and to have it grow at double digits like Buffett did in the late ‘80s, but there is some good research about acquiring companies with long runways and high growth at high multiples and still ending up ahead due to the power of compounding, see this great paper by LindsellTrain.

With all credit due to:

Ben Thompson’s blog, Greenhaven Q2 ‘17 Letter, Alex Moazed’’s Modern Monopolies, Facebook’s Investor Relations, Stevenoop’s TAM post, Horizon Kinetic’s Q2 ‘17 letter, John Lanchester’s amazing review of 3 books, World Bank Per Capita GDP Data.

General Market Musings (US Equities).

Some quick notes I put together in the past few weeks. I try not to focus too much on the macro in my day to day but I still think it helps to have some big picture perspective in order to not miss the forest for the trees. Don’t worry, my next post is going to tackle a specific company, actually one of the most popular of them all. Comments welcome.

Valuations & the zombie economy:  The Shiller P/E at 30.62 is currently at levels that ushered in the Great Depression and only surpassed by the tech bubble multiple. Rates are already low and money is loose so what happens the next time the bottom falls out of the economy. The zombie economy is an allusion to this idea: How much of the economic recovery is alive, real, and vibrant? The Feds balance sheet has quadrupled since the great recession from $1T to $4.5T. This has bled into the economy and maybe has not been matched by increases in productivity. Tough questions but questions nonetheless.

CPG Moats no more: Consumers goods companies that boasted huge moats are now facing some real threats. The advantage conferred to them by their distribution networks might persist but their moats due to their brands might be at risk. Take Dollar Shave Club: from 2012 to 2015 it raised $160M from the venture capital community, created a shaving product with blades that cost less than $10 a month and sometimes as low as $1, leveraged social media and for basically no money put out this great ad that has reached 24 million people. It exited to Unilever at $1B in July 2016. Gillette, a 115-year-old stalwart, has had its North American market share reduced from 70% in 2010 to 54% by 2016. Yikes!! Welcome to the new age of disruption. What does something like this mean to the Kraft Heinz’s and Coca-Cola’s of the world?

Demographics: The children of the baby boom are now entering retirement in droves. According to Stanley Druckenmiller 11,000 seniors are entering retirement everyday for next 20 years and unfunded liabilities promised to them by the government is closer to an astronomical $200T. Surely this is a major issue but maybe there lies an opportunity somewhere in the healthcare sector for the astute US Large Cap investor?

Software is eating the world (I know, I know, I keep repeating this): Chamath Palihapitiya of Social Capital put it much more eloquently than I ever could so I will quote him directly: “There is just this massive trade right now between the disruptors and the disrupted, technology companies are fundamentally dynamic organisms … [There are] so many assets that are fundamentally impaired due to technology.” Uncoupling this quote is important to US investors as it is important to distinguish the disruptors from the disrupted. Examples include: Old Media/Hollywood vs Netflix (not on valuation but company itself), old advertising vs Facebook and Google, Oracle/IBM vs AWS, hotels vs AirBnB. The list goes on and on.

100 Years?

Below is my response to a recent buy side job application question. Trying to go a post without mentioning Buffett or Munger or Berkshire but failing miserably so far. Also did not choose Berkshire as it is in the firm’s 13F. Feel free to let me know what your response to this question is.

If you could only own one business for the next 100 years, what would it be and why? (please do not select a company on our 13F) (max 500 words)

         “Google has a huge new moat. In fact, I’ve probably never seen such a wide moat.”

                                                 Charlie Munger.

Theme: Again, as Marc Andressen put it, “Software is eating the world” and the firm’s most likely to benefit from this are technology platform companies. Ben Thompson put it best in his brilliant post “Aggregation Theory.” The idea being suppliers are being modularized (Hotels rooms become a room in a house) by technology distributions (Airbnb in this example) who then take a disproportionate share of the spoils (users get onto Airbnb to find a room anywhere in the world with Airbnb getting a cut).
Thesis: Alphabet (formerly Google) is the ultimate platform company with several of its platforms (Android, Maps, Chrome, YouTube, Gmail, Search, Google Play all boasting over 1 Billion users each). Sure, almost all Google’s revenues are from its core search/advertising business but look deeper and you can recast it as a transportation business (Uber has to pay Google for every request to its maps API of which there are probably thousands every minute) or a music business (Google Play music keeps a portion of subscriber fees and pays the balance to music publishers).

What is the TAM of search: The global advertising is an approx. $600B market, online is approx 38% of this and Google is 44% of online (approx. $100B). Can online one day be 50% of advertising and Google maintain its position. With modest growth in GDP it is not entirely impossible for Google to double its revenue in 5 to 10 years. Now to get creative, if a brand, say Louis Vuitton, has to close a prime retail location (say London or Manhattan) because retail is migrating online, how much of its former rent will LVMH pay for a “prime location” on Google Search? See it this way and the TAM of search becomes more unbounded.

Valuation: So, what are you paying today for the search business? In my opinion, not much if you are conservatively creative with the numbers. Over the past 12 months Alphabet had FCF of approx. $25B. But if you dig deeper, The Other Bets segment incurred $3.5B of operating losses. Net of tax the core search business is earning closer to $28B in FCF. With $91B of net cash on the balance sheet, and a market cap of $650B, one is paying a fair 20x FCF for the core business growing at between 15 to 20% a year.

Free option on a fantastic future:
Alphabet’s Other Bets segment includes Google Fiber, Verily (Life Sciences), Waymo (Self Driving cars), Nest (IOT), Calico (Combating Aging) GV & CapitalG (Venture Capital, Wing (Drones).

Culture: To last a 100 years, a company must have strong culture and Google is more another company that has a strong culture than one might imagine, Berkshire Hathaway. Google published an owner’s manual in 2004 inspired by Buffett and have transformed to a holding company structure (Alphabet) and hired Ruth Porat as CFO to rationalize capital allocation.
The world of bits (tech companies) will always be more prone to change than the world of atoms and immutable laws of physics (railroads, utilities, etc.)

Antitrust: In a world of slow growth, higher inequality and more winner takes all scenarios there is the chance of a backlash against tech companies having a larger share of the spoils. See Google’s $2.7B settlement with the EU.

Social: Google missed Social and Facebook now has a walled garden and is fast on Google’s heels.

With all credit due to:

Wexboy’ post , Ben Thompson on Aggregation , Greenhaven Q2 Letter , Alex Moazed’’s Modern Monopolies , Google’s Investor Relations , Stevenoop’s TAM post & Horizon Kinetic’s Q2 letter .


Brief Company History: In 1947 Frederick Allen Boylen incorporated Macho River Gold mines to enter the business of mineral exploration with the focus on the Urban Township in Quebec. Through several incarnations the company became Urbana and has been led by its chairman Thomas Caldwell since 1980. It remained relatively dormant for 23 years with small funds being thrown at exploring the Urban Township property in Quebec. Around 2003, under the leadership of Thomas Caldwell Urbana transformed to a pooled fund concentrated in a single asset class: securities exchanges that were going public or merging. In 2005 it changed its principal business activity from mineral exploration to investment. Over time, Urbana has become much more diversified in asset classes and geographic scope. In its current state it is an investment holding company that focuses on a portfolio of publicly traded securities and private exchanges/investments.

Getting into Exchanges: Over the course of 2003-2004 Urbana spent approx. 5.7M CAD to buy 3 seats of the NYSE in anticipation of demutualization and the IPO. In 2005 when the demutualization happened the shares were worth $12M and then $23M by March 2006.

A good Idea taken too far: With this insight (demutualization of exchanges) taken to an extreme Caldwell raised $200M in 2007 to go on a buying spree of private and public exchanges with almost half of this amount invested in NYSE shares. Other exchanges picked up on this buying spree where stakes in the Bombay Stock Exchange and CBOE. Due to the inopportune timing of the purchases and the rise of alternative trading systems most of the NYSE purchase was sold at the loss in the years following the crisis. The CBOE Holdings ended up faring better over this time period as futures exchanges are more of a closed trading system and some shares are still held.

Key Players: Thomas Caldwell (73) and his son Brendan (46) own approx. 55% of the common voting shares thereby establishing hard control of the holding company and having some skin in the game. As of the most recent close price this economic interest is worth approx. $17M. Paradoxically the pair also own 86% of Caldwell Financial, the parent company of the fund’s investment manager (Caldwell Investment Management-CIM) thus it is important to also establish whether they are fleecing the company. Over the past 12 months the fund has paid $4M in investment management fees to CIM, $1.3M in administrative cost for the use of Caldwell’s Financial office, investor relation services & accounting services and $0.35M in trading cost to Caldwell Securities. This total of $5.65M Is approximately $2.5% of net average net assets ($221M) over this period. The model for stewardship is obviously Berkshire Hathaway where the manager participates in equity together with shareholders but 2.5% is not entirely out of whack considering most of these services are absolutely necessary and the Caldwell’s have delivered on NAV per share growth over this period (see below).

Are they Caldwells good capital allocators? Above average but not out of this world. They have had some huge wins such as NYSE before demutualized, CBOE Holdings (Cost $5M, Fair Value $19M), Teck Resources in 2016 (up 330% over holding period in later 2015 till present), Bank of America (Cost $12M, Fair Value $26) Real Matters (see below) but also their fair share of misses (Bombay Stock Exchange, AGF, Bermuda Stock Exchange).
Caldwell has made it clear that he does not intend on liquidating the fund in order to resolve the discount to NAV issue. He is of the view that the advantages of permanent capital and affording daily liquidity to current shareholders outweigh the disadvantages and I tend to agree with him. From October 1, 2002, the date when Caldwell Investment Management started managing Urbana’s investment portfolio, to June 30, 2017, the CAGR of Urbana’s net assets per share has been 16.2%. During the same period, the CAGR of the S&P/TSX Index was 9.1% and the CAGR of the DJIA Index was 10.0%.

Urbana Township: Urbana Corp has owned mineral claims in Urbana Township located in Urbana-Barry Greenstone belt in Quebec for decades giving it rights to 44 claims ( 2,756.31 acres) in a very active belt of gold deposits. Urbana entered into an exploration partnership with Beaufield Resources in November 2014 to further explore the area. It spend 460K on mining expenses in 2016 and 180K in 2015. The Intention is to do a deal with a mining partner (JV, royalties) as opposed to becoming a fully-fledged miner but no ore body tonnage has been proven as yet. I pulled up annual reports as far I could find on SEDAR (1997) and even then, the company spoke of exploration on the same parcel of land and had spend $200k to buy out a minority shareholder to hold all 48 Claims or the urban township so I wouldn’t quite bet the house on their prospects. A winter drilling program found 13.0 g/t gold and 0.8% copper over 1.23 metres on the parcel of land. Through conversations with geologist and investor relations presentations this find is apparently promising but still far from conclusive. I believe the way to view this is as a free option as long as exploration costs are kept at a minimal.

Dividend: $0.05 per share in each of the past 3 years but In Jan 2017 Urbana paid the regular $0.05 dividend and a special $0.05.

Shares Outstanding: 10 Million common shares (voting) and 40 Million Class A shares (non voting). Repurchased approx. 37M shares over the past 10 years. Reducing share count by almost 40%, all at discounts to NAV.

The opportunity: Shares are currently trading at a 31% discount to NAV/ Potential upside of 45% if the gap to close. The discount has been slowly decreasing over the past few years.

Why should the discount close? Although there is no way to be certain, 3 major events are happening over the next 6 months that will make the companies portfolio more liquid and possibly enhance investor confidence.


1. Urbana’s renewal of the NCIB to purchase up to approx. 4M of its non-voting Class A shares, representing 10% of the public float.
2. An Urbana holding, Real Matters went public in May 2017. The company is a Canadian effort to digitize the mortgage appraisal process. Urbana’s purchases started in Dec 2013 with 5 total financings in the private market at a cost of $12.8M and current market value of $29.5M (12% of Assets) as of Sept 15th 2017. It becomes freely tradeable on November 7th when the lockup period ends.
3. The Bombay Stock Exchange went public in Feb 2017, Urbana was able to sell 26% of its holding with the balance subject to lockup provisions. On Feb 1 2018 the balance is able to be fully sold. This balance of is currently $23M (9.3% of assets).
-Urbana’s Portfolio is currently 58.5% liquid public market equities and 41.5% illiquid. The above transactions would make the split 80% in favour of public equities. Of the remaining 20% of private assets, the main stakes are in the Canadian Securities Exchange (4.25% of assets), 2 Private Equity Funds that have been performing quite well (Radar Capital I & II- 3.8% of assets and Highview Financial Holdings (an outsourced CIO office – 3.26% of assets).

1. As the portfolio becomes more liquid, the capital is allocated poorly.
2. The Caldwells abuse their hard control of the company.

*Fun fact: In 2016 Caldwell took out a newspaper ad to apologize for punching a classmate 65 years ago. See story here . Also both Thomas and Brendan have a great sense of humor which is always a good thing.
*All dollar figures are CAD. See here for NAV breakdown

Getting Started

The idea behind this blog is to catalog my investing ideas and thoughts. Over the years I’ve come to realize that the only way to crystallize your thoughts is to put them down in writing. I’ve done much reading but have not put in nearly enough practice due to a combination of my own lethargy and personal circumstances over the past few years. Better late than never!!

The Philosophy : I adhere to a (mostly) strict value investing philosophy. For the uninitiated, value investing is the idea that each security has an intrinsic value that can be estimated. In addition, as Ben Graham, the father of value investing so succinctly put it, in the short term the stock market is a voting machine but in the long term it becomes a weighing machine.In essence, the true intrinsic value of a security is eventually reflected. In addition, I also have a strong belief in the power of compounding over long periods of time and our natural inability to grasp this idea. The philosophy is obviously influenced by Buffett, Munger, Graham and younger investors like Mohnish Pabrai and Allan Mecham.

The process : For every potential stock purchase I will initially perform bottom up analysis to estimate intrinsic value per share. This will then be compared to the current stock price. If the discount to the current stock is meaningful, we have a potential purchase opportunity and margin of safety. This margin of safety ensures 2 things, above average returns if the difference between stock price and intrinsic value is narrowed. Alternatively, if I have made an error in calculating intrinsic value the margin of safety potentially prevents a permanent loss of value.

The Return : The goal is to beat the average stock indices by 5 to 10% per annum. This objective is quite presumptuous if you consider that fewer than 5% of professional money managers beat their benchmark/index. I’m I any smarter? No, but I believe following a value investing framework, taking high conviction bets, and investing in smaller, less liquid situations that are not on the radar of large funds can help achieve this. The average return of the S&P 500 has been approximately 10% from 1928 to 2014. Amazing considering the world experienced 2 major wars, several economic cycles and much else. I believe the next few decade at least will have lower returns for several reasons (governments are highly indebted, stock markets have mostly recovered from the financial crisis so fewer bargains exists, global economic growth might be partly artificial from increased money supply and low interest rates). So my estimate for annual return of stock indexes going forward is 5%, thus our return objective is 10-15% per year.

Risk: To avoid permanent loss of capital. Volatility (movement of stock prices day to day) is not risk. Permanent capital loss is real risk and can happen in two main ways:
1. The actual business behind the stock is damaged permanently. For example, In June 2007 the Apple iPhone was introduced, at that time Blackberry was a dominant mobile phone company and the company had a market value of $90B, Fast forward the 2017 and Blackberry is a marginal player, iPhone dominates, and Blackberry stock has a $5B market value, which translates to a 95% permanent loss of value.
2. The stock was purchased at a price too high relative to the company’s value. For example, in the year 2000 during the heyday of the Tech Bubble, Microsoft net income was about $9B and the company had a market value of about $550B, so it traded at a multiple of 61 times earnings (=550/9). Fast forward to 2017 and Microsoft earned about $21B in the past 12 months (increase of 130% from 2000) but its market value is still roughly the same $550B and a holder of stock has not made money. This is not a typical permanent loss of value since no actual money was lost but when you think in terms of the opportunities missed the error becomes clear. Over the same period Warren Buffett’s Berkshire Hathaway increased in value by 358% and TD Bank increased by 267%. In 2000 you were paying too much for the future earnings of Microsoft, however rosy the future turned out to be.

In conclusion, I hope I can bring some value add to my investing process and the value investing community. Feedback welcome.